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Delaware Investments includes funds with a wide range of Voyageur Tax Free Funds
investment objectives. Stock funds, income funds, Voyageur Intermediate Tax Free Funds
national and state-specific tax exempt funds, money market Voyageur Insured Funds
funds, global and international funds and closed-end funds Voyageur Investment Trust
give investors the ability to create a portfolio that fits Voyageur Mutual Funds
their personal financial goals. For more information, Voyageur Mutual Funds II
shareholders of the Classes should contact their financial
adviser or call Delaware Investments at 800-523-1918.
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INVESTMENT MANAGER A CLASS
Delaware Management Company B CLASS
One Commerce Square C CLASS
Philadelphia, PA 19103
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NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING, PART B
DIVIDEND DISBURSING,
ACCOUNTING SERVICES STATEMENT OF
AND TRANSFER AGENT ADDITIONAL INFORMATION
Delaware Service Company, Inc. -----------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
NOVEMBER 1, 1999
LEGAL COUNSEL (as revised November 16, 1999)
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
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DELAWARE(SM)
INVESTMENTS
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STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
(as revised November 16, 1999)
Voyageur Tax Free Funds
Voyageur Intermediate Tax Free Funds
Voyageur Insured Funds
Voyageur Investment Trust
Voyageur Mutual Funds
Voyageur Mutual Funds II
1818 Market Street, Philadelphia, PA 19103
For Prospectus, Performance and Information on Existing Accounts of
Class A Shares, Class B Shares and Class C Shares: Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
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 investment management company, commonly
referred to as a mutual fund. This Part B supplements the information contained
in the current Prospectus for the Funds dated November 1, 1999, as it may be
amended from time to time. Part B 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. The Funds' financial statements, the
notes relating thereto, the financial highlights and the report of independent
auditors are incorporated by reference from the Annual Reports into this Part B.
The Annual Reports will accompany any request for Part B. The Annual Reports can
be obtained, without charge, by calling 800-523-1918.
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Delaware Tax-Free Arizona Insured Fund Delaware Tax-Free Florida Fund Delaware Tax-Free Missouri Insured Fund
Delaware Tax-Free Arizona Fund Delaware Tax-Free Idaho Fund Delaware Montana Municipal Bond Fund
Delaware Tax-Free California Insured Fund Delaware Tax-Free Iowa Fund Delaware Tax-Free New Mexico Fund
Delaware Tax-Free California Fund Delaware Tax-Free Minnesota Intermediate Fund Delaware Tax-Free New York Fund
Delaware Tax-Free Colorado Fund Delaware Minnesota Insured Fund Delaware Tax-Free North Dakota Fund
Delaware Tax-Free Florida Insured Fund Delaware Tax-Free Minnesota Fund Delaware Tax-Free Oregon Insured Fund
Delaware Tax-Free Kansas Fund Delaware Minnesota High-Yield Municipal Bond Delaware Tax-Free Wisconsin Fund
Fund
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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.
2
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TABLE OF CONTENTS
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Cover Page 1
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Investment Restrictions and Policies 3
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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 Exchange
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Distributions
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Taxes
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Investment Management Agreements
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Officers and Trustees
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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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Appendix B - Investment Objectives of the Funds in the Delaware Investments Family
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Appendix C - Description of Ratings
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3
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INVESTMENT RESTRICTIONS AND POLICIES
Fundamental Investment Restrictions
The Funds have adopted certain investment restrictions set forth below
which cannot be changed without approval by holders of a majority of the
outstanding voting shares of a 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.
Each Fund may not:
(1) Make investments that will result in the concentration (as that
term may be defined in the 1940 Act, any rule or order thereunder, or U.S.
Securities and Exchange Commission ("SEC") staff interpretation thereof) of its
investments in the securities of issuers primarily engaged in the same industry,
provided that this restriction does not limit the Fund from investing in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or in tax-exempt securities or certificates of deposit.
(2) Borrow money or issue senior securities, except as the 1940 Act,
any rule or order thereunder, or SEC staff interpretation thereof, may permit.
(3) Underwrite the securities of other issuers, except that the Fund
may engage in transactions involving the acquisition, disposition or resale of
its portfolio securities, under circumstances where it may be considered to be
an underwriter under the Securities Act of 1933.
(4) Purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments and provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
(5) Purchase or sell physical commodities, unless acquired as a result
of ownership of securities or other instruments and provided that this
restriction does not prevent the Fund from engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities.
(6) Make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
loaning its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
Non-Fundamental Investment Restrictions
In addition to the fundamental policies and investment restrictions
described above, and the various general investment policies described in the
Prospectus, each Fund will be subject to the following investment restrictions,
which are considered non-fundamental and may be changed by the Board of Trustees
without shareholder approval.
(1) The Fund is permitted to invest in other investment companies,
including open-end, closed-end or unregistered investment companies, either
within the percentage limits set forth in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof, or without regard to percentage
limits in connection with a merger, reorganization, consolidation or other
similar transaction. However, the Fund may not operate as a "fund of funds"
which invests primarily in the shares of other investment companies as permitted
by Section 12(d)(1)(F) or (G) of the 1940 Act, if its own shares are utilized as
investments by such a "fund of funds."
(2) The Fund may not invest more than 15% of its net assets in
securities which it cannot sell or dispose of in the ordinary course of business
within seven days at approximately the value at which the Fund has valued the
investment.
4
<PAGE>
The following investment restrictions are non-fundamental to Tax-Free
Arizona Insured Fund, Tax-Free Colorado Fund, Minnesota Insured Fund, Tax-Free
Minnesota Intermediate Fund, Tax-Free Minnesota Fund, Tax-Free North Dakota
Fund, Tax-Free California Insured Fund, Tax-Free Florida Fund, Tax-Free Florida
Insured Fund, Tax-Free Kansas Fund, Tax-Free Missouri Fund, Tax-Free New Mexico
Fund and Tax-Free Oregon Insured Fund.
These Funds will not:
(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
or trustees 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 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.
5
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The following non-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 the U.S. government, its
agencies or instrumentalities. (Note: For purposes of this investment
restriction, the Manager interprets "Tax Exempt Obligations" to exclude limited
obligation 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). This restriction shall not restrict such 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) 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 are non-fundamental to Tax-Free Arizona
Fund, Tax-Free California Fund, Tax-Free Idaho Fund, Minnesota High-Yield
Municipal Bond Fund ("Minnesota High-Yield Fund"), Tax-Free New York Fund and
Tax-Free Florida Fund.
These Funds will not:
(1) Borrow money (provided that such Fund may enter into reverse
repurchase agreements and, with respect to Minnesota High-Yield Fund only,
repurchase agreements may not exceed 10% of its total assets), 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, provided that such Funds may enter into reverse
repurchase agreements for such purposes, and 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.
6
<PAGE>
(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) Except with respect to Minnesota High-Yield Fund, 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 obligation bonds payable only from revenues derived from
facilities or projects within a single industry.) Minnesota High-Yield 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.
(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 such 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 apply to each
Fund.
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 Fund, Tax-Free California Fund,
Tax-Free Florida Fund, Tax-Free Idaho Fund, Minnesota High-Yield Fund and
Tax-Free New York Fund, 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.
(4) With respect to Minnesota High-Yield Fund, write puts if, as a
result, more than 50% of such Fund's assets would be required to be segregated
to cover such puts.
Except for Minnesota High-Yield 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 Funds' objectives and policies are described in the
Prospectus. Certain additional investment information is provided below.
7
<PAGE>
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,
personal income tax of the state specified in a 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
the United States 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 the United States
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 each Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P"), or Fitch IBCA, Inc.
(formerly Fitch Investors Service, L.P.) ("Fitch") 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 Part B. The ratings of Moody's, S&P and Fitch 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.
Each Fund may also acquire Derivative Tax Exempt Obligations, which are
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain Tax Exempt Obligations. The sponsor of these certificates or receipts
typically purchases and deposits the securities in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt, a Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, a Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if a Fund
had purchased a direct obligation of the issuer.
8
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In addition, in the event that the trust or custodial account in which
the underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state (and with respect to Tax-Free New York Fund, potentially New York City)
income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to such Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to a Fund would lose their tax exempt
character and become taxable, for federal and state purposes, in the hands of
such Fund and its shareholders. However, each Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable on
the receipts is tax exempt. If a Fund invests in custodial receipts, it is
possible that a portion of the discount at which that Fund purchases the
receipts might have to be accrued as taxable income during the period that such
Fund holds the receipts.
The principal and interest payments on the Tax Exempt Obligations
underlying custodial receipts or trust certificates may be allocated in a number
of ways. For example, payments may be allocated such that certain custodial
receipts or trust certificates may have variable or floating interest rates and
others may be stripped securities which pay only the principal or interest due
on the underlying Tax Exempt Obligations. The Funds may also invest in custodial
receipts or trust certificates which are "inverse floating obligations" (also
sometimes referred to as "residual interest bonds"). These securities pay
interest rates that vary inversely to changes in the interest rates of specified
short-term Tax Exempt Obligations or an index of short-term Tax Exempt
Obligations. Thus, as market interest rates increase, the interest rates on
inverse floating obligations decrease. Conversely, as market rates decline, the
interest rates on inverse floating obligations increase. Such securities have
the effect of providing a degree of investment leverage, since the interest
rates on such securities will generally change at a rate which is a multiple of
the change in the interest rates of the specified Tax Exempt Obligations or
index. As a result, the market values of inverse floating obligations will
generally be more volatile than the market values of other Tax Exempt
Obligations and investments in these types of obligations will increase the
volatility of the net asset value of shares of the Funds.
For each Fund, other than Minnesota High-Yield Fund, investments in
Derivative Tax Exempt Obligations, when combined with investments in below
investment grade rated securities, will not exceed 20% of each Fund's total
assets.
Forward Commitments
New issues of Tax Exempt Obligations and other securities are often
purchased on a "when issued" or delayed delivery basis, with delivery and
payment for the securities normally taking place 15 to 45 days after the date of
the transaction. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the buyer enters into the
commitment. Each Fund may enter into such "forward commitments" if it holds and
maintains, until the settlement date in a segregated account, cash or liquid
securities in an amount sufficient to meet the purchase price. There is no
percentage limitation on each Fund's total assets which may be invested in
forward commitments. Tax Exempt Obligations purchased on a when-issued basis and
the securities held in a Fund's portfolio are subject to changes in value (both
generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Tax Exempt Obligations purchased on
a when-issued basis may expose a Fund to risk because they may experience such
fluctuations prior to their actual delivery. Purchasing Tax Exempt Obligations
on a when-issued basis can involve the additional risk that the yield available
in the market when the delivery takes place actually may be higher than that
obtained in the transaction itself. Any significant commitment by a Fund to the
purchase of securities on a when-issued basis may increase the volatility of the
Fund's net asset value. Although each Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, it may
dispose of a commitment prior to settlement if the Manager deems it appropriate
to do so. The Funds may realize short-term profits or losses upon the sale of
forward commitments.
9
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Floating and Variable Rate Demand Notes
Variable rate master demand note, in which the Funds 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 a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a 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 a Fund will be determined by the
Manager, under guidelines established by the Funds' Board of Trustees to be of
comparable quality at the time of purchase to rated instruments eligible for
purchase under a 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) 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 a Fund, such 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 a 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 a 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.
With respect to Minnesota High-Yield Fund, 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 such Fund's total assets only if such notes are subject to a demand
feature that will permit that Fund to demand payment of the Principal within
seven days after demand by such Fund. If not rated, such instruments must be
found by the Fund's Manager under guidelines established by such Fund's Board of
Trustees, 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. 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
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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 statutes of many states contain requirements with which such states
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
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
In applying a Fund's policy on concentration: (i) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (ii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (iii) asset backed
securities will be classified according to the underlying assets securing such
securities.
Concentration Policy
Except with respect to Minnesota High-Yield Fund, 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 available investments may be in limited supply, in housing,
health care and/or utility obligations. Tax-Free Arizona Fund, Tax-Free
California Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund, Montana Municipal
Bond Fund and Tax-Free New York Fund also may, under such circumstances, invest
in transportation, education and/or industrial obligations. Minnesota High-Yield
Fund has a non-fundamental policy that restricts it from investing 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. Minnesota High-Yield Fund may invest 25%
or more of its total assets in industrial development revenue bonds. In
addition, it is possible that such 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.
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.
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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 invest, from time to
time, 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 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 invest, from time to time, 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 invest, from time to
time, 25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
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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 Internal Revenue
Code of 1986, as amended (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.
Zero Coupon Bonds and Pay-in-Kind Bonds
The Funds may invest in zero-coupon and payment-in-kind Tax exempt
Obligations. Zero-coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified date
when the securities begin paying current interest. They are issued and traded at
discount from their face amounts or par value, which discount varies depending
on the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
Code requires that regulated investment companies distribute at least 90% of
their net investment income each year, including tax exempt and non-cash income.
Accordingly, although the Fund will receive no coupon payments on zero-coupon
securities prior to their maturity, the Fund is required, in order to maintain
its desired tax treatment, to include in its distributions to shareholders in
each year any income attributable to zero-coupon securities that is in excess of
10% of the Fund's net investment income in that year. The Fund may be required
to borrow or to liquidate portfolio securities at a time that it otherwise would
not have done so in order to make such distributions. Payment-in-kind securities
are securities that pay interest through the issuance of additional securities.
Such securities generally are more volatile in response to changes in interest
rates and are more speculative investments than are securities that pay interest
periodically in cash.
Taxable Obligations
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
Fannie Mae, 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.
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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. A repurchase agreement
is a short-term investment by which the purchaser acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, thereby determining the yield during the purchaser's holding period.
Should an issuer of a repurchase agreement fail to repurchase the underlying
security, the loss to a Fund, if any, would be the difference between the
repurchase price and the market value of the security. Each Fund will limit its
investments in repurchase agreements to those which the Manager, under the
guidelines of the Board of Trustees, determines to present minimal credit risks
and which are of high quality. In addition, each Fund must have collateral of at
least 102% of the repurchase price, including the portion representing a Fund's
yield under such agreements which is monitored on a daily basis.
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).
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the 1940 Act to
allow funds in the Delaware Investments family jointly to invest cash balances.
The Funds may invest cash balances in a joint repurchase agreement in accordance
with the terms of the Order and subject generally to the conditions described
above.
Reverse Repurchase Agreements
Certain Funds (Tax-Free Arizona Fund, Tax-Free California Fund,
Tax-Free Florida Fund, Tax-Free Idaho Fund, Minnesota High-Yield Fund and
Tax-Free New York Fund) may engage in "reverse repurchase agreements" with banks
and securities dealers with respect to not more than 10% of the Fund's total
assets. Reverse repurchase agreements are ordinary repurchase agreements in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
the securities because it avoids certain market risks and transaction costs.
Because certain of the incidents of ownership of the security are retained by
the Fund, reverse repurchase agreements are considered a form of borrowing by
the Fund from the buyer, collateralized by the security. At the time a Fund
enters into a reverse repurchase agreement, cash or liquid having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be marked to market daily and maintained throughout the
period of the obligation. Reverse repurchase agreements may be used as a means
of borrowing for investment purposes subject to the 10% limitation set forth
above. This speculative technique is referred to as leveraging. Leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by income from or
appreciation of the securities purchased. Because the Funds do not currently
intend to utilize reverse repurchase agreements in excess of 10% of total
assets, the Funds believe the risks of leveraging due to use of reverse
repurchase agreements to principal are reduced. The Manager believes that the
limited use of leverage may facilitate the Funds' ability to provide current
income without adversely affecting the Funds' ability to preserve capital.
Other Taxable Investments
The Funds also may invest in certificates of deposit, bankers'
acceptances and other time deposits. Certificates of deposit are certificates
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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
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 a 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. The ability
of Minnesota High-Yield Fund to engage in options is discussed separately,
below.
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. 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. 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.
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. A 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.
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Each of the Funds may also purchase call options. During the life of
the call option, a 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.
Minnesota High-Yield Fund. Minnesota High-Yield 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 listed on a national securities exchange (an "Exchange") or traded
over-the-counter. 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. 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 Fund may liquidate such a
position by effecting a closing transaction. The Fund also 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 may sell a put option which it previously purchased prior to the sale of
the underlying options. The Fund may sell a put option purchased on individual
securities and may enter into closing transactions.
Minnesota High-Yield 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. The Fund may
effect closing transactions with respect to put options it previously wrote.
The risks associated with Minnesota High-Yield Fund's options
transactions are the same as those discussed above for Tax-Free Funds, Insured
Funds and Tax-Free Minnesota Intermediate Fund.
Securities Index Option Trading. The Funds, other than Minnesota
High-Yield Fund, 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.
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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, that Fund will segregate or put into escrow with
its custodian or pledge to a broker 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 that 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 a 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. Over the counter options are subject to each Fund's 15%
illiquid investment limitation.
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
approximately1 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 such 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 through offsetting 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.
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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 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, that 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 a 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. A
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
Although each Fund believes that the use of futures contracts and
options thereon will benefit it, if the Manager's judgment about the general
direction of securities prices or interest rates is incorrect, a 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 a 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, such 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, a 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.
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 that 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 a Fund, and
that 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, a 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
18
<PAGE>
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, such 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 such 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 enter into an option
position only if the Manager believes that a liquid secondary market exists for
such option, there is no assurance that such 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 a 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
19
<PAGE>
options with the result that a Fund would have to exercise the options in order
to realize any profit. If a 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 may 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.
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 such 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 that 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 the value of its net
assets in illiquid investments. 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 SEC
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). 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 of Trustees. Minnesota
High-Yield Fund, however, is subject to a 10% limit with respect to certain
restricted floating or variable rate demand notes. 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.)
20
<PAGE>
If the Manager determines that a Rule 144A Security that was previously
determined to be liquid is no longer liquid and, as a result, a Fund's holdings
of illiquid securities exceed such Fund's 15% limit on investment in such
securities, the Manager will determine what action to take to ensure that such
Fund continues to adhere to such limitation.
At the present time, it is not possible to predict with accuracy how
the markets for certain restricted 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 described in the Funds' Prospectus, the Funds are permitted to
invest in municipal leases. Traditionally, municipal leases have been viewed by
the SEC 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.
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.
21
<PAGE>
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
substantially identical to those contained in its municipal bond insurance
policy, will be excludable from federal gross income under Section 103(a) of the
Code.
As of December 31, 1997, AMBAC's total equity capital (GAAP) was
$1,872,500,000, up 16% from December 31, 1996 and as of December 31, 1998,
AMBAC's total equity capital (GAAP) was $2,096,100,000, up 11.9% from December
31, 1997. For the six months ended June 30, 1999, total equity capital (GAAP)
amounted to $2,044,468,000 (unaudited).
As of December 31, 1997, MBIA had total equity capital (GAAP) of
$3,361,512,000, up 35.6% from December 31, 1996 and as of December 31, 1998,
MBIA had total equity capital (GAAP) of $3,792,217,000 up 12.8% from December
31, 1997. For the six months ended June 30, 1999, total equity capital (GAAP)
amounted to $3,547,159,000 (unaudited).
As of December 31, 1997, FGIC's total equity capital (GAAP) amounted to
$1,953,000,000, up 12% from December 31, 1996 and as of December 31, 1998,
FGIC's total equity capital (GAAP) amounted to $2,071,718,000, up 6.1% from
December 31, 1997. For the six months ended June 30, 1999, total equity capital
(GAAP) amounted to $2,028,400,000 (unaudited).
As of December 31, 1997, FSA's total equity capital (GAAP) was
$882,000,000, up 10% from December 31, 1996 and as of December 31, 1998, FSA's
total equity capital (GAAP) was $1,072,700,000, up 21.7% from December 31, 1997.
For the six months ended June 30, 1999, total equity capital (GAAP) was
$1,082,729,000 (unaudited).
22
<PAGE>
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.
<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 periods, as applicable. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC or other CDSC, applicable only to 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.
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:
<TABLE>
<CAPTION>
n
P(1+T) = ERV
<S> <C> <C>
Where: P = a hypothetical initial purchase order of $1,000 from which, in the case of Class A
Shares only, 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.
</TABLE>
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.
2
<PAGE>
Each Fund may also state total return performance for its Classes in
the form of an average annual return. This average annual return figure will be
computed by taking the sum of a Class' annual returns, then dividing that figure
by the number of years in the overall period indicated. The computation will
reflect the impact of the maximum front-end sales charge or CDSC, if any, paid
on the illustrated investment amount against the first year's return. From time
to time, each Fund may quote actual total return performance for 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.
Average annual and cumulative total return performance is shown in this
section. For purposes of life of fund returns, the Classes of each Fund
commenced operations on the following dates:
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund Tax-Free Florida Fund Tax-Free Minnesota Fund Tax-Free New Mexico Fund
Class A March 2, 1995 Class A March 2, 1995 Class A February 29, 1984 Class A October 5, 1992
Class B June 29, 1995 Class B September 15, 1995 Class B March 11, 1995 Class B March 3, 1994
Class C May 13, 1995 Class C April 22, 1995 Class C May 4, 1994 Class C May 7, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund Tax-Free Florida Insured Fund Minnesota Insured Fund Tax-Free New York Fund
Class A April 1, 1991 Class A January 1, 1992 Class A May 1, 1987 Class A November 6, 1987
Class B March 10, 1995 Class B March 11, 1994 Class B March 7, 1995 Class B November 14, 1994
Class C May 26, 1994 Class C September 29, 1997 Class C May 4, 1994 Class C April 26, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund Tax-Free Idaho Fund Tax-Free Minnesota Tax-Free North Dakota Fund
Class A March 2, 1995 Class A January 4, 1995 Intermediate Fund Class A April 1, 1991
Class B August 23, 1995 Class B March 16, 1995 Class A October 27, 1985 Class B May 10, 1994
Class C April 9, 1996 Class C January 11, 1995 Class B August 15, 1995 Class C July 29, 1995
Class C May 4, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Tax-Free Iowa Fund Minnesota High-Yield Tax-Free Oregon Insured Fund
Fund Class A September 1, 1993 Municipal Bond Class A August 1, 1993
Class A October 15, 1992 Class B March 24, 1995 Class A June 4, 1996 Class B March 12, 1994
Class B March 2, 1994 Class C January 4, 1995 Class B June 12, 1996 Class C July 7, 1995
Class C April 12, 1995 Class C June 12, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund Tax-Free Kansas Fund Tax-Free Missouri Insured Fund Tax-Free Wisconsin Fund
Class A April 23, 1987 Class A November 30, 1992 Class A November 2, 1992 Class A September 1, 1993
Class B March 22, 1995 Class B April 8, 1995 Class B March 12, 1994 Class B April 22, 1995
Class C May 6, 1994 Class C April 12, 1995 Class C November 11, 1995 Class C March 28, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The performance, as shown below, is the average annual total return
quotations of each Class of each Fund through August 31, 1999, 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 Minnesota
Intermediate Fund 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 August 31,
1999. The average annual total return for Class B Shares and Class C Shares
excluding deferred sales charge assumes the shares were not redeemed at August
31, 1999 and therefore does not reflect the deduction of a CDSC.
Securities prices fluctuated during the periods covered and past
results should not be considered as representative of future performance
3
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year ended 8/31/99 (4.82%) (1.09%) (5.47%) (1.74%) (2.76%) (1.82%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.58% 5.92% 4.26% 5.17% 5.16% 5.16%
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.26% 7.17% 5.42% 5.82% 5.99% 5.99%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.10%) (0.36%) (4.92%) (1.11%) (2.15%) (1.20%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.01% 5.34% 3.60% 4.52% 4.52% 4.52%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.25% 6.06% N/A N/A 5.20% 5.20%
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.47% 6.95% 4.93% 5.30% 5.22% 5.22%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.25%) (1.53%) (6.08%) (2.35%) (3.20%) (2.26%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 5.38% 6.74% 5.17% 6.07% 5.98% 5.98%
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.12% 7.02% 6.32% 6.73% 6.26% 6.26%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.61%) (1.97%) (6.44%) (2.70%) (3.64%) (2.70%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.11% 5.45% 3.86% 4.78% 4.55% 4.55%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.06% 5.86% 4.95% 5.28% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.39% 5.98% 3.98% 4.13% 4.61% 4.61%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the periods.
Performance would have been lower without fees waivers and expense payments.
See Investment Management Agreements for information about expense caps.
(2) Effective 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;
(iv) 1% if shares are redeemed during the sixth year following purchase; and
(v) 0% thereafter. The above figures have been calculated using this new
schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00% if
shares are redeemed within 12 months of purchase. The above figures have
been calculated using this new schedule.
4
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year ended 8/31/99 (5.39%) (1.69%) (6.09%) (2.34%) (3.36%) (2.42%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.55% 5.88% 4.17% 5.09% 5.05% 5.05%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.63% 6.45% N/A N/A 5.58% 5.58%
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 6.75% 7.16% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 7.19% 7.52% 5.20% 5.58% 5.51% 5.51%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.22%) (1.50%) (5.99%) (2.24%) (3.26%) (2.33%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.84% 6.18% 4.60% 5.51% 5.39% 5.39%
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.89% 6.80% 4.74% 5.39% 5.56% 5.56%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund(1,4)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.53%) (0.83%) (5.36%) (1.58%) (2.52%) (1.58%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.51% 5.85% 4.22% 5.14% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.51% 6.33% 5.38% 5.70% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.08% 6.61% 4.65% 4.80% 2.65% 2.65%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.70%) (0.99%) (5.60%) (1.82%) (2.76%) (1.82%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.54% 5.86% 4.23% 5.14% 5.02% 5.02%
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.55% 7.43% 5.22% 5.59% 6.46% 6.46%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the periods.
Performance would have been lower without fees waivers and expense payments.
See Investment Management Agreements for information about expense caps.
(2) Effective 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;
(iv) 1% if shares are redeemed during the sixth year following purchase; and
(v) 0% thereafter. The above figures have been calculated using this new
schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00% if
shares are redeemed within 12 months of purchase. The above figures have
been calculated using this new schedule.
(4) Class C shares were redeemed and outstanding from September 29, 1997 until
December 18, 1997, when all of the outstanding Class C shares were redeemed.
There were no outstanding Class C shares or shareholder activity from
December 19, 1997 through January 7, 1999. The performance for Class C
shares during the period from December 19, 1997 through January 7, 1999 is
based on the performance of Class B shares.
5
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Iowa Fund(1)
- ----------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.04%) (0.26%) (4.84%) (1.03%) (1.98%) (1.03%)
- ----------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.57% 5.90% 4.18% 5.09% 5.10% 5.10%
- ----------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 4.96% 5.76% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Life of Fund 3.66% 4.32% 4.83% 5.21% 6.70% 6.70%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund(1)
- ----------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (3.37%) 0.35% (4.30%) (0.49%) (1.35%) (0.40%)
- ----------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.69% 6.02% 4.26% 5.17% 5.30% 5.30%
- ----------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.36% 6.18% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.77% 6.37% 4.98% 5.37% 5.33% 5.33%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund(1)
- ----------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.79%) (1.06%) (5.50%) (1.74%) (2.74%) (1.80%)
- ----------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.21% 5.53% 3.90% 4.82% 4.80% 4.80%
- ----------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 4.99% 5.80% N/A N/A 5.04% 5.04%
- ----------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 6.20% 6.61% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
15 years ended 8/31/99 7.97% 8.24% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Life of Fund 8.02% 8.29% 4.88% 5.26% 5.04% 5.04%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
6
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Minnesota Insured Fund(1)
- -----------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (3.91%) (0.17%) (4.72%) (0.91%) (1.86%) (0.91%)
- -----------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 3.99% 5.34% 3.64% 4.56% 4.55% 4.55%
- -----------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 4.93% 5.74% N/A N/A 4.95% 4.95%
- -----------------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 6.22% 6.63% N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.59% 6.92% 4.74% 5.12% 4.86% 4.86%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund(1)
- -----------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (2.93%) (0.14%) (2.89%) (0.98%) (2.03%) (1.08%)
- -----------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 3.07% 4.04% 2.95% 3.25% 3.19% 3.19%
- -----------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 3.94% 4.52% N/A N/A 3.71% 3.71%
- -----------------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 5.12% 5.41% N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.48% 5.69% 3.36% 3.36% 3.75% 3.75%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Municipal Bond Fund(1)
- -----------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.00%) (0.27%) (4.77%) (0.99%) (1.93%) (0.99%)
- -----------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 5.41% 6.77% 5.05% 5.95% 5.99% 5.99%
- -----------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
15 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.40% 6.65% 5.79% 6.60% 5.91% 5.91%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. Effective June 9,
1997, the CDSC schedule for Class B Shares of Tax-Free Minnesota
Intermediate Fund changed as follows: (i) 2% if shares are redeemed
within two years of purchase; (ii) 1% if shares are redeemed during the
third year following purchase; and (iii) 0% thereafter. The above
figures have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
7
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Missouri Insured Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.09%) (0.38%) (4.94%) (1.13%) (2.07%) (1.12%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.19% 5.52% 3.84% 4.75% 4.71% 4.71%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.26% 6.06% 5.05% 5.38% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.26% 5.85% 4.38% 4.53% 3.98% 3.98%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.91%) (1.17%) (5.68%) (1.91%) (2.94%) (1.99%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.40% 5.74% 4.05% 4.96% 4.89% 4.89%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.24% 6.04% 4.95% 5.28% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 5.85% 6.43% 4.44% 4.59% 5.27% 5.27%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free New York Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (6.14%) (2.44%) (6.88%) (3.18%) (4.01%) (3.08%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 2.19% 3.51% 1.89% 2.77% 2.75% 2.75%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 3.19% 3.98% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 5.39% 5.79% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.20% 6.54% 3.78% 4.13% 2.99% 2.99%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
8
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free North Dakota Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.18%) (0.41%) (4.92%) (1.14%) (2.10%) (1.15%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 4.27% 5.62% 4.02% 4.94% 4.74% 4.74%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.34% 6.15% 5.21% 5.54% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.40% 6.89% 5.73% 5.88% 4.95% 4.95%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.39%) (1.67%) (6.17%) (2.41%) (3.36%) (2.41%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 3.97% 5.32% 3.65% 4.57% 4.53% 4.53%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 5.00% 5.81% 4.82% 5.15% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 4.06% 4.71% 4.12% 4.27% 4.47% 4.47%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.56%) (0.87%) (5.38%) (1.60%) (2.65%) (1.70%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 3.87% 5.21% 3.49% 4.41% 4.39% 4.39%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 4.75% 5.55% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 3.53% 4.19% 4.11% 4.50% 4.59% 4.59%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
9
<PAGE>
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:
<TABLE>
<CAPTION>
a-b 6
YIELD = 2[(---- + 1) -- 1]
cd
<S> <C> <C> <C>
Where a = dividends and interest earned during the period;
b = expenses accrued for the period (net of payments);
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.
</TABLE>
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
Funds. Using this formula, the yields for the Funds for the 30-day period ended
August 31, 1999 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
30-Day Yield at 8/31/99*
----------------------------------------------------------------------------------------------------------
<S> <C>
Tax-Free Arizona Insured Fund - Class A 4.11%
----------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund - Class B 3.52%
----------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund - Class C 3.52%
----------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund - Class A 4.71%
----------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund - Class B 4.14%
----------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund - Class C 4.13%
----------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund - Class A 4.37%
----------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund - Class B 3.78%
----------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund - Class C 3.80%
----------------------------------------------------------------------------------------------------------
Tax-Free California Fund - Class A 5.06%
----------------------------------------------------------------------------------------------------------
Tax-Free California Fund - Class B 4.49%
----------------------------------------------------------------------------------------------------------
Tax-Free California Fund - Class C 4.50%
----------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund - Class A 4.58%
----------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund - Class B 4.00%
----------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund - Class C 3.99%
----------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund - Class A 4.29%
----------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund - Class B 3.70%
----------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund - Class C 3.70%
----------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund - Class A 4.72%
----------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund - Class B 4.15%
----------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund - Class C 4.15%
----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects fee waivers and payment of expenses in effect for certain
Funds during the period. Performance would have been lower without fee
waivers and expense payments. See Investment Management Agreements for
information about fee waivers and expense payments.
10
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
30-Day Yield at 8/31/99*
-------------------------------------------------------------------------------------------------------
<S> <C>
Tax-Free Idaho Fund - Class A 4.40%
-------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund - Class B 3.83%
-------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund - Class C 3.83%
-------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund - Class A 4.17%
-------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund - Class B 3.58%
-------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund - Class C 3.58%
-------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund - Class A 4.29%
-------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund - Class B 3.69%
-------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund - Class C 3.70%
-------------------------------------------------------------------------------------------------------
Minnesota Insured Fund - Class A 4.15%
-------------------------------------------------------------------------------------------------------
Minnesota Insured Fund - Class B 3.57%
-------------------------------------------------------------------------------------------------------
Minnesota Insured Fund - Class C 3.56%
-------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund - Class A 4.23%
-------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund - Class B 3.49%
-------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund - Class C 3.49%
-------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund - Class A 4.53%
-------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund - Class B 3.95%
-------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund - Class C 3.94%
-------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund - Class A 5.32%
-------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund - Class B 4.77%
-------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund - Class C 4.77%
-------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund - Class A 4.03%
-------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund - Class B 3.44%
-------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund - Class C 3.43%
-------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund - Class A 4.68%
-------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund - Class B 4.10%
-------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund - Class C 4.11%
-------------------------------------------------------------------------------------------------------
Tax-Free New York Fund - Class A 4.72%
-------------------------------------------------------------------------------------------------------
Tax-Free New York Fund - Class B 4.15%
-------------------------------------------------------------------------------------------------------
Tax-Free New York Fund - Class C 4.16%
-------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund - Class A 5.00%
-------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund - Class B 4.44%
-------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund - Class C 4.45%
-------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund - Class A 4.63%
-------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund - Class B 4.05%
-------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund - Class C 4.05%
-------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund - Class A 4.38%
-------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund - Class B 3.80%
-------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund - Class C 3.78%
-------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects fee waivers and payment of expenses in effect for certain
Funds during the period. Performance would have been lower without fee
waivers and expense payments. See Investment Management Agreements for
information about fee waivers and expense payments.
11
<PAGE>
Yield calculations assume the maximum front-end sales charge, if any,
and do not reflect the deduction of any CDSC or Limited CDSC. Actual yield on
Class A Shares 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 a Fund in the future.
The Funds may also publish a tax-equivalent yield for a Class based on
federal tax rates and, if applicable, state tax rates, which demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to such Class'
yield. Taxable equivalent yield is computed by dividing that portion of a Class'
yield which is tax exempt by one minus a stated marginal income tax rate and
adding the product to that portion, if any, of the yield of that Fund that is
not tax exempt.
The taxable equivalent yields for the Funds for the 30-day period ended
August 31, 1999 are set forth below. These taxable equivalent yields are based
on the Federal marginal income tax rates combined with state 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. In addition, the combined marginal
rates do not reflect any state personal property taxes, such as the Florida
intangible tax, or any local taxes that may apply. The highest state marginal
tax rate was used for each Federal taxable income bracket.
