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STATEMENT OF ADDITIONAL INFORMATION
JULY 16, 1999
VOYAGEUR MUTUAL FUNDS III, INC.
AGGRESSIVE GROWTH FUND
GROWTH STOCK FUND
TAX-EFFICIENT EQUITY FUND
1818 MARKET STREET
PHILADELPHIA, PA 19103
FOR PROSPECTUS, PERFORMANCE AND INFORMATION ON EXISTING ACCOUNTS OF
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES: NATIONWIDE 800-523-1918
FOR MORE INFORMATION ABOUT INSTITUTIONAL CLASSES: 800-510-4015
DEALER SERVICES: (BROKER/DEALERS ONLY) NATIONWIDE 800-362-7500
Voyageur Mutual Funds III, Inc. ("Mutual Funds III, Inc.") is a
professionally-managed mutual fund of the series type which currently offers
three series of shares: Aggressive Growth Fund, Growth Stock Fund and
Tax-Efficient Equity Fund (individually, a "Fund" and collectively, the
"Funds"). Each Fund offers Class A Shares, Class B Shares, Class C Shares (Class
A Shares, Class B Shares and Class C Shares together referred to as the "Fund
Classes"), and Institutional Class shares ("Institutional Classes"). All
references to "shares" in this Part B refer to all Classes of shares of Mutual
Funds III, Inc., except where noted.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectuses for
the Fund Classes dated July 16, 1999 and the current Prospectuses for the
Institutional Classes dated July 16, 1999, as they may be amended from time to
time. Part B should be read in conjunction with the respective Class'
Prospectuses. Part B is not itself a prospectus but is, in its entirety,
incorporated by reference into each Class' Prospectus. A prospectus relating to
the Fund Classes and a prospectus relating to the Institutional Classes may be
obtained by writing or calling your investment dealer or by contacting each
Fund's national distributor, Delaware Distributors, L.P. (the "Distributor"), at
the above address or by calling the above phone numbers. The Funds' financial
statements, the notes relating thereto, the financial highlights and the report
of independent auditors are incorporated by reference from the Annual Report
into this Part B. The Annual Report will accompany any request for Part B. The
Annual Report can be obtained, without charge, by calling 800-523-1918.
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TABLE OF CONTENTS
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COVER PAGE REDEMPTION AND REPURCHASE
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INVESTMENT RESTRICTIONS AND POLICIES DISTRIBUTIONS AND TAXES
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ACCOUNTING AND TAX ISSUES INVESTMENT MANAGEMENT AGREEMENTS AND SUB-ADVISORY
AGREEMENT
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PERFORMANCE INFORMATION OFFICERS AND DIRECTORS
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TRADING PRACTICES AND BROKERAGE GENERAL INFORMATION
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PURCHASING SHARES APPENDIX A -- RATINGS
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INVESTMENT PLANS APPENDIX B -- STOCK INDEX FUTURES CONTRACTS AND
RELATED OPTIONS
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DETERMINING OFFERING PRICE AND NET ASSET VALUE FINANCIAL STATEMENTS
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INVESTMENT RESTRICTIONS AND POLICIES
Investment Restrictions - Fundamental
Mutual Funds III, Inc. has adopted the following restrictions for each
Fund which cannot be changed without approval by the holders of a "majority" of
the respective Fund's outstanding shares, which is a vote by the holders of the
lesser of a) 67% or more of the voting securities present in person or by proxy
at a meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or b) more than 50% of the
outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities.
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 other 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 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.
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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
Directors 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.
Additional Investment Restrictions - Non-Fundamental
Following are additional non-fundamental investment restrictions for the Funds:
Aggressive Growth Fund:
1. The Fund will not borrow money, except that the Fund may borrow from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests and cash payments of dividends and distributions
that might otherwise require the untimely disposition of securities, in an
amount not to exceed 20% of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever borrowings exceed 5% of
the value of the total assets of the Fund, the Fund will not make any additional
investments.
2. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
3. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include the government of any
country other than the United States, but not the U.S. government.
4. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities of companies that deal in real estate or interests in real estate.
5. The Fund will not purchase or sell commodities or commodity
contracts, except futures contracts and related options and other similar
contracts.
6. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the securities
were sold, the Fund might be deemed to be an underwriter for purposes of the
Securities Act of 1933, as amended.
7. The Fund will not invest in oil, gas or other mineral leases or
exploration or development programs.
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8. The Fund will not purchase any investment company security, other
than a security acquired pursuant to a plan of reorganization or an offer of
exchange, if as a result of the purchase (a) the Fund would own more than 3% of
the total outstanding voting securities of any investment company, (b) more than
5% of the value of the Fund's total assets would be invested in securities of
any one investment company or (c) more than 10% or the Fund's total assets would
be invested in securities issued by investment companies.
9. The Fund will not participate on a joint or joint-and-several basis
in any securities trading account.
10. The Fund will not make investments for the purpose of exercising
control or management.
11. The Fund will not purchase any security, if as a result of the
purchase, the Fund would then have more than 5% of its total assets invested in
securities of companies (including predecessors) that have been in continuous
operation for fewer than three years.
12. The Fund will not purchase or retain securities of any issuer if,
to the knowledge of the Fund, any of Mutual Funds III, Inc.'s Directors or
officers or any officer or director of the investment manager or sub-adviser
individually owns more than 0.5% of the outstanding securities of the company
and together they own beneficially more than 5% of the securities.
13. The Fund will not invest in warrants (other than warrants acquired
by the Fund as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets of which not more than 2% of the
Fund's net assets may be invested in warrants not listed on a recognized foreign
or domestic stock exchange.
14. The Fund will not purchase securities on margin, except that the
Fund may obtain any short-term credits necessary for the clearance of purchases
and sales of securities. For purposes of this restriction, the deposit or
payment of initial or variation margin in connection with futures contracts or
options on futures contracts will not be deemed to be a purchase of securities
on margin.
15. The Fund will not make short sales of securities or maintain a
short position, unless at all times when a short position is open, the Fund owns
an equal amount of the securities or securities convertible into or exchangeable
for, without payment of any further consideration, securities of the same issue
as, and equal in amount to, the securities sold short.
In addition, subject to Aggressive Growth Fund's investment policies
and restrictions as set forth in the Prospectus and in this Part B, as a
nonfundamental policy, the Fund may not invest more than 15% of its assets,
collectively, in illiquid investments and securities of foreign issuers which
are not listed on a recognized domestic or foreign securities exchange.
Growth Stock Fund:
1. Invest more than 5% of the value of its total assets in the
securities of any one issuer (other than securities of the U.S. Government or
its agencies or instrumentalities).
2. Purchase more than 10% of any class of securities of any one issuer
(taking all preferred stock issues of an issuer as a single class and all debt
issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer.
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3. Concentrate its investments in any particular industry; however, it
may invest up to 25% of the value of its total assets in the securities of
issuers conducting their principal business activities in any one industry.
4. Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a record of less
than three years' continuous operation. (Securities of such issuers will not be
deemed to fall within this limitation if they are guaranteed by an entity in
continuous operation for more than three years.)
5. Issue any senior securities (as defined in the 1940 Act), except to
the extent that using options and futures contracts may be deemed to constitute
issuing a senior security.
6. Borrow money, except from banks for temporary or emergency purposes
in an amount not exceeding 5% of the value of the Fund's total assets.
7. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of the value of its total assets, to secure temporary or emergency
borrowing. For purposes of this policy, collateral arrangements for margin
deposits on futures contracts or with respect to the writing of options are not
deemed to be a pledge of assets.