The taxable equivalent yields for the Funds for the 30-day period ended
August 31, 1999 are set forth below. These taxable equivalent yields are based
on the Federal marginal income tax rates combined with state 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. In addition, the combined marginal
rates do not reflect any state personal property taxes, such as the Florida
intangible tax, or any local taxes that may apply. The highest state marginal
tax rate was used for each Federal taxable income bracket.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
ARIZONA*
- ---------------------------------------------------------------------------------------
31.63% 34.48% 39.23% 42.64%
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund - Class A 6.01% 6.27% 6.76% 7.17%
- ---------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund - Class B 5.14% 5.37% 5.79% 6.14%
- ---------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund - Class C 5.14% 5.37% 5.79% 6.14%
- ---------------------------------------------------------------------------------------
Tax-Free Arizona Fund - Class A 6.89% 7.19% 7.76% 8.21%
- ---------------------------------------------------------------------------------------
Tax-Free Arizona Fund - Class B 6.06% 6.32% 6.81% 7.22%
- ---------------------------------------------------------------------------------------
Tax-Free Arizona Fund - Class C 6.04% 6.30% 6.80% 7.20%
- ---------------------------------------------------------------------------------------
CALIFORNIA*
- ---------------------------------------------------------------------------------------
34.70% 37.42% 41.95% 45.22%
- ---------------------------------------------------------------------------------------
Tax-Free California Insured Fund - Class A 6.69% 6.98% 7.53% 7.98%
- ---------------------------------------------------------------------------------------
Tax-Free California Insured Fund - Class B 5.79% 6.04% 6.51% 6.90%
- ---------------------------------------------------------------------------------------
Tax-Free California Insured Fund - Class C 5.82% 6.07% 6.55% 6.94%
- ---------------------------------------------------------------------------------------
Tax-Free California Fund - Class A 7.75% 8.09% 8.72% 9.24%
- ---------------------------------------------------------------------------------------
Tax-Free California Fund - Class B 6.88% 7.17% 7.73% 8.20%
- ---------------------------------------------------------------------------------------
Tax-Free California Fund - Class C 6.90% 7.19% 7.75% 8.21%
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLORADO*
- ---------------------------------------------------------------------------------------
31.42% 34.28% 39.04% 42.47%
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Free Colorado Fund - Class A 6.68% 6.97% 7.51% 7.96%
- ---------------------------------------------------------------------------------------
Tax-Free Colorado Fund - Class B 5.83% 6.09% 6.56% 6.95%
- ---------------------------------------------------------------------------------------
Tax-Free Colorado Fund - Class C 5.81% 6.07% 6.55% 6.94%
- ---------------------------------------------------------------------------------------
FLORIDA*
- ---------------------------------------------------------------------------------------
28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund - Class A 5.96% 6.21% 6.70% 7.10%
- ---------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund - Class B 5.14% 5.36% 5.78% 6.12%
- ---------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund - Class C 5.14% 5.36% 5.78% 6.12%
- ---------------------------------------------------------------------------------------
Tax-Free Florida Fund - Class A 6.56% 6.84% 7.36% 7.81%
- ---------------------------------------------------------------------------------------
Tax-Free Florida Fund - Class B 5.76% 6.01% 6.48% 6.87%
- ---------------------------------------------------------------------------------------
Tax-Free Florida Fund - Class C 5.76% 6.01% 6.48% 6.87%
- ---------------------------------------------------------------------------------------
IDAHO*
- ---------------------------------------------------------------------------------------
33.90% 36.66% 41.25% 44.55%
- ---------------------------------------------------------------------------------------
Tax-Free Idaho Fund - Class A 6.65% 6.95% 7.49% 7.94%
- ---------------------------------------------------------------------------------------
Tax-Free Idaho Fund - Class B 5.79% 6.05% 6.52% 6.91%
- ---------------------------------------------------------------------------------------
Tax-Free Idaho Fund - Class C 5.79% 6.05% 6.52% 6.91%
- ---------------------------------------------------------------------------------------
IOWA*
- ---------------------------------------------------------------------------------------
34.47% 37.20% 41.75% 45.02%
- ---------------------------------------------------------------------------------------
Tax-Free Iowa Fund - Class A 6.36% 6.40% 7.16% 7.58%
- ---------------------------------------------------------------------------------------
Tax-Free Iowa Fund - Class B 5.46% 5.70% 6.15% 6.51%
- ---------------------------------------------------------------------------------------
Tax-Free Iowa Fund - Class C 5.46% 5.70% 6.15% 6.51%
- ---------------------------------------------------------------------------------------
KANSAS*
- ---------------------------------------------------------------------------------------
32.64% 35.45% 40.13% 43.50%
- ---------------------------------------------------------------------------------------
Tax-Free Kansas Fund - Class A 6.37% 6.65% 7.17% 7.59%
- ---------------------------------------------------------------------------------------
Tax-Free Kansas Fund - Class B 5.48% 5.72% 6.16% 6.53%
- ---------------------------------------------------------------------------------------
Tax-Free Kansas Fund - Class C 5.49% 5.73% 6.18% 6.55%
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINNESOTA*
- ---------------------------------------------------------------------------------------
33.76% 36.52% 41.12% 44.33%
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minnesota Insured Fund - Class A 6.27% 6.54% 7.05% 7.45%
- ---------------------------------------------------------------------------------------
Minnesota Insured Fund - Class B 5.39% 5.62% 6.06% 6.41%
- ---------------------------------------------------------------------------------------
Minnesota Insured Fund - Class C 5.37% 5.60% 6.05% 6.40%
- ---------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund - Class A 6.39% 6.66% 7.18% 7.60%
- ---------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund - Class B 5.27% 5.50% 5.93% 6.30%
- ---------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund - Class C 5.27% 5.50% 5.93% 6.30%
- ---------------------------------------------------------------------------------------
Tax-Free Minnesota Fund - Class A 6.84% 7.14% 7.69% 8.14%
- ---------------------------------------------------------------------------------------
Tax-Free Minnesota Fund - Class B 5.96% 6.22% 6.71% 7.10%
- ---------------------------------------------------------------------------------------
Tax-Free Minnesota Fund - Class C 5.95% 6.21% 6.69% 7.08%
- ---------------------------------------------------------------------------------------
Minnesota High-Yield Fund - Class A 8.03% 8.38% 9.04% 9.56%
- ---------------------------------------------------------------------------------------
Minnesota High-Yield Fund - Class B 7.20% 7.51% 8.10% 8.57%
- ---------------------------------------------------------------------------------------
Minnesota High-Yield Fund - Class C 7.20% 7.51% 8.10% 8.57%
- ---------------------------------------------------------------------------------------
MISSOURI*
- ---------------------------------------------------------------------------------------
32.32% 35.14% 39.84% 43.22%
- ---------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund - Class A 5.95% 6.21% 6.70% 7.10%
- ---------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund - Class B 5.08% 5.30% 5.72% 6.06%
- ---------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund - Class C 5.07% 5.29% 5.70% 6.04%
- ---------------------------------------------------------------------------------------
NEW MEXICO*
- ---------------------------------------------------------------------------------------
33.90% 36.66% 41.25% 44.55%
- ---------------------------------------------------------------------------------------
Tax-Free New Mexico Fund - Class A 7.08% 7.39% 7.97% 8.44%
- ---------------------------------------------------------------------------------------
Tax-Free New Mexico Fund - Class B 6.20% 6.47% 6.98% 7.39%
- ---------------------------------------------------------------------------------------
Tax-Free New Mexico Fund - Class C 6.22% 6.49% 7.00% 7.41%
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW YORK*
- ---------------------------------------------------------------------------------------
32.93% 35.73% 40.38% 43.74%
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Free New York Fund - Class A 7.04% 7.34% 7.92% 8.39%
- ---------------------------------------------------------------------------------------
Tax-Free New York Fund - Class B 6.19% 6.46% 6.96% 7.38%
- ---------------------------------------------------------------------------------------
Tax-Free New York Fund - Class C 6.20% 6.47% 6.98% 7.39%
- ---------------------------------------------------------------------------------------
NORTH DAKOTA*
- ---------------------------------------------------------------------------------------
36.64% 39.28% 43.68% 46.85%
- ---------------------------------------------------------------------------------------
Tax-Free North Dakota Fund - Class A 7.89% 8.23% 8.88% 9.41%
- ---------------------------------------------------------------------------------------
Tax-Free North Dakota Fund - Class B 7.01% 7.31% 7.88% 8.35%
- ---------------------------------------------------------------------------------------
Tax-Free North Dakota Fund - Class C 7.02% 7.33% 7.90% 8.37%
- ---------------------------------------------------------------------------------------
OREGON*
- ---------------------------------------------------------------------------------------
34.48% 37.21% 41.76% 45.04%
- ---------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund - Class A 7.07% 7.37% 7.95% 8.42%
- ---------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund - Class B 6.18% 6.45% 6.95% 7.36%
- ---------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund - Class C 6.18% 6.45% 6.95% 7.36%
- ---------------------------------------------------------------------------------------
WISCONSIN*
- ---------------------------------------------------------------------------------------
32.87% 35.67% 40.33% 43.69%
- ---------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund - Class A 6.52% 6.81% 7.34% 7.78%
- ---------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund - Class B 5.66% 5.91% 6.37% 6.75%
- ---------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund - Class C 5.63% 5.86% 6.33% 6.71%
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
* Reflects fee waivers and payment of expenses in effect for certain
Funds during the period. Performance would have been lower without fee
waivers and expense payments. See Investment Management Agreements for
information about fee waivers and expense payments.
14
<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, the Funds may quote each Class' actual total return
and/or yield performance in advertising and other types of literature. This
information may be compared to that of other mutual funds with similar
investment objectives and to stock, bond an other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund (or Class) may be compared to data prepared by Lipper
Analytical Services, Inc., Morningstar, Inc. or the performance of unmanaged
indices compiled or maintained by statistical research firms such as Lehman
Brothers or Salomon Brothers, Inc.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare the Fund's
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The total
return performance reported for these indices will reflect the reinvestment of
all distributions on a quarterly basis and market price fluctuations. The
indices do not take into account any sales charge or other fees. A direct
investment in an unmanaged index is not possible.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well as
unmanaged indices compiled and maintained by these firms, will be used in
preparing comparative illustrations. In addition, the performance of multiple
indices compiled and maintained by these firms may be combined to create a
blended performance result for comparative purposes. Generally, the indices
selected will be representative of the types of securities in which the Funds
may invest and the assumptions that were used in calculating the blended
performance will be described.
The Funds may also promote each Class' yield and/or total return
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., IBC/Donoghue's Money Market Report and
Morningstar, Inc.
Comparative information on the Consumer Price Index may also be
included in advertisements or other literature. The Consumer Price Index, as
prepared by the U.S. Bureau of Labor Statistics, is the most commonly used
measure of inflation. It indicates the cost fluctuations of a representative
group of consumer goods. It does not represent a return from an investment.
The performance of multiple indices compiled and maintained by
statistical research firms, such as Salomon Brothers and Lehman Brothers, 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 Funds may invest and the assumptions that were used in
calculating the blended performance will be described.
15
<PAGE>
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Funds may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Funds. The Funds may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of the Funds (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments, or global or international investments),
economic and political conditions, the relationship between sectors of the
economy and the economy as a whole, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time, advertisements, sales literature,
communications to shareholders or other materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Funds. In addition, selected indices may be used to illustrate
historic performance of selected asset classes. The Funds may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings which illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, domestic bonds, treasury bills and shares of the Funds. In addition,
advertisements, sales literature, communications to shareholders or other
materials may include a discussion of certain attributes or benefits to be
derived by an investment in the Funds and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax planning and investment alternatives to certificates of deposit
and other financial instruments. Such sales literature, communications to
shareholders or other materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the Funds and may
illustrate how to find the listings of the Funds in newspapers and periodicals.
Materials may also include discussions of other funds, products, and services.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. The Funds may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Funds may include information
regarding the background and experience of its portfolio managers.
16
<PAGE>
The following tables present examples, for purposes of illustration
only, of cumulative total return performance for each Class of each Fund through
August 31, 1999. For these purposes, the calculations assume the reinvestment of
any capital gains distributions, realized securities profits, distributions and
income dividends paid during the indicated periods. The performance also
reflects maximum sales charges, if any, but not any income taxes payable by
shareholders, if applicable, on the reinvested distributions included in the
calculations. The performance of Class A Shares reflects the maximum front-end
sales charge paid on purchases of shares but may also be shown without
reflecting the impact of any front-end sales charge. The performance of Class B
Shares and Class C Shares is calculated both with the applicable CDSC included
and excluded.
The net asset value of a Class fluctuates so shares, when redeemed, may
be worth more or less than the original investment, and past performance should
not be considered as representative of future results.
<TABLE>
<CAPTION>
Cumulative Total Return
- ------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Fund(1)
- ------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.71%) (3.03%) (6.96%) (3.12%) (4.16%) (3.21%)
- ------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.87%) (3.25%) (7.31%) (3.53%) (4.53%) (3.61%)
- ------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (6.06%) (2.43%) (6.65%) (2.88%) (3.91%) (2.97%)
- ------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.82%) (1.09%) (5.47%) (1.74%) (2.76%) (1.82%)
- ------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 14.37% 18.84% 13.34% 16.33% 16.29% 16.29%
- ------------------------------------------------------------------------------------------------------------------------
Life of Fund 31.43% 36.55% 24.67% 26.67% 28.43% 28.43%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund(1)
- ------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (5.90%) (2.26%) (6.32%) (2.46%) (3.51%) (2.54%)
- ------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.23%) (2.58%) (6.76%) (2.96%) (3.99%) (3.04%)
- ------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.64%) (1.98%) (6.25%) (2.46%) (3.49%) (2.54%)
- ------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.10%) (0.36%) (4.92%) (1.11%) (2.15%) (1.20%)
- ------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 12.53% 16.90% 11.20% 14.20% 14.19% 14.19%
- ------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 29.14% 34.18% N/A N/A 28.84% 28.84%
- ------------------------------------------------------------------------------------------------------------------------
Life of Fund 69.48% 76.08% 24.05% 26.05% 30.76% 30.76%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
17
<PAGE>
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
18
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund(1)
- ------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (7.54%) (3.94%) (7.91%) (4.12%) (5.07%) (4.12%)
- ------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (7.81%) (4.19%) (8.28%) (4.55%) (5.49%) (4.55%)
- ------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (7.05%) (3.42%) (7.68%) (3.96%) (4.81%) (3.88%)
- ------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.25%) (1.53%) (6.08%) (2.35%) (3.20%) (2.26%)
- ------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 17.02% 21.61% 16.32% 19.32% 19.03% 19.03%
- ------------------------------------------------------------------------------------------------------------------------
Life of Fund 30.64% 35.74% 27.95% 29.95% 22.88% 22.88%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund
- ------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (7.03%) (3.37%) (7.46%) (3.64%) (4.52%) (3.56%)
- ------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (7.60%) (4.03%) (8.23%) (4.48%) (5.34%) (4.41%)
- ------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (7.23%) (3.58%) (7.85%) (2.70%) (5.07%) (4.14%)
- ------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.61%) (1.97%) (6.44%) (2.70%) (3.64%) (2.70%)
- ------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 12.85% 17.26% 12.04% 15.04% 14.29% 14.29%
- ------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 27.98% 32.94% 27.32% 29.32% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Life of Fund 43.52% 49.12% 23.95% 24.93% 21.87% 21.87%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
19
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Colorado Fund(1)
- ---------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.88%) (3.25%) (7.25%) (3.42%) (4.38%) (3.42%)
- ---------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (7.40%) (3.78%) (7.89%) (4.13%) (5.07%) (4.14%)
- ---------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (6.75%) (3.12%) (7.31%) (3.57%) (4.51%) (3.57%)
- ---------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.39%) (1.69%) (6.09%) (2.34%) (3.36%) (2.42%)
- ---------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 14.28% 18.71% 13.05% 16.05% 15.93% 15.93%
- ---------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 31.52% 36.68% N/A N/A 31.17% 31.17%
- ---------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 92.09% 99.59% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund 135.84% 144.95% 25.29% 27.29% 33.06% 33.06%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund(1)
- ---------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.57%) (2.91%) (7.01%) (3.18%) (4.14%) (3.18%)
- ---------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.82%) (3.22%) (7.45%) (3.67%) (4.62%) (3.68%)
- ---------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (6.29%) (2.61%) (6.91%) (3.15%) (4.18%) (3.24%)
- ---------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.22%) (1.50%) (5.99%) (2.24%) (3.26%) (2.33%)
- ---------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 15.23% 19.71% 14.45% 17.45% 17.05% 17.05%
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund 29.40% 34.44% 20.13% 23.13% 26.60% 26.60%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
20
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Florida Insured Fund(1,4)
- ---------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.41%) (2.73%) (6.69%) (2.84%) (3.80%) (2.84%)
- ---------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.73%) (3.12%) (7.28%) (3.50%) (4.44%) (3.50%)
- ---------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.95%) (2.33%) (6.65%) (2.88%) (3.75%) (2.88%)
- ---------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.53%) (0.83%) (5.36%) (1.58%) (2.52%) (1.58%)
- ---------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 14.14% 18.60% 13.22% 16.22% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 30.76% 35.89% 29.97% 31.97% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund 57.20% 63.33% 28.26% 29.26% 5.14% 5.14%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund(1)
- ---------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.36%) (2.74%) (6.85%) (3.01%) (3.97%) (3.01%)
- ---------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.63%) (2.99%) (7.15%) (3.36%) (4.31%) (3.36%)
- ---------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.67%) (2.00%) (6.34%) (2.55%) (3.50%) (2.55%)
- ---------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.70%) (0.99%) (5.60%) (1.82%) (2.76%) (1.82%)
- ---------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 14.24% 18.65% 13.22% 16.22% 15.83% 15.83%
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund 34.40% 39.65% 25.48% 27.48% 33.70% 33.70%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
(4) Class C shares were redeemed and outstanding from September 29, 1997
until December 18, 1997, when all of the outstanding Class C shares
were redeemed. There were no outstanding Class C shares or shareholder
activity from December 19, 1997 through January 7, 1999. The
performance for Class C shares during the period from December 19, 1997
through January 7, 1999 is based on the performance of Class B shares.
21
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Iowa Fund(1)
- ---------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.11%) (2.47%) (6.52%) (2.66%) (3.62%) (2.66%)
- ---------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (5.61%) (1.97%) (6.19%) (2.36%) (3.32%) (2.36%)
- ---------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (4.96%) (1.22%) (5.61%) (1.79%) (2.74%) (1.79%)
- ---------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.04%) (0.26%) (4.84%) (1.03%) (1.98%) (1.03%)
- ---------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 14.35% 18.76% 13.07% 16.07% 16.09% 16.09%
- ---------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 27.36% 32.32% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund 24.04% 28.88% 23.31% 25.31% 35.24% 35.24%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund(1)
- ---------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (5.91%) (2.24%) (6.37%) (2.51%) (3.30%) (2.34%)
- ---------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.06%) (2.36%) (6.54%) (2.73%) (3.61%) (2.65%)
- ---------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (4.96%) (1.21%) (5.58%) (1.77%) (2.64%) (1.69%)
- ---------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (3.37%) 0.35% (4.30%) (0.49%) (1.35%) (0.40%)
- ---------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 14.73% 19.17% 13.32% 16.32% 16.75% 16.75%
- ---------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 29.85% 34.96% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Life of Fund 46.07% 51.77% 23.86% 25.86% 25.57% 25.57%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
22
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Minnesota Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.45%) (2.78%) (6.81%) (2.97%) (3.91%) (2.95%)
- ---------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.56%) (2.95%) (7.05%) (3.26%) (4.18%) (3.23%)
- ---------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (6.00%) (2.31%) (6.64%) (2.88%) (3.80%) (2.85%)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.79%) (1.06%) (5.50%) (1.74%) (2.74%) (1.80%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 13.16% 17.54% 12.17% 15.17% 15.09% 15.09%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 27.59% 32.59% N/A N/A 27.89% 27.89%
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 82.57% 89.75% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
15 years ended 8/31/99 215.82% 228.12% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 231.10% 244.04% 23.80% 25.80% 29.96% 29.96%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Minnesota Insured Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (5.51%) (1.85%) (5.92%) (2.04%) (3.00%) (2.03%)
- ---------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (5.63%) (1.94%) (6.14%) (2.31%) (3.35%) (2.39%)
- ---------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.20%) (1.51%) (5.87%) (2.07%) (3.01%) (2.06%)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (3.91%) (0.17%) (4.72%) (0.91%) (1.86%) (0.91%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 12.45% 16.88% 11.31% 14.31% 14.30% 14.30%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 27.23% 32.22% N/A N/A 27.33% 27.33%
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 82.89% 90.06% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 119.78% 128.34% 23.10% 25.10% 28.77% 28.77%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. The above figures
have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
23
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Minnesota Intermediate Fund(1)
- -----------------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (4.42%) (1.71%) (3.86%) (1.92%) (2.98%) (2.01%)
- -----------------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (4.34%) (1.66%) (3.99%) (2.07%) (3.13%) (2.17%)
- -----------------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (4.10%) (1.35%) (3.87%) (1.97%) (3.01%) (2.06%)
- -----------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (2.93%) (0.14%) (2.89%) (0.98%) (2.03%) (1.08%)
- -----------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 9.49% 12.60% 9.10% 10.08% 9.88% 9.88%
- -----------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 21.33% 24.71% N/A N/A 19.88% 19.88%
- -----------------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 64.70% 69.36% N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund 109.33% 115.19% 14.29% 14.29% 21.65% 21.65%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Municipal Bond Fund(1)
- -----------------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (5.88%) (2.24%) (6.28%) (2.42%) (3.39%) (2.42%)
- -----------------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (5.79%) (2.10%) (6.28%) (2.47%) (3.42%) (2.47%)
- -----------------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (4.89%) (1.17%) (5.60%) (1.81%) (2.66%) (1.71%)
- -----------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.00%) (0.27%) (4.77%) (0.99%) (1.93%) (0.99%)
- -----------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 17.13% 21.71% 15.94% 18.94% 19.07% 19.07%
- -----------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
15 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Life of Fund 18.60% 23.23% 19.88% 22.88% 20.40% 20.40%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. Effective June 9,
1997, the CDSC schedule for Class B Shares of Tax-Free Minnesota
Intermediate Fund changed as follows: (i) 2% if shares are redeemed
within two years of purchase; (ii) 1% if shares are redeemed during the
third year following purchase; and (iii) 0% thereafter. The above
figures have been calculated using this new schedule.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
24
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- -------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Missouri Insured Fund(1)
- -------------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (5.91%) (2.22%) (6.27%) (2.40%) (3.28%) (2.31%)
- -------------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.24%) (2.61%) (6.80%) (2.99%) (3.84%) (2.89%)
- -------------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.68%) (1.96%) (6.31%) (2.52%) (3.46%) (2.51%)
- -------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.09%) (0.38%) (4.94%) (1.13%) (2.07%) (1.12%)
- -------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 13.12% 17.48% 11.95% 14.95% 14.81% 14.81%
- -------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 29.24% 34.22% 27.96% 29.96% N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Life of Fund 41.92% 47.46% 26.42% 27.42% 16.03% 16.03%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund(1)
- -------------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.22%) (2.54%) (6.57%) (2.72%) (3.69%) (2.72%)
- -------------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.21%) (2.57%) (6.74%) (2.94%) (3.98%) (3.03%)
- -------------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.69%) (2.05%) (6.38%) (2.60%) (3.63%) (2.69%)
- -------------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.91%) (1.17%) (5.68%) (1.91%) (2.94%) (1.99%)
- -------------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 13.80% 18.22% 12.64% 15.64% 15.40% 15.40%
- -------------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 29.06% 34.06% 27.35% 29.35% N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Life of Fund 48.04% 53.82% 29.96% 27.96% 18.59% 18.59%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
25
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free New York Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (7.21%) (3.64%) (7.63%) (3.83%) (4.69%) (3.74%)
- ---------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (8.06%) (4.51%) (8.60%) (4.88%) (5.72%) (4.78%)
- ---------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (8.04%) (3.79%) (8.04%) (4.34%) (5.18%) (4.25%)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (6.14%) (2.44%) (6.88%) (3.18%) (4.01%) (3.08%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 6.70% 10.90% 5.77% 8.55% 8.47% 8.47%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 17.02% 21.52% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 69.10% 75.63% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 103.58% 111.52% 19.50% 21.41% 13.69% 13.69%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.04%) (2.36%) (6.39%) (2.53%) (3.51%) (2.54%)
- ---------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.02%) (2.38%) (6.55%) (2.74%) (3.70%) (2.74%)
- ---------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.08%) (1.41%) (5.75%) (1.95%) (2.91%) (1.96%)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.18%) (0.41%) (4.92%) (1.14%) (2.10%) (1.15%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 13.36% 17.82% 12.56% 15.56% 14.91% 14.91%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 29.69% 34.80% 28.91% 30.91% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 68.65% 75.22% 34.45% 35.45% 21.87% 21.87%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter.
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
26
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Oregon Insured Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.73%) (3.08%) (7.19%) (3.36%) (4.22%) (3.27%)
- ---------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (7.43%) (3.79%) (7.91%) (4.15%) (5.09%) (4.15%)
- ---------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (6.86%) (3.22%) (7.50%) (3.76%) (4.70%) (3.77%)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (5.39%) (1.67%) (6.17%) (2.41%) (3.36%) (2.41%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 12.38% 16.81% 11.34% 14.34% 14.21% 14.21%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 27.63% 32.64% 26.53% 28.53% N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 27.38% 32.34% 24.72% 25.72% 19.94% 19.94%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund(1)
- ---------------------------------------------------------------------------------------------------------------------------
3 months ended 8/31/99 (6.26%) (2.58%) (6.62%) (2.77%) (3.81%) (2.85%)
- ---------------------------------------------------------------------------------------------------------------------------
6 months ended 8/31/99 (6.28%) (2.64%) (6.80%) (3.00%) (4.05%) (3.10%)
- ---------------------------------------------------------------------------------------------------------------------------
9 months ended 8/31/99 (5.61%) (1.96%) (6.29%) (2.50%) (3.55%) (2.60%)
- ---------------------------------------------------------------------------------------------------------------------------
1 year ended 8/31/99 (4.56%) (0.87%) (5.38%) (1.60%) (2.65%) (1.70%)
- ---------------------------------------------------------------------------------------------------------------------------
3 years ended 8/31/99 12.06% 16.46% 10.83% 13.83% 13.76% 13.76%
- ---------------------------------------------------------------------------------------------------------------------------
5 years ended 8/31/99 26.12% 31.01% N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
10 years ended 8/31/99 N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
Life of Fund 23.14% 27.94% 19.19% 21.19% 22.02% 22.02%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects fee waivers and payment of expenses in effect during the
periods. Performance would have been lower without fees waivers and
expense payments. See Investment Management Agreements for information
about expense caps.
(2) Effective 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; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter.
27
<PAGE>
(3) Effective June 9, 1997, the CDSC applicable to Class C Shares is 1.00%
if shares are redeemed within 12 months of purchase. The above figures
have been calculated using this new schedule.
28
<PAGE>
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Funds and other mutual funds in the Delaware
Investments family, will provide general information about investment
alternatives and scenarios that will allow investors to assess their personal
goals. This information will include general material about investing as well as
materials reinforcing various industry-accepted principles of prudent and
responsible 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 funds in the
Delaware Investments family, investment disciplines employed in seeking the
objectives of the Funds and of the other funds in the Delaware Investments
family. The Distributor may also from time to time cite general or specific
information about the institutional clients of the Manager, 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, 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. Investors also should consider their financial ability
to continue to purchase shares during periods of high fund share prices.
Delaware Investments offers three services -- Automatic Investing Plan, Direct
Deposit Purchase Plan and the Wealth Builder Option -- that can help to keep
your regular investment program on track. See Investing by Electronic Fund
Transfer - Direct Deposit Purchase Plan, Investing by Electronic Fund Transfer -
Automatic Investing Plan and Wealth Builder Option under Investment Plans for a
complete description of these services, including restrictions or limitations.
29
<PAGE>
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share of a stock or bond fund over a
period of time will be lower than the average price per share of the same time
period.
-----------------------------------------------------------------------
Price Number
Investment Per of Shares
Amount Share Purchased
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Month 1 $100 $10.00 10
-----------------------------------------------------------------------
Month 2 $100 $12.50 8
-----------------------------------------------------------------------
Month 3 $100 $5.00 20
-----------------------------------------------------------------------
Month 4 $100 $10.00 10
-----------------------------------------------------------------------
$400 $37.50 48
-----------------------------------------------------------------------
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of any stock or bond fund in the Delaware
Investments family. Dollar-cost averaging can be appropriate for investments in
shares of funds that tend to fluctuate in value. Please obtain the prospectus of
any fund in the Delaware Investments family in which you plan to invest through
a dollar-cost averaging program. The prospectus contains additional information,
including charges and expenses. Please read it carefully before you invest or
send money.
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Fund shares,
your investment is given yet another opportunity to grow. It's called the Power
of Compounding. Each Fund may include illustrations showing the power of
compounding in advertisements and other types of literature.
30
<PAGE>
TRADING PRACTICES AND BROKERAGE
The Funds select brokers, dealers and banks 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 execution. Best execution refers to many factors, including
the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. When a commission is paid, a Fund pays
reasonably competitive brokerage commission rates based upon the professional
knowledge of the Manager's trading department as to rates paid and charged for
similar transactions throughout the securities industry. In some instances, a
Fund pays a minimal share transaction cost when the transaction presents no
difficulty. Trades generally are made on a net basis where a Fund either buys or
sells the securities 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 ask and bid price) which is the equivalent of a
commission.
During the fiscal years ended December 31, 1997, the fiscal period ended
August 31, 1998 and the fiscal year ended August 31, 1999, 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 August 31, 1999, 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 (the "1934 Act") 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
Investments family. Subject to best 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
31
<PAGE>
execution. Transactions involving commingled orders are allocated in a manner
deemed equitable to each account or fund. When a combined order is executed in a
series of transactions at different prices, each account participating in the
order may be allocated an average price obtained from the executing broker. It
is believed that the ability of the accounts to participate in volume
transactions will generally be beneficial to the accounts and funds. Although it
is recognized that, in some cases, the joint execution of orders could adversely
affect the price or volume of the security that a particular account or fund may
obtain, it is the opinion of the Manager and the Board of Trustees that the
advantages of combined orders outweigh the possible disadvantages of separate
transactions.
Consistent with the Conduct Rules of the NASD Regulation, Inc. (the
"NASD"), and subject to seeking best execution, the Funds may place orders with
broker/dealers that have agreed to defray certain expenses of the funds in the
Delaware Investments family such as custodian fees, and may, at the request of
the Distributor, give consideration to sales of shares of the funds in the
Delaware Investments family 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 or dispose of 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. To
that extent, the Funds 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
that Fund, during the particular fiscal year, exclusive of securities whose
maturities at the time of acquisition are one year or less.
The degree of portfolio activity may affect brokerage costs of a Fund
and taxes payable by such Fund's shareholders to the extent of any net realized
capital gains. Each Fund's portfolio turnover rate is not expected to exceed
100%; however, under certain market conditions a Fund may experience a rate of
portfolio turnover which could exceed 100%. A turnover rate of 100% would occur,
for example, if all the investments in a Fund's portfolio at the beginning of
the year were replaced by the end of the year.
A Fund's portfolio turnover will be increased if that 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.
32
<PAGE>
The portfolio turnover rates for each Fund for the past two fiscal
periods were as follows:
------------------------------------------------------------------------
Fund 1998 1999
------------------------------------------------------------------------
------------------------------------------------------------------------
Tax-Free Arizona Insured Fund 21% 29%
------------------------------------------------------------------------
Tax-Free Arizona Fund 96% 68%
------------------------------------------------------------------------
Tax-Free California Insured Fund 44% 114%
------------------------------------------------------------------------
Tax-Free California Fund 62% 123%
------------------------------------------------------------------------
Tax-Free Colorado Fund 36% 55%
------------------------------------------------------------------------
Tax-Free Florida Insured Fund 13% 25%
------------------------------------------------------------------------
Tax-Free Florida Fund 20% 30%
------------------------------------------------------------------------
Tax-Free Idaho Fund 8% 2%
------------------------------------------------------------------------
Tax-Free Iowa Fund 13% 2%
------------------------------------------------------------------------
Tax-Free Kansas Fund 40% 26%
------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund 14% 13%
------------------------------------------------------------------------
Minnesota Insured Fund 6% 4%
------------------------------------------------------------------------
Tax-Free Minnesota Fund 13% 17%
------------------------------------------------------------------------
Minnesota High-Yield Fund 7% 35%
------------------------------------------------------------------------
Tax-Free Missouri Insured Fund 18% 7%
------------------------------------------------------------------------
Tax-Free New Mexico Fund 20% 37%
------------------------------------------------------------------------
Tax-Free New York Fund 21% 21%
------------------------------------------------------------------------
Tax-Free North Dakota Fund 23% 28%
------------------------------------------------------------------------
Tax-Free Oregon Insured Fund 5% 10%
------------------------------------------------------------------------
Tax-Free Wisconsin Fund 16% 6%
------------------------------------------------------------------------
33
<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 or trustees and employees of any fund in the Delaware
Investments family, 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 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 which
are subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and generally are not subject to a CDSC.
Selling dealers have the responsibility of transmitting orders
promptly. Each 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. If a purchase is canceled because your check is returned unpaid, you
are responsible for any loss incurred. A Fund can redeem shares from your
account(s) to reimburse itself for any loss, and you may be restricted from
making future purchases in any of the funds in the Delaware Investments family.
Each Fund reserves the right to reject purchase orders paid by third-party
checks or checks that are not drawn on a domestic branch of a United States
financial institution. If a check drawn on a foreign financial institution is
accepted, you may be subject to additional bank charges for clearance and
currency conversion.
Each Fund also reserves the right, following shareholder notification,
to charge a service fee on accounts that, as a result of redemption, have
remained below the minimum stated account balance for a period of three or more
consecutive months. Holders of such accounts may be notified of their
insufficient account balance and advised that they have until the end of the
current calendar quarter to raise their balance to the stated minimum. If the
account has not reached the minimum balance requirement by that time, the Fund
will charge a $9 fee for that quarter and each subsequent calendar quarter until
the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
The NASD has adopted amendments to its Conduct Rules relating to
investment company sales charges. The Funds and the Distributor intend to
operate in compliance with these rules.
Class A Shares of Tax-Free Funds, Insured Funds and Minnesota High-Yield
Fund are purchased at the offering price which reflects a maximum front-end
sales charge of 3.75%. Class A Shares of Tax-Free Minnesota Intermediate Fund is
34
<PAGE>
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
in the Prospectus. Class A Shares are also subject to annual 12b-1 Plan expenses
for the life of the investment.
Class B Shares of Tax-Free Funds, Insured Funds and Minnesota High-Yield
Fund are purchased at net asset value and are subject to a CDSC of: (i) 4% if
shares are redeemed within two years of purchase; (ii) 3% if shares are redeemed
during the third or fourth year following purchase; (iii) 2% if shares are
redeemed during the fifth year following purchase; (iv) 1% if shares are
redeemed during the sixth year following purchase; and (v) 0% thereafter. 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
Funds, Insured Funds and Minnesota High-Yield Fund 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. See Automatic Conversion of Class B
Shares, below.
Class B Shares of Tax-Free Minnesota Intermediate Fund is purchased at
net asset value and are subject to a CDSC of: (i) 2% if shares are redeemed
within two years of purchase; (ii) 1% if shares are redeemed during the third
year following purchase; and (iii) 0% thereafter. 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
five years after purchase. Class B Shares of Tax-Free Minnesota Intermediate
Fund will automatically convert to Class A Shares 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.
See Automatic Conversion of Class B Shares, below.
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. Unlike Class B Shares, Class C Shares do not convert to another class.
Class A Shares, Class B Shares and Class C 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 Shares, Class
B Shares and Class C Shares, of any expenses under the Fund's 12b-1 Plans.
See Determining Offering Price and Net Asset Value and Plans Under Rule
12b-1 in this Part B.
Certificates representing shares purchased are not ordinarily issued
unless, in the case of Class A 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 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 their shares may only redeem those shares by written request. The
investor's certificate(s) must accompany such request.
35
<PAGE>
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.
The higher 12b-1 Plan expenses on Class B Shares and Class C Shares
will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money. In addition, the effect of any return earned on such additional money
will diminish over time. In comparing Class B Shares to Class C Shares,
investors should also consider the duration of the annual 12b-1 Plan expenses to
which each of the classes is subject and the desirability of an automatic
conversion feature, which is available only for Class B Shares.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Funds, the Distributor and others will be paid, in the
case of Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of Class B Shares and Class C Shares, from the
proceeds of the 12b-1 Plan fees and, if applicable, the CDSC incurred upon
redemption. Financial advisers may receive different compensation for selling
Class A Shares, Class B Shares and Class C Shares. Investors should understand
that the purpose and function of the respective 12b-1 Plans and the CDSCs
applicable to Class B Shares and Class C Shares are the same as those of the
12b-1 Plan and the front-end sales charge applicable to Class A Shares in that
such fees and charges are used to finance the distribution of the respective
Classes. See Plans under Rule 12b-1.
Dividends, if any, paid on Class A Shares, Class B Shares and Class C
Shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except that the additional amount of 12b-1
Plan expenses relating to Class B Shares and Class C Shares will be borne
exclusively by such shares. See Determining Offering Price and Net Asset Value.
Class A Shares
Purchases of $100,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges as shown in the tables in the Prospectus,
and may include a series of purchases over a 13-month period under a Letter of
Intention signed by the purchaser. See Special Purchase Features - Class A
Shares, below for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may reallow to dealers up to the full amount of the front-end sales.
In addition, certain dealers who enter into an agreement to provide extra
training and information on Delaware Investments products and services and who
increase sales of funds in the Delaware Investments family may receive an
additional commission of up to 0.15% of the offering price in connection with
sales of Class A Shares. Such dealers must meet certain requirements in terms of
organization and distribution capabilities and their ability to increase sales.
The Distributor should be contacted for further information on these
requirements as well as the basis and circumstances upon which the additional
commission will be paid. Participating dealers may be deemed to have additional
responsibilities under the securities laws.
Dealer's Commission
As described in the Prospectus, for initial purchases of Class A Shares
of $1,000,000 or more, a dealer's commission may be paid by the Distributor to
financial advisers through whom such purchases are effected.
For accounts with assets over $1 million, the dealer commission resets
annually to the highest incremental commission rate on the anniversary of the
36
<PAGE>
first purchase. In determining a financial adviser's eligibility for the
dealer's commission, purchases of Class A Shares of other Delaware Investments
funds as to which a Limited CDSC applies (see Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange) may be aggregated with those of the Class A Shares of a
Fund. Financial advisers also may be eligible for a dealer's commission in
connection with certain purchases made under a Letter of Intention or pursuant
to an investor's Right of Accumulation. Financial advisers should contact the
Distributor concerning the applicability and calculation of the dealer's
commission in the case of combined purchases.
An exchange from other Delaware Investments funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within prescribed periods after purchase
may be subject to a CDSC imposed at the rates and within the time periods set
forth above, and Class C Shares redeemed within 12 months of purchase may be
subject to a CDSC of 1%. CDSCs are charged as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the net asset value at the time of purchase of 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. For purposes of this
formula, the "net asset value at the time of purchase" will be the net asset
value at purchase of Class B Shares or Class C Shares of a Fund, even if those
shares are later exchanged for shares of another Delaware Investments fund. In
the event of an exchange of the shares, the "net asset value of such shares at
the time of redemption" will be the net asset value of the shares that were
acquired in the exchange. See Waiver of Contingent Deferred Sales Charge--Class
B Shares and Class C Shares under Redemption and Exchange for a list of the
instances in which the CDSC is waived.
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Funds, Insured
Funds and Minnesota High-Yield Fund will still be subject to the annual 12b-1
Plan expenses of up to 1% of average daily net assets of those shares. See
Automatic Conversion of Class B Shares, above. Investors are reminded that the
Class A Shares into which Class B Shares will convert are subject to ongoing
annual 12b-1 Plan expenses of up to a maximum of 0.25% of average daily net
assets of such shares.
During the fourth year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Minnesota
Intermediate Fund will still be subject to the annual 12b-1 Plan expenses of up
to 1% of average daily net assets of those shares. See Automatic Conversion of
Class B Shares, above. Investors are reminded that the Class A Shares into which
Class B Shares will convert are subject to ongoing annual 12b-1 Plan expenses of
up to a maximum of 0.25% of average daily net assets representing such shares.
In determining whether a CDSC applies to a redemption of Class B Shares,
it will be assumed that Class B Shares of Tax-Free Funds, Insured Funds and
Minnesota High-Yield Fund held for more than six years and Class B Shares of
Tax-Free Minnesota Intermediate Fund held for more than three years are redeemed
first, followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year or
three-year period, as applicable. With respect to Class C Shares, it will be
assumed that shares held for more than 12 months are redeemed first followed by
shares acquired through the reinvestment of dividends or distributions, and
finally by shares held for 12 months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge - Class B Shares and
Class C Shares under Redemption and Exchange.
37
<PAGE>
Deferred Sales Charge Alternative - Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class B Shares of Tax-Free Funds, Insured Funds
and Minnesota High-Yield Fund at the time of purchase from its own assets in an
amount equal to no more than 4% of the dollar amount purchased. Such payments
for Class B Shares of Tax-Free Minnesota Intermediate Fund is currently in an
amount equal to no more than 2%. In addition, from time to time, upon written
notice to all of its dealers, the Distributor may hold special promotions for
specified periods during which the Distributor may pay additional compensation
to dealers or brokers for selling Class B Shares at the time of purchase. As
discussed below, however, Class B Shares are subject to annual 12b-1 Plan
expenses of up to a maximum of 1% for approximately eight years after purchase
for Tax-Free Funds, Insured Funds and Minnesota High-Yield Fund and
approximately five years after purchase for Tax-Free Minnesota Intermediate Fund
and, if Class B Shares of Tax-Free Funds, Insured Funds and Minnesota High-Yield
Fund are redeemed within six years of purchase and Class B Shares of Tax-Free
Minnesota Intermediate Fund are redeemed within three years of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees, if any, are paid
to the Distributor and others for providing distribution and related services,
and bearing related expenses, in connection with the sale of Class B Shares.
These payments support the compensation paid to dealers or brokers for selling
Class B Shares. Payments to the Distributor and others under the Class B 12b-1
Plan may be in an amount equal to no more than 1% annually. The combination of
the CDSC and the proceeds of the 12b-1 Plan fees makes it possible for a Fund to
sell Class B Shares without deducting a front-end sales charge at the time of
purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class B Shares
described in this Part B, even after the exchange. Tax-Free Funds' Class B
Shares, Insured Funds' Class B Shares and Minnesota High-Yield Fund's Class C
Shares CDSC schedule may be higher than the CDSC schedule for Class B Shares
acquired as a result of the exchange. See Redemption and Exchange.
Automatic Conversion of Class B Shares
Class B Shares of Tax-Free Funds, Insured Funds and Minnesota
High-Yield Fund, other than shares acquired through reinvestment of dividends,
held for eight years after purchase are eligible for automatic conversion into
Class A Shares. Class B Shares of Tax-Free Minnesota Intermediate Fund, other
than shares acquired through reinvestment of dividends, held for five years
after purchase are eligible for automatic conversion into Class A Shares.
Conversions of Class B Shares into Class A Shares will occur only four times in
any calendar year, on the 18th business day or next business day of March, June,
September and December (each, a "Conversion Date"). If, as applicable, the
eighth or fifth anniversary after a purchase of Class B Shares falls on a
Conversion Date, an investor's Class B Shares will be converted on that date. If
such anniversary occurs between Conversion Dates, an investor's Class B Shares
will be converted on the next Conversion Date after the anniversary.
Consequently, if a shareholder's anniversary falls on the day after a Conversion
Date, that shareholder will have to hold Class B Shares for as long as three
additional months after, as applicable, the eighth or fifth anniversary of
purchase before the shares will automatically convert into Class A Shares.
Investors are reminded that the Class A Shares into which Class B Shares will
convert are subject to ongoing annual 12b-1 Plan expenses of up to a maximum of
0.25% of average daily net assets representing such shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
38
<PAGE>
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount purchased.
As discussed below, Class C Shares are subject to annual 12b-1 Plan expenses
and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C 12b-1 Plan may
be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class C Shares as
described in this Part B. See Redemption and Exchange.
Plans Under Rule 12b-1
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 particular Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the Class to which the Plan applies. Such shares are not included in
calculating the Plans' fees.
The Plans permit the Funds, 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 Class B Shares 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 Shares, Class B Shares 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.
39
<PAGE>
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 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
Trustees 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
Shares, Class B Shares and Class C Shares would be borne by such persons without
any payment from such Classes. Subject to seeking best 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 Trustees of the Funds, including a majority of the
trustees 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 called for the purpose of voting on the Plans and such
Distribution Agreements. Continuation of the Plans and the Distribution
Agreements, as amended, must be approved annually by the Board of Trustees in
the same manner as specified above.
Each year, the trustees must determine whether continuation of the Plans
is in the best interest of shareholders of, respectively, Class A Shares, Class
B Shares and Class C Shares of each Fund and that there is a reasonable
likelihood of the Plan relating to a Class providing a benefit to that Class.
The Plans and the Distribution Agreements, as amended, may be terminated at any
time without penalty by a majority of those trustees who are not "interested
persons" or by a majority vote of the relevant Fund 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 Fund Class'
outstanding voting securities, as well as by a majority vote of those trustees
who are not "interested persons." With respect to each Class A Shares' Plan, any
material increase in the maximum percentage payable thereunder must also be
approved by a majority of the outstanding voting securities of the respective
Fund's B Class. Also, any other material amendment to the Plans must be approved
by a majority vote of the trustees including a majority of the noninterested
trustees of the Funds having no interest in the Plans. In addition, in order for
the Plans to remain effective, the selection and nomination of trustees who are
not "interested persons" of the Funds must be effected by the trustees who
themselves are not "interested persons" and who have no direct or indirect
financial interest in the Plans. Persons authorized to make payments under the
Plans must provide written reports at least quarterly to the Board of Trustees
for their review.
The following tables show the amounts paid under each Class 12b-1 Plan
for the fiscal year ended August 31, 1999:
40
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Annual/ Interest
Semi- Broker Dealer on Commission
Annual Broker Sales Service Broker to
Advertising Reports Trails Charges Expenses Sales Wholesalers
Charges
- ---------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $110 $17,188 $245,144 $29,159
- ---------------------------------------------------------------------------------------------------------
Class B $13,426 $23,161 $15,788 $3,124
- ---------------------------------------------------------------------------------------------------------
Class C $5,318 $4,651 $389 $23
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Arizona
- ---------------------------------------------------------------------------------------------------------
Class A $36,134 $847
- ---------------------------------------------------------------------------------------------------------
Class B $13,163 $22,801 $14,314 $2,502
- ----------------------------------------------------------------------------------- ---------------------
Class C $4,128 $4,795 $500 $154
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free California Insured
- ---------------------------------------------------------------------------------------------------------
Class A $67,807 $1,840
- ---------------------------------------------------------------------------------------------------------
Class B $14,278 $31,889 $16,716 $3,661
- ------------------------------------------------------------------ ------------------ -------------------
Class C $3,076 $1,397 $304 $136
- ------------------------------------------------------------------------------------ --------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free California
- ---------------------------------------------------------------------------------------------------------
Class A $45,202 $574
- ---------------------------------------------------------------------------------------------------------
Class B $27,450 $46,568 $30,815 $5,711
- ----------------------------------------------------------------------------------- ---------------------
Class C $1,050 $20,500 $1,620 $1,455
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Colorado
- ---------------------------------------------------------------------------------------------------------
Class A $221 $34,338 $505,327 $85,568
- ---------------------------------------------------------------------------------------------------------
Class B $28,449 $53,373 $32,944 $8,545
- ------------------------------------------------------------------------------------ --------------------
Class C $12,937 $14,543 $1,441 $1,079
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured
- ---------------------------------------------------------------------------------------------------------
Class A $89 $26,030 $152,651 $8,888
- ---------------------------------------------------------------------------------------------------------
Class B $8,735 $25,083 $6,007 $3,459
- ---------------------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Florida
- ---------------------------------------------------------------------------------------------------------
Class A $9 $831 $23,595 $2,315
- ---------------------------------------------------------------------------------------------------------
Class B $10,419 $15,008 $14,035 $2,026
- ---------------------------------------------------------------------------------------------------------
Class C $2,540 $3,151 $1,038 $268
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Idaho
- ---------------------------------------------------------------------------------------------------------
Class A $102,584 $3,352
- ---------------------------------------------------------------------------------------------------------
Class B $21,669 $47,305 $13,243 $4,280
- ---------------------------------------------------------------------------------------------------------
Class C $10,008 $9,767 $786 $1,127
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Promotional
Broker Promotional Prospectus Wholesaler
Meetings Other Printing Telephone Expenses Other Total
- ------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A $16,134 $12,806 $3,246 $8,250 $33,129 $365,166
- ------------------------------------------------------------------------------------------------------------
Class B $39 $102 $55,640
- ------------------------------------------------------------------------------------------------------------
Class C $10,381
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Arizona
- ------------------------------------------------------------------------------------------------------------
Class A $36,981
- ------------------------------------------------------------------------------------------------------------
Class B $60 $180 $53,020
- ------------------------------------------------------------------------------------------------------------
Class C $9,577
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free California Insured
- ------------------------------------------------------------------------------------------------------------
Class A $69,647
- ------------------------------------------------------------------------------------------------------------
Class B $392 $2,098 $69,034
- ------------------------------------------------------------------------------------------------------------
Class C $4,913
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free California
- ------------------------------------------------------------------------------------------------------------
Class A $45,776
- ------------------------------------------------------------------------------------------------------------
Class B $110,544
- ------------------------------------------------------------------------------------------------------------
Class C $24,625
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Colorado
- ------------------------------------------------------------------------------------------------------------
Class A $21,778 $30,174 $7,319 $84,719 $769,444
- ------------------------------------------------------------------------------------------------------------
Class B $123,311
- ------------------------------------------------------------------------------------------------------------
Class C $30,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured
- ------------------------------------------------------------------------------------------------------------
Class A $11,255 $17,314 $2,589 $6,290 $14,075 $239,181
- ------------------------------------------------------------------------------------------------------------
Class B $103 $1,029 $44,416
- ------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Florida
- ------------------------------------------------------------------------------------------------------------
Class A $81 $643 $308 $324 $28,106
- ------------------------------------------------------------------------------------------------------------
Class B $41,488
- ------------------------------------------------------------------------------------------------------------
Class C $6,997
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Idaho
- ------------------------------------------------------------------------------------------------------------
Class A $105,936
- ------------------------------------------------------------------------------------------------------------
Class B $86,497
- ------------------------------------------------------------------------------------------------------------
Class C $21,688
- ------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Interest
Annual/ on
Semi- Broker Dealer Broker Commission
Annual Broker Sales Service Sales to
Advertising Reports Trails Charges Expenses Charges Wholesalers
- ---------------------------------------------------------------------------------------------------------
Tax-Free Iowa
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $32 $10,349 $64,969 $7,596
- ---------------------------------------------------------------------------------------------------------
Class B $11,033 $20,339 $10,582 $1,827
- ---------------------------------------------------------------------------------------------------------
Class C $7,562 $4,501 $271 $569
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Kansas
- ---------------------------------------------------------------------------------------------------------
Class A $7 $121 $27,533 $3,807
- ---------------------------------------------------------------------------------------------------------
Class B $10,783 $16,900 $13,164 $2,036
- ------------------------------------------------------------------ ------------------ -------------------
Class C $806 $640 $99 $19
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Minnesota
Intermediate
- ---------------------------------------------------------------------------------------------------------
Class A $144 $78,574 $7,928
- ---------------------------------------------------------------------------------------------------------
Class B $2,888 $10,178 $3,880 $2,922
- ---------------------------------------------------------------------------------------------------------
Class C $9,030 $7,918 $644 $1,543
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Minnesota Insured
- ---------------------------------------------------------------------------------------------------------
Class A $376 $685,860 $20,047
- ---------------------------------------------------------------------------------------------------------
Class B $28,671 $50,197 $30,200 $5,230
- ------------------------------------------------------------------------------------ --------------------
Class C $26,591 $8,171 $1,419 $1,275
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Minnesota
- ---------------------------------------------------------------------------------------------------------
Class A $244 $29,752 $879,664 $52,978
- ---------------------------------------------------------------------------------------------------------
Class B $28,144 $45,631 $34,892 $6,364
- ---------------------------------------------------------------------------------------------------------
Class C $25,617 $29,203 $2,670 $4,224
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Minnesota High-Yield
- ---------------------------------------------------------------------------------------------------------
Class A $93,540 $1,343
- ---------------------------------------------------------------------------------------------------------
Class B $36,969 $57,679 $45,271 $7,149
- ------------------------------------------------------------------------------------ --------------------
Class C $29,831 $25,095 $2,247 $3,599
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured
- ---------------------------------------------------------------------------------------------------------
Class A $38 $13,215 $73,000 $2,679
- ---------------------------------------------------------------------------------------------------------
Class B $24,078 $61,342 $16,430 $3,106
- --------------------------------------------------------- --------- -------------------------------------
Class C $886 $701 $171 $52
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free New Mexico
- ---------------------------------------------------------------------------------------------------------
Class A $14 $1,763 $38,393 $9,365
- ---------------------------------------------------------------------------------------------------------
Class B $5,185 $8,959 $5,782 $1,129
- ---------------------------------------------------------------------------------------------------------
Class C $2,751 $788 $371 $49
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Promotional
Broker Promotional Prospectus Wholesaler
Meetings Other Printing Telephone Expenses Other Total
- ------------------------------------------------------------------------------------------------------------
Tax-Free Iowa
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A $2,129 $3,991 $939 $8,838 $98,843
- ------------------------------------------------------------------------------------------------------------
Class B $72 $322 $44,175
- ------------------------------------------------------------------------------------------------------------
Class C $12,903
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Kansas
- ------------------------------------------------------------------------------------------------------------
Class A $60 $18 $31,546
- ------------------------------------------------------------------------------------------------------------
Class B $65 $42,948
- ------------------------------------------------------------------------------------------------------------
Class C $1,565
- -----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota
Intermediate
- ------------------------------------------------------------------------------------------------------------
Class A $86,646
- ------------------------------------------------------------------------------------------------------------
Class B $217 $20,085
- ------------------------------------------------------------------------------------------------------------
Class C $19,135
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Minnesota Insured
- ------------------------------------------------------------------------------------------------------------
Class A $706,283
- ------------------------------------------------------------------------------------------------------------
Class B $102 $448 $114,848
- ------------------------------------------------------------------------------------------------------------
Class C $37,456
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota
- ------------------------------------------------------------------------------------------------------------
Class A $15,096 $27,381 $7,414 $26,269 $1,038,798
- ------------------------------------------------------------------------------------------------------------
Class B $115,031
- -----------------------------------------------------------------------------------------------------------
Class C $61,714
- -----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Minnesota High-Yield
- ------------------------------------------------------------------------------------------------------------
Class A $94,883
- ------------------------------------------------------------------------------------------------------------
Class B $147,068
- ------------------------------------------------------------------------------------------------------------
Class C $60,772
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured
- ------------------------------------------------------------------------------------------------------------
Class A $3,008 $4,177 $1,402 $3,334 $100,853
- ------------------------------------------------------------------------------------------------------------
Class B $529 $5,616 $111,101
- ------------------------------------------------------------------------------------------------------------
Class C $1,810
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico
- ------------------------------------------------------------------------------------------------------------
Class A $504 $1,036 $1,293 $1,808 $54,176
- ------------------------------------------------------------------------------------------------------------
Class B $21,055
- ------------------------------------------------------------------------------------------------------------
Class C $61 $4,020
- ------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Interest
Annual/ on
Semi- Broker Dealer Broker Commission
Annual Broker Sales Service Sales to
Advertising Reports Trails Charges Expenses Charges Wholesalers
- ---------------------------------------------------------------------------------------------------------
Tax-Free New York
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A $26,499 $227
- ---------------------------------------------------------------------------------------------------------
Class B $2,434 $5,084 $1,618 $437
- ---------------------------------------------------------------------------------------------------------
Class C $555 $156 $169
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free North Dakota
- ---------------------------------------------------------------------------------------------------------
Class A $23 $7,297 $52,216 $1,960
- ---------------------------------------------------------------------------------------------------------
Class B $2,472 $3,274 $4,148 $501
- ---------------------------------------------------------------------------------------------------------
Class C $214 $855 $72
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured
- ---------------------------------------------------------------------------------------------------------
Class A $59,437 $8,916
- ---------------------------------------------------------------------------------------------------------
Class B $15,531 $32,790 $75 $15,633 $4,147
- ---------------------------------------------------------------------------------------------------------
Class C $5,792 $6,673 $615 $837
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin
- ---------------------------------------------------------------------------------------------------------
Class A $16 $2,030 $76,360 $9,850
- ---------------------------------------------------------------------------------------------------------
Class B $7,134 $13,396 $6,377 $1,340
- ---------------------------------------------------------------------------------------------------------
Class C $8,103 $5,165 $406 $753
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Promotional
Broker Promotional Prospectus Wholesaler
Meetings Other Printing Telephone Expenses Other Total
- -------------------------------------------------------------------------------------------------------------
Tax-Free New York
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $73 $16 $26,815
- -------------------------------------------------------------------------------------------------------------
Class B $9,573
- -------------------------------------------------------------------------------------------------------------
Class C $54 $934
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota
- -------------------------------------------------------------------------------------------------------------
Class A $3,131 $3,063 $1,193 $6,036 $74,919
- -------------------------------------------------------------------------------------------------------------
Class B $32 $228 $10,655
- -------------------------------------------------------------------------------------------------------------
Class C $1,141
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured
- -------------------------------------------------------------------------------------------------------------
Class A $68,353
- -------------------------------------------------------------------------------------------------------------
Class B $260 $741 $69,177
- -------------------------------------------------------------------------------------------------------------
Class C $13,917
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin
- -------------------------------------------------------------------------------------------------------------
Class A $57 $113 $136 $88,562
- -------------------------------------------------------------------------------------------------------------
Class B $28,247
- -------------------------------------------------------------------------------------------------------------
Class C $14,427
- -------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Other Payments to Dealers - Class A Shares, Class B Shares and Class C Shares
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits as set
by the Distributor, may receive from the Distributor an additional payment of up
to 0.25% of the dollar amount of such sales. The Distributor may also provide
additional promotional incentives or payments to dealers that sell shares of the
funds in the Delaware Investments family. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares. The Distributor may also pay a portion of the
expense of preapproved dealer advertisements promoting the sale of fund shares
in the Delaware Investments family.
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, trustees and employees of each Fund, any
other fund in the Delaware Investments family, 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 of a Fund and shares of any of the funds in the
Delaware Investments family, 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 within 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 funds in
the Delaware Investments family. Officers, directors and key employees of
institutional clients of the Manager or any of its affiliates may purchase Class
A Shares at net asset value. Moreover, purchases may be effected at net asset
value for the benefit of the clients of brokers, dealers and registered
investment advisers affiliated with a broker or dealer, if such broker, dealer
or investment adviser has entered into an agreement with the Distributor
providing specifically for the purchase of Class A Shares in connection with
special investment products, such as wrap accounts or similar fee based
programs. 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.
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
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 applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the
44
<PAGE>
Transfer Agent will surrender an appropriate number of the escrowed shares for
redemption in order to realize the difference. Such purchasers may include the
value (at offering price at the level designated in their Letter of Intention)
of all their shares of the Funds and of any class of any of the other mutual
funds in the Delaware Investments family (except shares of any fund in the
Delaware Investments family which do not carry a front-end sales charge, CDSC or
Limited CDSC, other than shares of Delaware Group Premium Fund, Inc.
beneficially owned in connection with the ownership of variable insurance
products, unless they were acquired through an exchange from a fund in the
Delaware Investments family which carried a front-end sales charge, CDSC or
Limited CDSC) previously purchased and still held as of the date of their Letter
of Intention toward the completion of such Letter. For purposes of satisfying an
investor's obligation under a Letter of Intention, Class B Shares and Class C
Shares of each Fund and the corresponding classes of shares of other funds in
the Delaware Investments family which offer such shares may be aggregated with
Class A Shares of a Fund and the corresponding class of shares of the other
funds in the Delaware Investments family.
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
funds available from the Delaware Investments family (except shares of any funds
in the Delaware Investments family which do not carry a front-end sales charge,
CDSC or Limited CDSC, other than shares of Delaware Group Premium Fund, Inc.
beneficially owned in connection with the ownership of variable insurance
products, unless they were acquired through an exchange from a fund in the
Delaware Investments family which carried a front-end sales charge, CDSC or
Limited CDSC). In addition, assets held by investment advisory clients of the
Manager or its affiliates in a stable value account may be combined with other
Delaware Investments family holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other funds in the Delaware
Investments family which offer such classes (except shares of any funds in the
Delaware Investments family which do not carry a front-end sales charge, CDSC or
Limited CDSC, other than shares of Delaware Group Premium Fund, Inc.
beneficially owned in connection with the ownership of variable insurance
products, unless they were acquired through an exchange from a fund in the
Delaware Investments family which carried a front-end sales charge, CDSC or
Limited CDSC). 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 in the Prospectus for Class
A Shares to determine the applicability of the Right of Accumulation to their
particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares and Class B Shares of a Fund who redeem such
shares have one year from the date of redemption to reinvest all or part of
their redemption proceeds in the same Class of the Fund or in the same Class of
any of the other funds in the Delaware Investments family. In the case of Class
A Shares, the reinvestment will not be assessed a front-end sales charge and in
the case of Class B Shares, the amount of the CDSC previously charged on the
redemption will be reimbursed by the Distributor. The reinvestment will be
subject to applicable eligibility and minimum purchase requirements and must be
in states where shares of such other funds may be sold. This reinvestment
privilege does not extend to Class A Shares where the redemption of
45
<PAGE>
the shares triggered the payment of a Limited CDSC. Persons investing redemption
proceeds from direct investments in mutual funds in the Delaware Investments
family, offered without a front-end sales charge will be required to pay the
applicable sales charge when purchasing Class A Shares. The reinvestment
privilege does not extend to a redemption of Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. In the case of
Class B Shares, the time that the previous investment was held will be included
in determining any applicable CDSC due upon redemptions as well as the automatic
conversion into Class A Shares.
A redemption and reinvestment of Class B Shares could have income tax
consequences. Shareholders will receive from the Fund the amount of the CDSC
paid at the time of redemption as part of the reinvested shares, which may be
treated as a capital gain to the shareholder for tax purposes. It is recommended
that a tax adviser be consulted with respect to such transactions.
Any reinvestment directed to a fund in which the investor does not then
have an account will be treated like all other initial purchases of the fund's
shares. Consequently, an investor should obtain and read carefully the
prospectus for the fund in which the investment is intended to be made before
investing or sending money. The prospectus contains more complete information
about the fund, including charges and expenses.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Fund's shareholder servicing agent, about the
applicability of the Class A Limited CDSC in connection with the features
described above.
46
<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. A confirmation 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 Funds in the Delaware Investments Family
Subject to applicable eligibility and minimum initial purchase
requirements, and the limitations set forth below, holders of Class A Shares,
Class B Shares and Class C Shares may automatically reinvest dividends and/or
distributions from a Fund in any of the other mutual funds in the Delaware
Investments family, 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, service
fee, 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 Investments family 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.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware
Investments family, you may write and authorize an exchange of part or all of
your investment into shares of a Fund. If you wish to open an account by
exchange, call the Shareholder Service Center for more information. All
exchanges are subject to the eligibility and minimum purchase requirements set
forth in each fund's prospectus. See Redemption and Exchange for more complete
information concerning your exchange privileges.
Holders of Class A Shares of a Fund may exchange all or part of their
shares for certain of the shares of other funds in the Delaware Investments
family, including other Class A Shares, but may not exchange their Class A
Shares for Class B Shares or Class C Shares of the Fund or of any other fund in
the Delaware Investments family. Holders of Class B Shares of a Fund are
permitted to exchange all or part of their Class B Shares only into Class B
Shares of other Delaware Investments funds. Similarly, holders of Class C Shares
of a Fund are permitted to exchange all or part of their Class C Shares only
into Class C Shares of other Delaware Investments funds. Class B Shares of a
Fund and Class C Shares of a Fund acquired by exchange will continue to carry
the CDSC and, in the case of Class B Shares, the automatic conversion schedule
of the fund from which the exchange is made. The
47
<PAGE>
holding period of Class B Shares of a Fund acquired by exchange will be added to
that of the shares that were exchanged for purposes of determining the time of
the automatic conversion into Class A Shares of that Fund.
Permissible exchanges into Class A Shares of a Fund will be made
without a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of a Fund will be made without the imposition of a CDSC
by the fund from which the exchange is being made at the time of the exchange.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan--Investors may arrange for a Fund to
accept for investment, 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--The Automatic Investing Plan enables
shareholders to make regular monthly investments without writing checks.
Shareholders may authorize, in advance, to make arrangements for their bank to
withdraw a designated amount monthly directly from their checking account for
deposit into a Class. 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 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 such
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.
48
<PAGE>
MoneyLine (SM) On Demand
You or your investment dealer may request purchases of Fund Class shares
by phone using MoneyLine (SM) On Demand. When you authorize a Fund to accept
such requests from you or your investment dealer, funds will be withdrawn from
(for share purchases) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions.
It may take up to four business days for the transactions to be
completed. You can initiate this service by completing an Account Services form.
If your name and address are not identical to the name and address on your Fund
account, you must have your signature guaranteed. The Funds do not charge a fee
for this service; however, your bank may charge a fee.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the Fund
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Investments family. Shareholders of the Fund Classes may
elect to invest in one or more of the other mutual funds in Delaware Investments
family through the Wealth Builder Option. If in connection with the election of
the Wealth Builder Option, you wish to open a new account to receive the
automatic investment, such new account must meet the minimum initial purchase
requirements described in the prospectus of the fund that you select. All
investments under this option are exchanges and are therefore subject to the
same conditions and limitations as other exchanges noted above.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the Delaware
Investments family, subject to the conditions and limitations set forth in the
Fund Classes' 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 in Wealth Builder at
any time by giving written notice to the fund from which exchanges are made.
Asset Planner
To invest in Delaware Investments funds using the Asset Planner asset
allocation service, you should complete an Asset Planner Account Registration
Form, which is available only from a financial adviser or investment dealer.
Effective September 1, 1997, the Asset Planner Service is only available to
financial advisers or investment dealers who have previously used this service.
The Asset Planner service offers a choice of four predesigned asset allocation
strategies (each with a different risk/reward profile) in predetermined
percentages in Delaware Investments funds. With the help of a financial adviser,
you may also design a customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Investments accounts into the Asset Planner service may be made at net asset
value under the circumstances described under Investing by Exchange. Also see
Buying Class A Shares at Net Asset Value. The minimum initial investment per
Strategy is $2,000; subsequent investments must be at least $100. Individual
fund minimums do not apply to investments made using the Asset Planner service.
Class A, Class B and Class C Shares are available through the Asset Planner
service. Generally, only shares within the same class may be used within the
same Strategy. However, Class A Shares of a Fund and of other funds in the
Delaware Investments family may be used in the same Strategy with consultant
class shares that are offered by certain other Delaware Investments funds.
An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30 of each subsequent year. The fee,
payable to Delaware Service Company, Inc. to defray extra costs associated with
administering the Asset Planner service, will be deducted automatically from one
of the funds within your Asset Planner account if not paid by September 30.
However, effective November 1, 1996, the annual maintenance fee is waived until
further notice. Investors will receive a customized quarterly Strategy Report
summarizing all Asset Planner investment performance and account activity during
the prior period. Confirmation statements will be sent following all
transactions other than those involving a reinvestment of distributions.
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Certain shareholder services are not available to investors using the
Asset Planner service, due to its special design. These include Delaphone,
Checkwriting, Wealth Builder Option and Letter of Intention. Systematic
Withdrawal Plans are available after the account has been open for two years.
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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 that Fund, its agent or certain other authorized
persons. 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 that Fund or its
agent. See Distribution and Service under Investment Management Agreements.
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 days on which the following holidays are
observed: New Year's Day, Martin Luther King, Jr.'s Birthday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. When the New York Stock Exchange is closed, the Funds will generally
be closed, pricing calculations will not be made and purchase and redemption
orders will not be processed.
An example showing how to calculate the net asset value per share and,
in the case of Class A Shares, the offering price per share, is included in each
Fund's financial statements which are incorporated by reference into this Part
B.
Each Fund's net asset value per share is computed by adding the value
of all securities and other assets in the portfolio of that Fund, deducting any
liabilities and dividing by the number of shares outstanding. Expenses and
income are accrued daily. In determining a Fund's total net assets, certain
portfolio securities are valued at fair value, using methods determined in good
faith by the Board of Trustees. 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 Funds.
In addition, when determining a Fund's total net assets, certain
portfolio securities, except for bonds, which are primarily listed or 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 Trustees.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
the particular 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 Shares, Class B Shares 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 EXCHANGE
You can redeem or exchange your shares in a number of different ways.
Exchanges are subject to the requirements of each fund and all exchanges of
shares constitute taxable events. Further, in order for an exchange to be
processed, shares of the fund being acquired must be registered in the state
where the acquiring shareholder resides. You may want to consult your financial
adviser or investment dealer to discuss which funds in Delaware Investments will
best meet your changing objectives, and the consequences of any exchange
transaction. You may also call the Delaware Investments directly for fund
information.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after a Fund receives your request in good order,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
For example, redemption or exchange requests received in good order after the
time the offering price and net asset value of shares are determined will be
processed on the next business day. A shareholder submitting a redemption
request may indicate that he or she wishes to receive redemption proceeds of a
specific dollar amount. In the case of such a request, a Fund will redeem the
number of shares necessary to deduct the applicable CDSC in the case of Class B
Shares and Class C Shares, and, if applicable, the Limited CDSC in the case of
Class A Shares and tender to the shareholder the requested amount, assuming the
shareholder holds enough shares in his or her account for the redemption to be
processed in this manner. Otherwise, the amount tendered to the shareholder upon
redemption will be reduced by the amount of the applicable CDSC or Limited CDSC.
Redemption proceeds will be distributed promptly, as described below, but not
later than seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total number
of shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund in which you want to invest the proceeds.
Exchange instructions and redemption requests must be signed by the record
owner(s) exactly as the shares are registered. You may request a redemption or
an exchange by calling the Shareholder Service Center at 800-523-1918. Each Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Funds, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the respective Fund,
its agent, or certain other authorized persons 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 Funds and the Distributor end their business days at 5 p.m. Eastern
time. This offer is discretionary and may be completely withdrawn without
further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to 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.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order by the Fund or certain other authorized persons (see Distribution
and Service under Investment Management Agreements); provided, however, that
each commitment to mail or wire redemption proceeds by a certain time, as
described below, is modified by the qualifications described in the next
paragraph.
Each Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
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settled. Each Fund will honor redemption requests as to shares for which a check
was tendered as payment, but a Fund will not mail or wire the proceeds until it
is reasonably satisfied that the purchase check has cleared, which may take up
to 15 days from the purchase date. You can avoid this potential delay if you
purchase shares by wiring Federal Funds. Each Fund reserves the right to reject
a written or telephone redemption request or delay payment of redemption
proceeds if there has been a recent change to the shareholder's address of
record.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for insufficient funds or for any other reason, the
Fund involved will automatically redeem from the shareholder's account the
shares purchased by the check plus any dividends earned thereon. Shareholders
may be responsible for any losses to a Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practical,
or it is not reasonably practical for a Fund fairly to value its assets, or in
the event that the SEC has provided for such suspension for the protection of
shareholders, a Fund may postpone payment or suspend the right of redemption or
repurchase. In such case, the shareholder may withdraw the request for
redemption or leave it standing as a request for redemption at the net asset
value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sale by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, the Trust
has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which
each Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of such Fund during any 90-day period for
any one shareholder.
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange. Class B Shares of Tax-Free Funds, Insured Funds and
Minnesota High-Yield Fund are subject to a CDSC of: (i) 4% if shares are
redeemed within two years of purchase; (ii) 3% if shares are redeemed during the
third or fourth year following purchase; (iii) 2% if shares are redeemed during
the fifth year following purchase; (iv) 1% if shares are redeemed during the
sixth year following purchase; and (v) 0% thereafter. Class B Shares of Tax-Free
Minnesota Intermediate Fund are subject to a CDSC of: (i) 2% if shares are
redeemed within two years of purchase; (ii) 1% if shares are redeemed during the
third year following purchase; and (iii) 0% thereafter. See Contingent Deferred
Sales Charge Class B Shares and Class C Shares under Purchasing Shares. Except
for the applicable CDSC or Limited CDSC, and with respect to the expedited
payment by wire for which there is currently a $7.50 bank wiring cost, neither
the Funds nor the Distributor charges a fee for redemptions or repurchases, but
such fees could be charged at any time in the future.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of the other funds in the Delaware Investments
family (in each case, "New Shares") in a permitted exchange, will not be subject
to a CDSC that might otherwise be due upon redemption of Original Shares.
However, such shareholders will continue to be subject to the CDSC and, in the
case of Class B Shares, the automatic conversion schedule of Original Shares as
described in this Part B and any CDSC assessed upon redemption will be charged
by the fund from which the Original Shares were exchanged. In an exchange of
shares from Tax-Free Funds B Class, Insured Funds B Class or Minnesota
High-Yield Fund B Class, the CDSC schedule for such Class may be higher than the
CDSC schedule relating to New Shares acquired as a result of the exchange. For
purposes of computing the CDSC that may be payable upon a disposition of the New
Shares, the period of time that an investor held Original Shares is added to the
period of time that an investor held New Shares. The automatic conversion
schedule of Original Shares of Class B Shares of Tax-Free Funds, Insured Funds
and Minnesota High-Yield Fund may be longer than that of the New Shares.
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Consequently, an investment in New Shares by exchange may subject an investor to
the higher 12b-1 fees applicable to Class B Shares of Tax-Free Funds, Insured
Funds and Minnesota High-Yield Fund shares for a longer period of time than if
the investment in New Shares were made directly.
Small Accounts
Before a Fund involuntarily redeems shares from an account that, under
the circumstances noted in the relevant 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 by the Prospectus and
will be allowed 60 days from the date of notice to make an additional investment
to meet the required minimum. 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.
Written Redemption
You can write to your Fund at 1818 Market Street, Philadelphia, PA
19103 to redeem some or all of your shares. The request must be signed by all
owners of the account or your investment dealer of record. For redemptions of
more than $50,000, or when the proceeds are not sent to the shareholder(s) at
the address of record, the Funds require a signature by all owners of the
account and a signature guarantee for each owner. A signature guarantee can be
obtained from a commercial bank, a trust company or a member of a Securities
Transfer Association Medallion Program ("STAMP"). Each Fund reserves the right
to reject a signature guarantee supplied by an eligible institution based on its
creditworthiness. The Funds may require further documentation from corporations,
executors, retirement plans, administrators, trustees or guardians.
Payment is normally mailed the next business day after receipt of your
redemption request. If your Class A Shares are in certificate form, the
certificate(s) must accompany your request and also be in good order.
Certificates are issued for Class A Shares only if a shareholder submits a
specific request. Certificates are not issued for Class B Shares or Class C
Shares.
Written Exchange
You may also write to your Fund (at 1818 Market Street, Philadelphia,
PA 19103) to request an exchange of any or all of your shares into another
mutual fund in Delaware Investments, subject to the same conditions and
limitations as other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption - Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your account
in writing that you do not wish to have such services available with respect to
your account. Each Fund reserves the right to modify, terminate or suspend these
procedures upon 60 days' written notice to shareholders. It may be difficult to
reach the Funds by telephone during periods when market or economic conditions
lead to an unusually large volume of telephone requests.
Neither the Funds nor their Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
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redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, each Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by the
Fund Classes are generally tape recorded, and a written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, you are acknowledging prior
receipt of a prospectus for the fund into which your shares are being exchanged.
Telephone Redemption--Check to Your Address of Record
The Telephone Redemption feature is a quick and easy method to redeem
shares. You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your address of record. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next business
day after receipt of the redemption request. This service is only available to
individual, joint and individual fiduciary-type accounts.
Telephone Redemption--Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must complete an Authorization Form and have your signature
guaranteed. For your protection, your authorization must be on file. If you
request a wire, your funds will normally be sent the next business day. If the
proceeds are wired to the shareholder's account at a bank which is not a member
of the Federal Reserve System, there could be a delay in the crediting of the
funds to the shareholder's bank account. First Union National Bank's fee
(currently $7.50) will be deducted from redemption proceeds. If you ask for a
check, it will normally be mailed the next business day after receipt of your
redemption request to your predesignated bank account. There are no separate
fees for this redemption method, but the mail time may delay getting funds into
your bank account. Simply call the Shareholder Service Center prior to the time
the offering price and net asset value are determined, as noted above.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in Delaware Investments under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Investments family. Telephone exchanges may be subject to
limitations as to amounts or frequency. The Transfer Agent and each Fund reserve
the right to record exchange instructions received by telephone and to reject
exchange requests at any time in the future.
MoneyLine (SM) On Demand
You or your investment dealer may request redemptions of Fund shares by
phone using MoneyLine (SM) On Demand. When you authorize a Fund to accept such
requests from you or your investment dealer, funds will be deposited to (for
share redemptions) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions. See
MoneyLine (SM) On Demand under Investment Plans.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), the Funds will refuse any new timing
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arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Investments funds from Timing Firms. A Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including accounts administered so as to
redeem or purchase shares based upon certain predetermined market indicators,
will be aggregated for purposes of the exchange limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Investments funds: (1)
Delaware Decatur Income Fund, (2) Delaware Decatur Total Return Fund, (3)
Delaware Balanced Fund, (4) Delaware Limited-Term Government Fund, (5) Delaware
Tax-Free USA Fund, (6) Delaware Cash Reserve, (7) Delaware Delchester Fund and
(8) Delaware Tax-Free Pennsylvania Fund. No other Delaware Investments funds are
available for timed exchanges. Assets redeemed or exchanged out of Timing
Accounts in Delaware Investments funds not listed above may not be reinvested
back into that Timing Account. Each Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
time pattern (as described above).
A Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
Systematic Withdrawal Plans
Shareholders of Class A Shares, Class B Shares and Class C Shares who
own or purchase $5,000 or more of shares at the offering price, or net asset
value, as applicable, for which certificates have not been issued may establish
a Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or
quarterly withdrawals of $75 or more, although the Funds do not recommend any
specific amount of withdrawal. This is particularly useful to shareholders
living on fixed incomes, since it can provide them with a stable supplemental
amount. Shares purchased with the initial investment and through reinvestment of
cash dividends and realized securities profits distributions will be credited to
the shareholder's account and sufficient full and fractional shares will be
redeemed at the net asset value calculated on the third business day preceding
the mailing date.
Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital, and the share
balance may in time be depleted, particularly in a declining market.
Shareholders should not purchase additional shares while participating in a
Systematic Withdrawal Plan.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
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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 Delaware Investments funds
which do not carry a sales charge. Redemptions of Class A Shares pursuant to a
Systematic Withdrawal Plan may be subject to a Limited CDSC if the purchase was
made at net asset value and a dealer's commission has been paid on that
purchase. The applicable Limited CDSC for Class A Shares and CDSC for Class B
and C Shares redeemed via a Systematic Withdrawal Plan will be waived if the
annual amount withdrawn in each year is less than 12% of the account balance on
the date that the Plan is established. If the annual amount withdrawn in any
year exceeds 12% of the account balance on the date that the Systematic
Withdrawal Plan is established, all redemptions under the Plan will be subjected
to the applicable contingent deferred sales charge, including an assessment for
previously redeemed amounts under the Plan. Whether a waiver of the contingent
deferred sales charge is available or not, the first shares to be redeemed for
each Systematic Withdrawal Plan payment will be those not subject to a
contingent deferred sales charge because they have either satisfied the required
holding period or were acquired through the reinvestment of distributions.