8. 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.
9. Purchase or sell real estate or real estate mortgage loans, except
the Fund may purchase or sell securities issued by companies owning real estate
or interests therein.
10. Purchase or sell oil, gas or other mineral leases, rights or
royalty contracts, except the Fund may purchase or sell securities of companies
investing in the foregoing.
11. Purchase or sell commodities or commodities futures contracts,
except that it may enter into financial futures contracts and engage in related
options transactions.
12. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers or directors of Mutual Funds III, Inc. or its
affiliates or of its investment adviser or sub-adviser who individually own
beneficially more than 0.5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such outstanding securities.
13. Make loans to other persons, except to the extent that repurchase
agreements are deemed to be loans under the 1940 Act, and except that it may
purchase debt securities as described in the Prospectus under "Investment
Objectives and Policies." The purchase of a portion of an issue of bonds,
debentures or other debt securities distributed to the public or to financial
institutions will not be considered the making of a loan.
14. Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities and except that it may make margin deposits in connection with
futures contracts.
15. Participate on a joint or a joint and several basis in any
securities trading account.
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16. Write, purchase or sell puts, calls or combinations thereof, except
that it may (a) purchase or write put and call options on stock indexes listed
on national securities exchanges, (b) write and purchase put and call options
with respect to the securities in which it may invest and (c) engage in
financial futures contracts and related options transactions.
17. Make short sales except where, by virtue of ownership of other
securities, it has the right to obtain without payment of further consideration,
securities equivalent in kind and amount to those sold.
18. Invest for the purpose of exercising control or management.
19. Invest more than 5% of the value of its total assets in the
securities of any single investment company or more than 10% of the value of its
total assets in the securities of two or more investment companies except as
part of a merger, consolidation or acquisition of assets.
20. Invest more than 15% of its net assets in illiquid investments.
Tax-Efficient Equity Fund:
1. The Fund will not borrow money, except that the Fund may borrow from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests and cash payments of dividends and distributions
that might otherwise require the untimely disposition of securities, in an
amount not to exceed 20% of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever borrowings exceed 5% of
the value of the total assets of the Fund, the Fund will not make any additional
investments.
2. The Fund will not issue any senior securities, as defined in the
1940 Act, other than as set forth in investment restriction #1 above and except
to the extent that using options and futures contracts or purchasing or selling
securities on a when-issued or delayed delivery basis may be deemed to
constitute issuing a senior security.
3. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
4. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include the government of any
country other than the United States, but not the U.S. government.
5. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities of companies that deal in real estate or interests in real estate.
6. The Fund will not purchase or sell commodities or commodity
contracts, except futures contracts and related options and other similar
contracts.
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7. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the securities
were sold, the Fund might be deemed to be an underwriter for purposes of the
Securities Act of 1933, as amended.
Each Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of the Fund's shares in certain states.
Should a Fund determine that a commitment is no longer in the best interests of
the Fund and its shareholders, the Fund will revoke the commitment by
terminating the sale of the Fund's shares in the state involved.
For purposes of a Fund's concentration policy, each Fund intends to
comply with the SEC staff position that securities issued or guaranteed as to
principal and interest by any single foreign government are considered to be
securities of issuers in the same industry.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the applicable percentage occurs immediately after an acquisition of
securities or utilization of assets and such excess results therefrom.
Diversification
Each Fund intends to operate as a "diversified" management investment
company, as defined in the 1940 Act, which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables), U.S.
government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
such Fund and to not more than 10% of the outstanding voting securities of such
issuer.
Supplemental information is set out below concerning certain of the
securities and other instruments in which the Funds may invest, the investment
techniques and strategies that the Funds may utilize and certain risks involved
with those investments, techniques and strategies.
Government Securities
Securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities ("Government Securities") in which the Funds may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. government,
including the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal National Mortgage Association, Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Student Loan Marketing Association and Resolution Trust Corporation. Direct
obligations of the United States Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. government is not obligated by law to provide support to an instrumentality
that it sponsors, each Fund invests in obligations issued by an instrumentality
of the U.S. government only if Delaware Management Company, Inc. (the "Manager")
or Voyageur Asset Management LLC (the "Sub-Adviser" in the case of Growth Stock
Fund) determines that the instrumentality's credit risk does not make its
securities unsuitable for investment by a Fund.
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Repurchase Agreements
The Funds may invest in repurchase agreements. Repurchase agreements
are instruments under which securities are purchased from a bank or securities
dealer with an agreement by the seller to repurchase the securities. Under a
repurchase agreement, the purchaser acquires ownership of the security but the
seller agrees, at the time of sale, to repurchase it at a mutually agreed-upon
time and price. The Funds will take custody of the collateral under repurchase
agreements. Repurchase agreements may be construed to be collateralized loans by
the purchaser to the seller secured by the securities transferred. The resale
price is in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate or maturity of the purchase security. Such
transactions afford an opportunity for the Funds to invest temporarily available
cash. The Funds' risk is limited to the seller's ability to buy the security
back at the agreed-upon sum at the agreed-upon time, since the repurchase
agreement is secured by the underlying obligation. Should such an issuer
default, the investment managers believe that, barring extraordinary
circumstances, the Funds will be entitled to sell the underlying securities or
otherwise receive adequate protection for its interest in such securities,
although there could be a delay in recovery. The Funds consider the
creditworthiness of the bank or dealer from whom it purchases repurchase
agreements. The Funds will monitor such transactions to assure that the value of
the underlying securities subject to repurchase agreements is at least equal to
the repurchase price. The underlying securities will be limited to those
described above.
Not more than 15% of each Fund's assets may be invested in illiquid
securities of which no more than 10% may be invested in repurchase agreements of
over seven days' maturity. A Fund will limit its investments in repurchase
agreements to those which the Manager under guidelines of the Board of Directors
determines to present minimal credit risks and which are of high quality. In
addition, a Fund must have collateral of at least 102% of the repurchase price,
including the portion representing the Fund's yield under such agreements, which
is monitored on a daily basis.
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the Investment
Company Act of 1940 to allow such funds jointly to invest cash balances. Each
Fund of the Mutual Funds III, Inc. may invest cash balances in a joint
repurchase agreement in accordance with the terms of the Order and subject
generally to the conditions described above.
Restricted and Illiquid Securities
Most of the privately placed securities acquired by a Fund will be
eligible for resale by the Fund without registration pursuant to Rule 144A
("Rule 144A Securities") under the Securities Act of 1933. While maintaining
oversight, the Board of Directors has delegated to the Manager or Sub-Adviser
the day-to-day function of determining whether individual Rule 144A Securities
are liquid for purposes of a Fund's 15% limitation on investments in illiquid
securities. The Board has instructed the Manager or Sub-Adviser to consider the
following factors in determining the liquidity of a Rule 144A Security: (i) the
frequency of trades and trading volume for the security; (ii) whether at least
three dealers are willing to purchase or sell the security and the number of
potential purchasers; (iii) whether at least two dealers are making a market in
the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
Investing in Rule 144A Securities could have the effect of increasing
the level of a Fund's illiquidity to the extent that qualified institutional
buyers become, for a period of time, uninterested in purchasing these
securities. If the Manager determines that a Rule 144A Security which was
previously determined to be liquid is no longer liquid and, as a result, a
Fund's holdings of illiquid securities exceed the Fund's 15% limit on investment
in such securities, the Manager will determine what action shall be taken to
ensure that the Fund continues to adhere to such limitation.