See Waivers of Contingent Deferred Sales Charges, below.
An investor wishing to start a Systematic Withdrawal Plan must complete
an authorization form. If the recipient of Systematic Withdrawal Plan payments
is other than the registered shareholder, the shareholder's signature on this
authorization must be guaranteed. Each signature guarantee must be supplied by
an eligible guarantor institution. The Funds reserve the right to reject a
signature guarantee supplied by an eligible institution based on its
creditworthiness. This plan may be terminated by the shareholder or the Transfer
Agent at any time by giving written notice.
Systematic Withdrawal Plan payments are normally made by check. In the
alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank account through the MoneyLine (SM) Direct
Deposit Service. Your funds will normally be credited to your bank account up to
four business days after the payment date. There are no separate fees for this
redemption method. It may take up to four business days for the transactions to
be completed. You can initiate this service by completing an Account Services
form. If your name and address are not identical to the name and address on your
Fund account, you must have your signature guaranteed. The Funds do not charge a
fee for any this service; however, your bank may charge a fee.
Shareholders should consult with their financial advisers to determine
whether a Systematic Withdrawal Plan would be suitable for them.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000 or more made on or after July 1, 1998, a
Limited CDSC will be imposed on certain redemptions of Class A Shares (or shares
into which such Class A Shares are exchanged) according to the following
schedule: (1) 1.00% if shares are redeemed during the first year after the
purchase; and (2) 0.50% if such shares of the Tax-Free Funds and Insured Funds
are redeemed during the second year after the purchase, if such purchases were
made at net asset value and triggered the payment by the Distributor of the
dealer's commission described above.
The Limited CDSC will be paid to the Distributor and will be assessed
on an amount equal to the lesser of: (1) the net asset value at the time of
purchase of the Class A Shares being redeemed or (2) the net asset value of such
Class A Shares at the time of redemption. For purposes of this formula, the "net
asset value at the time of purchase" will be the net asset value at purchase of
the Class A Shares even if those shares are later exchanged for shares of
another Delaware Investments fund and, in the event of an exchange of Class A
Shares, the "net asset value of such shares at the time of redemption" will be
the net asset value of the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than two years (one
year with respect to Tax-Free Minnesota Intermediate Fund) will not be subjected
to the Limited CDSC and an exchange of such Class A Shares into another Delaware
Investments fund will not trigger the imposition of the Limited CDSC at the time
of such exchange. The period a shareholder owns shares into
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which Class A Shares are exchanged will count towards satisfying the two-year
holding period (one year holding period with respect to the Tax-Free Minnesota
Intermediate Fund). The Limited CDSC is assessed if such two year period is not
satisfied irrespective of whether the redemption triggering its payment is of
Class A Shares of a Fund or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed
that shares not subject to the Limited CDSC are the first redeemed followed by
other shares held for the longest period of time. The Limited CDSC will not be
imposed upon shares representing reinvested dividends or capital gains
distributions, or upon amounts representing share appreciation. All investments
made during a calendar month, regardless of what day of the month the investment
occurred, will age one month on the last day of that month and each subsequent
month.
Waivers of Contingent Deferred Sales Charges
Waiver of Limited Contingent Deferred Sales Charge -- Class A Shares
- --The Limited CDSC for Class A Shares on which a dealer's commission has been
paid will be waived in the following instances: (i) redemptions that result from
a Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; (ii) distributions from an account if the redemption results from
the death of the registered owner, or a registered joint owner, of the account
(in the case of accounts established under the Uniform Gifts to Minors or
Uniform Transfers to Minors Acts or trust accounts, the waiver applies upon the
death of all beneficial owners) or a total and permanent disability (as defined
in Section 72 of the Code) of all registered owners occurring after the purchase
of the shares being redeemed; and (ii) redemptions by the classes of
shareholders who are permitted to purchase shares at net asset value, regardless
of the size of the purchase (see Buying Class A Shares at Net Asset Value under
Purchasing Shares).
Waiver of Contingent Deferred Sales Charge -- Class B Shares and Class
C Shares -- The CDSC is waived on certain redemptions of Class B Shares in
connection with the following redemptions: (i) redemptions that result from a
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; and (ii) distributions from an account if the redemption results
from the death of the registered owner, or a registered joint owner, of the
account (in the case of accounts established under the Uniform Gifts to Minors
or Uniform Transfers to Minors Acts or trust accounts, the waiver applies upon
the death of all beneficial owners) or a total and permanent disability (as
defined in Section 72 of the Code) of all registered owners occurring after the
purchase of the shares being redeemed.
The CDSC of Class C Shares is waived in connection with the following
redemptions: (i) redemptions that result from a Fund's right to liquidate a
shareholder's account if the aggregate net asset value of the shares held in the
account is less than the then-effective minimum account size; and (ii)
distributions from an account if the redemption results from the death of the
registered owner, or a registered joint owner, of the account (in the case of
accounts established under the Uniform Gifts to Minors or Uniform Transfers to
Minors Acts or trust accounts, the waiver applies upon the death of all
beneficial owners) or a total and permanent disability (as defined in Section 72
of the Code) of all registered owners occurring after the purchase of the shares
being redeemed.
In addition, the Limited CDSC will be waived on Class A Shares and the
CDSC will be waived on Class B Shares and Class C Shares redeemed in accordance
with a Systematic Withdrawal Plan if the annual amount withdrawn under the Plan
does not exceed 12% of the value of the account on the date that the Systematic
Withdrawal Plan was established.
-58-
<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Each Fund declares a dividend to shareholders of each Class of a
respective Fund's shares from net investment income on a daily basis. Dividends
are declared each day the Funds are open and cash dividends are paid monthly.
Net investment income earned on days when each Fund is not open will be declared
as a dividend on the next business day. 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.
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 such 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 that 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
Plan.
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
such Fund's effort to locate a shareholder if a shareholder's mail is returned
by the United States Post Office or such 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. See Taxes.
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<PAGE>
TAXES
Under 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 that Fund.
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 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 such Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system."
-60-
<PAGE>
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), as revised by
the Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998
Act") and the Omnibus Consolidated and Emergency Supplemental Appropriations
Act, a Fund is required to track its sales of portfolio securities and to report
its capital gain distributions to you according to the following categories:
Long-term capital gains": gains on securities sold after December 31,
1997 and held for more than 12 months as capital assets in the hands of
the holder are taxed at the 20% rate when distributed to shareholders
(15% for individual investors in the 15% tax bracket.
"Short -term capital gains": Gains on securities sold by a Fund that do
not meet the long-term holdings period are considered short term
capital gains and are taxable as ordinary income.
"Qualified 5-year gains": For individuals in the 15% bracket, qualified
five-year gains are net gains on securities held for more than 5 years
which are sold after December 31, 2000. For individual who are subject
to tax at higher rate brackets, qualified five-year gains are net gains
on securities which are purchased after December 31, 2000 and are held
for more than five years. Taxpayers subject to tax at a higher rate
brackets may also make an election for shares held on January 1, 2001
to recognize gain on their shares in order to qualify such shares as
qualified five-year property. These gains will be taxable to individual
investors at a maximum rate of 18% for investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 8% for investors
in the 15% federal income tax bracket when sold after the five-year
holding period.
Any loss incurred on the redemption or exchange of shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your Fund shares and any remaining loss will
be treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the Fund on those shares.
All or a portion of any loss that you realize upon the redemption of
your Fund shares will be disallowed to the extent that you buy other shares in
the Fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
If you redeem some or all of yours shares in a Fund, and then reinvest
the sales proceeds in such Fund or in another Delaware Investments fund within
90 days of buying the original shares, the sales charge that would otherwise
apply to your reinvestment may be reduced or eliminated. The IRS will require
you to report gain or loss on the redemption of your original shares in a Fund.
In doing so, all or a portion of the sales charge that you paid for your
original shares in a Fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.
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<PAGE>
Arizona State Considerations
Exempt interest dividends from the Arizona Funds that are excluded from
gross income for federal income tax purposes and that are derived from interest
on (i) obligations of the State of Arizona and its political subdivisions and
(ii) obligations of United States possessions that are exempt from state
taxation under federal law, are excluded from taxable income for Arizona income
tax purposes to the same extent as the interest income would be excluded from
taxable income for Arizona income tax purposes if such obligations were directly
held by a shareholder.
California State Taxation
Shareholders of the California Funds that are individuals may exclude
from taxable income for purposes of the California Personal Income Tax dividends
received from the California Funds that are properly designated by the
California Funds in a written notice mailed to the shareholders as California
exempt interest dividends. The portion of the California Funds' dividends
designated as California exempt interest dividends may not exceed the amount of
interest the California Funds receive during their taxable year on obligations
the interest on which, if held by an individual, is exempt from taxation by the
State of California, reduced by certain non-deductible expenses. The California
Funds may designate California exempt interest dividends only if the California
Funds qualify as regulated investment companies under the Code, and if, at the
close of each quarter of its taxable year, at least 50 percent of the value of
its total assets consists of obligations the interest on which, when held by an
individual, is exempt from taxation by the State of California. Distributions
from the California Funds, including California exempt interest dividends,
received by shareholders subject to the California Bank and Corporation Tax Law
may be subject to the California franchise tax.
Colorado State Taxation
Exempt interest dividends from the Colorado Funds that are excluded from
gross income for federal income tax purposes and that are attributable to
interest on (i) obligations of the State of Colorado or its political
subdivisions which are issued on or after May 1, 1980, (ii) obligations of the
State of Colorado or its political subdivisions which were issued before May 1,
1980, to the extent that such interest is specifically exempt from income
taxation under the laws of the State of Colorado authorizing the issuance of
such obligations and (iii) obligations of possessions of the United States that
are exempt from state taxation under federal law, are excluded from taxable
income for purposes of the income tax imposed by the State of Colorado on
individuals and corporations.
Florida State Taxation
Florida does not currently impose an income tax on individuals. Florida
does, however, impose a tax on intangible personal property held by individuals
as of the first day of each calendar year. Under interpretations promulgated by
the Florida Department of Revenue, shares in the Florida Funds are not subject
to the intangible property tax so long as, on the last business day of each
calendar year, all of the assets of the Florida Funds consist of obligations of
the U. S. government and its agencies and territories that are exempt from state
taxation under federal law, and obligations of the State of Florida and its
municipalities, counties and other taxing districts. If the Florida Funds hold
any other types of assets on that date, then the entire value of the shares in
the Florida Funds (except for the portion of the value of the shares
attributable to U. S. government obligations) are subject to the intangible
property tax. The Florida Funds must sell any non-exempt assets held in its
portfolio during the year and reinvest the proceeds in exempt assets prior to
December 31. Transaction costs involved in converting the portfolio's assets to
such exempt assets would likely reduce the Florida Funds' investment return and
might, in extraordinary circumstances, exceed any increased investment return
the Florida Funds had achieved by investing in non-exempt assets during the
year. Florida does impose an income tax on corporations and certain other
entities, and distributions from the Florida Funds may be subject to this income
tax.
-62-
<PAGE>
Idaho State Taxation
The Idaho Fund has received a ruling from the Idaho Department of Revenue
dated December 13, 1994 to the effect that dividends paid by a fund such as the
Idaho Fund that are attributable to (a) interest earned on bonds issued by the
State of Idaho, its cities and political subdivisions, and (b) interest earned
on obligations of the U.S. government or its territories and possessions that
are exempt from state taxation under federal law, are not included in the income
of Idaho Fund shareholders subject to either the Idaho personal income tax or
the Idaho corporate income tax.
Iowa State Taxation
The Iowa Fund has received a ruling from the Iowa Department of Revenue
and Finance dated May 21, 1993 to the effect that dividends paid by a fund such
as the Iowa Fund that are attributable to (a) interest earned on bonds issued by
the State of Iowa, its political subdivisions, agencies and instrumentalities,
the interest on which is expressly exempt from state income taxation by Iowa
statute, and (b) interest earned on obligations of the U. S. government or its
territories and possessions and which have interest that is exempt from state
taxation under federal law, are not included in the income of the Iowa Fund
shareholders subject to either the Iowa personal income tax or the Iowa
corporate income tax (except in the case of shareholders that are financial
institutions subject to the tax imposed by Iowa Code ss 422.60), if the Iowa
Fund provides statements to the shareholders as to the percentage of dividends
from the Iowa Fund that are attributable to such interest.
Kansas State Taxation
Exempt interest dividends from the Kansas Fund that are excluded from
gross income for federal income tax purposes and that are attributable to
interest on (i) obligations of the State of Kansas or its political subdivisions
issued after December 31, 1987, (ii) obligations of the State of Kansas or its
political subdivisions issued prior to January 1, 1988, the interest on which is
expressly exempt from income tax under Kansas law and (iii) obligations of
possessions of the United States that are exempt from state taxation under
federal law, are excluded from taxable income for purposes of the income tax
imposed by the State of Kansas on individuals, fiduciaries and corporations
(other than insurance companies, banks, trust companies and savings and loan
associations). Distributions from the Kansas Fund, including exempt interest
dividends, may be subject to the taxes imposed by the State of Kansas on
insurance companies and on banks, trust companies and savings and loan
associations, when received by shareholders subject to such taxes.
Minnesota State Taxation
Minnesota taxable net income is based generally on federal taxable
income. The portion of exempt-interest dividends that is derived from interest
income on Minnesota Tax-Exempt Obligations is excluded from the Minnesota
taxable net income of individuals, estates and trusts, provided that the portion
of the exempt-interest dividends from such Minnesota sources paid to all
shareholders represents 95 percent or more of the exempt-interest dividends paid
by all Minnesota Funds. Exempt interest dividends that are treated as an item of
tax preference for purposes of the federal alternative minimum tax are also
subject to the Minnesota alternative minimum tax on individuals, estates and
trusts. Distributions from the Minnesota Funds, including exempt interest
dividends, may be subject to the Minnesota income tax imposed on corporations
when received by shareholders subject to such tax.
In 1995, the Minnesota Legislature passed a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is subject to tax.
This provision applies to taxable years that begin during or after the calendar
year in which any such court decision becomes final, irrespective of the date on
which the obligations were issued. The Minnesota Funds are not aware of any
decision in which a court has held that a state's exemption of interest on its
own bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or Indian
tribes, unlawfully discriminates against interstate commerce or otherwise
contravenes the United States Constitution. Nevertheless, the Minnesota Funds
cannot predict the likelihood that interest on the Minnesota obligations held by
the Minnesota Funds would become taxable under this Minnesota statutory
provision.
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<PAGE>
Missouri State Taxation
Exempt interest dividends from the Missouri Fund that are excluded from
gross income for federal income tax purposes and that are derived from interest
on (i) obligations of the State of Missouri or any of its political subdivisions
or authorities or (ii) obligations of territories and possessions of the United
States that are exempt from state taxation under federal law, as designated by
the Missouri Fund in an annual notice mailed to shareholders, are not included
in taxable income for purposes of the Missouri income tax imposed on
individuals, trusts, estates and certain corporations (not including banking
institutions, credit institutions, credit unions and savings and loan
associations.) Distributions from the Missouri Fund, including exempt interest
dividends, may be subject to the franchise taxes imposed on banking
institutions, credit institutions, credit unions and savings and loan
associations when received by shareholders subject to such taxes.
Montana State Taxation
Exempt interest dividends from the Montana Municipal Bond Fund that are
excluded from gross income for federal income tax purposes and that are
attributable to (i) interest on obligations of the State of Montana or counties,
municipalities, districts or other political subdivisions of the State of
Montana or (ii) interest on obligations of the United States government and
other interest income that is exempt from taxation by Montana under federal law,
are excluded from taxable income for purposes of the Montana personal income tax
imposed on individuals, estates and trusts. Distributions from the Montana
Municipal Bond Fund, including exempt interest dividends, may be subject to the
Montana corporate license and income taxes when received by shareholders subject
to such taxes. Shares of the Montana Municipal Bond Fund may be subject to the
Montana property tax.
New York State and City Taxation
Exempt interest dividends from the New York Fund that are excluded from
gross income for federal income tax purposes and that are derived from interest
on (i) obligations of the State of New York or its political subdivisions and
(ii) obligations of possessions of the United States that are exempt from state
taxation under federal law, are excluded from taxable income for purposes of the
income taxes imposed by the State of New York and New York City on resident
individuals, estates and trusts. Dividends from the New York Fund, including
exempt interest dividends, may be taken into account in determining the New York
State and New York City income and franchise taxes on business corporations,
banking corporations and insurance companies when received by shareholders
subject to such taxes.
New Mexico State Taxation
Shareholders may exclude from income subject to the New Mexico Income Tax
imposed on individuals and the New Mexico Corporate Income and Franchise Tax
imposed on corporations the portion of the dividends of the New Mexico Fund that
is attributable to interest on (i) obligations of the United States, (ii)
obligations of the State of New Mexico or any of its agencies, institutions,
instrumentalities or political subdivisions and (iii) obligations of United
States territories and possessions that are exempt from state taxation under
federal law, provided that the New Mexico Fund provides an annual statement to
each shareholder that identifies the source of income that was distributed to
the shareholder.
North Dakota State Taxation
Exempt interest dividends from the North Dakota Fund that are excluded
from gross income for federal income tax purposes and that are attributable to
interest earned on obligations of the State of North Dakota or its political
subdivisions are excluded from taxable income for purposes of the North Dakota
personal income tax imposed on individuals, estates and trusts, if the North
Dakota Fund provides certain required information to the North Dakota tax
commissioner in each year. However, to the extent a portion of an exempt
interest dividend from the North Dakota Fund is treated as an item of tax
preference for purposes of the federal alternative minimum tax, such a dividend
could affect a taxpayer's North Dakota income tax liability if the taxpayer
computes North Dakota income tax liability pursuant to the optional percentage
of federal income tax liability method permitted by North Dakota law.
Distributions from the North Dakota Fund, including exempt interest dividends,
may be subject to the North Dakota income tax imposed on corporations and the
North Dakota tax imposed on the income of financial institutions when received
by shareholders subject to such taxes.
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<PAGE>
Oregon State Taxation
Exempt interest dividends from the Oregon Fund that are excluded from
gross income for federal income tax purposes and that are attributable to
interest on (i) obligations of the State of Oregon or its political subdivisions
and (ii) obligations of possessions of the United States that are exempt from
state taxation under federal law, are excluded from taxable income for the
purposes of the income tax imposed by the State of Oregon on individuals.
Distributions from the Oregon Fund, including exempt interest dividends, may be
subject to the Oregon Corporate Excise Tax or Corporate Income Tax when received
by shareholders subject to such taxes.
Wisconsin State Taxation
The Wisconsin Fund has received a ruling from the Wisconsin Department of
Revenue dated July 7, 1993 to the effect that dividends paid by a fund such as
the Wisconsin Fund that are attributable to (a) interest earned on certain
obligations of the State of Wisconsin, or Wisconsin agencies or political
subdivisions, the interest on which is expressly exempt from Wisconsin personal
income taxation by Wisconsin statute, and (b) interest earned on obligations of
the U.S. government or its territories and possessions the interest on which is
exempt from state taxation under federal law, are excluded from the income of
the Wisconsin Fund shareholders subject to the Wisconsin personal income tax.
Distributions from the Wisconsin Fund, including exempt interest dividends, may
be subject to the Wisconsin Corporate Franchise Tax or Corporate Income Tax when
received by shareholders subject to such taxes.
The foregoing discussion relates to federal and state taxation as of
the date of this Part B. Distributions from the Funds, including exempt-interest
dividends, may be subject to tax in other states. This discussion is not
intended as a substitute for careful tax planning. You are urged to consult your
tax adviser with specific reference to your own tax situation.
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<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS
Delaware Management Company (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 Trustees.
The Manager and its predecessors have been managing the funds in the
Delaware Investments family since 1938. On August 31, 1999, the Manager and its
affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $46 billion in assets in
various institutional or separately managed (approximately $28,183,690,000) and
investment company (approximately $18,686,470,000) accounts.
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<PAGE>
The current Investment Management Agreement for each Fund is dated and
approved by shareholders as follows.
<TABLE>
<CAPTION>
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Approved by Approved by
Agreement Date Shareholders Agreement Date Shareholders
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund November 1, 1999 Nov. 1, 1999 Minnesota Insured Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Arizona Fund November 1, 1999 Nov. 1, 1999 Tax-Free Minnesota Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free California Insured Fund January 1, 1999 Dec. 4, 1998 Minnesota High-Yield Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free California Fund November 1, 1999 Nov. 1, 1999 Tax-Free Missouri Insured January 1, 1999 Dec. 4, 1998
Fund
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Colorado Fund November 1, 1999 Nov. 1, 1999 Tax-Free Montana Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Florida Fund January 1, 1999 Dec. 4, 1998 Tax-Free New Mexico Fund January 1, 1999 Dec. 4, 1998
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Florida Insured Fund January 1, 1999 Dec. 4, 1998 Tax-Free New York Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Kansas Fund January 1, 1999 Dec. 4, 1998 Tax-Free North Dakota Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Idaho Fund November 1, 1999 Nov. 1, 1999 Tax-Free Oregon Insured January 1, 1999 Dec. 4, 1998
Fund
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Iowa Fund November 1, 1999 Nov. 1, 1999 Tax-Free Wisconsin Fund April 15, 1999 April 13, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
Tax-Free Minnesota Intermediate Fund November 1, 1999 Nov. 1, 1999
- ------------------------------------- ---------------- --------------- --------------------------- ----------------- --------------
</TABLE>
Each Agreement 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 Trustees or by vote of a majority of the
outstanding voting securities of the Fund to which the Agreement relates, and
only if the terms and the renewal thereof have been approved by the vote of a
majority of the trustees of 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 trustees of the Funds or by the Manager. Each Agreement will
terminate automatically in the event of its assignment.
Under each Fund's current Investment Management Agreement, each Fund
pays the Manager a monthly investment advisory fee equivalent on an annual basis
to the rates set forth below.
<TABLE>
<CAPTION>
FUND As a percentage of average daily net assets
------------------------------------------------ ------------------------------------------------
<S> <C> <C>
Minnesota Insured Fund 0.50% on the first $500 million;
Tax-Free Arizona Insured Fund 0.475% on the next $500 million;
Tax-Free California Insured Fund 0.45% on the next $1.5 billion;
Tax-Free Florida Insured Fund 0.425% on assets in excess of $2.5 billion
Tax-Free Minnesota Intermediate Fund
Tax-Free Missouri Insured Fund
Tax-Free Oregon Insured Fund
------------------------------------------------ ------------------------------------------------
Minnesota High-Yield Fund 0.55% on the first $500 million;
Montana Municipal Bond Fund 0.50% on the next $500 million;
Tax-Free Arizona Fund 0.45% on the next $1.5 billion;
Tax-Free California Fund 0.425% on assets in excess of $2.5 billion
Tax-Free Colorado Fund
Tax-Free Florida Fund
Tax-Free Idaho Fund
Tax-Free Iowa Fund
Tax-Free Kansas Fund
Tax-Free Minnesota Fund
Tax-Free New Mexico Fund
Tax-Free New York Fund
Tax-Free North Dakota Fund
Tax-Free Wisconsin Fund
------------------------------------------------ ------------------------------------------------
</TABLE>
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<PAGE>
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 Trustees. 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. Lincoln
National, 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 Investments family.
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 1940 Act, and the
previous agreements therefore terminated upon the completion of the acquisition.
On February 14, 1997, new advisory agreements with the Manager on behalf of the
Florida Funds and Tax-Free New York Fund and with Voyageur on behalf of the
other Funds were unanimously approved by each Fund's respective board at a
meeting held in person, and each such board called a shareholder meeting to
approve these agreements. At a meeting held on April 11, 1997, the shareholders
of each Fund approved its respective investment management agreement 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 these other Funds.
Beginning May 1, 1997, the Manager, an indirect, wholly owned
subsidiary of LNC, was retained as investment manager of the Florida Funds and
Tax-Free New York Fund and Voyageur was retained as investment manager for the
other Funds. The Manager is a series of Delaware Management Business Trust. The
Manager changed its form of organization from a corporation to a business trust
on March 1, 1998.
In connection with the merger transaction described above, the Manager
agreed for a period of two years ending on April 30, 1999, to voluntarily waive
that portion, if any, of the annual management fees payable by each Fund and to
pay that Fund's expenses to the extent necessary to ensure that such Fund's
total operating expenses (excluding 12b-1 Plan fees, interest expense, taxes,
brokerage fees and commissions) did not exceed, on an annual basis, 1.00% of the
average daily net assets of each Class of that Fund. This agreement replaced a
similar provision in the Funds' investment advisory contracts with the Funds'
predecessor investment adviser. The Manager and the Distributor reserve the
right to voluntarily waive their fees in whole or part and to voluntarily pay or
reimburse certain other of the Fund's expenses. This agreement replaced a
similar provision in the Fund's investment advisory contracts with the Fund's
predecessor investment adviser.
The Manager has voluntarily agreed to waive that portion, if any, of
the annual management fees payable by a Fund and to pay that Fund's expenses to
the extent necessary to ensure that such Fund's total operating expenses
(excluding 12b-1 Plan fees, interest expense, taxes, brokerage fees and
commissions) do not exceed, on an annual basis, the amounts noted below as a
percentage of the average daily net assets of that Fund through February 29,
2000.
---------------------------------------------------------- ------------
Minnesota High-Yield Fund 0.50%
---------------------------------------------------------- ------------
Minnesota Insured Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Arizona Insured Fund 0.70%
---------------------------------------------------------- ------------
Tax-Free California Fund 0.25%
---------------------------------------------------------- ------------
Tax-Free California Insured Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Colorado Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Florida Fund 0.50%
---------------------------------------------------------- ------------
Tax-Free Florida Insured Fund 0.65%
---------------------------------------------------------- ------------
Tax-Free Idaho Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Iowa Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Kansas Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Minnesota Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free Minnesota Intermediate Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free New Mexico Fund 0.75%
---------------------------------------------------------- ------------
Tax-Free New York Fund 0.25%
---------------------------------------------------------- ------------
Tax-Free Oregon Insured Fund 0.60%
---------------------------------------------------------- ------------
Tax-Free Wisconsin Fund 0.75%
---------------------------------------------------------- ------------
-68-
<PAGE>
The Manager has contracted to waive that portion, if any, of the annual
management fees payable by a Tax-Free Arizona Fund and Montana Municipal Bond
Fund and to pay a Fund's expenses to the extent necessary to ensure that such
Fund's total operating expenses (excluding 12b-1 Plan fees, interest expense,
taxes, brokerage fees and commissions) do not exceed, on an annual basis, 0.50%
of respective average daily net assets of that Fund through October 31, 1999.
On August 31, 1999, the total net assets of each Fund were as follows:
-----------------------------------------------------------------------
Minnesota High-Yield Fund $ 65,142,352
-----------------------------------------------------------------------
Minnesota Insured Fund $284,587,916
-----------------------------------------------------------------------
Tax-Free Arizona Fund $ 26,499,091
-----------------------------------------------------------------------
Tax-Free Arizona Insured Fund $173,800,559
-----------------------------------------------------------------------
Tax-Free California Fund $ 43,322,171
-----------------------------------------------------------------------
Tax-Free California Insured Fund $ 32,221,567
-----------------------------------------------------------------------
Tax-Free Colorado Fund $356,045,981
-----------------------------------------------------------------------
Tax-Free Florida Fund $ 16,595,979
-----------------------------------------------------------------------
Tax-Free Florida Insured Fund $130,743,163
-----------------------------------------------------------------------
Tax-Free Idaho Fund $ 57,909,876
-----------------------------------------------------------------------
Tax-Free Iowa Fund $ 43,703,122
-----------------------------------------------------------------------
Tax-Free Kansas Fund $ 16,886,410
-----------------------------------------------------------------------
Tax-Free Minnesota Fund $414,269,906
-----------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund $ 61,392,313
-----------------------------------------------------------------------
Tax-Free Missouri Insured Fund $ 53,139,881
-----------------------------------------------------------------------
Tax-Free New Mexico Fund $ 23,737,434
-----------------------------------------------------------------------
Tax-Free New York Fund $ 12,127,618
-----------------------------------------------------------------------
Tax-Free North Dakota Fund $ 28,402,142
-----------------------------------------------------------------------
Tax-Free Oregon Insured Fund $ 37,120,435
-----------------------------------------------------------------------
Tax-Free Wisconsin Fund $ 38,125,062
-----------------------------------------------------------------------
<PAGE>
The Manager makes and implements all investment decisions on behalf of
the Funds. The Funds pay all of their other expenses. Set forth below is
information regarding the amount of investment advisory fees incurred, paid and
waived, if any, by each Fund to the Manager or Voyageur, whichever the case may
be, during the periods indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Investment Fees Waived
Advisory Fees Advisory Fees and Expenses
Incurred Paid Paid
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $918,346 $918,346 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $619,756 $535,646 $84,110
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $652,289 $584,130 $68,159
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $341,216 $311,799 $29,417
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $1,119,609 $1,119,609 None
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $113,916 $5,972 $107,944
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $53,250 None $61,174
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $48,532 None $49,907
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $21,995 None $34,425
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $55,464 None $90,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-69-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Investment Fees Waived
Advisory Fees Advisory Fees and Expenses
Incurred Paid Paid
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Free California Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $175,920 $136,887 $39,033
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $109,350 $108,264 $1,086
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $114,802 $113,884 $918
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $60,088 $51,460 $8,628
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $192,101 $117,101 $75,000
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $177,540 None $216,947
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $44,783 None $76,468
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $21,305 None $43,102
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $3,980 None $10,565
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $7,369 None $40,001
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $1,927,364 $1,927,364 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $1,229,144 $1,003,319 $225,825
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $1,199,154 $1,020,963 $178,191
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $588,023 $588,023 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $1,865,515 $1,865,515 None
- -----------------------------------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Investment Fees Waived
Advisory Fees Advisory Fees and Expenses
Incurred Paid Paid
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Free Florida Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $718,482 $718,482 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $529,873 $340,976 $188,897
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $571,547 $461,777 $109,770
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $305,198 $305,198 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $1,074,026 $1,049,026 $25,000
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $87,289 None $88,761
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $39,404 None $43,020
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $27,555 None $28,543
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $12,388 None $15,447
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $29,915 None $60,727
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $281,574 $260,382 $21,192
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $152,524 $132,155 $20,369
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $130,918 $76,955 $26,963
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $57,986 $27,984 $30,002
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $131,410 $1,410 $130,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-70-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Investment Fees Waived
Advisory Fees Advisory Fees and Expenses
Incurred Paid Paid
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Free Iowa Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $233,909 $195,725 $38,184
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $143,522 $115,543 $27,979
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $139,262 $122,155 $17,107
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $68,692 $62,756 $5,936
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $217,160 $212,160 $5,000
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $91,783 $91,783 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $51,288 $41,153 $10,135
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $44,934 $22,579 $22,355
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $21,163 $18,426 $2,737
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $60,154 $30,154 $30,000
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $270,971 $270,971 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $157,232 $157,232 None
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $162,269 $162,269 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $84,555 $59,658 $24,897
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $281,038 $281,038 None
- -----------------------------------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Investment Fees Waived
Advisory Fees Advisory Fees and Expenses
Incurred Paid Paid
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Minnesota Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $1,488,420 $1,488,420 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $990,662 $951,207 $39,455
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $1,000,967 $968,290 $32,677
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $502,457 $473,267 $29,190
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $1,518,301 $1,518,301 None
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $2,233,518 $2,233,518 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $1,427,564 $1,340,807 $86,757
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $1,423,345 $1,353,410 $69,935
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $706,459 $612,643 $93,816
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $2,222,690 $2,222,690 None
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $349,134 $51,212 $297,922
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $168, 083 None $204,795
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97 $136,823 None $136,823
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-71-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investment Investment Fees Waived
Advisory Fees Advisory Fees and Expenses
Incurred Paid Paid
- ------------------------------------------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Tax-Free Missouri Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $279,337 $279,337 $-0-
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $196,563 $156,816 $39,747
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $200,279 $185,491 $14,788
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $97,877 $97,877 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $290,247 $195,247 $95,000
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $126,495 $126,495 $5,031
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $73,889 $53,004 $20,885
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $68,560 $59,118 $9,442
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $34,332 $34,332 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $107,784 $107,784 None
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free New York Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $62,067 None $62,995
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $33,403 $25,972 $9,796
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $30,450 $21,543 $8,907
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $16,645 None $27,742
- -----------------------------------------------------------------------------------------------------------------------------
10/1/96-12/31/96(1) $17,615 None $23,062
- -----------------------------------------------------------------------------------------------------------------------------
10/1/95-9/30/96 $93,048 $68,468 $24,580
- -----------------------------------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $158,426 $147,711 $10,715
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $105,393 $73,673 $31,720
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $106,481 $93,426 $13,055
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $54,890 $54,890 None
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $175,239 $175,239 None
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $181,007 $103,132 $77,875
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $100,177 $36,024 $64,153
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $92,073 $50,164 $41,909
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $42,995 $23,231 $19,764
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $124,769 $59,769 $65,000
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund
- -----------------------------------------------------------------------------------------------------------------------------
9/1/98-8/31/99 $207,708 $207,708 $00,000
- -----------------------------------------------------------------------------------------------------------------------------
1/1/98-8/31/98 $123,329 $113,696 $9,633
- -----------------------------------------------------------------------------------------------------------------------------
5/1/97-12/31/97 $100,882 $79,307 $21,575
- -----------------------------------------------------------------------------------------------------------------------------
1/1/97-4/30/97 $48,044 $46,138 $1,906
- -----------------------------------------------------------------------------------------------------------------------------
1/1/96-12/31/96 $141,262 $131,262 $10,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective December 31, 1996, Tax-Free New York Fund changed its fiscal year
from September 30 to December 31.
-72-
<PAGE>
Set forth below is information regarding the amount of transfer agent
fees and accounting services fee paid by each Fund to Delaware Service Company,
Inc. during the fiscal period ended August 31,1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Transfer Agent Fees Accounting Services Fees
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Minnesota Insured Fund $227,417 $119,977
----------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund $18,812 $10,538
----------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund $116,347 $90,645
----------------------------------------------------------------------------------------------------
Tax-Free California Fund $26,282 $15,681
----------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund $32,300 $20,498
----------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund $251,020 $182,927
----------------------------------------------------------------------------------------------------
Tax-Free Florida Fund $16,972 $9,878
----------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund $90,604 $32,611
----------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund $45,672 $21,356
----------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund $54,766 $19,525
----------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund $16,577 $7,293
----------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund $292,530 $179,592
----------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund $60,263 $23,460
----------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund $48,336 $20,075
----------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund $22,672 $12,988
----------------------------------------------------------------------------------------------------
Tax-Free New York Fund $16,225 $6,111
----------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund $38,794 $11,059
----------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund $35,756 $14,695
----------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund $34,936 $16,246
----------------------------------------------------------------------------------------------------
</TABLE>
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.
Distribution and Service
The Distributor, Delaware Distributors, L.P., located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of each
Fund's shares under separate Distribution Agreements. 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 Plan for each such Class.
Delaware Distributors, L.P. is an indirect, wholly owned subsidiary of Delaware
Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
each Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to Shareholders Services Agreements. 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. and, therefore, Lincoln
National Corporation.
The Funds have authorized one or more brokers to accept on its behalf
purchase and redemption orders in addition to the Transfer Agent. Such brokers
are authorized to designate other intermediaries to accept purchase and
redemption orders on the behalf of the Funds. For purposes of pricing, the Funds
will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Investors may be charged a fee when effecting transactions through a
broker or agent.
-73-
<PAGE>
OFFICERS AND TRUSTEES
The business and affairs of the Funds are managed under the direction of
its Board of Trustees.
Certain officers and trustees of the Funds hold identical positions in
each of the other funds in the Delaware Investments family. As of September 30,
1999, the officers and trustees 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 September 30, 1999, management believes the following accounts
held 5% or more of a Class of shares of a Fund. The Funds have no knowledge of
beneficial ownership.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Arizona Insured Merrill Lynch, Pierce, Fenner & Smith 1,180,911 7.88%
Fund Class A Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Arizona Robert D Wickwire TTEE 25,153 7.98%
Insured Fund Class B Shares Robert D. Wickwire Rev
6050 N. Camino Esplendora
Tucson, AZ 85718
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Arizona Donaldson Lufkin Jenrette Securities Corporation Inc. 72,913 58.21%
Insured Fund Class C Shares P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Arthur N. Miller TTEE 9,295 7.42%
Of the Arthur N. Miller Revocable Trust
3192 E. Marlette Avenue
Phoenix, AZ 85016
- ---------------------------------------------------------------------------------------------------------------------------------
Thomas R. Schneiderhan 6,734 5.37%
Mary Lee H. Schneiderhan Comm. Prop.
10011 N. 76th Place
Scottsdale, AZ 85258
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-74-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Arizona Fund Class Charles Schwab & Co., Inc. 322,446 17.96%
A Shares For the Exclusive Benefit of its Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- ---------------------------------------------------------------------------------------------------------------------------------
Dain Rauscher Incorporated 198,130 11.03%
For the Benefit of Gaylord Rubin and
Beverly Rubin, Trustees
Gaylord & Beverly Rubin Family Trust
6580 N. Praying Monk Road
Paradise Valley, AZ 85253
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Arizona Fund Class Dain Rauscher Incorporated 28,661 5.04%
B Shares For the Benefit of Gaylord Rubin and
Beverly Rubin, Trustees
Gaylord & Beverly Rubin Family Trust
6580 N. Praying Monk Road
Paradise Valley, AZ 85253
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-75-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free California Insured Margaret R. Peterson TTEE 271,248 11.60%
Fund Class A Shares The Peterson Family Trust
539 East Walnut
Burbank, CA 91501
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free California Insured Wexford Clearing Services Corp. 47,841 7.23%
Fund Class B Shares FBO Ms. Billee Sawyer & Ms. Georgie Skropits, JT TEN
4338 Beverly Drive
Santa Maria, CA 93455
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free California Insured Donaldson Lufkin Jenrette Securities 36,189 63.51%
Fund Class C Shares Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
- ---------------------------------------------------------------------------------------------------------------------------------
NFSC FEBO 5,067 8.89%
Wong Family Trust
John D. Wong
517 Trinidad Lane
Foster City, CA 94404
- ---------------------------------------------------------------------------------------------------------------------------------
BT Alex Brown Incorporated 4,706 8.25%
FBO 489-60501-11
P.O. Box 1346
Baltimore, MD 21203
- ---------------------------------------------------------------------------------------------------------------------------------
Painewebber 4,673 8.20%
For the Benefit of Daryl Rice
Cheryl Rice JTWROS
PMB 288, 3334 E. Coast Highway
Corona Del Mar, CA 92625
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free California Fund George Fouts 431,092 18.61%
Class A Shares 1930 Village Center, Suite 3445
Las Vegas, NV 89134
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 191,797 8.28%
Securities Corporation, Inc.
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Margaret R. Peterson TTEE 179,739 7.75%
The Peterson Family Trust
539 East Walnut
Burbank, CA 91501
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-76-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free California Fund Harris Torgerson 58,619 11.96%
Class C Shares Verley Dahl Torgerson Trust
Harris O. & Verley Dahl Torgerson, Trustees
21 Rue Cannes
Newport Beach, CA 92660
- ---------------------------------------------------------------------------------------------------------------------------------
Dean Witter 36,390 7.42%
For the Benefit of Berlin Hall & Marliss Hall
Trustees
P.O. Box 250
Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------------------------------
Karin Schlobohm 26,267 7.40%
Trustee, Schlobohm Family Revocable Trust
1234 McIntosh Court
Sunnyvale, CA 94087
- ---------------------------------------------------------------------------------------------------------------------------------
Julia C. Kirkup, Trustee 35,556 7.25%
Richard P. Kirkup Non-Sheltered Marital Trust
1333 Via Margarita
Palos Verdes, CA 90274
- ---------------------------------------------------------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith 27,838 5.68%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Bancorp Piper Jaffray Inc. FBO 27,409 5.59%
Bob and Jean Bundy TTEES
Bob and Jean Bundy Revocable Trust
689 Anza Park Terrace
P.O. Box 9
Borrego Springs, CA 92004
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-77-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Colorado Fund Class Merrill Lynch, Pierce, Fenner & Smith 45,440 11.24%
C Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Florida Insured Merrill Lynch, Pierce, Fenner & Smith 1,223,782 10.53%
Fund Class A Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Florida Insured Merrill Lynch, Pierce, Fenner & Smith 105,284 23.48%
Fund Class B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Florida Insured NFSC FEBO John Canfield 4,523 45.52%
Fund Class C Shares June Canfiled
5450 N.E. 22nd Avenue
Fort Lauderdale, FL 33308
- ---------------------------------------------------------------------------------------------------------------------------------
Patricia Dembitsky 3,589 36.12%
John Dembitsky JT TEN
7066 Fairview Village
Winter Haven, FL 33881
- ---------------------------------------------------------------------------------------------------------------------------------
Rodney J. Nelson and 921.830 9.27%
Mary Jean Nelson JR WROS
5048 W. Sago Plam Court
Lecanto, FL 34461
- ---------------------------------------------------------------------------------------------------------------------------------
Norma M. Shaw 901 9.07%
9240 S.W. 44th Street
Miami, FL 33165
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Florida Fund Class Advest, Inc. 69,139 6.47%
A Shares 90 State House Square
Hartford, CT 06103
- ---------------------------------------------------------------------------------------------------------------------------------
NFSC FEBO 68,829 5.95%
FABCO
Slivka R&D IMA
P.O. Box 105870
Atlanta, GA 30348
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Florida Fund Class Merrill Lynch, Pierce, Fenner & Smith 104,169 25.44%
B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-78-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Florida Fund Class Jack C. Shaw, Trustee 16,569 25.55%
C Shares Lula Shaw Trust
2156 N.E. 24th Street
Fort Lauderdale, FL 33305
- ---------------------------------------------------------------------------------------------------------------------------------
Mary J. Manns 9,968 15.37%
2628 Nantucket Lane
Tallahassee, FL 32308
- ---------------------------------------------------------------------------------------------------------------------------------
Paine Webber 9,041 13.94%
For the Benefit of William H. Opalka and
Lotte S. Opalka TTEES
William H. Opalka Loving Trust
3825 Ming Tree Drive
New Port Richey, FL 34652
- ---------------------------------------------------------------------------------------------------------------------------------
Raymond James & Associates, Inc. FBO 4,630 7.13%
Russell C. Smith, Sr.
R.R. 3, Box 1225
Madison, FL 32340
- ---------------------------------------------------------------------------------------------------------------------------------
Dorothy C. Fisher and Harry F. Fisher JT TTEES 4,534 6.99%
Dorothy Fisher Rev. Trust
1048 Main Street
Sebastian, FL 32958
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette Securities 3,805 5.86%
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Idaho Fund Merrill Lynch, Pierce, Fenner & Smith 794,654 19.58%
Class A Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Idaho Fund Merrill Lynch, Pierce, Fenner & Smith 123,415 13.39%
Class B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Dean Witter for the benefit of 47,170 5.11%
Kenneth Schwarze
P.O. Box 250
Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-79-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Idaho Fund Harmon Johnson & Elizabeth Johnson JT WROS 44,416 13.95%
Class C Shares Prime Account
6935 N. Penncross Way
Meridian, ID 83642
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette Securities 41,949 13.18%
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith 18,716 5.88%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Donald F. Barstad & Mary E. Barstad, Trustees 18,039 5.66%
The Donald F. & Mary E. Barstad
Revocable Trust
1555 Highway 95 North
Weiser, ID 83672
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Iowa Fund Alex P. Despenas 69,593 14.73%
Class B Shares Ethel Despenas TEN COM
960 Briarstone
Mason City, IA 50401
- ---------------------------------------------------------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith 33,210 7.03%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
c/o Earl Van Zante 30,470 6.45%
Edith Roorda
2220 Adams Avenue
Pella, IA 50219
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Iowa Fund David W. Oberbroeckling and 18,173 13.29%
Class C Shares Julia A. Oberbroeckling JT WROS
3702 Wisconsin Avenue
Davenport, IA 52806
- ---------------------------------------------------------------------------------------------------------------------------------
Donald R. Kurtz 14,530 10.63%
Mildred Kurtz JT TEN
1010 Plane Street
Burlington, IA 52601
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-80-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Roger E. Jensen and Judy A. Jensen JT WROS 10,130 7.41%
505 Front Street
Lone Rock, IA 50559
- ---------------------------------------------------------------------------------------------------------------------------------
Mary M. Phillips 7,378 5.39%
1001 Gary Avenue
Spirit Lake, IA 51360
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Kansas Fund Class A Merrill Lynch, Pierce, Fenner & Smith 74,753 6.92%
Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Alena M. Hess, Trustee 72,903 6.75%
Alena M. Hess Trust
P.O. Box 53
Louisburg, KS 66053
- ---------------------------------------------------------------------------------------------------------------------------------
Henry R. Kircher 54,068 5.00%
P.O. Box 861
Louisburg, KS 66053
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Kansas Fund Class B Merrill Lynch, Pierce, Fenner & Smith 31,633 7.18%
Shares For the Sole Benefit of its Customers
Attn Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Prudential Securities, Inc. 24,870 5.64%
FBO Frank F. Castellano and
Patricia J. Castellano JT WROS
14032 Hayes Street
Overland Park, KS 66221
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Kansas Fund Class C Merrill Lynch, Pierce, Fenner & Smith 26,556 62.80%
Shares For the Sole Benefit of its Customers
Attn Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Harold L. Smith 4,512 10.66%
TOD Sheryl S. Olson
David A. Smith
Jayne A. Radley & Marcia L. Vaughn
1708 Arrowhead
Derby, KS 67037
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-81-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Kansas Fund Class C Gilbert O. Sears 2,649 6.26%
Shares TOD Megan R. Fishpool
Lisa Papadopoulos
Tricia R. Sears
213 East Parliament
Smith Center, KS 66967
- ---------------------------------------------------------------------------------------------------------------------------------
O.J. O'Connell, Jr. TEN 2,415 5.71%
O.J. O'Connell, Jr. REV LIV TR
P.O. Box 6
El Dorado, KS 67042
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Minnesota Merrill Lynch, Pierce, Fenner & Smith 354,628 6.86%
Intermediate Fund For the Sole Benefit of its Customers
Class A Shares Attn Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Prudential Securities, Inc. FBO 265,094 5.13%
Timothy O. Dougherty, Barbara Hilbert &
C. David Luther, Trustees
Motors Management Corp. Incentive Plan
Minneapolis, MN 55416
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Minnesota Loucinda M. Kozlowski 23,351 8.54%
Intermediate Fund TOD Frances Kay Pieper
Class B Shares TOD William J. Pieper
1776 Saint Clair Avenue
St. Paul, MN 55105
- ---------------------------------------------------------------------------------------------------------------------------------
Ursella Brinkhaus Trust 22,462 8.21%
Ursella Brinkhaus Trustee
Copperfield Hill
4200 40th Avenue North
Apt. 227
Robbinsdale, MN 55422
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-82-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Minnesota Merrill Lynch, Pierce, Fenner & Smith 21,844 10.11%
Intermediate Fund Class C Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Emery Jahnke 13,6254 6.30%
Ann Jahnke JT TEN
2402 Lilac Lane
Fargo, ND 58102
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Minnesota Insured Fund Class The Drifter Family Limited Partnership 30,043 7.34%
C Shares Gopher Macine & Eng. Co., General Partners
c/o Firstar Center, Attn: George Benz
101 E. 5th Street, Suite 2104
Saint Paul, MN 55101
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Minnesota Attn: Fund Administration 2,059,110 6.43%
Fund Class A Shares Merrill Lynch, Pierce, Fenner & Smith
For the Sole Benefit of its Customers
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Minnesota Merrill Lynch, Pierce, Fenner & Smith 70,273 6.36%
Fund Class B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-83-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free Minnesota Securities Corporation 57,465 9.91%
Fund Class C Shares Donaldson Lufkin Jenrette, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette Securities 48,025 8.28%
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Donald E. Horne 30,853 5.32%
Beatice Y. Horne JT TEN
4515 Merrywood Lane
Excelsior, MN 55331
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Minnesota High-Yield Woodland Development Corporation 370,714 9.11%
Municipal Bond Fund Attn: Larry Carlson
Class A Shares 830 West Main Street
Anoka, MN 55303
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Minnesota High-Yield Merrill Lynch, Pierce, Fenner & Smith 226,328 14.49%
Municipal Bond Fund For the Sole Benefit of its Customers
Class B Shares Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-84-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minnesota High-Yield Merrill Lynch, Pierce, Fenner & Smith 72,982 9.60%
Municipal Bond Fund For the Sole Benefit of its Customers
Class C Shares Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Andrew Ellis 52,193 6.86%
Harriet A. Ellis JT TEN
5201 Belmont
Minneapolis, MN 55419
- ---------------------------------------------------------------------------------------------------------------------------------
Bonnie D. Kersting and 43,661 5.74%
Steven M. Kersting TTEES
Bonnie D. Kersting Rev. Trust
17751 Layton Path
Lakeville, MN 55044
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Missouri Insured Dean Witter 9,369 40.05%
Fund Class C Shares For the Benefit of Gary E. Brasser
P.O. Box 250
Chruch Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------------------------------
George A. Rhodes 5,000 21.37%
TOD Russell G. Rhodes
1359 East Stoneridge Dr.
Springfield, MO 65803
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette Securities Corporation, 2,517 10.76%
Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Dean Witter 1,914 8.18%
For the benefit of Mary E. Crabtree &
James D. Crabtree
P.O. Box 250
Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------------------------------
NFSC FEBO 1,891 8.08%
Leroy F. Fisher
900 W. 2nd Street
Cameron, MO 64429
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free New Mexico Fund Merrill Lynch, Pierce, Fenner & Smith 350,092 18.72%
Class A Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-85-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free New Mexico Fund Donaldson Lufkin Jenrette Securities 95,093 5.08%
Class A Shares Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free New Mexico Fund Dean Witter 16,565 6.67%
Class B Shares For the Benefit of
Helen G. Elsbernd, Trustee
P.O. Box 250
Church Street Station
New York, NY 10008
- ---------------------------------------------------------------------------------------------------------------------------------
Legg Mason Wood Walker, Inc. 13,181 5.30%
P.O. Box 1476
Baltimore, MD 21203
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free New Mexico Fund Title Services, Inc. 9,015 25.96%
Class C Shares Attn: Bob Harris
P.O. Box 696
Raton, NM 87740
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 10,397 29.94%
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
R. Harold Wingo 3,808 10.97%
Ethel J. Wingo JT TEN
TOD David N. Wingo & Raymond M. Wingo
725 Collier Avenue
Raton, NM 87740
- ---------------------------------------------------------------------------------------------------------------------------------
Kathleen Porter Harris 2,166 6.23%
TOD Bob Harris
712 South 5th Street
Raton, NM 87740
- ---------------------------------------------------------------------------------------------------------------------------------
Kathleen Porter Harris 1,984 5.71%
TOD Mary Porter
712 S. 5th Street
Raton, NM 87740
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-86-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free New York Fund Class First Clearing Corporation 97,112 9.11%
A Shares Anthony A. Pugliese &
Carole D. Pugliese, Jt. Ten.
109 Eastwoods Road
Pound Ridge, NY 10576
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free New York Merrill Lynch, Pierce, Fenner & Smith 22,448 15.90%
Fund Class B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, Fl 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette 33,557 23.76%
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Charlotte A. Corbett 12,357 8.75%
6211 Seneca Street
P.O. Box 46
Springbrook, NY 14140
- ---------------------------------------------------------------------------------------------------------------------------------
NFSC FEBO 9,284 6.57%
Albert Wasilefsky
Tanya Sherman
4918 New Utrecht Avenue
Brooklyn, NY 11219
- ---------------------------------------------------------------------------------------------------------------------------------
Nancy Schmirl 8,812 6.24%
227 Napoli Street
Central Islip, NY 11722
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free New York Fund Class Donaldson Lufkin Jenrette 5,715 49.92%
C Shares Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
NFSC FEBO 3,110 27.16%
Lillian Stark
185 East 85th Street, Apartment 17N New
York, NY 10028
- ---------------------------------------------------------------------------------------------------------------------------------
Sarah R. Sealy 1,945 16.99%
3244 Hone Avenue
Bronx, NY 10469
- ---------------------------------------------------------------------------------------------------------------------------------
George W. Middleton 677.330 5.91%
39 N. Main Street
Massena, NY 13662
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free North Dakota Fund Wilkota and Company 208,641 8.41%
Class A Shares 1st National Bank & Trust Co. of Williston
P.O. Box 1827
Williston, ND 58802
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-87-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class Name and Address of Account Share Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Tax-Free North Dakota Fund Edward D Jones & Co F/A/O 9,298 9.57%
Class B Shares Arthur N. Lee
P.O. Box 2500
Maryland Heights, MO 63043
- ---------------------------------------------------------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith 8,125 8.37%
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Susan K Krueger 4,732 4.87%
P.O. Box 716
West Fargo, ND 58078
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free North Dakota Fund Merrill Lynch, Pierce, Fenner & Smith 26,901 90.12%
Class C Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Jacob N. Gust 2,588 8.67%
Barbara A. Olive JT TEN
4614 81st N
Fargo, ND 58102
- --------------------------------------- ------------------------------------------------------ ------------------- --------------
Delaware Tax-Free Oregon Insured Merrill Lynch, Pierce, Fenner & Smith 271,238 9.57%
Class A Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, Second Floor
Jacksonville, FL 32246
- ---------------------------------------------------------------------------------------------------------------------------------
Duane E. Hill and Sherry L. Hill JT WROS 153,993 5.43%
P.O. Box 659
Gold Hill, OR 97525
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Oregon Insured Glenn F. Taylor & 23,128 13.67%
Class C Shares Opal E. Taylor JT WROS
3760 Highway 101
Florence, OR 97439
- ---------------------------------------------------------------------------------------------------------------------------------
Ralph W. Sheffer & 19,751 11.67%
L. Marciel Sheffer TTEE
Ralph W. & L. Marciel Sheffer Rev. Liv. Trust
2147 Madison Street SE
Albany, OR 97321
- ---------------------------------------------------------------------------------------------------------------------------------
PaineWebber 16,016 9.46%
For the Benefit of the Herbert L. Bodner Trust
and The Bodner Family Trust
1419 NW 14th
Portland, OR 97209
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-88-
<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 12,662 7.48%
Class B Shares Cecil W. Carleton
P.O. Box 2500
Maryland Heights, MD 63043
- ---------------------------------------------------------------------------------------------------------------------------------
G. Collen Kinney & 9,105 5.38%
Dale G. Kinney JT WROS
2345 Salem Avenue SE
Albany, OR 97321
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Wisconsin Fund Salomon Smith Barney 363,641 10.43%
Class A Shares 388 Greenwich Street
New York, NY 10013
- ---------------------------------------------------------------------------------------------------------------------------------
Paine Webber 327,256 9.39%
For the Benefit of Bayban
c/o First State Bank of Bayport
Attn: Barb Monteith
950 North Highway 95
Bayport, MN 55003
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Tax-Free Wisconsin Fund Everen Clearing Corp. 28,496 18.29%
Class C Shares Alan R. Hyman & Harriet S. Hyman
111 East Kilbourn Avenue
Milwaukee, WI 53202
- ---------------------------------------------------------------------------------------------------------------------------------
Everen Clearing Corp. 19,159 12.29%
Beverly Humleker Calhoun Trust
111 East Kilbourn Avenue
Milwaukee, WI 53202
- ---------------------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin Jenrette Securities 12,580 8.07%
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
- ---------------------------------------------------------------------------------------------------------------------------------
Everen Clearing Corp. 9,248 5.93%
Harry A. Palmiter
111 East Kilbourn Avenue
Milwaukee, WI 53202
- ---------------------------------------------------------------------------------------------------------------------------------
Everen Clearing Corp. 8,775 5.63%
Robert P. Fahey
111 East Kilbourn Avenue
Milwaukee, WI 53202
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-89-
<PAGE>
DMH Corp., Delvoy, Inc., Delaware Management Company, Inc., Delaware
Management Business Trust, Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust), Delaware Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware Management Trust Company,
Delaware International Holdings Ltd., Founders Holdings, Inc., Delaware
International Advisers Ltd., Delaware Capital Management, Inc. and Retirement
Financial Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National 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.
-90-
<PAGE>
Certain officers and trustees of the Funds hold identical positions in
each of the other funds in the Delaware Investments family. Trustees and
principal officers of the Funds are noted below along with their ages and their
business experience for the past five years. Unless otherwise noted, the address
of each officer and trustee is One Commerce Square, Philadelphia, PA 19103.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
*Wayne A. Stork (62) Chairman, Director and/or Trustee of each of the six investment companies and each of
the other 27 investment companies in the Delaware Investments family.
Chairman and Director of Delaware Management Holdings, Inc.
Director of Delaware International Advisers Ltd.
Prior to January 1, 1999, Mr. Stork was Director of Delaware Capital Management, Inc.;
Chairman, President and Chief Executive Officer and Director/Trustee of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.; Chairman, President, Chief
Executive Officer, Chief Investment Officer and Director/Trustee of Delaware Management
Company, Inc. and Delaware Management Business Trust; Chairman, President, Chief
Executive Officer and Chief Investment Officer of Delaware Management Company (a series
of Delaware Management Business Trust); Chairman, Chief Executive Officer and Chief
Investment Officer of Delaware Investment Advisers (a series of Delaware Management
Business Trust); Chairman and Chief Executive Officer of Delaware International Advisers
Ltd.; Chairman, Chief Executive Officer and Director of Delaware International Holdings
Ltd.; Chief Executive Officer of Delaware Management Holdings, Inc.; President and Chief
Executive Officer of Delvoy, Inc.; Chairman of Delaware Distributors, L.P.; Director of
Delaware Service Company, Inc. and Retirement Financial Services, Inc.
In addition, during the five years prior to January 1, 1999, Mr. Stork has served in
various executive capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
*Trustee affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
-91-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
*David K. Downes (59) President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and
Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
President and Director of Delaware Management Company, Inc.
President of Delaware Management Company (a series of Delaware Management Business
Trust)
President, Chief Executive Officer and Director of Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer and Director of Delaware Service Company,
Inc.
President, Chief Operating Officer, Chief Financial Officer and Director of Delaware
International Holdings Ltd.
Chairman and Director of Delaware Management Trust Company and Retirement Financial
Services, Inc.
Executive Vice President, Chief Operating Officer, Chief Financial Officer of Delaware
Management Holdings, Inc., Founders CBO Corporation, Delaware Investment Advisers (a
series of Delaware Management Business Trust) and Delaware Distributors, L.P.
Executive Vice President, Chief Financial Officer, Chief Operating Officer and Trustee
of Delaware Management Business Trust
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director
of DMH Corp., Delaware Distributors, Inc., Founders Holdings, Inc. and Delvoy, Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Downes has served in various executive capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
*Trustee affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
-92-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard G. Unruh, Jr. (60) Executive Vice President and Chief Investment Officer, Equity of each of the six
investment companies and each of the other 27 investment companies in the Delaware
Investments family.
Chief Executive Officer/Chief Investment Officer of Delaware Investment Advisers (a
series of Delaware Management Business Trust)
Executive Vice President and Chief Investment Officer of Delaware Management Company
(a series of Delaware Management Business Trust)
Executive Vice President and Trustee of Delaware Management Business Trust
Executive Vice President of Delaware Management Holdings, Inc. and Delaware Capital
Management, 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.
- ---------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin (46) Executive Vice President/ Chief Investment Officer, Fixed Income of each of
the six investment companies and each of the other 27 investment companies in
the Delaware Investments family.
Director of Delaware Management Holdings, Inc.
Executive Vice President/Chief Investment Officer, DMC-Fixed Income of
Delaware Management Company (a series of Delaware Management Business Trust)
Executive Vice President of Delaware Management Holdings, Inc. and Delaware
Capital Management, Inc.
President and Director of Lincoln Investment Management, Inc.
Mr. McMeekin joined Delaware Investments in 1999. He has been employed in
various executive capacities by Lincoln National Corporation from 1994 to
present.
- ---------------------------------------------------------------------------------------------------------------------------
Richard J. Flannery (42) Executive Vice President/General Counsel of each of the six investment companies and
each of the other 27 investment companies in the Delaware Investments family, Delaware
Management Holdings, Inc., Delaware Management Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers (a series of Delaware Management Business
Trust) Delaware Distributors, L.P. and Founders CBO Corporation.
Executive Vice President/General Counsel and Director of Delaware International Holdings
Ltd., Founders Holdings, Inc., Delvoy, Inc., DMH Corp., Delaware Management Company,
Inc., Delaware Service Company, Inc., Delaware Capital Management, Inc., Retirement
Financial Services, Inc., Delaware Distributors, Inc., and Delaware Management Trust
Company.
Executive Vice President and Trustee of Delaware Management Business Trust.
Director of Delaware International Advisers Ltd.
Director of HYPPCO Finance Company Ltd.
During the past five years, Mr. Flannery has served in various executive capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-93-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Walter P. Babich (72) Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
460 North Gulph Road, King of Prussia, PA 19406
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and from 1988 to 1991,
he was a partner of I&L Investors.
- ---------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr (60) Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
500 Fifth Avenue, New York, NY 10110
Founder and Managing Director, Anthony Knerr & Associates
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and Treasurer of
Columbia University, New York. From 1987 to 1989, he was also a lecturer in English at
the University. In addition, Mr. Knerr was Chairman of The Publishing Group, Inc., New
York, from 1988 to 1990. Mr. Knerr founded The Publishing Group, Inc. in 1988.
- ---------------------------------------------------------------------------------------------------------------------------
Ann R. Leven (59) Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
785 Park Avenue, New York, NY 10021
Treasurer, National Gallery of Art
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer of the Smithsonian
Institution, Washington, DC, and from 1975 to 1992, she was Adjunct Professor of
Columbia Business School.
- ---------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison (63) Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402
President and Chief Executive Officer, MLM Partners, Inc.
Mr. Madison has also been Chairman of the Board of Communications Holdings, Inc. since
1996. From February to September 1994, Mr. Madison served as Vice Chairman--Office of
the CEO of The Minnesota Mutual Life Insurance Company and from 1988 to 1993, he was
President of U.S. WEST Communications--Markets.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-94-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Charles E. Peck (73) Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
P.O. Box 1102, Columbia, MD 21044
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of The Ryland
Group, Inc., Columbia, MD.
- ---------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans (51) Director and/or Trustee of each of the six investment companies and each of the other 27
investment companies in the Delaware Investments family.
Building 220-13W-37, St. Paul, MN 55144
Vice President and Treasurer, 3M Corporation.
From 1987-1994, Ms. Yeomans was Director of Benefit Funds and Financial Markets for the
3M Corporation; Manager of Benefit Fund Investments for the 3M Corporation, 1985-1987;
Manager of Pension Funds for the 3M Corporation, 1983-1985; Consultant--Investment
Technology Group of Chase Econometrics, 1982-1983; Consultant for Data Resources,
1980-1982; Programmer for the Federal Reserve Bank of Chicago, 1970-1974.
- ---------------------------------------------------------------------------------------------------------------------------
Eric E. Miller (46) Senior Vice President/Deputy General Counsel/Secretary of each of the six investment
companies and each of the other 27 investment companies in Delaware Investments family.
Senior Vice President/Deputy General Counsel/Assistant Secretary of Delaware Management
Holdings, Inc., DMH Corp., Delvoy, Inc., Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware Management Business Trust) and Delaware
Investment Advisers (a series of Delaware Management Business Trust), Delaware Service
Company, Inc., Delaware Capital Management, Inc., Retirement Financial Services, Inc.,
Delaware Distributors, Inc., Delaware Distributors, L.P. and Founders Holdings, Inc.
During the past five years, Mr. Miller has served in various executive capacities at
different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Joseph H. Hastings (49) Senior Vice President/Corporate Controller of each of the six investment companies and
each of the other 27 investment companies in the Delaware Investments family.
Senior Vice President/Corporate Controller and Treasurer of Delaware Management
Holdings, Inc., DMH Corp., Delaware Management Company, Inc., Delaware Management
Company (a series of Delaware Management Business Trust), Delaware Distributors, L.P.,
Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware Capital
Management, Inc., Delaware International Holdings Ltd., Delvoy, Inc., Founders Holdings, Inc.
and Delaware Management Business Trust
Executive Vice President/Chief Financial Officer/Treasurer of Delaware Management Trust
Company
Chief Financial Officer of Retirement Financial Services, Inc.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
During the past five years, Mr. Hastings has served in various executive capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-95-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Michael P. Bishof (37) Senior Vice President and Treasurer of each of the six investment companies and each of
the other 27 investment companies in the Delaware Investments family.
Senior Vice President/Investment Accounting of Delaware Service Company, Inc.,
Delaware Capital Management, Inc., Delaware Distributors, L.P., Delaware Management Company
(a series of Delaware Management Business Trust) and Founders Holdings, Inc.
Senior Vice President and Treasurer/Investment Accounting of Delaware Investment Advisers (a
series of Delaware Management Business Trust) Senior Vice President and Manager/Investment
Accounting of Delaware International Holdings, Inc.
Senior Vice President and Assistant Treasurer of Founders CBO Corporation
Before joining Delaware Investments in 1995, Mr. Bishof was a Vice President for Bankers
Trust, New York, NY from 1994 to 1995, a Vice President for CS First Boston Investment
Management, New York, NY from 1993 to 1994 and an Assistant Vice President for Equitable
Capital Management Corporation, New York, NY from 1987 to 1993.
- ---------------------------------------------------------------------------------------------------------------------------
Patrick P. Coyne (36) Vice President/Senior Portfolio Manager of each of the six investment companies and the
other 27 investment companies in the Delaware Investments family, Delaware Capital
Management, Inc., Delaware Management Company (a series of Delaware Management Business
Trust) and Delaware Investment Advisers (a series of Delaware Management Business
Trust).
During the past five years, Mr. Coyne has served in various capacities at different
times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Mitchell L. Conery (41) Vice President/Senior Portfolio Manager of each of the six investment companies and the
other 27 investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Before joining the Delaware Investments 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.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-96-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee/Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Elizabeth H. Howell (38) Vice President/Senior Portfolio Manager of each of the six investment companies and the
other 27 investment companies in the Delaware Investments family, Delaware Investment
Advisers (a series of Delaware Management Business Trust) and Delaware Management
Company (a series of Delaware Management Business Trust)
Before joining Delaware Investments in 1997, Ms. Howell was a senior portfolio manager
with Voyageur Fund Managers, Inc.
- ---------------------------------------------------------------------------------------------------------------------------
Andrew M. McCullagh, Jr. (51) Vice President/Senior Portfolio Manager of each of the six investment companies and the
other 27 investment companies in the Delaware Investments family, Delaware Investment
Advisers (a series of Delaware Management Business Trust) and Delaware Management
Company (a series of Delaware Management Business Trust)
Before joining Delaware Investments in 1997, Mr. McCullagh was a senior portfolio
manager with Voyageur Funds Managers.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-97-
<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 and the total compensation received from all investment companies in the
Delaware Investments family for the fiscal period ended August 31, 1999 and an
estimate of annual benefits to be received upon retirement under the Delaware
Investments Retirement Plan for Directors/Trustees as of August 31, 1999. Only
the independent trustees of the Funds receive compensation from the Funds.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Total
Compensation
from all 33
Voyageur Investment
Voyageur Voyageur Voyageur Intermediate Voyageur Voyageur Companies
Tax Free Insured Investment Tax Free Mutual Mutual Funds in Delaware
Director/Trustee Funds Funds Trust Funds Funds II Investments(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
W. Thacher Longstreth(2) $1,356 $1,409 $1,105 $517 $1,045 $1,169 $50,780
- ----------------------------------------------------------------------------------------------------------------------------------
Ann R. Leven $1,793 $1,855 $1,503 $823 $1,434 $1,578 $66,167
- ----------------------------------------------------------------------------------------------------------------------------------
Walter P. Babich $1,613 $1,670 $1,345 $716 $1,276 $1,413 $59,525
- ----------------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr $1,768 $1,828 $1,485 $819 $1,417 $1,557 $65,168
- ----------------------------------------------------------------------------------------------------------------------------------
Charles E. Peck $1,701 $1,757 $1,435 $810 $1,376 $1,504 $62,667
- ----------------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison $1,768 $1,828 $1,484 $819 $1,417 $1,557 $65,186
- ----------------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans(2) $760 $778 $661 $431 $670 $688 $28,405
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Pension or Retirement Benefits Accrued
as Part of each Investment Company's Expenses
- ----------------------------------------------------------------------------------------------------------------------------------
Total
Compensation
from all 33
Voyageur Investment
Voyageur Voyageur Voyageur Intermediate Voyageur Voyageur Companies
Tax Free Insured Investment Tax Free Mutual Mutual Funds in Delaware
Director/Trustee Funds Funds Trust Funds Funds II Investments(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans(2) none none none none none none none
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each independent director currently receives a total annual retainer fee of
$38,000 for serving as a trustee for all 33 investment companies in Delaware
Investments, plus $3,145 for each Board Meeting attended. Ann R. Leven,
Anthony D. Knerr, Thomas F. Madison and Charles E. Peck serve on the Funds'
audit committee; Ms. Leven is the chairperson. Members of the audit
committee currently receive additional annual compensation of $5,000 from
all investment companies, in the aggregate, with the exception of the
chairperson, who receives $6,000.
(2) W. Thacher Longstreth retired from the Board of Trustees of the six
investment companies on March 17, 1999. The compensation shown in the table
is the amount Mr. Longstreth received from September 1, 1998 through March
17, 1999. Janet L. Yeomans joined the Board of Trustees of each of the six
investment companies on March 17, 1999. The compensation shown is the amount
Ms. Yeomans received from March 17, 1999 through August 31, 1999.
-98-
<PAGE>
<TABLE>
<CAPTION>
Estimated Annual Benefits Upon Retirement(3)
- -----------------------------------------------------------------------------------------------------------------
Voyageur
Voyageur Voyageur Voyageur Intermediate Voyageur Voyageur
Tax Free Insured Investment Tax Free Mutual Mutual Funds
Director/Trustee Funds Funds Trust Funds Funds II
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Ann R. Leven $38,000 $38,000 $38,000 $38,000 $38,000 $38,000
- -----------------------------------------------------------------------------------------------------------------
Walter P. Babich $38,000 $38,000 $38,000 $38,000 $38,000 $38,000
- -----------------------------------------------------------------------------------------------------------------
Anthony D. Knerr $38,000 $38,000 $38,000 $38,000 $38,000 $38,000
- -----------------------------------------------------------------------------------------------------------------
Charles E. Peck $38,000 $38,000 $38,000 $38,000 $38,000 $38,000
- -----------------------------------------------------------------------------------------------------------------
Thomas F. Madison $38,000 $38,000 $38,000 $38,000 $38,000 $38,000
- -----------------------------------------------------------------------------------------------------------------
Janet L. Yeomans $38,000 $38,000 $38,000 $38,000 $38,000 $38,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Under the terms of the Delaware Investments Retirement Plan for
Directors/Trustees, each disinterested director/trustee who, at the time of
his or her retirement from the Board, has attained the age of 70 and served
on the Board for at least five continuous years, is entitled to receive
payments from each investment company in the Delaware Investments family for
a period equal to the lesser of the number of years that such person served
as a director or trustee or the remainder of such person's life. The amount
of such payments will be equal, on an annual basis, to the amount of the
annual retainer that is paid to directors/trustees of each investment
company at the time of such person's retirement. If an eligible
director/trustee retired as of August 31, 1999, he or she would be entitled
to annual payments totaling $38,000, in the aggregate, from all of the
investment companies in the Delaware Investments family, based on the number
of investment companies in the Delaware Investments family as of that date.
-99-
<PAGE>
GENERAL INFORMATION
The shares of the Funds constitute separate series of parent entities,
which are open-end investment companies. Each Fund is non-diversified as defined
by the Investment Company Act of 1940. Below shows each Fund's original and
current form of organization.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Parent Original Form of Organization (date) Current Form of Organization (date)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Voyageur Tax-Free Funds Minnesota Corporation Delaware Business Trust
Tax-Free Minnesota (November 10, 1983) (November 1, 1999)
Tax-Free North Dakota
- ---------------------------------------------------------------------------------------------------------------------------------
Voyageur Intermediate Tax-Free Funds Minnesota Corporation Delaware Business Trust
Tax-Free Minnesota Intermediate (January 21, 1985) (November 1, 1999)
- ---------------------------------------------------------------------------------------------------------------------------------
Voyageur Insured Funds Minnesota Corporation Delaware Business Trust
Tax-Free Arizona Insured (January 6, 1987) (November 1, 1999)
Minnesota Insured
- ---------------------------------------------------------------------------------------------------------------------------------
Voyageur Investment Trust Massachusetts Business Trust Massachusetts Business Trust
Tax-Free California Insured (September 16, 1991) (September 16, 1991)
Tax-Free Florida Insured
Tax-Free Florida
Tax-Free Kansas
Tax-Free Missouri Insured
Tax-Free New Mexico
Tax-Free Oregon Insured
- ---------------------------------------------------------------------------------------------------------------------------------
Voyageur Mutual Funds Minnesota Corporation Delaware Business Trust
Tax-Free Arizona (April 14, 1993) (November 1, 1999)
Tax-Free California
Tax-Free Idaho
Tax-Free Iowa
Tax-Free New York
Minnesota High-Yield Fund
Tax-Free Wisconsin Fund
Montana Municipal Bond Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Voyageur Mutual Funds II Minnesota Corporation Delaware Business Trust
Tax-Free Colorado (January 13, 1987) (November 1, 1999)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-100-
<PAGE>
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 Investments family. An affiliate of the Manager 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 or Delaware International also manages the investment options
for Delaware-Lincoln Choice Plus and Delaware Medallion (SM) III Variable
Annuities. Choice Plus is issued and distributed by Lincoln National Life
Insurance Company. choice Plus offers a variety of different investment styles
managed by leading money managers. Medallion is issued by Allmerica Financial
Life Insurance and Annuity Company (First Allmerica Financial Life Insurance
Company in New York and Hawaii). Delaware Medallion offers various investment
series ranging from domestic equity funds, international equity and bond funds
and domestic fixed income funds. Each investment series available through Choice
Plus and Medallion utilizes an investment strategy and discipline the same as or
similar to one of the Delaware Investments mutual funds available outside the
annuity. See Delaware Group Premium Fund, Inc., in Appendix B.
Access persons and advisory persons of the funds in the Delaware
Investments family, as those terms are defined in SEC Rule 17j-1 under the 1940
Act, who provide services to the Manager, 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.