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Investment Techniques and Strategies
Each Fund may purchase put and call options and engage in the writing
of covered call options and secured put options, and employ a variety of other
investment techniques. Specifically, each Fund may engage in the purchase and
sale of stock index future contracts, interest rate futures contracts, and
options on such futures, all as described more fully below. Such investment
policies and techniques may involve a greater degree of risk than those inherent
in more conservative investment approaches.
The Funds will engage in such transactions only to hedge existing
positions. They will not engage in such transactions for the purposes of
speculation or leverage.
The Funds will not engage in such options or futures transactions
unless they receive any necessary regulatory approvals permitting them to engage
in such transactions.
Options on Securities. To hedge against adverse market shifts, a Fund
may purchase put and call options on securities held in its portfolio. In
addition, a Fund may seek to increase its income in an amount designed to meet
operating expenses or may hedge a portion of its portfolio investments through
writing (that is, selling) "covered" put and call options. A put option provides
its purchaser with the right to compel the writer of the option to purchase from
the option holder an underlying security at a specified price at any time during
or at the end of the option period. In contrast, a call option gives the
purchaser the right to buy the underlying security covered by the option from
the writer of the option at the stated exercise price. A covered call option
contemplates that, for so long as the Fund is obligated as the writer of the
option, it will own (1) the underlying securities subject to the option or (2)
securities convertible into, or exchangeable without the payment of any
consideration for, the securities subject to the option. The value of the
underlying securities on which covered call options will be written at any one
time by a Fund will not exceed 25% of the Fund's total assets. 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.
Each Fund may purchase options on securities that are listed on
securities exchanges or, with respect to Aggressive Growth Fund, that are traded
over-the-counter. As the holder of a put option, a Fund has the right to sell
the securities underlying the option and as the holder of a call option, a Fund
has the right to purchase the securities underlying the option, in each case at
the option's exercise price at any time prior to, or on, the option's expiration
date. A Fund may choose to exercise the options it holds, permit them to expire
or terminate them prior to their expiration by entering into closing sale
transactions. In entering into a closing sale transaction, a Fund would sell an
option of the same series as the one it has purchased.
A Fund receives a premium when it writes call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. A Fund receives a premium when it
writes put options, which increases such Fund's return on the underlying
security in the event the option expires unexercised or is closed out at a
profit. By writing a put, a Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for as long as the Fund's obligation as writer of the option
continues. Thus, in some periods, a Fund will receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities if unhedged.
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In purchasing a put option, a Fund seeks to benefit from a decline in
the market price of the underlying security, whereas in purchasing a call
option, a Fund seeks to benefit from an increase in the market price of the
underlying security. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying security remains equal
to or greater than the exercise price, in the case of a put, or remains equal to
or below the exercise price, in the case of a call, during the life of the
option, the Fund will lose its investment in the option. For the purchase of an
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
Over-the-Counter ("OTC") Options. Aggressive Growth Fund may purchase
OTC options. OTC options differ from exchange-traded options in several
respects. They are transacted directly with dealers and not with a clearing
corporation, and there is a risk of non-performance by the dealer. However, the
premium is paid in advance by the dealer. OTC options are available for a
greater variety of securities and foreign currencies, and in a wider range of
expiration dates and exercise prices than exchange-traded options. Since there
is no exchange, pricing is normally done by reference to information from a
market maker, which information is carefully monitored or caused to be monitored
by the Manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it
voluntarily only by entering into a closing transaction. In the case of OTC
options, there can be no assurance that a continuous liquid secondary market
will exist for any particular option at any specific time. Consequently, the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The Fund may purchase and write over-the-counter ("OTC") put and call
options in negotiated transactions. The staff of the Securities and Exchange
Commission has previously taken the position that the value of purchased OTC
options and the assets used as "cover" for written OTC options are illiquid
securities and, as such, are to be included in the calculation of the Fund's 15%
limitation on illiquid securities. However, the staff has eased its position
somewhat in certain limited circumstances. The Fund will attempt to enter into
contracts with certain dealers with which it writes OTC options. Each such
contract will provide that the Fund has the absolute right to repurchase the
options it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of such formula
may vary among contracts, the formula will generally be based upon a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value. The formula will also include a factor to
account for the difference between the price of the security and the strike
price of the option. If such a contract is entered into, the Fund will count as
illiquid only the initial formula price minus the option's intrinsic value.
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The Fund will enter into such contracts only with primary U.S.
government securities dealers recognized by the Federal Reserve Bank of New
York. Moreover, such primary dealers will be subject to the same standards as
are imposed upon dealers with which the Fund enters into repurchase agreements.
Securities Index Options. In seeking to hedge all or a portion of its
investment, a Fund may purchase and write put and call options on securities
indexes listed on securities exchanges, which indexes include securities held in
the Fund's portfolio.
A securities index measures the movement of a certain group of stocks
or debt securities by assigning relative values to the securities included in
the index. Options on securities indexes are generally similar to options on
specific securities. Unlike options on specific securities, however, options on
securities indexes do not involve the delivery of an underlying security; the
option in the case of an option on a stock index represents the holder's right
to obtain from the writer in cash a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
When a Fund writes an option on a securities index, it will establish a
segregated account with its custodian, or a designated sub-custodian, in which
the Fund will deposit cash, U.S. government securities or other liquid high
grade debt obligations in an amount equal to the market value of the option, and
will maintain the account while the option is open.
Securities index options are subject to position and exercise limits
and other regulations imposed by the exchange on which they are traded. If a
Fund writes a securities index option, it may terminate its obligation by
effecting a closing purchase transaction, which is accomplished by purchasing an
option of the same series as the option previously written. The ability of a
Fund to engage in closing purchase transactions with respect to securities index
options depends on the existence of a liquid secondary market. Although a Fund
generally purchases or writes securities index options only if a liquid
secondary market for the options purchased or sold appears to exist, no such
secondary market may exist, or the market may cease to exist at some future
date, for some options. No assurance can be given that a closing purchase
transaction can be effected when the Fund desires to engage in such a
transaction.
Risks Relating to Purchase and Sale of Options on Stock Indexes.
Purchase and sale of options on stock indexes by a Fund are subject to certain
risks that are not present with options on securities. Because the effectiveness
of purchasing or writing stock index options as a hedging technique depends upon
the extent to which price movements in the Fund's portfolio correlate with price
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or writing of an
option on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by a Fund of options on indexes will be subject to
the ability of the Manager or the Sub-Adviser, as the case may be, to correctly
predict movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. In the event a Fund's
adviser is unsuccessful in predicting the movements of an index, such Fund could
be in a worse position than had no hedge been attempted.
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Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, a Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to such Fund. However, it will be each Fund's
policy to purchase or write options only on indexes which include a sufficient
number of stocks so that the likelihood of a trading halt in the index is
minimized.
Short Sales Against the Box. Each Fund may sell securities "short
against the box." Whereas a short sale is the sale of a security the Fund does
not own, a short sale is "against the box" if at all times during which the
short position is open, the Fund owns at least an equal amount of the securities
or securities convertible into, or exchangeable without further consideration
for, securities of the same issue as the securities sold short. Short sales
against the box are typically used by sophisticated investors to defer
recognition of capital gains or losses.
Futures Contracts and Options on Futures Contracts. Each Fund may
purchase and sell stock index futures contracts. The purpose of the acquisition
or sale of a futures contract by a Fund is to hedge against fluctuations in the
value of its portfolio without actually buying or selling securities. The
futures contracts in which a Fund may invest have been developed by and are
traded on national commodity exchanges. Stock index futures contracts may be
based upon broad-based stock indexes such as the S&P 500 or upon narrow-based
stock indexes. A buyer entering into a stock index futures contract will, on a
specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. The Fund
may assume both "long" and "short" positions with respect to futures contracts.