-101-
<PAGE>
Effective March 1, 1997, the Distributor acts as sole national
distributor for each Fund and for the other mutual funds in the Delaware
Investments family. Prior thereto, the Distributor and/or Voyageur Fund
Distributors, Inc. ("VFD") acted as national distributor(s) for each Fund. The
Distributor and/or VFD received net commissions from each Fund, after
reallowances to dealers, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year period year year year period year year
ended ended ended ended ended ended ended ended
8/31/99 8/31/98 12/31/97 12/31/96 8/31/99 8/31/98 12/31/97 12/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund $206,332 $125,139 $162,464 $339,087 $26,477 $18,977 $22,139 $40,338
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund $92,850 34,624 47,805 104,978 $14,670 5,377 6,805 13,217
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund $59,660 30,767 30,039 107,617 $7,369 4,563 4,208 14,226
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund $166,108 28,096 16,692 11,751 $22,071 3,880 2,201 1,641
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund $592,186 347,853 453,936 525,069 $77,134 52,239 79,332 68,666
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund $90,881 43,501 93,605 174,064 $13,240 7,037 12,762 20,261
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund $20,346 52,188 26,437 41,214 $2,891 7,799 3,569 5,271
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund $242,652 188,855 158,771 313,894 $33,170 28,012 23,159 32,689
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund $82,240 78,483 95,358 167,735 $11,921 10,975 12,752 26,641
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund $55,514 24,725 32,401 55,360 $8,529 3,464 4,550 7,686
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund $79,920 30,062 58,451 71,429 $9,945 4,484 14,687 5,306
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund $539,760 295,201 428,428 650,734 $77,659 45,681 74,750 69,682
- ------------------------------------------------------------------------------------------------------------------------------------
Minnesota Insured Fund $333,411 207,531 275,689 454,762 $47,700 31,523 41,538 33,673
- ------------------------------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund $257,595 139,770 137,364 N/A $38,482 23,189 117,637 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund $34,640 35,876 59,498 211,558 $3,518 5,223 8,119 29,607
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund $69,837 50,817 46,722 45,937 $13,824 8,164 4,168 6,724
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free New York Fund $37,036 15,202 11,429 465 $10,857 2,123 1,603 ---
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund $20,258 11,209 9,217 38,688 $2,978 1,553 1,251 5,425
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund $167,813 102,635 71,994 149,165 $24,691 15,563 9,496 20,166
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund $110,641 57,432 60,987 107,671 $15,344 8,312 8,433 11,170
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-102-
<PAGE>
The Distributor and/or VFD received in the aggregate Limited CDSC
payments with respect to Class A Shares of each Fund as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Limited CDSC Payments
Class A Shares
- ---------------------------------------------------------------------------------------------------------------------
Fund Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
8/31/99 8/31/98 12/31/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund $--- $--- $---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund 609 --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund --- --- 2,443
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund --- --- 600
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund 833 --- 12,500
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund --- --- 5,000
- ---------------------------------------------------------------------------------------------------------------------
Minnesota Insured Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free New York Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-103-
<PAGE>
The Distributor and/or VFD received in the aggregate CDSC payments with
respect to Class B Shares of each Fund as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CDSC Payments
Class B Shares
- -----------------------------------------------------------------------------------------------------------------
Fund Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
8/31/99 8/31/98 12/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund $300 $10,032 $27,983
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund 8,391 11,254 20,921
- -----------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund 22,230 12,696 17,873
- -----------------------------------------------------------------------------------------------------------------
Tax-Free California Fund 51,039 6,336 2,542
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund 40,700 6,647 15,156
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund 7,880 19,856 6,964
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund 17,668 20,047 7,251
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund 26,530 20,547 14,466
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund 14,540 4,557 3,628
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund 16,762 6,850 4,170
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund 621 4,757 1,116
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund 23,890 12,155 13,282
- -----------------------------------------------------------------------------------------------------------------
Minnesota Insured Fund 25,052 16,552 5,440
- -----------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund 25,088 15,556 14,833
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund 12,086 26,709 35,076
- -----------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund 5,864 --- 3,500
- -----------------------------------------------------------------------------------------------------------------
Tax-Free New York Fund 1,945 --- ---
- -----------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund 2,388 417 1,850
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund 6,080 13,858 1,587
- -----------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund 14,701 9,156 4
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-104-
<PAGE>
The Distributor and/or VFD received in the aggregate CDSC payments with
respect to Class C Shares of each Fund as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CDSC Payments
Class C Shares
- --------------------------------------------------------------------------------------------------------------------
Fund Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
8/31/99 8/31/98 12/31/97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Insured Fund $1,922 $--- $---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Arizona Fund 1,425 --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free California Insured Fund --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free California Fund 1,632 --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Colorado Fund 3,772 1,416 ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Insured Fund 199 --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Florida Fund 628 --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Idaho Fund 2,446 909 6
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Iowa Fund 2,246 921 ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Kansas Fund --- --- 433
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Intermediate Fund 439 989 26
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Minnesota Fund 1,237 143 753
- --------------------------------------------------------------------------------------------------------------------
Minnesota Insured Fund 1,075 486 497
- --------------------------------------------------------------------------------------------------------------------
Minnesota High-Yield Fund 2,505 2,411 2,925
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Missouri Insured Fund --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free New Mexico Fund 298 --- 119
- --------------------------------------------------------------------------------------------------------------------
Tax-Free New York Fund --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free North Dakota Fund --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Oregon Insured Fund 496 96 182
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Wisconsin Fund 908 29 30
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for the Funds and for the
other mutual funds available from the Delaware Investments family. The Transfer
Agent is paid a fee by each Fund for providing these services consisting of an
annual per account charge of $11.00 plus transaction charges for particular
services according to a schedule. Compensation is fixed each year and approved
by the Board of Trustees, including a majority of the disinterested trustees.
The Transfer Agent also provides accounting services to the Funds. Those
services include performing all functions related to calculating each Fund's net
asset value and providing all financial reporting services, regulatory
compliance testing and other related accounting services. For its services, the
Transfer Agent is paid a fee based on total assets of all funds in the Delaware
Investments family for which it provides such accounting services. Such fee is
equal to 0.25% multiplied by the total amount of assets in the complex for which
the Transfer Agent furnishes accounting services, where such aggregate complex
assets are $10 billion or less, and 0.20% of assets if such aggregate complex
assets exceed $10 billion. The fees are charged to each fund, including the
Funds, on an aggregate pro-rata basis. The asset-based fee payable to the
Transfer Agent is subject to a minimum fee calculated by determining the total
number of investment portfolios and associated classes.
-105-
<PAGE>
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 the Funds, Norwest maintains a separate account or
accounts for each Fund; receives, holds and releases portfolio securities on
account of each Fund; receives and disburses money on behalf of each Fund; and
collects and receives income and other payments and distributions on account of
each Fund's portfolio securities.
Capitalization
Each Trust has a present unlimited authorized number of shares of
beneficial interest with no par value allocated to each Class.
While all shares have equal voting rights on matters affecting each
corporate entity, shareholders of each Fund would vote separately on any matter,
such as any change in its own investment objective and policies or action to
dissolve a Fund and as prescribed by the 1940 Act. Shares of a Fund have a
priority in the assets of that Fund, and in gains on and income from the
portfolio of such 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.
-106-
<PAGE>
Effective June 9, 1997, the names of the Funds were changed as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Previous Name New Name
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
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 Insured Tax Free Fund Delaware-Voyageur Tax-Free California Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Voyageur California Tax Free Fund Delaware-Voyageur Tax-Free California Fund
- -----------------------------------------------------------------------------------------------------------------------------
Voyageur Colorado Tax Free Fund Delaware-Voyageur Tax-Free Colorado 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 Minnesota High-Yield Municipal Bond Fund Delaware-Voyageur Minnesota High-Yield Municipal Bond 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 Wisconsin Tax Free Fund Delaware-Voyageur Tax-Free Wisconsin Fund
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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Effective August 16, 1999, the names of the Funds were changed as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Previous Name New Name
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Arizona Insured Fund Delaware Tax-Free Arizona Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Arizona Fund Delaware Tax-Free Arizona Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free California Insured Fund Delaware Tax-Free California Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free California Fund Delaware Tax-Free California Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Colorado Fund Delaware Tax-Free Colorado Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Florida Insured Fund Delaware Tax-Free Florida Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Florida Fund Delaware Tax-Free Florida Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Idaho Fund Delaware Tax-Free Idaho Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Iowa Fund Delaware Tax-Free Iowa Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Kansas Fund Delaware Tax-Free Kansas Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund Delaware Tax-Free Minnesota Intermediate Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Minnesota Insured Fund Delaware Minnesota Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Minnesota Fund Delaware Tax-Free Minnesota Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Minnesota High-Yield Municipal Bond Fund Delaware Minnesota High-Yield Municipal Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Missouri Insured Fund Delaware Tax-Free Missouri Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free New Mexico Fund Delaware Tax-Free New Mexico Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free New York Fund Delaware Tax-Free New York Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free North Dakota Fund Delaware Tax-Free North Dakota Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Oregon Insured Fund Delaware Tax-Free Oregon Insured Fund
- -----------------------------------------------------------------------------------------------------------------------------
Delaware-Voyageur Tax-Free Wisconsin Fund Delaware 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 trustees can elect all the trustees if they choose to
do so, and, in such event, the holders of the remaining shares will not be able
to elect any trustees.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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FINANCIAL STATEMENTS
Effective May 1, 1997, Ernst & Young LLP serves as the independent
auditors for each Fund and, in its capacity as such, audits the annual financial
statements of the Funds. Each Fund's Statement of Net Assets, Statement of
Assets and Liabilities, as applicable, Statement of Operations, Statements of
Changes in Net Assets, Financial Highlights and Notes to Financial Statements,
as well as the reports of Ernst & Young LLP for the fiscal year ended August 31,
1999 are included in each Fund's Annual Report to shareholders. The financial
statements and financial highlights, the notes relating thereto and the reports
of Ernst & Young LLP are incorporated by reference from the Annual Reports into
this Part B. KPMG Peat Marwick LLP, the Funds' previous auditors, audited the
annual financial statements and financial highlights of the Funds for fiscal
years ending on or before December 31, 1996.
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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 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 C to the Prospectus.
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 has been
among the top five employment-growth States for more than four years, and it
should remain there through 1999. 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 5.6% in 1996-97, and growth of 4.7% through November l998 which ranked
Arizona #1 in the nation for non-agricultural job growth through that period.
Arizona's wage and salary employment grew 5.6% in 1996, 4.5% in 1997 and 4.6% in
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1998. The unemployment rate was around 4.0% for 1998 and has remained around
3.6% in early 1999, but is expected to increase throughout 1999.
Arizona ranked third in the nation in personal income growth during
1991-96. Personal income grew 7.2% in 1997 and 1998, and is estimated at 7.8% in
1999.
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. Employment growth will continue to be
stronger in the Phoenix area than in the balance of the state. Housing has
probably peaked and is likely to decline after seven extremely strong years.
Retail sales should also continue to slow.
Population, because of continued employment growth, will record
above-average growth rates. Population grew 3.2% in 1996, 3% in 1997 and 2.8% in
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 1997 made significant changes to the State's
planning and budgeting systems. Beginning with the FY 2000/FY 2001 biennial
period, all State agencies, including capital improvement budgeting, will be
moved to a biennial budgeting system. From FY2000 to 2006, all State agencies
will move to a budget format that reflects the program structure in the "Master
List of State Government Programs."
The Budget Reform Act of 1993 established the current budgeting system
of one- and two-year budget reviews. 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 review and,
ultimately, more resources. The 18 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).
Revenues and Expenditures. The General Fund closed fiscal year 1998
with a $525.8 million ending balance, and the Executive plan for fiscal year
1999 anticipates a $60.8 million balance. Overall, fiscal year 1998 revenues
totaled $5.745 billion. Corporate income tax revenue declined by 10%, from $600
million in fiscal year 1997 to $528 million in fiscal year 1998. Individual
income tax revenues grew by 8.2% from fiscal year 1997 to fiscal year 1998.
Expenditures for fiscal year 1998 totaled $5.219 billion. Revertments totaled
$99.2 million in fiscal year 1998.
Fiscal Year 1999. The current Executive forecast for fiscal year 1999
revenue is $5.960 billion. The major revenue source, transaction privilege
taxes, is forecast to produce $2.547 billion for fiscal year 1999. Overall,
General Fund revenues will grow modestly, including 4% in fiscal year 1999 and
5.7% in fiscal year 2000. The 1999 rate of growth reflects the impact of the
$120 million tax reduction program passed in 1998, and the 2000 revenue estimate
includes an incremental reduction to account for an additional $60 million of
tax reductions already enacted.
The Executive fiscal plan for Fiscal Year 1999 is based on revenue
estimates of $5.43 billion ($5.75 billion including the $525 million balance
forward) and expenditures of $5.90 billion, leaving a balance of $60 million.
After spending $2.926 billion on education in Fiscal Year 1998, the Executive
fiscal plan for Fiscal Year 1999 includes spending $3.405 billion.
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Fiscal Biennium 2000-2001. The Executive is recommending a base
operating budget of $5.7 billion for fiscal year 2000 and $6.03 billion for
fiscal year 2001. The majority of recommended expenditures for fiscal biennium
are in education. A projected ending balance of $26.9 million and $4.7 million
is expected for Fiscal Biennium 2000-01. By the end of Fiscal Year 2001, the
Budget Stabilization Fund balance is estimated to reach $425 million, or 7.08%
of revenues. The Medical Services Stabilization Fund, by the end of Fiscal Year
2001 is estimated to reach $100.8 million, and the Temporary Assistance
Stabilization Fund $59.7 million.
Significant Litigation. In response to the court's ruling in the
Roosevelt v. Bishop 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. 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.
Since the recession in California in the early 1990's, California has
made a significant recovery. Deep cuts in the nation's defense budget were the
main reason that California's downturn was so severe. By 1996, nearly 60% of
California's more than 385,000 aerospace jobs had been eliminated. In addition,
California suffered more than two-thirds of all of the nation's job losses
resulting from military base closures.
As 1998 unfolded, the impact of Asia's recession on California began to
emerge. High-technology manufacturing employment -- aerospace and electronics --
peaked in March 1998, and by November 1998, had lost almost 15,000 jobs, or
nearly 3% of the industries' workforce. Total non-farm employment started 1998
with annual growth above 3%, but more recently, the year-to-year pace has slowed
to around 2.7%.
Overall, however, California's economy continued to expand in 1998.
Non-farm employment growth averaged 3.2% and personal income was up more than
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6%. The jobless rate was below 6% most of the year. Nonresidential construction
activity remained strong, with building permit value up almost 18%. Homebuilding
continued on a moderate recovery path, with permits for new houses reaching
126,000 units, a 13% increase over 1997. The construction industry led
California's employment growth in 1998. From October 1997 to October 1998,
construction jobs increased by more than 9%.
Although weak export demand is likely to persist through at least 1999,
there are other elements in the California economy that will help partially
offset the Asia-related problems. Demand for computer services and software
remains extremely strong, buoyed by the demand to fix Year 2000 problems, the
continued explosive growth of the Internet, and by financial sector needs
related to the new Euro currency. The strength in construction activity will
continue to boost prospects for related manufacturing industries. Although
California economic growth will slow from the pace of 1997 and 1998, gains in
employment and income should continue to outpace the nation.
California's population grew by 574,000 people in 1997 to total 32.96
million. This reflects a 1.8% increase of population for the year, compared to
1.0% growth posted in calendar year 1995. California's population is
concentrated in metropolitan areas specifically located in the Los Angeles and
San Diego counties.
California enjoys a large and diverse labor force. For calendar year
1997, the total civilian labor force was 15,971,000 with 14,965,000 individuals
employed and 1,006,000, or 6.3%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 4.9%.
Budgetary Process. The State's fiscal year begins on July I 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"). The
investment of PMIA is restricted by law to the following categories: U.S.
Government securities, securities of federally sponsored agencies, domestic
corporate bonds, bank notes, interest-bearing time deposits in California banks
and savings and loan associations, prime commercial paper, repurchase and
reverse repurchase agreements, security loans, bankers' acceptances, negotiable
certificates of deposit, and loans to various bond funds. The average daily
investment balance for the year ended June 30, 1998, amounted to $29.3 billion,
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with an average effective yield of 5.7%. For the year ended June 30, 1997, the
average daily investment was $28.3 billion and the average effective yield was
5.6%. Total earnings of the PMIA for fiscal year 1997-98 amounted to $1.7
billion.
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 disbursements in the General Fund. As of
December 31, 1998, the General Fund had outstanding internal loans from Special
Funds of $1.1 billion (in addition, there are $1.7 billion of external loans
represented by the 1998-99 Revenue Anticipation Notes, which mature on June 30,
1999). The revised projected 1997-98 fiscal year General Fund Reserve for
Economic Uncertainties was $2,594.6 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
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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.
Litigation Generally. The State is involved in certain legal
proceedings (described in the State's recent financial statements) that, if
decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. In January of 1997,
California experienced major flooding in six different areas with current
estimates of property damage to be approximately $1.6 to $2 billion. One lawsuit
has been filed by 500 homeowners and more lawsuits are expected. Exposure from
all of the anticipated cases arising from these floods could total approximately
$2 billion.
The primary government is a defendant in Ceridian Corporation v.
Franchise Tax Board, a suit which challenges the validity of two sections of the
California tax laws. The first relates to deduction from corporate taxes for
dividends received for insurance companies to the extent the insurance companies
have California activities. The second relates to corporate deduction of
dividends to the extent the earnings of the dividend paying corporation have
already been included in the measure of their California tax. If both sections
of the California Tax law are invalidated, and all dividends become deductible,
then the General fund can become liable for approximately $200-$250 million
annually.
Fiscal Year 1997-1998. General Fund revenues and transfers for fiscal
year 1997-98 were $55.0 billion, a 5.8% increase from the prior year.
Expenditures for the 1997-98 fiscal year were $53.1 billion, an 8% increase. As
of June 30, 1998, the General Fund balance was $2.8 billion.
Overall, General Fund revenues and transfers represent about 80% of
total revenues. The remaining 20% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and bank
and corporation) account for about 75% of total revenues with personal income
tax accounting for 50% of the total.
1998-99FiscalYear. The balance in the General Fund at the end of fiscal
year l999 is forecast at $1.1 billion. General Fund revenues are estimated to be
$56.3 billion, a 2.4% net increase from 1997-98.
K-12 education remains the state's top funding priority. Education,
public safety, and health and welfare expenditures constitute nearly 93% of all
state General Fund expenditures. The Budget fully funds the fourth and final
year of the Governor's "Compact with Higher Education" and calls for the
development of a new compact with UC and CSU. The Budget provides $50 million in
General Fund and $200 million a proposed bond to capitalize the Infrastructure
and Development Bank, while it will help business locate and expand in
California. The Budget also proposes a $7 billion investment plan to maintain
and building the State's school system, water supply, prisons, natural
resources, and other important infrastructure.
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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 $19.3 billion aggregate principal amount of general
obligation bonds outstanding, and $14.3 billion authorized and unissued, as of
December 31, 1998. Outstanding lease revenue bonds totaled $6.7 billion as of
December 31, 1998, and are estimated to total $6.6 billion as of June 30,1999.
From July 1, 1997 to July 1, 1998, the State issued approximately $2.6
billion in non-self liquidating general obligation bonds and $1.0 billion in
revenue bonds. Refunding bonds, which are used to refinance existing long-term
debt, accounted for $ 1.0 billion of the general obligation bonds and $514
million of the revenue bonds.
General Fund general obligation debt service expenditures for fiscal
year 1997-98 were $1.865 billion, and are estimated at $1.926 billion for fiscal
year 1998-99.
The State's general obligation bonds have received ratings of "A1" by
Moody's, "A+" by S&P and "AA+" by Fitch.
Factors Affecting Colorado Funds
General Economic Conditions. Colorado's population as of calendar year
1998 is estimated at 3.971 million. This represents a 2.0% increase over the
1997 estimate of 3.892 million. A large part of Colorado's current growth is
related to growth in the West and to decentralization trends that emanate from
California.
Colorado employment has slowed from 4.2% in 1997 to 3.6% in 1998.
Construction reported the largest percentage gain in 1998 at 10.8%. Mining
continued to be the weakest industry sector.
Colorado's job growth is expected to increase 3.4% in 1999 and the
economy in general will begin to slow. There are three main factors contributing
to the economic slowdown: scarcity of labor and higher costs, the effects of
weaknesses in international economies on the Colorado economy, and a slowdown in
the construction industry.
Unemployment increased to 3.8% in 1998 compared to 3.3% in 1997. In
comparison, the national unemployment rate in 1997 was 4.9% and in 1998, 4.5%.
In 1973, Colorado's unemployment rate was at 3.0%. In this business cycle,
however, that 24-year low will not be breached. Unemployment rates will decrease
slightly in 1999 and then creep upward until 2001.
Total personal income in Colorado during 1998 reached $113.7 billion,
an increase of 8.2%, and higher than the 7.6% increase reached in 1997.
Preliminary estimates for Colorado personal income predict an annual growth rate
of 7.2% for 1999 and 6.9% for 2000.
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
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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 mileage 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, 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. For the year-ended June 30, 1998, the
unreserved general fund balance was $901 million, or about 18.5% of general fund
expenditures, and after setting aside reserve monies, as required by statute,
the ending fund balance was $724 million. Revenue growth was 15.4% in 1998, and
is estimated at 6.8% in 1999, with sales tax collections growing 8.9% in fiscal
1998 and an estimated 10.4% in 1999. Individual income taxes grew 18.6% in
fiscal 1998 and are projected to grow only 8.1 % in 1999.
According to the Colorado Economic Perspective, June 20, 1999 (the
"Economic Report"), General Fund revenues for the 1998 fiscal year totaled
$5,348 million and program revenues (cash funds) totaled $2,087.2 million,
resulting in total base revenues of $7,435.2 million. Expenditures for the 1997
fiscal year, therefore, could not exceed $6,508.6 million. The total base
revenues were $563.2 million more than expenditures allowed under the spending
limitation. This excess revenue of $563.2 million will be refunded to Colorado
taxpayers during the 1999 tax filing season. The Economic Report estimates that
the limit will be breached by $686.3 million in fiscal year 1998-99. Because of
the significant anticipated surpluses, many permanent tax reductions were
enacted. In total, taxes were permanently reduced by $237.8 million in fiscal
year 2000-01.
General fund revenues for fiscal year 1998-99 are estimated at $5,766.4
million with expenditures estimated at $5,850.3 million. After reserve
set-asides, the state is estimated to have an ending fund balance of $457.6
million.
The State Controller may allow certain over expenditures of the legal
appropriation with the approval of the Governor. If the State Controller
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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 $233 million transferred to the capital
construction fund in 1997 and $181.8 million estimated in 1998. 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 1, 1997,
the State Treasurer issued General Fund Tax Revenue Anticipation Notes (the
"Notes') in the amount of $200 million. These Notes have a maturity date of June
1998, and are not subject to redemption prior to maturity. The amount due at
maturity is $209,000,000 consisting of the Note principal of $200,000,000 and
interest of $9,000,000. To ensure the payment of the Notes, the Treasurer has
agreed to deposit pledged revenues into the Account so that the balance 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 Mary's 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 from 1996-1997,
ranked fourth among the fifty states with an estimated population of 14.63
million. By 1999, Florida's population is expected to average 15.18 million. The
State's strong population growth is one fundamental reason why its economy has
typically performed better than the nation as a whole. In the long term,
national demographic trends will continue to slow net migration into Florida,
resulting in slower job and income growth. 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 1987, the prime working age population
(18-44) has grown at an average annual rate of more than 2.0%. 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 (18-64) total
population is approximately 60%.
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. This is
because Florida's population has been growing at a very strong pace, and since
the early 1970's, the state's economy has diversified so as to provide a broader
economic base. As a result, Florida's personal income has tracked closely with
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the national average and, historically, above that of the southeast. Florida's
personal income growth is expected to exceed that for the United States in both
FY 1997-98 and 1998-99. Real personal income will increase 4.9% in FY 1998-99,
and 3.5% in 1999-00. Real per capita income is expected to grow 3.1% in FY
1998-99 and 1.8% in FY 1999-00.
The state's economy is expected to grow at a moderate rate along with
the nation, but is expected to outperform the nation as a whole. Total non-farm
employment is expected to increase 3.4% in 1998-99 and 2.9% in 1999-00. The
strongest areas in job growth in Florida in fiscal year 1999-00 and 1998-99 are
expected to be in services and a combination of retail and wholesale trade.
Services are forecast to lead the economy, growing 55% in fiscal year 1998-99,
and 4.4% in 1999-00. Services are the single largest source of employment in
Florida, making up about a third of the total in fiscal year 1997-98.
Wholesale and retail trade is projected to increase 2.8% in fiscal year
1998-99, which parallels general economic growth. This sector is the second
largest, with about 25% of all jobs in the state, and is anticipated to increase
2.8% in fiscal year 1999-00. Construction job growth has declined in recent
years because of a slowing economy. Yet, single and multi-family housing starts
accounted for about 9.2% of total U.S. housing starts in 1997.
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 4.8% in 1997 and is estimated at 4.5% in 1998-99. The
national unemployment rate was 4.9% in 1997.
Tourism is one of Florida's most important industries. Approximately 47
million people visited the State in 1997. 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
1999, 49.7 million domestic and international tourists are expected to have
visited the State. In 1998-1999, tourist arrival should increase 2.0% and then
1.7% in 1999-00. 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 estimates. Florida
Statutes provide that 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.
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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 1998-1999, an estimated 39%
of total direct revenues to these funds will be derived from State taxes and
fees compared to 40% from the previous fiscal year. 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 71%, 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 1998-1999, the Governor recommended appropriations from
the General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 53%, 24%, and 16%, respectively, of total General
Revenue funds available.
Estimated fiscal year 1998-99 General Revenue plus Working Capital and
Budget Stabilization funds available to the State total $19.46 billion, a 5.1%
increase from 1997-98. Of the total General Revenue plus Working Capital and
Budget Stabilization funds available to the State, $17.69 billion is Estimated
Revenues. With effective General Revenues plus Working Capital Fund
appropriations at $18.19 billion, including a $100.9 million transfer to the
Budget Stabilization Fund, unencumbered reserves at the end of 1998-99 are
estimated at $1.38 billion. Estimated fiscal year 1999-00 General Revenue plus
Working Capital and Budget Stabilization funds available total $19.92 billion, a
2.4% increase over 1998-99. The $18.39 billion in Estimated Revenues represents
an increase of 3.9% 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 (Aa2), S&P (AA+) and Fitch
(AA) on all of its general obligation bonds. As of June 30, 1997, the state's
net outstanding debt totaled $7.89 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 was issued to finance capital
outlay for educational projects of local school districts, community colleges
and state universities, environmental protection and highway construction.
Financial Issues. The State of Florida and the tobacco industry settled
a lawsuit on August 25, 1997, in which the state sought to recover the costs
associated with tobacco usage by Floridians. The settlement provided for $750
million in payments to the state on or before September 15, 1997, then annual
payments beginning September 15, 1998, that will accumulate to about $10.5
billion over 25 years. The estimated payment for FY 1998-99 is $220 million.
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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 1998, Idaho completed the twelfth consecutive year of
economic expansion, yet at a much slower pace than previously. Overall non-farm
employment increased 3.5% in 1998 but the mining and lumber-related industries
lost jobs. Per capita personal income increased 3.4% during 1998. The rapid
employment increases enjoyed by the state for the last ten years have already
begun to slow and are anticipated to continue slowing. The unemployment rate
dropped to 5.0% in 1998, its lowest level since 1978. Per capita personal income
increased 3.4% during 1998. Idaho's population growth, which peaked at 3.0% in
1994, has tapered gradually to 1.6% during 1998, where it is expected to remain
over the next few years.
Exports. Exports of agricultural and manufactured goods play an ever
increasingly important role in Idaho's economic performance. Japan, the United
Kingdom, Canada, Singapore, and Taiwan are the state's biggest customers. It
should be noted that the recent Asian currency crises could dampen the outlook
for foot exports. Exports of American-style snack and fast foods, including
frozen french fries and other potato products, to this region have expanded with
rising incomes and the westernization of Asian diets. These products will become
relatively more expensive due to the devaluation of several Asian currencies.
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,
representing approximately 16% of the Gross State Product. 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 the 1997 Census of Agriculture, Idaho's
annual agricultural products were valued at $3.3 billion. This 1997 figure shows
a 10% decline from the previous year, and through 1999 low prices continue to
plague the state's huge agricultural industry. Currently, prices for hay, barley
and beans are down approximately 20% from 1998 values, while potatoes, wheat and
milk are down only 4%-8%.
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. Among the
service-producing sectors, 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 remaining components of the
service-producing sectors, including the finance, insurance, real estate,
transportation, communication and public utility industries, are expected to
continue to have mixed experiences with employment, that is, growth partly
offset by right-sizing. The net result is that these industries are expected to
average around 1.5% 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 had substantially slower growth rates in
1998; the goods producing sector will be a consistent rather than spectacular
performer. Idaho's weakness in 1999 will come primarily from the goods-producing
sector, with a 1.5% employment decline forecasted. Particularly weak sectors
will include lumber and wood processing, construction and mining. Nevertheless,
strong gains in electrical and high-tech manufacturing, services and education
are projected to offset these losses.
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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, untended 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. Total revenues available for all government
fund types during Fiscal Year 1998 totaled $3.39 billion, reflecting a 6.4% gain
from the previous year. This increase was caused by continued growth in Idaho's
core revenue sources, with sales tax receipts rising 6.4% and individual and
corporate income taxes growing 8.4%, demonstrating the continued strength of the
Idaho economy.
The state General Fund accounted for $1.85 billion of these collections
and was offset by $1.69 billion in General Fund spending. During Fiscal 1998
every category of appropriations increased over the previous year except
transportation and natural resources, both of which had experienced a jump in
spending during Fiscal 1997 due to a major flood in northern Idaho in 1996
requiring emergency appropriations from the State Budget Reserve Fund. Public
safety/ corrections and general government spending showed the greatest gains
during Fiscal 1998. The General Fund balance as of June 30, 1998 was $262.3
million, and overall governmental expenditures totaled $3.33 billion, up 3.6%.
The total funding available to the General Fund during Fiscal Year 1999
is projected to reflect 6.8% net growth, including a Fiscal 1998 carryover of
$14.2 million. The largest source of income is the individual income tax,
representing 51% of all receipts. Sales tax receipts, the corporate income tax
and product taxes (beer, wine, liquor and cigarette taxes) represent 36%, 6.9%
and 1%, respectively, of General Fund revenues. With three months remaining in
Fiscal 1999, the State Division of Financial Management reports that General
Fund revenues are $14 million ahead of targeted goals.
General Fund spending currently authorized for Fiscal 1999 is $1.561
billion. The estimated fund balance for the General Fund at the end of Fiscal
1999 is anticipated to be $2.28 million. Expenditures during Fiscal 1999 consist
of $1.42 billion in base spending plus $136.2 million in salary increases,
inflation adjustments and nonstandard adjustments, replacement capital outlays,
annualizations, enhancements, personnel benefit roll-up costs and public school
spending. Above-base increases in public school expenditures are the largest
item of increase, with $44.81 million provided as a lump sum.
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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 anticipation
note to correct the shortfall. The State Treasurer has in the past issued
internal General Fund tax anticipation notes to borrow monies from other
available State funds or accounts. Internal tax anticipation notes were not
issued in fiscal years 1988 through 1994. The State Treasurer has also 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 1997 Notes. The State issued $300 million in Tax Anticipation
Notes ("TANs") on July 1, 1997, which matured on June 30, 1998. The 1997 Notes
were issued in anticipation of the income and revenues and taxes to be received
by the General Fund during the fourth quarter of fiscal 1998. As required by
law, all income and revenues from the taxes collected during the fourth quarter
of the 1998 fiscal year were 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.
Factors Affecting Iowa Fund
General Economic Conditions
In 1998, once again Iowa had one of the lowest average annual
unemployment rates in the nation. The percentage of growth in Iowa's employed
workforce began in 1992 when the State's economy was more resilient to the
1990-92 recession than was the rest of the nation. Beginning in mid-1992, Iowa's
unemployment rate has consistently remained about two percentage points below
the national average - even as the national average has been falling during this
time. By the end of 1998, Iowa's seasonally adjusted unemployment rate was in
the 2.5% to 2.6% range. The U.S. unemployment rate has been in the 4.4%-4.7%
range. All of Iowa's counties and cities had unemployment rates below the U.S.
average.
Iowa's resident employment grew by 1% from October 1997 to October
1998. This more moderate growth rate is a consequence of having a labor supply
that is more fully utilized.
As of October, the number of non-farm payroll jobs was up about 33,000
from year-earlier numbers. However, the Iowa Economic Forecasting Council's
November outlook is that only 11,000 more jobs will be added over the next two
years.
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. In
1997, the export of factory goods accounted for $5.2 billion, or about 50% of
the $9.4 billion total exports from Iowa. Iowa factory exports increased 13% in
1997 but the pace appears to have slowed in 1998.
Iowa has been successful in reducing its reliance on both property and
income taxes. Effective January 1, 1998, Iowa reduced personal income taxes by
10% across-the-board. In 1997, legislation was passed exempting from inheritance
tax property passed onto lineal descendants.
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 cannot 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.
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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 1998 were $4,844.5
million, a 4.2% increase from the prior year. Of this amount, $4,478.4 million
came from special taxes, with 5l% from personal income tax and 28.5% from sales
tax. Total net refunds of taxes paid for fiscal year l998 were $455.l million.
Total revenues available in the General Fund in l998 were $6,542.6 million. The
State's two reserve funds, the Cash Reserve Fund and the Economic Emergency
Fund, are both filled to their Statutory maximum level, which is a total of 10%
of the State's annual general fund revenues.
Total General Fund appropriations for fiscal year 1998 were $6,128.0
million. Approximately 43.5% or $2.66 billion was for education, and 37% or
$2.26 billion was for human services.
Total State revenues are expected to grow 4.3% for fiscal year 1999. In
fiscal year 2000, it is projected that general fund receipts will total $5.1
billion.
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.
Revenue bonds issued by various authorities of the State totaled
$1,231.5 million outstanding at fiscal yearend. This amount consisted of $3.6
million of internal service revenue bonds, $549.3 million of component unit
proprietary funds revenue bonds (housing and higher education), $489.3 million
in revenue bonds issued by the three State universities (for facilities), and
$97.6 million and $91.7 million in various bonds issued by the Iowa Finance
Authority for the Underground Storage Tank Program and the Department of
Corrections, respectively. Such bonds are backed by the revenues of the issuing
project or authority.
Certificates of Participation (COPS), issued by the State and
outstanding at fiscal year-end, amounted to $103.4 million. COPS represent an
ownership interest of the certificate holder in a lease purchase agreement.
Other financing arrangements payable, excluding COPS, totaled $5.5 million at
June 30, 1998.
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, 1998,
was $32.9 million.
The Pooled Money Investment Fund had an average daily investment
balance of $1,481,684 in fiscal year 1998 with a 6.05% annual rate of return.
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 to 2.6 million in 1998. This
represents a percentage increase of 1.1% from 1997.
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With more than 90% of Kansas' land area dedicated to crop and livestock
production, agriculture is one of the most important sectors of the state
economy. Kansas leads the nation in wheat and sorghum production, generates
about 20% of the nation's cattle for slaughter, and is a major producer of
sunflowers, hay and soybeans. During 1997, however, crop prices were down from
previous years, agricultural production was valued at only $2.7 billion
(dropping from $3.1 billion in both 1996 and 1995), and farm employment fell
11.7%. Despite these setbacks, total farm earnings grew by 0.6% in 1997, and
farmers set new records for wheat, corn and soybeans. During 1998, agricultural
employment estimates show a 12.0% decline, and personal income from farming is
projected to have fallen 15%. In 1999, the farm economy is expected to remain
soft, but production should continue to increase slowly and farm income is
expected to turn around and post 2.0% growth.
Other key components of the Kansas economy are manufacturing,
telecommunications and health services. No single industry experienced large
employment gains during 1998, but all sectors did exhibit stable, modest growth.
The greatest percentage gains occurred in Kansas' aircraft industry (including
Boeing, Raytheon, Cessna and Learjet), which increased by 5.6%, despite summer
layoffs at Boeing's Wichita plant (manufacturing in general grew 2.7%). Services
and trade, the two largest areas of employment in Kansas, experienced 4.0% and
3.2% growth during 1998, enabling the state to create over 53,000 new jobs.
During 1999, non-farm employment is expected to increase by only 2.0%, about
half of the 1998 increase.
Kansas lead the Great Plains region in per capita personal income
growth during 1998 with a 5.3% gain. Bolstered by the strength of the
construction and durable goods manufacturing industries, per capita personal
income rose to $24,014 or 95% of the national average ($25,298). Although its
5.3% growth rate outpaced the 4.7% national growth rate during 1998, the state's
per capita personal income gain is expected to be somewhat lower at 4.1 % during
1999.
During 1998, the Kansas average unemployment rate decreased from 3.8%
to 3.6%. This compares favorably with a national unemployment rate of 4.5% in
1998.
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.
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 1998. Fiscal year 1998 began with a balance in the General
Fund of $527.8 million. Actual revenue for fiscal year 1998 was $4.02 billion,
an increase of 9.2% from the prior fiscal year. Total expenditures were $3.8
billion. The ending balance in the General Fund at the end of fiscal year 1998
was $756.3 million. This balance represents 19.2% of expenditures and demand
transfers, more than double the targeted amount.
Fiscal Year 1999. The Fiscal Year 1999 budget anticipates net General
Fund receipts of $4.1 billion, a 1.4% increase over FY 1998. This amount
reflects a slight decrease in income taxes and a slight increase in excise
taxes. FY 1999 General Fund expenditures are expected to rise by 11.1% to $4.2
billion. Despite the large increase in expenses, the General Fund ending balance
for Fiscal Year 1999 is expected to equal 14.5% of expenditures and demand
transfers or $611.8 million. This large surplus estimate anticipates receipt of
the first installment of proceeds from the tobacco companies lawsuit settlement.
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Fiscal Year 2000. The Governor's revised Fiscal Year 2000 budget
projects moderate increases in revenues and expenditures. General Fund receipts
from income tax are estimated at $1.9 billion, while excise taxes are expected
to bring in $1.8 billion. Total receipts in the General Fund are projected to be
$4.2 billion, up 3.7%. In conjunction with $15.1 million in planned tax
reductions and another payment from the expected tobacco settlement, $4.8
billion in total revenues are expected to be available during FY 2000.
Recommended expenditures total $4.4 billion (up 4.6%), leaving the state a
projected $423.1 million (9.6%) surplus at the end of the fiscal year.
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
"master lease" 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 many years. No other provision of the Constitution or state
statute limits the amount of debt that can be issued. As of June 30, 1997, the
state had authorized but unissued debt of $155,015,000. During 1998, Kansas had
the lowest per capita debt among the 50 states.
Although the state has no General Obligation debt rating, it seeks an
underlying rating on specific issues of at least "AA" from S&P and "Al" from
Moody's. In October l997, S&P assigned an issuer credit rating of AA+ to Kansas.
S&P credit rating reflects the state's credit quality in the absence of general
obligation debt. The underlying ratings for the most recently issued revenue
bonds were Al and AA- from Moody's and Fitch, respectively. The ratings for the
most recently issued fixed rate bonds issued by the Kansas Department of
Transportation were "Aa" and "AA" from Moody's and S&P, respectively.
The Kansas Department of Transportation issues debt to finance highway
projects. 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. Proceeds from debt financing by KDFA for capital
improvements are used for prison construction, acquisition and renovation of
office space, energy conservation improvements, university facility construction
and renovation, and projects for local governments.
In fiscal year 1998, KDFA issued $5.6 million in bonds to finance the
replacement of site utilities at the El Dorado Correctional Facility Site
Utilities Project. The original installation of heat insulation around the
steamlines has failed, allowing heat to escape and damage other utilities. The
Office of the Attorney General has filed litigation against the contractor,
manufacturer, and project architect to recover the costs of the replacement. All
cost recoveries will be used to finance the debt service payments. The first
payment begins in fiscal year 1999, and the Governor recommends $78,000 from the
State General Fund for this purpose.