A long position involves entering into a futures contract to buy a commodity,
whereas a short position involves entering into a futures contract to sell a
commodity.
The purpose of trading futures contracts is to protect a Fund from
fluctuations in value of its investment securities without necessarily buying or
selling the securities. Because the value of a Fund's investment securities will
exceed the value of the futures contracts sold by a Fund, an increase in the
value of the futures contracts could only mitigate, but not totally offset, the
decline in the value of the Fund's assets. No consideration is paid or received
by a Fund upon trading a futures contract. Upon trading a futures contract, a
Fund will be required to deposit in a segregated account with its custodian, or
designated sub-custodian, an amount of cash, short-term Government Securities or
other U.S. dollar-denominated, high-grade, short-term money market instruments
equal to approximately 1% to 10% of the contract amount (this amount is subject
to change by the exchange on which the contract is traded and brokers may charge
a higher amount). This amount is known as "initial margin" and is in the nature
of a performance bond or good faith deposit on the contract that is returned to
the Fund upon termination of the futures contract, assuming that all contractual
obligations have been satisfied; the broker will have access to amounts in the
margin account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, a Fund may elect to close a position by taking
an opposite position, which will operate to terminate the Fund's existing
position in the contract.
Each short position in a futures or options contract entered into by a
Fund is secured by the Fund's ownership of underlying securities. The Funds do
not use leverage when they enter into long futures or options contracts; each
Fund places in a segregated account with its custodian, or designated
sub-custodian, with respect to each of its long positions, cash or money market
instruments having a value equal to the underlying commodity value of the
contract.
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The Funds may trade stock index futures contracts to the extent
permitted under rules and interpretations adopted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges that have been designated as "contract markets" by the CFTC, and must
be executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
The Funds intend to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that a Fund use futures and
options positions (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Funds currently do not intend
to engage in transactions in futures contracts or options thereon for
speculation, but will engage in such transactions only for bona fide hedging
purposes.
Risks of Transactions in Futures Contracts and Options on Futures
Contracts. Holding Risks in Futures Contracts Transactions. There are several
risks in using stock index futures contracts as hedging devices. 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 stock indexes or
securities and movements in the prices of futures contracts, even a correct
forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable stock index. It is
possible that a Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts and also experience a decline in the
value of its portfolio securities. While this could occur, the Manager and the
Sub-Adviser believe that over time the value of a Fund's portfolio will tend to
move in the same direction as the market indexes and will attempt to reduce this
risk, to the extent possible, by entering into futures contracts on indexes
whose movements they believe will have a significant correlation with movements
in the value of the Fund's portfolio securities sought to be hedged.
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Successful use of futures contracts by a Fund is subject to the ability
of the Manager or the Sub-Adviser, as the case may be, to predict correctly
movements in the direction of interest rates or the market. If a Fund has hedged
against the possibility of a decline in the value of the stocks held in its
portfolio or an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and stock prices increase or
interest rates decrease instead, the Fund would 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.
Liquidity of Futures Contracts. A Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, 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.
Risks and Special Considerations of Options on Futures Contracts. The
use of options on interest rate and stock index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to a Fund because the maximum amount at risk is the premium paid for the
options (plus transactions costs). The writing of a call option on a futures
contract generates a premium which may partially offset a decline in the value
of a Fund's portfolio assets. By writing a call option, a Fund becomes obligated
to sell a futures contract, which may have a value higher than the exercise
price. Conversely, the writing of a put option on a futures contract generates a
premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. Thus, the loss incurred by a
Fund in writing options on futures contracts 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 or the Sub-Adviser deems it desirable to do so. Although a Fund will
enter into an option position only if the Manager, or the Sub-Adviser, as the
case may be, believes that a liquid secondary market exists for such option,
there is no assurance that the Fund will be able to effect closing transactions
at any particular time or at an acceptable price. The Funds' transactions
involving options on futures contracts will be conducted only on recognized
exchanges.
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A Fund's purchase or sale of put or call options on futures contracts
will be based upon predictions as to anticipated interest rates or market trends
by the Manager or the Sub-Adviser, as the case may be, which could prove to be
inaccurate. Even if the expectations of the Manager or Sub-Adviser are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
Investments in futures contracts and related options by their nature
tend to be more short-term than other equity investments made by the Funds. Each
Fund's ability to make such investments, therefore, may result in an increase in
such Fund's portfolio activity and thereby may result in the payment of
additional transaction costs.
The Internal Revenue Code of 1986, as amended (the "Code"), forbids
each Fund from earning more than 30% of its gross income from the sale or other
disposition of certain investments, including futures contracts and options
thereon, which are owned for less than three months. The likelihood of violating
this 30% test is increased by the amount of investing a Fund does in futures
contracts and related options. Additionally, the Code requires each Fund to
diversify its investment holdings. The Internal Revenue Service position
regarding the treatment of futures contracts and related options for
diversification purposes is not clear, and the extent to which a Fund may engage
in these transactions may be limited by this requirement. The Code also provides
that, with respect to certain futures contracts and options held by a Fund at
the end of its taxable year, unrealized gain or loss on such contracts may have
to be recognized for tax purposes under a special system within the Code. The
actual gain or loss recognized by the Fund in an eventual disposition of such
contract, however, will be adjusted by the amount of the gain or loss recognized
earlier under the Code's system. See Accounting and Tax Issues and Distributions
and Taxes. For more information on stock index futures contracts and related
options, see Appendix B.
Special Considerations - Tax-Efficient Equity Fund. From time to time,
the Manager may employ a trading strategy which involves the use of options,
futures contracts and other derivative products to hedge against anticipated
market movements, rather than a more traditional strategy that would involve the
purchase and sale of portfolio securities in anticipation of such movements. For
example, using a more traditional trading strategy, if an investment adviser
anticipated a market decline with respect to a particular group of portfolio
stocks with significant unrealized gains, the adviser would sell the stocks,
realize any gains and make a taxable distribution of such gains to shareholders.
If market prices fall as anticipated, the fund will have avoided capital losses
as a result of the fall in prices, but the fund will have incurred trading costs
and investors will be taxed on the realized capital gains. In the event market
prices rise, trading costs and tax consequences will be the same; however, the
fund will have lost the opportunity to participate in the rising prices. Using
the tax-sensitive trading strategy which the Manager intends to employ, rather
than sell the Fund's portfolio securities, the Manager might, for example, buy a
put option on the group of securities. If prices fall as anticipated, the
decline in the value of the fund's portfolio would be offset by the gain on the
put options. Although this gain will be taxable, presumably the gain, and
therefore the tax liability, will be significantly less than the gain that would
have been realized had the Fund sold the underlying portfolio securities. The
Fund will not incur trading costs, but will pay a premium for purchase of the
put option. in the event prices rise, the fund will be in a significantly better
position than had the underlying securities been sold. Although the Fund will
have lost the premium it paid for the option, the Fund will participate fully in
the rising stock prices and will have deferred the realization of capital gains
(and the resulting tax liability of shareholders).
Debt Securities
In pursuing its investment objective, Aggressive Growth Fund may invest
up to 35% of its total assets and Growth Stock Fund may invest up to 20% of its
total net assets in debt securities of corporate and governmental issuers. The
risks inherent in debt securities depend primarily on the term and quality of
the obligations in a Fund's portfolio as well as on market conditions. A decline
in the prevailing levels of interest rates generally increases the value of debt
securities, while an increase in rates usually reduces the value of those
securities.
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Investments in debt securities by each Fund are limited to those that
are at the time of investment within the four highest grades (generally referred
to as an investment grade) assigned by a nationally recognized statistical
rating organization or, if unrated, are deemed to be of comparable quality by
the Manager. If a change in credit quality after acquisition by a Fund causes a
security to no longer be investment grade, the Fund will dispose of the
security, if necessary, to keep its holdings to 5% or less of the Fund's net
assets. See Credit Quality below. Debt securities rated Baa by Moody's or BBB by
Standard & Poor's, although considered investment grade, have speculative
characteristics and changes in economic circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds.
When a Fund's Manager or Sub-Adviser, as the case may be, determines
that adverse market or economic conditions exist and considers a temporary
defensive position advisable, the Fund may invest without limitation in
high-quality fixed income securities or hold assets in cash or cash equivalents.
Credit Quality
Any bond in which Aggressive Growth Fund and Growth Stock Fund invest
will be rated investment grade. As has been the industry practice, this
determination of credit quality is made at the time a Fund acquires the bond.
However, because it is possible that subsequent downgrades could occur, if a
bond held by a Fund is later downgraded, the Manager or the Sub-Adviser, as the
case may be, under the supervision of the Board of Directors, will consider
whether it is in the best interest of the Fund's shareholders to hold or to
dispose of the bond. Among the criteria that may be considered by the Manager or
the Sub-Adviser, as the case may be, and the Board are the probability that the
bonds will be able to make scheduled interest and principal payments in the
future, the extent to which any devaluation of the bond has already been
reflected in the Fund's net asset value, and the total percentage, if any, of
bonds currently rated below investment grade held by the Fund. In no event,
however, will a Fund invest more than 5% of its net assets in bonds rated lower
than investment grade.
Non-investment grade securities have moderate to poor protection of
principal and interest payments and have speculative characteristics. They
involve greater risk of default or price declines due to changes in the issuer's
creditworthiness than investment-grade debt securities. Because the market for
lower-rated securities may be thinner and less active than for higher-rated
securities, there may be market price volatility for these securities and
limited liquidity in the resale market. Market prices for these securities may
decline significantly in periods of general economic difficulty or rising
interest rates.
Indexed Securities
Indexed securities include commercial paper, certificates of deposit
and other fixed-income securities whose values at maturity or coupon interest
rates are determined by reference to the return of a particular stock index or
group of stocks. Indexed securities can be affected by changes in interest rates
and the creditworthiness of their issuers as well as stock prices and may not
track market returns as accurately as direct investments in common stocks.
Indexed securities in which the Tax-Efficient Equity Fund may invest
include Foreign Index Linked Instruments. Foreign Index Linked Instruments are
fixed-income securities which are issued by U.S. issuers (including U.S.
subsidiaries of foreign issuers) and are denominated in U.S. dollars but return
principal and/or pay interest to investors in amounts which are linked to the
level of a particular foreign index. A foreign index may be based upon the
exchange rate of a particular currency or currencies or the differential between
two currencies, or the level of interest rates in a particular country or
countries, or the differential in interest rates between particular countries.
In the case of Foreign Index Linked Instruments linking the principal amount to
a foreign index, the amount of principal payable by the issuer at maturity will
increase or decrease in response to changes in the level of the foreign index
during the term of the Foreign Index Linked Instrument. In the case of Foreign
Index Linked Instruments linking the interest component to a foreign index, the
amount of interest payable will adjust periodically in response to changes in
the level of the foreign index during the term of the Foreign Index Linked
Instrument. Foreign Index Linked Instruments may be issued by a U.S.
governmental agency or instrumentality or by a private issuer.
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Swap Agreements
Swap agreements typically involve a commitment by the Tax-Efficient
Equity Fund to pay specified amounts (such as fixed or floating interest rates)
at regular intervals in return for all or a portion of the investment return of
a particular stock index or group of stocks. As with stock index options and
futures (discussed below), swap agreements provide exposure to the stock market,
but may not track market returns as accurately as direct investments in common
stocks. In addition, the Fund typically depends on the credit of a single
counterparty when investing in a swap agreement, and may suffer a loss
irrespective of the value of the underlying index if the counterparty's credit
declines. The Fund will usually enter into swap agreements on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each swap agreement will be accrued on a daily basis, and an amount of cash,
U.S. government securities or other liquid high-grade debt securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into a swap agreement on other than a net basis, the Fund will maintain a
segregated account in the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the swap.
Investment Company Securities
Any investments that the Funds make in either closed-end or open-end
investment companies will be limited by the 1940 Act, and would involve an
indirect payment of a portion of the expenses, including advisory fees, of such
other investment companies. Under the 1940 Act's current limitations, the Fund
may not (1) own more than 3% of the voting stock of another investment company;
(2) invest more than 5% of the Fund's total assets in the shares of any one
investment company; nor (3) invest more than 10% of the Fund's total assets in
shares of other investment companies. If the Fund elects to limit its investment
in other investment companies to closed-end investment companies, the 3%
limitation described above is increased to 10%. These percentage limitations
also apply to the Fund's investments in unregistered investment companies.
When-Issued and Delayed Delivery Securities
The Funds may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are purchased with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will maintain with its custodian bank a
separate account with a segregated portfolio of securities in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Fund enters into the commitment
and no interest accrues to the Fund until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Foreign Securities
Aggressive Growth Fund and Growth Stock Fund each may invest up to 10%
of its total assets in foreign securities. Foreign securities may include ADRs
and GDRs. There are substantial and different risks involved in investing in
foreign securities. An investor should consider these risks carefully. For
example, there is generally less publicly available information about foreign
companies than is available about companies in the U.S. Foreign companies are
not subject to uniform audit and financial reporting standards, practices and
requirements comparable to those in the U.S.
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Foreign securities involve currency risks. The U.S. dollar value of a
foreign security tends to decrease when the value of the dollar rises against
the foreign currency in which the security is denominated and tends to increase
when the value of the dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be returned to
the country of origin, based on the exchange rate at the time of disbursement,
and restrictions on capital flows may be imposed. Losses and other expenses may
be incurred in converting between various currencies in connection with
purchases and sales of foreign securities.
Foreign stock markets are generally not as developed or efficient as
those in the U.S. In most foreign markets volume and liquidity are less than in
the U.S. and, at times, volatility of price can be greater than that in the U.S.
Fixed commissions on foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and companies
than in the U.S.
There is also the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, political or social
instability, or diplomatic developments which could adversely affect
investments, assets or securities transactions of a Fund in some foreign
countries. The Funds are not aware of any investment or exchange control
regulations which might substantially impair their operations as described,
although this could change at any time.
The dividends and interest payable on certain foreign securities may be
subject to foreign withholding taxes, thus reducing the net amount available for
distribution to a Fund's shareholders.
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.
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ACCOUNTING AND TAX ISSUES
When a Fund writes a call option, an amount equal to the premium
received by it is included in the section of the Fund's assets and liabilities
as an asset and as an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which a Fund has written expires on its stipulated expiration date, the Fund
reports a realized gain. If a Fund enters into a closing purchase transaction
with respect to an option which the Fund has written, the Fund realizes a gain
(or loss if the cost of the closing transaction exceeds the premium received
when the option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
Any such gain or loss is a short-term capital gain or loss for federal income
tax purposes. If a call option which a Fund has written is exercised, the Fund
realizes a capital gain or loss (long-term or short-term, depending on the
holding period of the underlying security) from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received.