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.
Minnesota's economy continued to outperform national averages during
1998. Overall payroll employment increased 2.9% in 1998, up from 1997's 1.6%
growth, to total over 2.6 million jobs. High technology industries, including
printing and publishing, health and medical devices, and computer components and
software are flourishing. Manufacturing, transportation, trade and services
experienced moderate growth, in the 2% to 3.5% range, as Minnesota's
manufactured exports increased rapidly. During 1997 the state's top three export
industries - industrial machinery, scientific instrument and electronic
equipment - accounted for about 60% ($5.8 billion) of Minnesota's total
manufactured exports. The fastest growing sectors in terms of employment,
however, were construction with 8.6% growth and the finance, insurance and real
estate (FIRE) sector, which enjoyed employment gains of 6.0% during 1998. During
the 1990s, Minnesota's FIRE sector has grown approximately six times faster than
the national average.
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Agriculture is another important factor of the Minnesota economy.
During 1997, the state exported over $2.6 billion worth of agricultural
products. Among the state's most important products are sugar beets, soybeans,
corn, wheat, oats, peas, turkeys and cheese. During 1998, reduced Asian demand
and good harvests sent farm prices below the break-even point for many crop and
livestock farmers, causing farm income for Minnesota grain producers to hit the
lowest levels since the mid-1980s. The state's farmers are expected to face
another difficult year in 1999. Problems in Brazil will allow Minnesota to take
a larger share of the world soybean market, but soybean prices are likely to
remain at or near their 20-year lows. Livestock and poultry farmers will benefit
from lower grain prices, but current market prices for hogs and turkeys will
continue to be depressed.
The annual unemployment rate in Minnesota has been below the national
rate every year since 1985. During 1998, the state's average unemployment rate
dropped to 2.5% from 3.3% a year earlier, resting two full percentage points
below the U.S. rate. Nationally, the average unemployment rate during 1998 was
4.5%. In conjunction with its low unemployment rate, Minnesota boasts the
highest labor participation rate (75%) in the nation. Accordingly, investors
should note that future economic growth may be hampered by shortages in skilled
workers.
Minnesota's per capita income growth has also outpaced the nation's
during the 1990s. While population has been stable in 1998 with less than 1%
growth (4.7 million), personal income has risen rapidly. The state averaged 4.1%
gains in per capita personal income during 1998, following 6.3% growth in 1997.
Minnesota's per capita personal income level is now $26,295, almost 104% of the
U.S. rate ($25,298).
Personal income in Minnesota is forecast to grow by 4.7% during 1999,
slightly above the average rate forecast for the nation. Wage and salary income
growth, however, is projected to lag the national average rate as states outside
the Midwest also begin to feel labor market pressures and part-time workers
elsewhere increase their hours to, or beyond, the levels they desire. Forecasts
for 1999 show Minnesota experiencing continued growth, particularly in high-tech
industries and business services. Despite a projected national slump in
manufacturing, the state's manufacturing sector is expected to rise much as it
has in the past when national manufacturing employment shrinks. Overall non-farm
employment is projected to rise 2.1 % during 1999.
Revenues and Expenditures. Minnesota operates on a two-year budget
cycle (a biennium). The 1998-99 biennium began on July 1, 1997. Net general fund
revenues for the current biennium are expected to total $22.5 billion, 1.3% more
than the amount forecast shortly after the mid-point of the biennium. Of this
amount, $10.7 billion in receipts were collected during Fiscal Year 1998. The
individual income tax represents the largest portion of these collections (44%),
while the state sales tax generates another 30%.
During Fiscal Year 1999, income tax revenues are expected to grow 8.2%
and sales tax revenues are projected to increase by 5.0%, bringing total
projected revenues to $11.9 billion. The larger than expected increase in income
tax revenues are due to strong wage gains, as well as rapidly increasing capital
gains payments. The $22.5 billion in estimated revenues for the FY 1998-99
biennium represents 14.9% growth over the previous biennium's revenues.
The February 1999 expenditure forecast for the FY 1998-99 biennium
totals $21.7 billion. Minor decreases in K-12 education, health care, family
support and other major local assistance estimates, combined with slightly
higher costs for property tax aid and state agency spending, account for the
increases in spending over originally budgeted amounts. The largest area for
appropriations continues to be education, representing 31.9% of overall spending
(or 43% when post-secondary education is included). Another 14.4% is spent on
health care, while 11.9% is used for property tax credits.
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The ending balance for FY 1998-99 is projected to be $91.0 million. As
of the end of FY 1998, Minnesota had nearly $1 billion in general fund reserves,
including a $350 million Cash Flow Account and a Budget Reserve Fund of $613
million. Minnesota's Budget Reserve is the 6th largest in the nation, while the
reserve as a percentage of expenditures ranks 10th largest. At the end of the
current biennium, the Budget Reserve Fund is projected to reach $963 million or
5.4% of appropriations.
On May 8, 1998, Minnesota settled its lawsuit with the tobacco
industry, resulting in estimated revenues to the state of $6.1 billion over the
next 25 years. A small portion ($202 million) of the settlement has been set
aside by the courts for specific purposes, but the balance is to be deposited
into the state's general fund as non-dedicated revenues. The payments have the
following components: (1) Annual payments to the state's general reserve fund
start with a $114.8 million deposit in FY 2000. This amount increases annually,
will reach $204 million during FY 2004, and will continue in perpetuity; and (2)
One-time settlement payments begin in FY 1999 and will end in FY 2003. Those
payments, totaling $1.3 billion, will be $461 million during FY 1999, $242
million during FY 2001-03, and $121 million in FY 2003.
Total current resources for the FY 2000-01 biennium are forecast to
reach $25.4 billion, 11.1% higher than the current biennium. Of this amount, the
income tax is expected to generate $5.8 million (up 13 %) and $6.1 million (up
5.7%) during FY 2000 and FY 2001, respectively. The unusually high growth rate
in the income tax during the first part of the biennium is attributable to the
impact of the property tax rebate program on net income tax receipts during the
FY 1998-99 biennium. Those rebates have reduced that biennium's income tax by a
total of $886 million. Without the rebates, the total increase in FY 2000-01
receipts would be only 10.9%. Total expenditures for the biennium are projected
at $22.5 million, a 4.1% increase over the FY 1998-99 biennium.
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 "Dividends, Distributions and Taxes; Minnesota State
Taxation" in the Prospectus.
The state issued $531 million of new general obligation bonds in fiscal
year 1998, and $184.8 million of general obligation bonds were redeemed, leaving
an outstanding balance of $2.51 billion.
The most recent ratings applicable to General Obligation bonds issued
by the State of Minnesota are as follows: "Aaa" by Moody's, "AAA" by S&P and
"AAA" by Fitch.
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 1999. Missouri's per capita personal
income rose at a 3.4% rate during 1998. The Missouri economy has produced
exceptional job growth over the past five years. Missouri's employment stood at
2.74 million in 1998, down 1.1% from the previous year. By March 1999, however,
employment had grown enough to surpass the 1996 peak of 2.78 million. The state
unemployment rate was 4.2% in both 1997 and 1998 which compares favorably to the
national unemployment rate of 4.9% and 4.5% for those years.
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.
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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.
Revenues and Expenditures. Balancing Missouri's budget in fiscal year
1998 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 1998 in sound financial
condition due to strong revenue collections and efficient management of State
programs. Net general revenue collections increased slightly over fiscal year
1997 due to a strong national and state economy. Expenditures were lower than
anticipated in fiscal year 1998 as prudent state agency managers did not use all
available spending authority. General revenue collections in fiscal year 1998
were $6.88 billion, 5.6% above fiscal year 1997 collections. General Revenue
expenditures in fiscal year 1998 for the operating budget were $6.31 billion.
The fiscal year 1999 budget is conservatively based upon general revenue
collections of $6.67 billion.
Final calculations made pursuant to Article X of the Missouri
Constitution show that total state revenues for Fiscal Year 1998 exceeded the
total state revenue limit by $548 million. Therefore, in accordance with Article
X, the entire amount of excess revenues will be refunded to Missouri income
taxpayers in calendar year 1999. The State ended fiscal year 1998 with an ending
balance (surplus) of $197.5 million for the General Revenue Fund.
Proposed tax cuts which may be enacted during Fiscal 1999 include an
increase in the personal exemption on the individual income tax (the first since
1946), a new deduction on health insurance premiums for the self-employed, and a
reduction in the corporate income tax for small businesses. If passed, these
proposals would have $191 million impact on revenues for the first year after
enactment.
As of April 30, 1999, year-to-date Fiscal 1999 revenues have reached
$5.53 billion, showing a 3.1 % gain over Fiscal 1998 collections through that
date. Appropriations during this period total $6.23 billion, 12.2% higher than
the previous year's spending to date.
Federal court-ordered payments for the St. Louis and Kansas City
desegregation plans were $279.8 million in fiscal year 1998 which is about 4% of
the State's general revenue budget. The estimate for fiscal year 1999 is $250.6
million including a final settlement payment for Kansas City. 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.
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Missouri voters have 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. Total general
obligation bonds issued as of June 30, 1998, was $1.23 billion of which $1.06
billion was outstanding. As of June 30, 1998, total revenue bonds issued was
$148.5 million with $108.3 million outstanding. Total state indebtedness as of
June 30, 1998, was $1.71 billion with $1.37 billion outstanding.
As of January 1, 1998, $194,465,000 principal remains outstanding of
the $200,000,000 issued fourth state building bonds (approved in August 1994);
and $128,590,000 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. With the final
issuance in fiscal year 1998, Missouri will have issued all $250 million in
fourth state building bonds authorized by Missouri voters.
In fiscal year 1997, Missouri invested a total of $276.5 million in its
capital assets with appropriations for maintenance and construction projects
throughout the State. Appropriations for fiscal year 1998 are estimated at
$237.6 million. Capital improvements of $192.5 million are recommended for
fiscal years 1998-99 biennial budget. Of this amount, $20.8 million is for vital
maintenance and repairs to state-owned facilities to initiate the voter-approved
maintenance funding mechanism. Also included is $171.8 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, S&P, and Fitch.
Factors Affecting Montana Fund
General Economic Conditions. Montana's growth rate in the 1990s has
steadily converged on its predicted long-term sustainable rate of 2% per year.
This growth is expected to continue for the next 10 years.
Agriculture continues to be Montana's largest basic industry. It
accounts for over 30% of the state's employment, labor income and gross sales.
Approximately 60 million of the state's 93 million acres are used for farming
and ranching. Montana agriculture generates about $2 billion in cash receipts.
Total revenues have remained constant for approximately 40 years, but the mix of
revenues has changed. Livestock prices rebounded dramatically in 1997 which may
reflect a bottoming of the current cattle cycle. If so, Montana should see
continued strength in cattle prices over the next few years. Wheat prices have
been above average for the last few years due, in part, to relatively low prices
elsewhere in the U.S. and around the world.
Much of Montana's manufacturing industry is tied to the state's natural
resources. The state's manufacturing sector produces more than $5 billion in
output annually and employs 30,000 workers earning $870 million in annual labor
income in 1997. The largest component, wood, paper and furniture products
manufacturing, is based primarily on Montana's timber resource and contributes
approximately 40% of the state's manufacturing labor income and 37% of
employment. In late 1997, due to Asian activity, three small to medium sawmills
announced closures due to reduced timber availability and large swings in lumber
prices. Overall, with growing global demand, the long-term outlook for Montana's
wood and paper products industry is positive. The overall outlook for
manufacturing is stability. A major addition in 1998, the Advanced Silicon plant
in Silverbow County, will employ several hundred workers by the end of 1999.
Personal income increased by 4.2% in 1997 which is nearly twice the
inflation rate of 2.3%. Montana's non-farm wage and salary jobs increased by
8,000 in 1998. The job market is expected to increase at a rate of 9,400 jobs
per year until 2OO6. Most job growth is projected to be in the
services-producing segment of the economy.
Although Montana's population continues to increase, the annual growth
rate has begun a projected slow down. The 1997 population, estimated to be
879,000, reflects an increase of 80,000 or 10.01% since 1990.
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Budgetary Process. Montana prepares two annual budgets biennially in
the odd-numbered years when the legislature meets. The constitution requires
that legislative appropriations not exceed available revenues. The legislature
only utilizes revenue estimates in the budgetary process to establish
appropriation levels. Expenditures may not legally exceed budgeted
appropriations. In addition, the State Constitution prohibits borrowing to cover
deficits incurred because appropriations exceed anticipated revenues. State law
requires an appropriation for disbursements from the General, Special Revenue
and Capital Projects Funds, except for those State Special Revenue Funds which
receive donations. Budgets may be established in other funds for administrative
purposes.
Appropriations may not be increased by amendment in the General Fund.
However, a department, institution or agency of the executive branch desiring
authorization to make expenditures from the General Fund during the first fiscal
year of the biennium from appropriations for the second fiscal year of the
biennium may apply for authorization from the Government through the budget
director. In the second year of the biennium, during the legislative session,
the legislature may authorize supplemental appropriations. During the 1997
legislative session, the legislature appropriated $14.2 million general fund and
$.93 million in special revenue supplemental appropriations for fiscal year
1997.
Revenues and Expenditures. Revenue sources for general governmental
functions, which include the General, Special Revenue, Debt Service, and Capital
Projects Funds, increased 7.5% from fiscal year 1997 to fiscal year 1998. Total
revenues were $2.34 billion. Total expenditures for all general governmental
functions increased 7.6% from fiscal year 1997 to 1998. Total expenditures were
$2.36 billion.
Total General Fund revenues for fiscal year 1998 were estimated at
$1.047 billion. Approximately $387 million of this amount was from the
individual income tax. General appropriations for fiscal year 1998 were
estimated at $979.7 million. The unreserved, undesignated fund balance of the
General Fund increased from $30.315 million at June 30, 1997, to $44.309 million
at June 30, 1998. This represents an increase of 46.16%. The Executive Budget
projects an estimated ending fiscal year 1999 general fund balance of
approximately $38.6 million. During the 2001 biennium the projected ending
balance in the General Fund could be over $62 million due to revenues from the
tobacco settlement.
The Governor's Budget Office estimates that current law revenues will
increase from $1,959.3 million in the 1997 biennium to $2,132.7 million for the
199 biennium, or by $173.4 million. Much of the estimated increase is due to
increased revenues from the 101 mills state property tax levy and the property
reappraisal.
Debt Administration. State debt may be authorized either by a
two-thirds vote of the members of each house of the legislature or by a
favorable vote of a majority of the State's electors voting. There is no
constitutional limit on the amount of debt that may be incurred by the State.
The Montana Constitution does, however, prohibit the incurring of debt to cover
deficits caused by appropriations exceeding anticipated revenue. General
obligation debt increased from $96.62 million at June 30, 1997, to $187.005
million at June 30, 1998. Total Special Revenue debt as of June 30, 1997 was
$166.83 million.
Montana receives general obligation bond ratings of Aa3 from Moody's
Investors Service and AA- from Standard & Poor's Corporation.
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. As of
July 1, 1997, the population had increased to 1,729,75 1, or 13.8% since 1990.
Major industries in the State are energy resources, tourism, services,
construction, trade, agriculture agribusiness, government, manufacturing, and
mining. In 1995, the value of energy resources production (crude petroleum,
natural gas, uranium, and coal) was approximately $4.9 billion with an increase
showing for 1996. From 1995-96, the value of construction contracts increased
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4.9% to $2.2 billion. Natural gas prices have declined to $1.75 per mcf as of
February 1999 as significant new sources of supply are bought on line in Canada
and the deep water Gulf of Mexico. Gas sale prices have averaged $1.90 per mcf
for fiscal year 1999 as of February 1999. Crude oil prices declined in fiscal
year 1999 (as of February 1999) to an average of $11.36 per barrel compared to
$21.04 in fiscal year 1997. Oil prices are expected to continue downward. Major
federally funded scientific research facilities at Los Alamos, Albuquerque and
White Sands are also a notable part of the State's economy.
New Mexico's economic growth has slowed. Nonagricultural employment
growth was only 1.3% from February 1998 to February 1999, a loss of 0.1% from
the 1.8% growth in 1997, and 0.9% below the national average. This is a
significant slowdown following growth rates of 3.8% in 1995, 5.0% in 1994 and
4.1 % in 1993. Causes for the slowdown can be traced to developments in several
sectors of the economy, including the Asian "flu." After an increase of 6.0% in
1995, construction employment declined 3.2% in 1996 and 1.2% in 1997, but
rebounded slightly with an increase of 2.2% for the period of February 1998 to
February 1999. This increase in construction employment, though positive, is
well below the 5.8% growth for the -nation and the 11.4% increase seen by
neighboring state Arizona. The finance, insurance and real estate sector lost
0.3% of its jobs during 1997, but it too saw a slight increase of 1.6% for the
February 1998-1999 period. New Mexico's manufacturing suffered the largest
decreases in the country during the February 1998-1999 period, with a 4.6% drop
in employment. In the trade sector, the State saw slight growth of 1.8%.
Finally, New Mexico has seen a loss of government jobs, as during the period of
February 1998-1999, the State lost 0.7% of its government jobs. In all of the
above categories, New Mexico fell in the bottom quarter of all states.
Agriculture is a major part of the State's economy, producing $49.6
million as of March 1999 for the 1999 fiscal year. This was a 2.5% increase from
the previous fiscal year period. 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 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.
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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 first 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.
For the Fiscal Year ending June 30, 1998, recurring revenue totaled
$3.158 billion, an increase of 6.5% over the previous fiscal year. Total General
Fund Revenue was $3.206 billion, up 6.0% from fiscal year 1997.
Preliminary results for fiscal year 1999 show recurring appropriations
at $3.182 billion, up 0.8% from the previous fiscal year. Nonrecurring
appropriations for fiscal year 1998 were $51.8 million, and are estimated at
$46.5 million for fiscal year 1999.
The net transfer necessary from the operating reserve was $145.2 million.
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 $377.9 million. Without the risk reserve, balances would be
$237.4 million. The fiscal year 1998 balance in the operating reserve was $225.3
million, or 7.0% of fiscal year 1998 total revenue.
Disaster allotments from the appropriation contingency fund totaled
$3.9 million, and the ending balance in the appropriation contingency fund is
$6.9 million for 1998 and is expected to be around $3.6 million in 1999.
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. The 1994 Legislature authorized the largest
capital program in the State's history, $383 million. The Executive Capital
outlay recommendation for the 1998 session totals $265.9 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
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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, 1998, the total
amount outstanding on General Obligation Bonds was $188,440,106.
The State of New Mexico General Obligation Capital Projects
Improvements Bonds Series 1997 in the principal amount of $64,825,000 are
authorized by the 1996 Capital Projects General Obligation Bond Act (the "Act")
passed by the State Legislature in 1996, have been approved by the voters in a
statewide election in November 1996 and will be issued pursuant to a resolution
of the State Board of Finance. General obligation bond recommendations for
fiscal year 1998-99 total $83.3 million. Of this amount, $72.1 million is for
public and higher education facilities, and $11.2 million is for statewide
projects.
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. For the fiscal year ended June 30, 1998, the
total amount outstanding on Severance Tax Bonds was $376,888,806. Of this
amount, $58,953,257 is in interest.
The Severance Tax Bonds, Series 1995A funds 55 projects for schools,
local governments, universities, and State agencies. Total amount of principal
and interest due on Series 1995-B and Series 1996-A as of June 30, 1997 is
$66,176,318 and $47,067,458, respectively. Total amount of principal and
interest outstanding as of June 30, 1997 for the Series 1997-A Refunding Bonds
is $68,515,621. The Severance Tax Bond recommendation for the 1998 session
totals $140 million. Of this amount, $68.6 million is for public and higher
education facilities, $12.7 million is for adult corrections projects and
facility purchase and $58.7 million is for other statewide projects.
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 main minerals extracted from
the State which contribute the largest portion of Severance Tax revenues are
natural gas, oil and coal. Severance tax collections totaled $183.9 million in
fiscal year 1998 and are projected at $139.4 million for 1999.
Moody's and S&P have assigned the bond ratings of "Aa" 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.
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Bond ratings received on New York State's and New York City's general
obligation bonds are discussed below. Moody's, S&P and/or Fitch 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 C.
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.
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 of New York has historically been one of the wealthiest
states in the nation. For decades, however, the state economy has grown more
slowly than that of the nation as a whole, gradually eroding the state's
relative economic affluence. The economic recovery from the national recession
of the early 1990s started considerably later in New York than in the nation.
Several factors were attributed to the state's slow recovery, including the
significant retrenchment in the banking and financial services industries,
downsizing by several major corporations, cutbacks in defense spending and an
oversupply of office buildings. During the last few years, however, New York has
shown signs of economic resurgence.
To a great extent, the current economic improvement for both the state
and New York City is heavily dependent on Wall Street. Using some of the
broadest measures of the state's economic performance, it appears that the Wall
Street investment banking and securities brokerage firms have dominated New
York's economic picture throughout the 1990's expansion. From 1992 to 1997, Wall
Street accounted for half of the state's $27 billion increase in real earnings,
and the same result holds true for growth in New York's Gross State Product.
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Considering that the securities industry represents only 2% of
statewide employment Wall Street's lucrative bonus pay-outs, which soared an
estimated 60% in 1996 and another 25% in 1997 and heavily impacted the state's
personal income levels and tax revenues, reflect the concentration of wage gains
in the 1990s among a small group of high earners. The economic important of Wall
Street to the state and to New York City has been much greater in the 1990s than
it was in the 1980s. The October 1987 Wall Street crash was the watershed
developing in ending New York's 1980's economic expansion. The effects of the
crash related directly to the fact that the state's 1989-1992 recession was much
steeper and longer-lasting than in the rest of the nation.
While New York income growth continues to follow U.S. personal income
growth for 1998, employment growth in the state still lags behind the nation.
After adding jobs at about half the national rate in 1997, New York job gains
during 1998 improved to nearly two-thirds of the national pace. Led by the
acceleration of job gains in New York City, the pace of statewide job growth
improved in the first half of 1998, although the state still trails most urban
industrial states such as New Jersey, Massachusetts and California. During the
period from December 1994 and May 1998, the state ranked 48th among the 50
states in terms of total job growth.
Within New York, recent job growth remains concentrated in New York
City and the downstate counties. Between 1995 and 1998, job growth averaged 1.4%
annually in New York City, 1.3% in the other downstate counties, but only 0.4%
annually for the four large upstate metropolitan areas (Buffalo, Rochester,
Syracuse and Albany). The state's unemployment rate has also improved from
1997's 6.4% rate, but it still averaged 5.6% during 1998 (U.S. unemployment
averaged 4.5%).
During between 1992 and 1998, New York's largest employment gains were
in services and construction, with growth of 18.7% and 8.8%, respectively.
Payrolls in the finance, insurance and real estate sector as well as the
government sector declined during this period, with losses of 1.4% and 3.9%,
respectively. Manufacturing, however, suffered the largest drop in employment,
with more than 100,000 jobs lost (representing I 0% of overall manufacturing
employment). Total employment in the state at the end of 1998 reached 8.23
million, up 0.6% over 1997 figures. Nationally, employment grew 2.7%.
New York's unemployment rate is improving faster than the U.S. rate,
although it is still much higher than the national average. During 1998 the
state's unemployment rate averaged 5.6% (down from 6.4% in 1997), but it is
still nearly a percentage higher than the U.S. unemployment rate of 4.5% (4.9%
in 1997). Since 1994, New York has ranked 48th among the fifty states in job
creation and unemployment.
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 experienced in
attracting people and business. New York 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.
New York City accounts for approximately 41% of the state's
population and personal income, and the its financial health affects the state
in numerous ways. From 1993 to 1996, the rate of economic growth in the City
slowed substantially. The City's economic improvement significantly accelerated
during 1997 and 1998, resulting in an unusually high, across-the-board increase
in tax receipts. Much of the increase can be traced to the performance of the
securities industry, but the City's economy has produced gains in retail trade,
tourism, and in business services. During 1998, the City experienced the largest
private sector job growth in the last 13 years.
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The extraordinary earnings growth on Wall Street along with trends such
as corporate downsizing and the reduction in well-paying manufacturing jobs
upstate have widened the income gap between the highest earners and those in the
middle or at the bottom of the spectrum. Those gaps are now greater in New York
than in any other state. The income gap between the top fifth of families and
the middle fifth increased the third fastest of all states between the mid-1980s
and the mid-1990s. During this period, the average income of the middle fifth of
families declined by $1,200 while the average income of the richest fifth of
families grew by $24,700. And while the nation's poverty rate has decreased
since 1993, New York's has increased. In 1996, New York's poverty rate stood at
16.7%, much higher than the 13.7% rate for the country as a whole.
Per capita personal income in New York increased by 4.3% during 1997,
compared with the 5.4% gain during 1996. The state's per capita personal income
level is now $30,299, which is nearly 20% higher than the U.S. average
($25,298). Nationally, per capita personal income grew 4.7% in 1997. Since 1994,
however, total New York personal income has increased 23%, compared to a 25%
increase nationwide.
Over the near term, the New York's economy is vulnerable to the risk of
a slow-down on Wall Street or further weakening in the national economy. On Wall
Street, the continued weakness in corporate profits could upset the prevailing
investor sentiment that has permitted historically high stock valuations. A
serious Wall Street setback would jeopardize state revenue collections, and
though a powerful multiplier effect, would dampen consumption and housing
spending and ultimately, job growth in other sectors.
During 1999, overall employment in New York is projected to grow by
1.4%, with the largest percentage gains in the construction and services
industries. Much like 1998, manufacturing will continue to lose jobs, while the
finance, insurance and real estate and government sectors remain stagnant.
Personal income will increase more slowly, with an estimated 4.5% gain, and the
unemployment rate is projected to drop nearly half a percent to 5.2%. During
2000, New York's economy is expected to expand more slowly with the state
average unemployment rate estimated to be 5.3%, overall employment growing 1.1%,
and personal income rising 4.2%.
Many uncertainties exist in forecasts of both the national and state
economies and there can be no assurance that the state economy will perform at a
level sufficient to meet the state's projections of receipts and disbursements.
State Revenues and Expenditures. The State of New York completed its
fiscal year ended March 31, 1998 with a combined Governmental Fund operating
surplus of $1.8 billion, compared with the balance from the preceding fiscal
year of $2.6 billion. The FY 1998 operating surplus included operating surpluses
in the General Fund of $1.56 billion, Special Revenues Funds of $49 million,
Capital Project Funds of $233 million, and offset by an operating deficit in the
Debt Service Funds of $43 million. As a result of the $1.56 billion surplus in
the General Fund during FY 1998, New York has managed to generate an accumulated
General Fund surplus of $567 million. Without the benefit of $4.4 billion of New
York Local Government Assistance Corporation net bond proceeds (1991-95),
however, as well as the decision to issue $292 of Dormitory Authority bond
proceeds in 1996, the General Fund accumulated deficit would have been $4.2
billion.
Revenues and other financing sources of the Governmental Funds totaled
$70.46 billion during FY 1998, an increase of $1.32 billion (1.9%) over the
previous fiscal year. The largest source of revenues is from tax receipts,
representing about half of all overall revenues. The personal income tax, which
generates about 26.5% of all revenues, grew by 4.2% during 1998, due to a
combination of strong employment, wage growth and increased in tax payments due
to the strong performance by the financial markets. The consumption and use
taxes, generating 13.8% of revenues, increased by 4.9%, primarily because of
increased sales tax receipts caused by increased consumer confidence and related
spending. New York relies heavily on federal funding, with grants reaching
$22.27 billion in 1998 or a third of all Governmental Funds revenues.
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Expenditures and other financing uses totaled $68.67 billion during FY
1998, which represents an increase of $1.59 billion (2.4%) over FY 1997. Social
services is the single largest use of state funds at $25.6 billion or 37% of all
spending, with a 3.7% increase over the previous fiscal year. Education, the
second largest category of expenditures, grew by 4.4% to $14.3 billion. Debt
service payment increased by $338 during FY 1998.
The General Fund closing balance at the end of FY 1998 was $465
million. Of this amount, $400 million was deposited in the Tax Stabilization
Reserve Fund (TSRF), while another $65 million was deposited in the Contingency
Reserve Fund (CRF). The TSRF had an opening balance of $317 million,
supplemented by a required payment of $15 million and an extraordinary maximum
deposit of $68 million from surplus FY 1998 monies.
The fiscal year 1999 budget is balanced, with most of the spending
increases driven by state law, rather than by program expansions. No significant
spending reductions are included because (1) a significant portion of the $2
billion FY 98 budget surplus was carried over and used in the FY 1999 budget;
(2) a boom in incomes led by strong financial market performance anticipates
expanding tax collections; and (3) spending growth for entitlement program
continues to be moderate, with public assistance caseloads declining and
moderate Medicaid growth.
The FY 1999 enacted budget anticipates spending from all Governmental
Funds to total $7.15 billion, an increase of $5.5 billion or 8.3% over FY 1998
expenditures. Of this amount, state funds are expected to grew by 9.8%, while
General Fund spending increases by only 7.1%. This spending growth is higher
than it has been during the previous three fiscal years, representing a reversal
of the state's recent trend to keep spending growth near or below inflation.
For many years, New York has had a very high state and local tax burden
relative to other states. The burden of state and local taxation, in combination
with the many other causes of regional economic dislocation has contributed to
the decisions of some businesses and individuals to relocate outside, or not
locate within, the state. New York combined state and local taxes are 30% above
the national average per share of person income, primarily because local taxes
are 72% higher than the national average (state taxes along are only 4% above
the national average).
General Fund tax receipts are forecast to grow 5.5% during FY 1999,
with growth almost entirely attributable to the personal income tax and
collections association with capital gains. The receipts also reflect the
initial phases of the STAR property tax reduction program, as well as the
continuing impact of other 1997 and earlier tax reduction legislation. In
addition, the FY 1999 budget reflects several additional tax reduction proposals
that will reduce receipts available to the General Fund by about $700 million
during the fiscal year. Total General Fund revenues are estimated to increase by
$3 billion or 8.7% during FY 1999. Spending within the General Fund is projected
to increase by $2.43 billion over the previous fiscal year, so that the
projected surplus for FY 1999 is expected to surpass $1 billion.
One major uncertainty to the FY 1999 state financial plan continues to
be risks related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year. It is
possible that recent changes could produce slower economic growth and a
deterioration in state receipts. An additional risk to the enacted budget arises
from the potential impact of certain litigation now pending against the state,
which could produce adverse effects on the state's projections of receipts and
disbursements.
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 FY 1999 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.
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For example, the budget enacted for FY 1999 will increase debt service
by more than 40% through FY 2003, when total debt service will be more than $4.5
billion annually. New York's outstanding debt will total more than $40 billion
in FY 2003, compared to $23.4 billion in FY 1993. At that point, taxpayers will
pay more the debt service (8.4% as a percent of revenue) than for planned
capital projects. In addition, even if the economy continues modest growth, New
York will still face a budget gap of $5.5 billion in FY 2001, the highest
projected gap in history. The last time New York faced budget gaps of that
magnitude was during the recession of the late 1980s and early 1990s.
There can be no assurance that the State of New York will not face
substantial potential budget gaps in the future 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.
New York City. In response to the fiscal crisis in New York City (the
"City") during 1975, the state took a number of steps to assist the City in
returning to fiscal stability. Among other actions, the State Legislature (i)
created the Municipal assistant Corporation ("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 City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations")).
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. 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 and imminence 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. If the state experiences
revenue shortfalls or spending increases beyond its projections during FY 1999
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. 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 absence of wage increases in excess of the increases assumed in
its financial plan, employment growth, 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, and approval by the Governor or the State
Legislature and the cooperation of MAC with respect to various other actions
proposed in such financial plan.
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Attaining a balanced budget 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 work capital requirements. The terms and success of
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projected public sales of City general obligation bonds and notes will be
subject to prevailing market conditions at the time of the sale, and no
assurance can be given that the credit markets will absorb the projected amounts
of public bond and note sales. 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
and notes. If the City were unable to sell its general obligation bonds and
notes, it would be prevented from meeting its planned operating and capital
expenditures.
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.
In January, 1998, the New York City mayor announced the City's
Financial Plan for Fiscal Years 1998-2002. For the second year in a row, the New
York City four-year financial plan contains a record surplus of more than $1
billion. Since the adoption of the FY 1998 budget, the City is now forecasting
additional resources of $3.1 billion. Approximately 73% will be used to reduce
the out-year gaps, 19% will fund targeted educational, public safety and other
initiatives, and 8% will be used to reduce taxes further.
To reduce the out-year gaps, the City has imposed fiscal discipline on
the rate of growth of City spending which has, over the last four years, been
held below the rate of inflation. For fiscal year 1999, the proposed City funded
spending increase will be held to 0.6%. The budget stabilization account,
established for the first time in 1997, will be maintained in fiscal year 1999
at $210 million with an additional $210 million created for fiscal year 2000. As
a result of this fiscal planning, the out-year gaps have been cut in half
compared to six years ago: fiscal year 1993 was $13.3 billion and fiscal year
1998 is $6.75 billion.
According to recent staff reports, while economic recovery in New York
City has been slower than in other regions of the country, a surge in Wall
Street profitability resulted in increased tax revenues and generated a
substantial surplus for the City in City fiscal year 1996-97. Although several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industry and the course of the
national economy. These reports have also indicated that recent City budgets
have been balanced in part through the use of non-recurring resources; that the
City's Financial Plan tends to rely on actions outside its direct control; that
the City has not yet brought its long-term expenditure growth in line with
recurring revenue growth; and that the City is therefore likely to continue to
face substantial gaps between forecast revenues and expenditures in future years
that must be closed with reduced expenditures and/or increased revenues.
Given the foregoing factors, 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's economic base.
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 receipts and expenditures in the New York's FY 1999 budget.
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Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment 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 increased state
expenditures for extraordinary local assistance.
In addition, beginning in 1990, the City of Troy experienced a series
of budgetary deficits that resulted in the establishment of a Supervisory Board
for the City of Troy in 1994. The Supervisory Board's powers were increased in
1995, when Troy MAC was created to help Troy avoid default on certain
obligations. The legislation creating Troy MAC prohibits the City of Troy from
seeking federal bankruptcy protection while Troy MAC bonds are outstanding. Troy
MAC has issued bonds to effect a restructuring of the City of Troy's
obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, aid that was largely continued in 1997. Twenty-eight
municipalities were scheduled to share the more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
State Agencies. Certain Agencies of the state 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 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 New
York City and MAC obligations and could thus jeopardize the City's long-term
financing plans.
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, any of its agencies, New York City or any other
municipality 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 New
York Trust, could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial
decisions, and long-range economic trends. The 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.
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.
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The state is also engaged in a variety of claims wherein significant
monetary damages are sought. In 1997, a civil rights claim alleging intentional
school segregation in Yonkers has resulted in a $9 million judgment for
plaintiffs that the state must pay. Adverse developments in the foregoing
proceedings or new proceedings could adversely affect the financial condition of
the state in the future.
The City is also 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, on the
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the City's ability to
carry out its financial plan. 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.
Debt Management. There are a number of methods by which the State of
New York may incur debt. The state may issue general obligation bonds approved
by the voters and notes in anticipation of such bonds. The state, with voter
approval, may also directly guarantee obligations of public benefit
corporations. (Presently, the Job Development Authority is the only public
benefit corporation authorized to issue state-guaranteed bonds.) Payments for
debt service on state general obligation and state-guaranteed bonds or notes are
legally enforceable obligations of the state. New York has never been called
upon to make any direct payment pursuant to its guarantee.
As of March 31, 1998, New York had approximately $34 billion in
outstanding state-supported debt. Of this amount, $4.74 billion were for
outstanding general obligation bonds, $29 billion in state-supported debt issued
by public authorities and Albany County (to finance Empire State Plaza), $429
million issued as certificates of participation (COPs), the proceeds of which
are used to finance equipment and real property acquisitions. New York is ranked
fourth among the fifty states in state-supported debt per capita, at $1,596 per
resident.
During FY 1998, the state issued $487 million in general obligation
bonds and redeemed $482 million. The total amount of general obligation bonded
debt authorized but not yet issued at year-end was $2.29 billion. Notes payable
(issued in the form of commercial paper) had a year end-balance of $294 million.
Although New York generally incurs debt to pay for the state's
long-term capital needs, the state also incurred debt to eliminate its annual
spring borrowing through the Local Government Assistance Corporation (LGAC). In
June 1990, legislation was enacted creating the 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 March 31, 1998, $5.2 billion remained outstanding for the LGAC.
In addition, that the end of FY 1997, New York public authorities had $56.1
billion in debt outstanding not supported by state funds. This debt is paid back
through authority revenues such as Thruway tolls. Total non-general obligation
debt was $33.95 billion at the end of FY 1998.
The state anticipates that its state-supported debt outstanding will
grow to $36.5 billion by the end of FY 1999, a 7.4% increase. Debt outstanding
is forecast to grow another 4.7% to $38.2 billion in FY 2000, with annual rates
of increase around 3% for the three following fiscal years.
In addition to the state, a number of New York's local governments,
agencies, instrumentalities and political subdivisions issue Municipal
Obligations, some of which may be conduit revenue obligations payable from
payments from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued by them
may vary considerably from the credit quality of obligations backed by the full
faith and credit of the state.
The total of such debt incurred by counties, cities (including New York
City), towns, villages, school districts and fire districts, was $44.7 billion
in outstanding debt as of the fiscal year ending in 1996. A portion
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of that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to state enabling legislation. State law requires the State
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. Eighteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1997.
Ratings. In August, 1998, Moody's Investors Service, Inc. lowered its
rating for State of New York general obligation bonds from Al to A2, its lowest
state rating (Louisiana is the only other state to receive this rating).
Standard & Poor's Ratings Services gives the state an A rating, which it has
retained since improving from A- in January, 1992. Fitch IBCA, Inc. (formerly
known as Fitch Investors Service, L.P.) rates the state's general obligation
bonds as A+.
New York City general obligation bonds are currently rated A- by
Standard & Poor's; Baal by Moody's; and A by Fitch IBCA (upgraded from A- on
March 8, 1999).
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 comer of the State is 750 feet above sea level and in the southwest
comer of the State is 3,506 feet. The North Dakota economy continues to grow at
a slow and steady pace. Taxable sales and purchases were up 2.86% over the
second quarter of 1998. Only one industry sector, wholesale trade, declined in
the second quarter of 1998.