Other tax Requirements
Each Fund has qualified, and intends to continue to qualify, as a
regulated investment companies under Subchapter M of the Code. As such, a Fund
will not be subject to federal income tax, or to any excise tax, to the extent
its earnings are distributed as provided in the Code and it satisfies other
requirements relating to the sources of its income and diversification of its
assets.
In order to qualify as a regulated investment company for federal
income tax purposes, each Fund must meet certain specific requirements,
including:
(i) A Fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of that Fund's total assets, and,
with respect to 50% of that Fund's total assets, no investment (other than cash
and cash items, U.S. government securities and securities of other regulated
investment companies) can exceed 5% of that Fund's total assets;
(ii) A Fund must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) A Fund must distribute to its shareholders at least 90% of its
investment company taxable income and net tax-exempt income for each of its
fiscal years, and
(iv) A Fund must realize less than 30% of its gross income for each
fiscal year from gains from the sale of securities and certain other assets that
have been held by the Fund for less than three months ("short-short income").
The Taxpayer Relief Act of 1997 (the "1997 Act") repealed the 30% short-short
income test for tax years of regulated investment companies beginning after
August 5, 1997; however, this rule may have continuing effect in some states for
purposes of classifying the Fund as a regulated investment company.
-19-
<PAGE>
The Code requires a Fund to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain net
income earned during the 12 month period ending October 31 (in addition to
amounts from the prior year that were neither distributed nor taxed to such
Fund) to shareholders by December 31 of each year in order to avoid federal
excise taxes. The Funds intend as a matter of policy to declare and pay
sufficient dividends in December or January (which are treated by shareholders
as received in December) but does not guarantee and can give no assurances that
its distributions will be sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the year that unrealized losses exceed unrealized gains or when
the offsetting position is sold.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, the Fund must recognize gain (but not loss) on any constructive
sale of an appreciated financial position in stock, a partnership interest or
certain debt instruments. The Fund will generally be treated as making a
constructive sale when it: 1) enters into a short sale on the same or
substantially identical property; 2) enters into an offsetting notional
principal contract; or 3) enters into a futures or forward contract to deliver
the same or substantially identical property. Other transactions (including
certain financial instruments called collars) will be treated as constructive
sales as provided in Treasury regulations to be published. There are also
certain exceptions that apply for transactions that are closed before the end of
the 30th day after the close of the taxable year.
Investment in Foreign Currencies and Foreign Securities--The Funds are
authorized to invest certain limited amounts in foreign securities. Such
investments, if made, will have the following additional tax consequences to
each Fund:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time a Fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of its disposition are
also treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of a Fund's net investment company taxable income, which, in turn, will affect
the amount of income to be distributed to you by a Fund.
If a Fund's Section 988 losses exceed a Fund's other investment company
taxable income during a taxable year, a Fund generally will not be able to make
ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
-20-
<PAGE>
The 1997 Act generally requires that foreign income be translated into
U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than two
years after the taxable year to which they relate. This new law may require a
Fund to track and record adjustments to foreign taxes paid on foreign securities
in which it invests. Under a Fund's current reporting procedure, foreign
security transactions are recorded generally at the time of each transaction
using the foreign currency spot rate available for the date of each transaction.
Under the new law, a Fund will be required to record at fiscal year end (and at
calendar year end for excise tax purposes) an adjustment that reflects the
difference between the spot rates recorded for each transaction and the year-end
average exchange rate for all of a Fund's foreign securities transactions. There
is a possibility that the mutual fund industry will be given relief from this
new provision, in which case no year-end adjustments will be required.
The Funds may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of a
Fund at the end of its fiscal year are invested in securities of foreign
corporations, a Fund may elect to pass-through to you your pro rata share of
foreign taxes paid by a Fund. If this election is made, you will be: (i)
required to include in your gross income your pro rata share of foreign source
income (including any foreign taxes paid by a Fund); and (ii) entitled to either
deduct your share of such foreign taxes in computing your taxable income or to
claim a credit for such taxes against your U.S. income tax, subject to certain
limitations under the Code. You will be informed by a Fund at the end of each
calendar year regarding the availability of any such foreign tax credits and the
amount of foreign source income (including any foreign taxes paid by a Fund). If
a Fund elects to pass-through to you the foreign income taxes that it has paid,
you will be informed at the end of the calendar year of the amount of foreign
taxes paid and foreign source income that must be included on your federal
income tax return. If a Fund invests 50% or less of its total assets in
securities of foreign corporations, it will not be entitled to pass-through to
you your pro-rata shares of foreign taxes paid by a Fund. In this case, these
taxes will be taken as a deduction by a Fund, and the income reported to you
will be the net amount after these deductions. The 1997 Act also simplifies the
procedures by which investors in funds that invest in foreign securities can
claim tax credits on their individual income tax returns for the foreign taxes
paid by a Fund. These provisions will allow investors who pay foreign taxes of
$300 or less on a single return or $600 or less on a joint return during any
year (all of which must be reported on IRS Form 1099-DIV from a Fund to the
investor) to claim a tax credit against their U.S. federal income tax for the
amount of foreign taxes paid by a Fund. This process will allow you, if you
qualify, to bypass the burdensome and detailed reporting requirements on the
foreign tax credit schedule (Form 1116) and report your foreign taxes paid
directly on page 2 of Form 1040. This simplified procedure was not available
until calendar year 1998.
-21-
<PAGE>
Investment in Passive Foreign Investment Company Securities--The Funds
may invest in shares of foreign corporations which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a Fund receives an "excess distribution" with respect
to PFIC stock, the Fund itself may be subject to U.S. federal income tax on a
portion of the distribution, whether or not the corresponding income is
distributed by a Fund to you. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which a Fund held the PFIC shares. A Fund itself will be subject to tax on the
portion, if any, of an excess distribution that is so allocated to prior Fund
taxable years, and an interest factor will be added to the tax, as if the tax
had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by a Fund.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
distribution might have been classified as capital gain. This may have the
effect of increasing Fund distributions to you that are treated as ordinary
dividends rather than long-term capital gain dividends.
A Fund may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC during such period. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market the Fund's PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. The Fund would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction would be
limited to the amount of any net mark-to-market gains previously included with
respect to that particular PFIC security. If a Fund were to make this second
PFIC election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the
amount of tax payable by a Fund (if any), the amounts distributable to you by a
Fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares
of a foreign corporation are acquired to ascertain that the foreign corporation
is a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after a Fund acquires shares in that corporation. While a
Fund will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
Most foreign exchange gains are classified as ordinary income which
will be taxable to you as such when distributed. Similarly, you should be aware
that any foreign exchange losses realized by a Fund, including any losses
realized on the sale of foreign debt securities, are generally treated as
ordinary losses for federal income tax purposes. This treatment could increase
or reduce a Fund's income available for distribution to you, and may cause some
or all of a Fund's previously distributed income to be classified as a return of
capital.
-22-
<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may state each of its Classes' total
return in advertisements and other types of literature. Any statement of total
return performance data for a Class will be accompanied by information on the
average annual compounded rate of return for that Class over, as relevant, the
most recent one-, five- and ten-year (or life-of-fund, if applicable) periods.
Each Fund may also advertise aggregate and average total return information for
its Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be deducted
from any computation of total return. See the Prospectuses for the Fund Classes
for a description of the Limited CDSC and the limited instances in which it
applies. All references to a CDSC in this Performance Information section will
apply to Class B Shares or Class C Shares of the Funds.