The state's transportation, communication and public utilities sectors
experienced a healthy 23.4% increase in the second quarter. The largest sector,
retail trade, grew by 4%, well over twice the inflation rate of 1.6%, indicating
continuing consumer confidence in the economy.
The North Dakota employment picture remains robust. The August 1998
unemployment rate was 2.1 %, the lowest August rate since 1957 and significantly
better than the national unemployment rate for August, which was 4.5%.
The state added 3,300 jobs in the past year, and posted gains in seven
major industry sectors. The largest gain was in finance, insurance and real
estate, up 5%, followed by construction, up 2%.
Agriculture, North Dakota's mainstay industry, continues to struggle
with low prices for the state's major crops and depressed cattle prices as well.
Farm income plummeted from $764 million in 1996 to just $15 million in 1997,
with the outlook for 1998 nearly as bleak. The farmers who remain solvent are
those who diversify into unusual crops and increase their off-farm income with
jobs in town for themselves and family members. Despite the misery in the farm
sector, overall the state's residents posted an increase in adjusted gross
incomes for 1997 of over 3%, indicating strength in the off-farm economy that
more than offsets the agricultural losses.
Low prices are prevalent in the oil patch as well. The Amoco-posted
field price for North Dakota sweet crude averaged just $10.05 for the month of
July 1998. Lackluster prices are responsible for a slowdown in oil production in
the state. Statewide oil production averaged 96,268 barrels per day in July
1998, down 3% from 99,304 barrels per day in July 1997.
These factors combine to make the outlook for the North Dakota economy
mixed. Healthy employment numbers will likely continue, contributing to strength
in the retail sector and, coupled with low interest rates, increasing home
buying and major expenditures for durable goods. Still, the outlook for the
agricultural economy is poor and the continued demise of rural North Dakota
inevitable unless grain prices and global marketing improve dramatically.
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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. The legislative appropriations passed by the fifty-fifth
assembly were $1,489 million, an increase of $147 million over the 1995-97
appropriations.
The beginning balance for the 1997-99 biennium was $65 million. The
actual ending balance for the previous biennium was $82 million, however
legislation passed by the 1997 Legislative Assembly required any amount in
excess of $65 million at the end of the biennium to be transferred to the budget
stabilization fund and subsequently transferred to the Bank of North Dakota to
become part of the Bank's undivided profits. As a result, $17 million was
transferred to the Bank of North Dakota and the 1997-99 biennium began with a
$65 million balance.
The 1997-99 general fund biennial appropriation was $1.489 billion,
while the general fund revenue forecast was $1.435 billion. Taxes were not
raised and no one-time transfers were used in the 1997-99 budget.
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. Revenues for general
governmental functions totaled approximately $1.7 billion for the fiscal year
ended June 30, 1998, an increase of approximately $187 million from fiscal year
1997. The largest increase in taxes on a budgetary basis comes from corporate
income taxes with an increase of $15 million because of economic growth in the
State. The second largest source of general fund revenue, the individual income
tax, increased $14 million.
Total sales and use tax for the 1997-99 biennium is estimated at $570.2
million. Total individual income tax for the biennium is estimated at $359.8
million and total corporate income tax $115.7 million.
General government appropriations totaled $1.6 billion for the fiscal
year ended June 30, 1998, an increase of 8.73% from 1997. The three leading
expenditures are: education, $364 million, health and human services, $598.8
million; and, highways, $280.6 million. Highway expenditures increased by $44
million because of an increase in highway repairs. The GAAP General Fund
undesignated balance increased from $109.3 million on June 30, 1997, to $141.9
million as of June 30, 1998.
Projected general fund revenues for the 1997-99 biennium, based on the
1999 revised legislative forecast, are $1.476 billion. This is a $95 million or
7% increase over the 1995-97 biennium. The projected ending balance at June 30,
1999 is approximately $51.7 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, 1998, the state had a number of
debt issues outstanding. These issues include:
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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. General obligation bonds currently
outstanding are the 1984 and 1986 Real Estate Series. At June 30, 1998, the
balance was $31,441,000.
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, 1998, total Revenue Bonds outstanding were $1,179,881,000. The Bonds
and balance were as follows: State Fair, $2,851,000; Student Loan Trust,
$210,752,000; Building Authority, $77,506,000; Housing Finance, $712,872,000;
Lignite Research Fund, $7,560,000; Water Commission, $8,050,000; University
System, $56,780,000; and Municipal Bond Bank, $103,510,000.
Long-Term Notes. The Bank of North Dakota has advances from the Federal
Home Loan Bank in the amount of $53.5 million. The advances have a fixed rate of
interest, ranging from 5.78% to 8.19%.
North Dakota continues to receive high bond ratings from both Moody's
(Aa3) and S&P (AA-) on general obligation bond issues.
Factors Affecting Oregon Fund
General Economic Conditions. Oregon's May 1999 forecast issued by the
Department of Administrative Services states that Oregon's economy grew briskly
in the first quarter of 1999. The pattern for growth was once again similar to
the U.S., with consumer spending leading the way. The mild recovery in the Asian
crisis alleviated some of the pain experienced by the manufacturing sector
throughout the second half of 1998.
The preliminary estimate of first quarter 1999 Oregon job growth is 3.9
percent. This is the fastest quarterly growth since the fourth quarter of 1996.
It compares with 2.3 percent for the U.S. as a whole. The first quarter was a
marked improvement over the fourth quarter of 1998, when jobs grew 2.4 percent.
Over the past year, Oregon's economy slowed relative to its Western
neighbors. Oregon ranks 32nd among states for job growth between February 1998
and February 1999. California and Washington had much faster job growth during
the period, ranking 7th and 12th respectively.
The forecast for Oregon's economy is that it will grow faster than the
U.S. economy over the next two years. The growth will be mild and well below the
fast pace of 1995 through 1997. No decline in employment is expected unless the
U.S. economy falls into recession. Job losses to manufacturing should lessen in
1999 with slight gains in 2000, following the recovery of Asian economies.
Oregon's economy has growth relatively faster than the nation
throughout the 1990s. Oregon is expected to remain a high growth state.
The major risk to Oregon's economy is a change in consumer spending
patterns. A stock market correction that adversely impacts wealth and shakes
consumer confidence, will slow down spending. The risk to businesses is further
turmoil in world economic markets. Both consumers and businesses would be
directly impacted if oil prices keep spiraling higher. If all these risks come
to play, the reduction in growth would be widespread across all industries and
consumer groups.
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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 authorized 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.
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: programs
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. General Fund
revenue totaled $7,731.58 million for the 1995-1997 biennium. Revenue exceeded
the May estimate by $187.7 million.
As of May 1999, General Fund revenue is projected to be $8,260.3
million for the 1997-99 biennium. The ending balance is estimated to be $329.6
million. The 1997-99 General Fund revenue estimate is $76.0 million lower than
the March 1999 forecast. It is $35.2 million higher than the Close of Session
(COS) estimate.
All non-corporate income tax revenue is now projected to exceed the
1997-99 COS forecast by $153.9 million. This is 2.03 percent above the COS
forecast. While this means that a surplus kicker refund for individuals is
projected for the 1999-2001 biennium, revenues exceed the threshold by only $2.6
million. The corporate income tax forecast is $118.7 million below the COS
estimate. This makes a surplus kicker credit next biennium highly unlikely.
General Fund revenue is forecast to total $9,827.4 million in
1999-2001, a 19 percent increase from the prior biennium. The beginning balance
is forecast to be $329.6 million. Combined, they provide total General Fund
resources of $10,157.0 million for the biennium. This is an increase in
resources of $43.8 million from March 1999.
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.
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 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.
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Ballot Measure 50, passed by Oregon voters in May of 1997, limits the
taxes a property owner must pay. It limits taxes on each property by rolling
back the 1997-98 assessed value of each property to 90% of its 1995-96 value.
The measure also limits future growth on taxable value to 3% a year, with
exceptions for items such as new construction, remodeling, subdivisions, and
rezoning. It establishes permanent tax rates for Oregon's local taxing
districts, yet allows voters to approve new, short-term option levies outside
the permanent rate limit if approved by a majority of a 50% voter turnout.
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.
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. As of June 30, 1998, the total balance of general
obligation bonds was $3.0 billion. The debt service requirements for general
obligation bonds, as of June 30, 1998, was $4.87 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 a 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 requests from local mass transit districts
and may 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.
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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
systems by the Department of Administrative Services and the Adult & Family
Services Division. As of June 30, 1998, the certificates of participation debt
totaled $665.1 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
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, Moody's and S&P has assigned their municipal bond
ratings of "AA," "Aa2" 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. The population of Puerto Rico is estimated to have
increased to 3,857,070 as of July 1998.
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.
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The economy of Puerto Rico is closely integrated with that of the
mainland United States. During fiscal 1996 approximately 88% of Puerto Rico's
exports went to the United States mainland, which was also the source of
approximately 62% of Puerto Rico's imports. In fiscal 1996, Puerto Rico
experienced a $3.2 billion positive adjusted merchandise trade balance. Gross
product in fiscal 1997 is estimated at $32.9 billion. A real growth rate of
gross domestic product is estimated at 2.7% for 1999. Puerto Rico had
approximately $30.3 billion in exports in 1998, an increase of 26.4% from 1997.
Construction is currently one of the most dynamic activities in Puerto
Rico's economy, growing 15% since the mid-1980's. Average employment in creased
from 987,000 in fiscal 1992 to 1,228,000 in fiscal 1996. Average unemployment
decreased from 15.1% in fiscal 1992 to 13% in fiscal 1996.
Puerto Rico has a diversified economy. During the fiscal years
1992-1996, 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 1992 was $23.7 billion and gross product in
fiscal 1996 was $30.2 billion. This represents an increase in gross product of
27.6% from fiscal 1992 to 1996. 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.
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 1997 budget revenues and other
resources of all budgetary funds total $9,517,835,000, 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 $8,795,900,000, an increase of $63,797,000 from fiscal
1996. The general obligation bond authorization for the fiscal 1997 budget is
$369,000,000.
In the fiscal 1998 budget proposal revenues and other resources of all
budgetary funds total $8,863,071,000 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
$9,767,984,000, an increase of $528,330,000 from fiscal 1997. The general
obligation bond authorization for the fiscal 1996 budget is $500,000,000.
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 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.
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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 line 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 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.
In President Clinton's 1998 budget submission to Congress, proposed
that existing Section 30A of the tax code be made permanent to provide an
estimated US $417 mn a year in tax incentives to compensate for the phasing out
of Section 936. Section 30A allows companies to claim 60% of wages and capital
investment as allowances against tax. New firms may opt to incorporate
themselves in Puerto Rico as "controlled foreign corporations" and receive the
tax benefits provided by Section 901 of the U.S. Internal Revenue Code.
On the other hand, the agreement between the U.S., Canada and Mexico
for the North American Free Trade Agreement (NAFTA) also has implications for
Puerto Rico because of competition for jobs and investment. Although wage levels
are lower in Mexico, Section 936 gives companies in Puerto Rico an advantage in
pharmaceuticals and hi-tech industries. In low-skill labor-intensive
manufacturing, such as clothing and footwear, Mexico has the advantage. Puerto
Rico currently employs 30,000 in the clothing industry.
Industrial Incentives Program. Since 1948 Puerto Rico has had various
industrial incentives laws designed to stimulate industrial investment in the
island. On December 2, 1997, the Governor of Puerto Rico signed into law the
most recent industrial incentives law, known as the 1998 Tax Incentives Law Act
(the "1998 Act"). The tax exemption benefits provided by the 1998 Act are
generally more favorable than those provided by its predecessor, the Industrial
Incentives Act of 1987 (the " 1987 Act"). The activities eligible for exemption
under the 1998 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 benefits provided by the 1998 Act are available to new companies as
well as companies currently conducting tax exempt operations in Puerto Rico
which choose to renegotiate their existing tax exemption grant. The activities
eligible for tax exemption include manufacturing, certain designated services
performed 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. For companies qualifying thereunder, the 1998 Act would
impose income tax rates ranging from 2% to 7%. In addition, it would grant 90%
exemption from property taxes, 100% exemption from municipal license taxes
during the first eighteen months of operation and between 80% and 60%
thereafter, and 100% exemption from municipal excise taxes. The 1998 Act also
provides various special deductions designed to simulate employment and
productivity, research and development and capital investment in Puerto Rico.
Under the 1998 Act, companies can repatriate and distribute their
profits free of tollgate taxes. In addition, passive income derived from the
investment of eligible funds in Puerto Rico financial institutions, obligations
of the government of Puerto Rico and other designated investments are fully
exempt from income and municipal license taxes. Individual shareholders of an
exempted business are allowed a credit against their Puerto Rico income taxes
equal to 30% of their proportionate share in the exempted business-income tax
liability. Gain from the sale or exchange of shares of an exempted business by
its shareholders during the exemption period is subject to a 4% income tax rate.
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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.
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. As of December 31, 1997, $46,080,000 of
Commonwealth guaranteed bonds of Housing Bank and Finance Agency were
outstanding. These bonds were originally issued by Urban Renewal and Housing
Corporation and refinanced in fiscal 1992 by Housing Bank and Finance Agency.
Annual debt service on these bonds is $13,252,788 in fiscal 1999, which
constitutes their maximum annual debt service. Their final maturity is October
1, 2001.
As of December 31, 1997, $1,814,511,000 of Commonwealth guaranteed
bonds of Public Buildings Authority were outstanding. Annual debt service on
these bonds is $150,008,064 in fiscal year ending June 30, 1998, with their
final maturity being July 1, 2027.
No payments under the Commonwealth guaranty have been required to date
for bonds for Housing Bank and Finance Agency or Public Buildings Authority.
As of December 31, 1997, $267,000,000 of Commonwealth guaranteed
obligations of GDB were outstanding. No payments under the Commonwealth guaranty
have been required for any obligations of GDB to date.
As of December 31, 1997, the Commonwealth had guaranteed certain
outstanding revenue bonds of the Aqueduct and Sewer Authority in the aggregate
principal amount of $400,340,000. On January 1, 1997, the Commonwealth began to
make debt service payments under the Commonwealth guaranty and expects to make
all debt service payments required on these revenue bonds.
Public Sector Debt. Historically, Puerto Rico 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 debt.
The government of Puerto Rico has also sought opportunities to realize debt
service savings by refunding outstanding debt with obligations bearing lower
interest rates.
During fiscal 1992 to 1996, public sector debt and gross product
increased 27.5% and 27.7%, respectively. During fiscal 1993 to 1997, however,
public sector debt increased 37% while gross product increased 27.7%. This
higher level of growth of public sector debt over the growth of gross product is
due to the increase during fiscal 1996 and 1997 in the amount of debt incurred
to finance certain key infrastructure projects, which are important to the
development of the economy and are expected to produce long term economic
benefits. This trend of higher levels of public sector debt relative to the
growth in gross product is expected to continue during the next few fiscal years
as the level of public sector capital investment remains high.
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As of December 31, 1997, outstanding short-term debt, relative to total
debt, was 10.1%, including $600 million tax and revenue anticipation notes of
the Commonwealth issued on December 3, 1997 and payable on July 30, 1998.
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 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 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. Wisconsin's economy remains
vibrant. A strong 1997 has been followed by an equally strong 1998. Unemployment
remained at full employment levels in 1997, averaging 3.7 percent. In 1998,
unemployment has averaged 3.2 percent through October. This is the lowest
average rate since 1966. Wisconsin's October 1998 rate of 2.9 percent is far
below the national average of 4.6 percent. Manufacturing jobs rose 1.4 percent
in 1997 to 609,400. In August of 1998, total manufacturing employment reached an
all-time high of 630,500. Construction employment increased to 108,600 in 1997,
4.1 percent higher than 1996. Construction employment reached a record 125,100
in August 1998. Total non-farm employment in 1997 also set a new record at
2,652,500. In 1998, total non-farm employment should set another record of
2,711,400. Personal income increased 5.1 percent in 1997 and is expected to
increase by 4.4 percent in 1998. The State's exports set yet another record in
1997, reaching $9.8 billion, an increase of 16.4 percent.
Wisconsin's economy has consistently outperformed the nation's in
recent years. Since 1987, Wisconsin's unemployment rate has been below the
national rate. The Bureau of Economic Analysis projects Wisconsin's real growth
will exceed the national average through the year 2005. The State's population
growth has been among the highest for Midwest states as people relocate to
Wisconsin. Since 1990, the State's population has grown by 5.9 percent. Over the
past four years, Wisconsin's per capita personal income grew by 20.5 percent,
slightly ahead of the national average of 19.2 percent.
Wisconsin's personal income growth will be affected by the slowdown in
employment growth. Personal income increased 4.4% in 1998 and is expected to
increase 4.2% in 1999. Personal income per capita continues to increase, but at
a slower rate.
In 1998, the State continued its efforts to expand existing State
business and attract new businesses to Wisconsin. In addition, the State
operates a variety of programs that target minority business development,
development zones and community-based economic development. As of June 30, 1998,
approximately $72.4 million in tax credits was awarded to create 11,500 new jobs
and retain more than 18,850 jobs. In 1998, the State expended $7.7 million to
market Wisconsin as a national and international tourism destination, assisting
a tourism industry that pumps over $6.7 billion into Wisconsin's economy and
directly or indirectly supports more than 200,000 jobs. Through an Internet home
page, the department is providing statewide tourism information and enabling
local governments and local tourism organizations to showcase local and regional
attractions.
The State continued to make significant investments in transportation
infrastructure through expansion in highway capacity and reconstruction of
existing highways and bridges. In 1998, more than 891 miles of State Trunk
Highway (STH) and local highways were improved and 275 deficient STH bridges
were rehabilitated or replaced. In all, more than $594 million in construction
projects on STH and local road systems was contracted through the Wisconsin
Department of Transportation.
Wisconsin also distributes State transportation user fee revenues to
local governments for transportation infrastructure improvements and transit
operating assistance. In 1998, $387.8 million was transferred to local
governments for these purposes.
Fiscal Year 1998 was the first year of implementation for Wisconsin's
welfare reform program called Wisconsin Works or W-2, which officially began on
September 1, 1997. This program, the culmination of welfare reform efforts that
began ten years ago, replaced welfare checks with the opportunity to earn a
living. The welfare caseload has continued its steep decline from over 71,000 in
June of 1995 to just over 55,000 in June of 1996 to just over 3 8,000 in June of
1997 to just under 16,000 cases in June of 1998. The caseload declined from June
1997 to June 1998 by 57.9 percent.
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Educational technology was at the forefront of major education
initiatives in Fiscal Year 1998. As part of the 1997-99 biennial budget, the
Governor and Legislature created the TEACH program, which authorized $95 million
in technology grants and loans in Fiscal Year 1998 for school districts, the
University of Wisconsin System, the Wisconsin Technical College System and
public libraries. Funding is used to wire schools for Internet and distance
education access, subsidize monthly access costs, purchase hardware and software
and provide staff training.
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 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 1997-1998 fiscal year and 1998-1999
fiscal year, the statutorily required reserves are $98 million and $99.4 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.
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, 1998, the State ended the fiscal year with a general
fund balance (budgetary basis) of $589 million. General fund revenues totaled
$15.70 billion. Of this amount, $9.54 billion, or 6l% was from taxes. General
fund expenditures totaled $15.46 billion. Education was the biggest expenditure
with $6.89 billion, or 45% of total expenditures.
Revenues of governmental fund types totaled $15.0 billion for the
Fiscal Year 1998, increasing $711.2 million or approximately 5.0 percent over
the previous year. Due to continued strong growth, State tax revenue for Fiscal
Year 1998 totaled $10.2 billion, an increase of approximately $555.8 million
which represents a 5.8 percent increase over the previous year. Major increases
in tax revenues occurred in individual income, general sales and use, and excise
taxes. Intergovernmental revenues consisting primarily of federal assistance
increased $116.3 million over Fiscal Year 1997, while revenues from all other
sources, excluding proceeds from sale of bonds, increased $39.1 million, a 3.8
percent increase from the previous year.
Governmental expenditures totaled $14.3 billion for the fiscal year
ended June 30, 1998. This represents a $496.7 million or a 3.6 percent increase
over the previous year. Education expenditures had the largest increase of
$272.0 million, while Environmental Resources expenditures had the largest
decrease of $36.3 million.
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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. On
July 1, 1998 the State issued $350.0 million of operating notes. The proceeds of
the notes were to be used within six months to fund local assistance payments to
the State's municipalities and school districts, and finance day-to-day
operations in anticipation of revenues received later in the fiscal year. The
notes were issued because of an imbalance between the timing of payments
disbursed and receipts collected. The imbalance exists because receipts are
received in the second half of the fiscal year, primarily January, March and
April. The notes will be paid at maturity on June 15, 1999. Operating notes are
not general obligations of the State and are not on a parity with State general
obligations.
Debt Administration and Limitation. At the inception of statehood,
constitutional limitations severely restricted the issuance of direct State
debt. Prior to 1969, independent nonstick, 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 percent of aggregate value of taxable property or 5
percent of aggregate value of taxable property less net indebtedness at January
1. 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.
As of June 30, 1998, authorized but unissued general obligation bonding
authority for general purpose revenue supported programs amounted to $2,141.2
million. General obligation bonds issued and outstanding as of June 30, 1998
were $4.71 billion and $3.29 billion, respectively. The principal balance of
general obligation bonds as of June 30, 1998 is $3.348 billion.
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
nonstick, 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, 1998, State of Wisconsin general
obligation bonds had a rating of Aa2 from Moody's and a rating of AA from S&P.
The State's Transportation revenue bonds had a rating of Al from Moody's and AA-
from S&P.
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APPENDIX B--INVESTMENT OBJECTIVES OF THE OTHER FUNDS IN THE DELAWARE INVESTMENTS
FAMILY
Following is a summary of the investment objectives of the funds in the
Delaware Investments family:
Delaware Balanced Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. Delaware Devon
Fund seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
Delaware Trend Fund seeks long-term growth by investing in common
stocks issued by emerging growth companies exhibiting strong capital
appreciation potential.
Delaware Small Cap Value Fund seeks capital appreciation by investing
primarily in common stocks whose market values appear low relative to their
underlying value or future potential.
Delaware DelCap Fund seeks long-term capital growth by investing in
common stocks and securities convertible into common stocks of companies that
have a demonstrated history of growth and have the potential to support
continued growth.
Delaware Decatur Equity Income Fund seeks the highest possible current
income by investing primarily in common stocks that provide the potential for
income and capital appreciation without undue risk to principal. Delaware Growth
and Income Fund seeks long-term growth by investing primarily in securities that
provide the potential for income and capital appreciation without undue risk to
principal. Delaware Blue Chip Fund seeks to achieve long-term capital
appreciation. Current income is a secondary objective. It seeks to achieve these
objectives by investing primarily in equity securities and any securities that
are convertible into equity securities. Delaware Social Awareness Fund seeks to
achieve long-term capital appreciation. It seeks to achieve this objective by
investing primarily in equity securities of medium- to large-sized companies
expected to grow over time that meet the Fund's "Social Criteria" strategy.
Delaware Delchester Fund seeks as high a current income as possible by
investing principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Delaware Strategic Income Fund seeks
to provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities. Delaware High-Yield Opportunities Fund seeks to provide
investors with total return and, as a secondary objective, high current income.
Delaware Corporate Bond Fund seeks to provide investors with total return by
investing primarily in corporate bonds. Delaware Extended Duration Bond Fund
seeks to provide investors with total return by investing primarily in corporate
bonds.
Delaware Limited-Term Government Fund seeks high, stable income by
investing primarily in a portfolio of short- and intermediate-term securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
and instruments secured by such securities.
Delaware American Government Bond Fund seeks high current income by
investing primarily in long-term debt obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
Delaware Cash Reserve Fund seeks the highest level of income consistent
with the preservation of capital and liquidity through investments in short-term
money market instruments, while maintaining a stable net asset value.
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REIT Fund seeks to achieve maximum long-term total return with capital
appreciation as a secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in the real estate
industry.
Delaware Tax-Free USA Fund seeks high current income exempt from
federal income tax by investing in municipal bonds of geographically-diverse
issuers. Delaware Tax-Free Insured Fund invests in these same types of
securities but with an emphasis on municipal bonds protected by insurance
guaranteeing principal and interest are paid when due. Delaware Tax-Free USA
Intermediate Fund seeks a high level of current interest income exempt from
federal income tax, consistent with the preservation of capital by investing
primarily in municipal bonds.
Delaware Tax-Free Money Fund seeks high current income, exempt from
federal income tax, by investing in short-term municipal obligations, while
maintaining a stable net asset value.
Delaware Tax-Free New Jersey Fund seeks a high level of current
interest income exempt from federal income tax and New Jersey state and local
taxes, consistent with preservation of capital. Delaware Tax-Free Ohio Fund
seeks a high level of current interest income exempt from federal income tax and
Ohio state and local taxes, consistent with preservation of capital. Delaware
Tax-Free Pennsylvania Fund seeks a high level of current interest income exempt
from federal income tax and Pennsylvania state and local taxes, consistent with
the preservation of capital.
Foundation Funds are "fund of funds" which invest in other funds in the
Delaware Investments family (referred to as "Underlying Funds"). Delaware Income
Portfolio seeks a combination of current income and preservation of capital with
capital appreciation by investing primarily in a mix of fixed income and
domestic equity securities, including fixed income and domestic equity
Underlying Funds. Delaware Balanced Portfolio seeks capital appreciation with
current income as a secondary objective by investing primarily in domestic
equity and fixed income securities, including domestic equity and fixed income
Underlying Funds. Delaware Growth Portfolio seeks long term capital growth by
investing primarily in equity securities, including equity Underlying Funds,
and, to a lesser extent, in fixed income securities, including fixed-income
Underlying Funds.
Delaware International Equity Fund seeks to achieve long-term growth
without undue risk to principal by investing primarily in international
securities that provide the potential for capital appreciation and income.
Delaware Global Bond Fund seeks to achieve current income consistent with the
preservation of principal by investing primarily in global fixed-income
securities that may also provide the potential for capital appreciation.
Delaware Global Equity Fund seeks to achieve long-term total return by investing
in global securities that provide the potential for capital appreciation and
income. Delaware Emerging Markets Fund seeks long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries.
Delaware U.S. Growth Fund seeks to maximize capital appreciation by
investing in companies of all sizes which have low dividend yields, strong
balance sheets and high expected earnings growth rates relative to their
industry. Delaware Overseas Equity Fund seeks to maximize total return (capital
appreciation and income), principally through investments in an internationally
diversified portfolio of equity securities. Delaware New Pacific Fund seeks
long-term capital appreciation by investing primarily in companies which are
domiciled in or have their principal business activities in the Pacific Basin.
Delaware Group Premium Fund, Inc. offers various funds available
exclusively as funding vehicles for certain insurance company separate accounts.
Growth and Income Series seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. Delchester Series seeks as high a
current income as possible by investing in rated and unrated corporate bonds,
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.
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Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term money
market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Balanced Series seeks a balance of
capital appreciation, income and preservation of capital. It uses a
dividend-oriented valuation strategy to select securities issued by established
companies that are believed to demonstrate potential for income and capital
growth. International Equity Series seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers that
provide the potential for capital appreciation and income. Small Cap Value
Series seeks capital appreciation by investing primarily in small-cap common
stocks whose market values appear low relative to their underlying value or
future earnings and growth potential. Emphasis will also be placed on securities
of companies that may be temporarily out of favor or whose value is not yet
recognized by the market. Trend Series seeks long-term capital appreciation by
investing primarily in small-cap common stocks and convertible securities of
emerging and other growth-oriented companies. These securities will have been
judged to be responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over time. Emerging Markets Series seeks to achieve long-term capital
appreciation by investing primarily in equity securities of issuers located or
operating in emerging countries. Convertible Securities Series seeks a high
level of total return on its assets through a combination of capital
appreciation and current income by investing primarily in convertible
securities. Social Awareness Series seeks to achieve long-term capital
appreciation by investing primarily in equity securities of medium to
large-sized companies expected to grow over time that meet the Series' "Social
Criteria" strategy. REIT Series seeks to achieve maximum long-term total return,
with capital appreciation as a secondary objective, by investing in securities
of companies primarily engaged in the real estate industry. Aggressive Growth
Series seeks long-term capital appreciation. The Series attempts to achieve its
investment objective by investing primarily in equity securities of companies
which the manager believes have the potential for high earnings growth. U.S.
Growth Series seeks to maximize capital appreciation. The Series seeks to
achieve its investment objective by investing in companies of all sizes which
have low dividend yields, strong balance sheets and high expected earnings
growth rates relative to their industry.
Delaware U.S. Government Securities Fund seeks to provide a high level
of current income consistent with the prudent investment risk by investing in
U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware Tax-Free Arizona Insured Fund seeks to provide a high level of
current income exempt from federal income tax and the Arizona personal income
tax, consistent with the preservation of capital. Delaware Minnesota Insured
Fund seeks to provide a high level of current income exempt from federal income
tax and the Minnesota personal income tax, consistent with the preservation of
capital.
Delaware Tax-Free Minnesota Intermediate Fund seeks to provide a high
level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with preservation of capital. The Fund seeks to
reduce market risk by maintaining an average weighted maturity from five to ten
years.
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Delaware Tax-Free California Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the California personal
income tax, consistent with the preservation of capital. Delaware Tax-Free
Florida Insured Fund seeks to provide a high level of current income exempt from
federal income tax, consistent with the preservation of capital. The Fund will
seek to select investments that will enable its shares to be exempt from the
Florida intangible personal property tax. Delaware Tax-Free Florida Fund seeks
to provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital. The Fund will seek to select
investments that will enable its shares to be exempt from the Florida intangible
personal property tax. Delaware Tax-Free Kansas Fund seeks to provide a high
level of current income exempt from federal income tax, the Kansas personal
income tax and the Kansas intangible personal property tax, consistent with the
preservation of capital. Delaware Tax-Free Missouri Insured Fund seeks to
provide a high level of current income exempt from federal income tax and the
Missouri personal income tax, consistent with the preservation of capital.
Delaware Tax-Free New Mexico Fund seeks to provide a high level of current
income exempt from federal income tax and the New Mexico personal income tax,
consistent with the preservation of capital. Delaware Tax-Free Oregon Insured
Fund seeks to provide a high level of current income exempt from federal income
tax and the Oregon personal income tax, consistent with the preservation of
capital.
Delaware Tax-Free Arizona Fund seeks to provide a high level of current
income exempt from federal income tax and the Arizona personal income tax,
consistent with the preservation of capital. Delaware Tax-Free California Fund
seeks to provide a high level of current income exempt from federal income tax
and the California personal income tax, consistent with the preservation of
capital. Delaware Tax-Free Iowa Fund seeks to provide a high level of current
income exempt from federal income tax and the Iowa personal income tax,
consistent with the preservation of capital. Delaware Tax-Free Idaho Fund seeks
to provide a high level of current income exempt from federal income tax and the
Idaho personal income tax, consistent with the preservation of capital. Delaware
Minnesota High-Yield Municipal Bond Fund seeks to provide a high level of
current income exempt from federal income tax and the Minnesota personal income
tax primarily through investment in medium and lower grade municipal
obligations. Delaware National High-Yield Municipal Fund seeks to provide a high
level of income exempt from federal income tax, primarily through investment in
medium and lower grade municipal obligations. Delaware Tax-Free New York Fund
seeks to provide a high level of current income exempt from federal income tax
and the personal income tax of the state of New York and the city of New York,
consistent with the preservation of capital. Delaware Tax-Free Wisconsin Fund
seeks to provide a high level of current income exempt from federal income tax
and the Wisconsin personal income tax, consistent with the preservation of
capital. Delaware Montana Municipal Bond Fund seeks as high level of current
income exempt from federal income tax and the Montana personal income tax, as is
consistent with preservation of capital.
Delaware Tax-Free Colorado Fund seeks to provide a high level of
current income exempt from federal income tax and the Colorado personal income
tax, consistent with the preservation of capital.
Delaware Tax-Free Minnesota Fund seeks to provide a high level of
current income exempt from federal income tax and the Minnesota personal income
tax, consistent with the preservation of capital. Delaware Tax-Free North Dakota
Fund seeks to provide a high level of current income exempt from federal income
tax and the North Dakota personal income tax, consistent with the preservation
of capital.
Delaware 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. Delaware Growth Stock Fund has an objective of long-term capital
appreciation. The Fund seeks to achieve its objective from equity securities
diversified among individual companies and industries. Delaware Tax-Efficient
Equity Fund seeks to obtain for taxable investors a high total return on an
after-tax basis. The Fund will attempt to achieve this objective by seeking to
provide a high long-term after-tax total return through managing its portfolio
in a manner that will defer the realization of accrued capital gains and
minimize dividend income.
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For more complete information about any of the funds in the Delaware
Investments family, including charges and expenses, you can obtain a prospectus
from the Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
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APPENDIX C - DESCRIPTION OF RATINGS
General Rating Information
Bonds
The ratings list below can be further described as follows. For all
categories lower than Aaa, Moody's Investors Service, Inc. includes a "1", "2"
or "3" following the rating to designate a high, medium or low rating,
respectively. Similarly, for all categories lower than AAA, Standard & Poor's
Ratings Group and Fitch IBCA, Inc. may add a "+" or "-" following the rating to
characterize a higher or lower rating, respectively.
<TABLE>
<CAPTION>
<S> <C> <C>
Moody's Investors Aaa Highest quality, smallest degree of investment risk.
Service, Inc.
Aa High quality; together with Aaa bonds, they compose the high-grade
bond group
A Upper-medium-grade obligations; many favorable investment
attributes.
Baa Medium-grade obligations; neither highly protected nor poorly secured.
Interest and principal appear adequate for the present, but certain
protective elements may be lacking or may be unreliable over any
great length of time.
Ba More uncertain with speculative elements. Protective of interest and
principal payments not well safeguarded in good and bad times.
B Lack characteristics of desirable investment; potentially low assurance
of timely interest and principal payments or maintenance of other
contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in high degree; could be in default or have other marked
shortcomings.
C Lowest rated. Extremely poor prospects of ever attaining investment
standing.
Standard & Poor's AAA Highest rating; extremely strong capacity to pay principal and interest.
Ratings Group
AA High quality; very strong capacity to pay principal and interest.
A Strong capacity to pay principal and interest; somewhat more susceptible to
the adverse effects of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest; normally exhibit adequate
protection parameters, but adverse economic conditions or changing
circumstances more likely to lead to weakened capacity to pay
principal and interest than for higher-rated bonds.
BB, B, Predominantly speculative with respect to the issuer's capacity to
CCC, CC meet required interest and principal payments. BB-lowest degree of
speculation; CC-the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or
major risk exposure to adverse conditions.
D In default.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Fitch IBCA, Inc. AAA Highest quality; obligor has exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA Very high quality; obligor's ability to pay interest and repay principal
is very strong. Because bonds rated in the AAA and AA categories are
not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A High quality; obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than higher-rated
bonds.
BBB Satisfactory credit quality; obligor's ability to pay interest and repay
principal is considered adequate. Unfavorable changes in economic
conditions and circumstances are more likely to adversely affect
these bonds and impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for higher-rated bonds.
BB, Not investment grade; predominantly speculative with respect to the
CCC, issuer's capacity to repay interest and repay principal in accordance
CC, C with the terms of the obligation for bond issues not in default.
BB is the least speculative. C is the most speculative.
</TABLE>
Commercial Paper
<TABLE>
<CAPTION>
Moody's S&P Fitch
<S> <C> <C> <C> <C> <C>
P-1 Superior quality A-1+ Extremely strong quality F-1+ Exceptionally strong quality
A-1 Strong quality F-1 Very strong quality
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
P-3 Acceptable quality A-3 Adequate quality F-3 Fair quality
B Speculative quality F-S Weak credit quality
C Doubtful quality
</TABLE>
<TABLE>
<CAPTION>
State and Municipal Notes
Moody's S&P Fitch
<S> <C> <C> <C> <C> <C>
MIG1/
VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong quality
SP1 Strong grade F-1 Very strong quality
MIG2/
VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
MIG3/
VMIG3 Favorable quality F-3 Fair credit quality
MIG4/
VMIG4 Adequate quality
SG Speculative quality SP3 Speculative grade F-S Weak credit quality
</TABLE>
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Earnings and Dividend Rankings for Common Stocks
Standard & Poor's Ratings Group. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, 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:
<TABLE>
<CAPTION>
-------- ------------------- ----- ------------------------------- ----- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
A+ Highest B+ Average C Lowest
-------- ------------------- ----- ------------------------------- ----- ------------------------------
A High B Below Average D In Reorganization
-------- ------------------- ----- ------------------------------- ----- ------------------------------
A- Above Average B- Lower
-------- ------------------- ----- ------------------------------- ----- ------------------------------
</TABLE>
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.
Preferred Stock Rating
<TABLE>
<CAPTION>
<S> <C> <C>
Moody's Investors Service, Aaa Considered to be a top-quality preferred stock. This rating indicates good asset
Inc. protection and the least risk of dividend impairment within the universe of
preferred stocks.
Aa Considered a high-grade preferred stock. This rating indicates that there is
reasonable assurance that earnings and asset protection will remain relatively
well maintained in the foreseeable future.
A Considered to be an upper-medium grade preferred stock. While risks are judged
to be somewhat greater than in the "aaa" and "aa" classifications, earnings
and asset protection are, nevertheless, expected to be maintained at adequate
levels.
Baa Considered to be medium-grade, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
Ba Considered to have speculative elements and its future cannot be considered well
assured. Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
B Generally lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any long
period of time may be small.
Caa Likely to be in arrears on dividend payments. This rating designation does
not purport to indicate the future status of payments.
Ca Speculative in a high degree and is likely to be in arrears on dividends
with little likelihood of eventual payment.
C The lowest rated class of preferred or preference stock. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Standard & AAA Has the highest rating that may be assigned by Standard & Poor's to a
Poor's Ratings preferred stock issue and indicates an extremely strong capacity to pay the
Group preferred stock obligations.
AA Qualifies as a high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as for issues
rated "AAA."
A Backed by a sound capacity to pay the preferred stock obligations, although it
is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB Regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to make payments for a preferred stock in this category
than for issues in the "A" category.
BB,B, Regarded, on balance, as predominantly speculative with respect to the issuer's
CCC capacity to pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC Reserved for a preferred stock issue in arrears on dividends or sinking fund
payments but that is currently paying.
C A non-paying issue.
D A non-paying issue with the issuer in default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
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