Total return performance for each Class will be computed by adding all
reinvested income and realized securities profits distributions plus the change
in net asset value during a specific period and dividing by the offering price
at the beginning of the period. It will not reflect any income taxes payable by
shareholders on the reinvested distributions included in the calculation.
Because securities prices fluctuate, past performance should not be considered
as a representation of the results that may be realized from an investment in
either Fund in the future.
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of $1,000
from which, in the case of only Class A Shares, the
maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical $1,000
purchase at the end of the period after the
deduction of the applicable CDSC, if any,
with respect to Class B Shares and Class C
Shares.
-23-
<PAGE>
Aggregate or cumulative total return is calculated in a similar manner,
except that the results are not annualized. Each calculation assumes the maximum
front-end sales charge, if any, is deducted from the initial $1,000 investment
at the time it is made with respect to Class A Shares and that all distributions
are reinvested at net asset value, and, with respect to Class B Shares and Class
C Shares, reflects the deduction of the CDSC that would be applicable upon
complete redemption of such shares. In addition, each Fund may present total
return information that does not reflect the deduction of the maximum front-end
sales charge or any applicable CDSC.
The performance of each Class of each Fund, as shown below, is the
average annual total return quotations through April 30, 1999, computed as
described above.
The average annual total return for Class A Shares at offer reflects
the maximum front-end sales charge of 5.75% paid on the purchase of shares. The
average annual total return for Class A Shares at net asset value (NAV) does not
reflect the payment of any front-end sales charge. Pursuant to applicable
regulation, total return shown for the Institutional Classes of Aggressive
Growth Fund and Growth Stock Fund for the periods prior to the commencement of
operations of such Classes is calculated by taking the performance of the
respective Class A Shares and adjusting it to reflect the elimination of all
sales charges. However, for those periods, no adjustment has been made to
eliminate the impact of 12b-1 payments by Class A Shares, and performance for
the Institutional Classes would have been affected had such an adjustment been
made. The average annual total 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 April 30, 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 April 30, 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.
<TABLE>
<CAPTION>
Average Annual Total Return (1)
- ----------------------------------------------------------------------------------------------------------------------------
1 Year Ended 3 Years Ended 5 Years Ended 10 Years Ended Life of Fund
4/30/99 4/30/99 4/30/99 4/30/99
- ----------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A 21.08% 35.79% N/A N/A 28.08%
(at offer) (2)
(Inception 5/16/94)
- ----------------------------------------------------------------------------------------------------------------------------
Class A 28.43% 38.50% N/A N/A 29.62%
(at NAV)
(Inception 5/16/94)
- ----------------------------------------------------------------------------------------------------------------------------
Class B 22.41% 36.59% N/A N/A 40.25%
(Including CDSC) (3)
(Inception 4/16/96)
- ----------------------------------------------------------------------------------------------------------------------------
Class B 27.41% 37.12% N/A N/A 40.74%
(excluding CDSC)
(Inception 4/16/96)
- ----------------------------------------------------------------------------------------------------------------------------
Class C 26.45% 37.44% N/A N/A 28.70%
(Including CDSC)
(Inception 5/20/94)
- ----------------------------------------------------------------------------------------------------------------------------
Class C 27.45% 37.44% N/A N/A 28.70%
(excluding CDSC)
(Inception 5/20/94)
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Class 28.73% 38.75% N/A N/A 29.76%
(Inception 8/29/97)
- ----------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund
- ----------------------------------------------------------------------------------------------------------------------------
Class A 3.26% 17.09% 18.59% 14.01% 15.83%
(at offer) (2)
(Inception 8/1/85)
- ----------------------------------------------------------------------------------------------------------------------------
Class A 9.56% 19.41% 20.01% 14.69% 16.33%
(at NAV)
(Inception 8/1/85)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1 Year Ended 3 Years Ended 5 Years Ended 10 Years Ended Life of Fund
4/30/99 4/30/99 4/30/99 4/30/99
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Stock Fund
- ----------------------------------------------------------------------------------------------------------------------------
Class B 3.72% 17.84% N/A N/A 18.82%
(Including CDSC) (3)
(Inception 9/8/95)
- ----------------------------------------------------------------------------------------------------------------------------
Class B 8.72% 18.56% N/A N/A 19.34%
(excluding CDSC)
(Inception 9/8/95)
- ----------------------------------------------------------------------------------------------------------------------------
Class C 7.72% 18.52% N/A N/A 18.60%
(Including CDSC)
(Inception 10/21/95)
- ----------------------------------------------------------------------------------------------------------------------------
Class C 8.72% 18.52% N/A N/A 18.60%
(excluding CDSC)
(Inception 10/21/95)
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Class 9.79% 19.74% 20.21% 14.78% 16.40%
(inception 8/29/97)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Tax-Efficient Equity Fund
- ----------------------------------------------------------------------------------------------------------------------------
Class A 0.94% N/A N/A N/A 15.63%
(at offer) (2)(4)
(Inception 6/27/97)
- ----------------------------------------------------------------------------------------------------------------------------
Class A (4) 7.09% N/A N/A N/A 19.42%
(at NAV)
(Inception 6/27/97)
- ----------------------------------------------------------------------------------------------------------------------------
Class B 1.30% N/A N/A N/A 16.75%
(Including CDSC) (3)
(Inception 6/27/97)
- ----------------------------------------------------------------------------------------------------------------------------
Class B 6.30% N/A N/A N/A 18.65%
(excluding CDSC)
(Inception 6/27/97)
- ----------------------------------------------------------------------------------------------------------------------------
Class C 5.39% N/A N/A N/A 18.70%
(Including CDSC)
(Inception 6/27/97)
- ----------------------------------------------------------------------------------------------------------------------------
Class C 6.39% N/A N/A N/A 18.70%
(excluding CDSC)
(Inception 6/27/97)
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Class(5) 7.09% N/A N/A N/A 19.42%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the voluntary waivers in effect during the periods.
(2) Effective November 2, 1998, the maximum front-end sales charge is
5.75%. The above performance numbers are calculated using 5.75% as the
applicable sales charge for all time periods.
(3) Effective November 2, 1998, the CDSC schedule for Class B Shares
increased as follows: (i) 5% if shares are redeemed within one year of
purchase (ii) 4% if shares are redeemed with two years of purchase;
(iii) 3% if shares are redeemed during the third or fourth year
following purchase; (iv) 2% if shares are redeemed during the fifth
year following purchase; (v) 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.
(4) For the period beginning February 1, 1998 through October 31, 1999, the
Distributor has elected voluntarily to waive 0.05% of the 0.30% 12b-1
plan expenses otherwise payable by the Fund with respect to Class A
Shares. Such waiver will have favorable impact on the performance of
Class A Shares.
(5) Pursuant to applicable regulation, total return shown for the
Tax-Efficient Equity Fund Institutional Class is calculated by taking
the performance of the Fund's Class A Shares and adjusting it to
reflect the elimination of all sales charges. However, no adjustment
has been made to eliminate the impact of 12b-1 payments by Class A
Shares, and performance for the Institutional Class would have been
affected had such an adjustment been made.
-25-
<PAGE>
From time to time, each Fund may also quote its Classes' actual total
return performance, dividend results and other performance information in
advertising and other types of literature. This information may be compared to
that of other mutual funds with similar investment objectives and to stock, bond
and other relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Fund (or Class) maybe compared to
data prepared by Lipper Analytical Services, Inc., Morningstar, Inc. or to the
S&P 500 Index or the Dow Jones Industrial Average.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare a Fund's
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The S&P 500
Stock Index and the Dow Jones Industrial Average are industry-accepted unmanaged
indices of stocks which are representative of and used to measure broad stock
market performance. 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. In
seeking a particular investment objective, a Fund's portfolio may include common
stocks considered by the Manager to be more aggressive than those tracked by
these indices.
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.
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.
-26-
<PAGE>
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 a Fund (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic and political conditions, the relationship
between sectors of the economy and the economy as a whole, the effects of
inflation and historical performance of various asset classes, including but not
limited to, stocks, bonds and Treasury bills. From time to time advertisements,
sales literature, communications to shareholders or other materials may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund. In addition, selected indices may be used
to illustrate historic performance of selected asset classes. The Funds may also
include in advertisements, sales literature, communications to shareholders or
other materials, charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, treasury bills and shares of a Fund. In addition,
advertisements, sales literature, communications to shareholders or other
materials may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning (such as information on Roth IRAs and
Education IRAs) and investment alternative to certificates of deposit and other
financial instruments. Such sales literature, communications to shareholders or
other materials may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the Funds and may
illustrate how to find the listings of the Funds in newspapers and periodicals.
Materials may also include discussions of other Funds, products, and services.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Fund may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include information
regarding the background and experience of its portfolio managers.
The following tables are examples, for purposes of illustration only,
of cumulative total return performance for each Class of each Fund through April
30, 1999. Pursuant to applicable regulation, total return shown for the
Institutional Classes of the Aggressive Growth Fund and Growth Stock Fund for
the periods prior to the commencement of operations of such Classes is
calculated by taking the performance of the respective Class A Shares and
adjusting it to reflect the elimination of all sales charges. However, for those
periods, no adjustment has been made to eliminate the impact of 12b-1 payments
by the Class A Shares, and performance for the Institutional Classes would have
been affected had such an adjustment been made. For these purposes, the
calculations assume the reinvestment of any realized securities profits
distributions and income dividends paid during the indicated periods, but does
not reflect any income taxes payable by shareholders on the reinvested
distributions. The performance of each Class is shown calculated both with the
applicable maximum sales charges included and excluded. Past performance is no
guarantee of future results. Performance shown for short periods of time may not
be representative of longer term results.
-27-
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return (1)
- ------------------------------------------------------------------------------------------------------------------------------------
3 Months 6 Months 9 Months 1 Year 3 Years 5 Years 10 Years Life of Fund
Ended Ended Ended Ended Ended Ended Ended
4/30/99 4/30/99 4/30/99 4/30/99 4/30/99 4/30/99 4/30/99
- ------------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 0.62% 35.42% 26.44% 21.08% 150.38% N/A N/A 241.22%
(at offer) (2)
(Inception 5/16/94)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A 6.75% 43.68% 34.16% 28.43% 165.69% N/A N/A 262.04%
(at NAV)
(Inception 5/16/94)
- ------------------------------------------------------------------------------------------------------------------------------------
Class B 1.57% 38.19% 28.41% 22.41% 154.83% N/A N/A 179.72%
(Including CDSC) (3)
(Inception 4/16/96)
- ------------------------------------------------------------------------------------------------------------------------------------
Class B 6.57% 43.19% 33.41% 27.41% 157.83% N/A N/A 182.72%
(excluding CDSC)
(Inception 4/16/96)
- ------------------------------------------------------------------------------------------------------------------------------------
Class C 5.55% 42.17% 32.37% 26.45% 159.62% N/A N/A 248.53%
(Including CDSC)
(Inception 5/20/94)
- ------------------------------------------------------------------------------------------------------------------------------------
Class C 6.55% 43.17% 33.37% 27.45% 159.62% N/A N/A 248.53%
(excluding CDSC)
(Inception 5/20/94)
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional Class 6.85% 43.88% 34.38% 28.73% 167.13% N/A N/A 263.99%
(inception 8/29/97)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A -1.27% 2.55% 8.44% 3.26% 60.52% 134.59% 271.07% 653.77%
(at offer) (2)
(Inception 8/1/85)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A 4.76% 8.79% 15.05% 9.56% 70.28% 148.91% 293.66% 699.76%
(at NAV)
(Inception 8/1/85)
- ------------------------------------------------------------------------------------------------------------------------------------
Class B -0.43% 3.41% 9.41% 3.72% 63.64% N/A N/A 87.51%
(Including CDSC) (3)
(Inception 9/8/95)
- ------------------------------------------------------------------------------------------------------------------------------------
Class B 4.57% 8.41% 14.41% 8.72% 66.64% N/A N/A 90.51%
(excluding CDSC)
(Inception 9/8/95)
- ------------------------------------------------------------------------------------------------------------------------------------
Class C 3.57% 7.37% 13.38% 7.72% 66.48% N/A N/A 82.56%
(Including CDSC)
(Inception 10/21/95)
- ------------------------------------------------------------------------------------------------------------------------------------
Class C 4.57% 8.37% 14.38% 8.72% 66.48% N/A N/A 82.56%
(excluding CDSC)
(Inception 10/21/95)
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional Class 4.82% 8.92% 15.26% 9.79% 71.69% 150.97% 296.91% 706.35%
(inception 8/29/97)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Efficient Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A -6.95% 2.97% 0.77% 0.94% N/A N/A N/A 30.71%
(at offer) (2) (4)
(Inception 6/27/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A -1.26% 9.27% 6.89% 7.09% N/A N/A N/A 38.71%
(at NAV) (4)
(Inception 6/27/97))
- ------------------------------------------------------------------------------------------------------------------------------------
Class B -6.37% 3.88% 1.39% 1.30% N/A N/A N/A 33.06%
(Including CDSC) (3)
(Inception 6/27/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Class B -1.44% 8.88% 6.39% 6.30% N/A N/A N/A 37.06%
(excluding CDSC)
(Inception 6/27/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Class C -2.34% 7.97% 5.39% 5.39% N/A N/A N/A 37.18%
(Including CDSC)
(Inception 6/27/97))
- ------------------------------------------------------------------------------------------------------------------------------------
Class C -1.35% 8.97% 6.39% 6.39% N/A N/A N/A 37.18%
(excluding CDSC)
(Inception 6/27/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional Class(5) -1.26% 9.27% 6.89% 7.09% N/A N/A N/A 38.71%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the voluntary waivers in effect during the periods.
(2) Effective November 2, 1998, the maximum front-end sales charge is
5.75%. The above performance numbers are calculated using 5.75% as the
applicable sales charge for all time periods.
(3) Effective November 2, 1998, the CDSC schedule for Class B Shares
increased as follows: (i) 5% if shares are redeemed within one year of
purchase (ii) 4% if shares are redeemed with two years of purchase;
(iii) 3% if shares are redeemed during the third or fourth year
following purchase; (iv) 2% if shares are redeemed during the fifth
year following purchase; (v) 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.
(4) For the period beginning February 1, 1998 through October 31, 1999, the
Distributor has elected voluntarily to waive 0.05% of the 0.30% 12b-1
plan expenses otherwise payable by the Fund with respect to Class A
Shares. Such waiver will have favorable impact on the performance of
Class A Shares.
(5) Pursuant to applicable regulation, total return shown for the
Tax-Efficient Equity Fund Institutional Class is calculated by taking
the performance of the Fund's Class A Shares and adjusting it to
reflect the elimination of all sales charges. However, no adjustment
has been made to eliminate the impact of 12b-1 payments by Class A
Shares, and performance for the Institutional Class would have been
affected had such an adjustment been made.
-29-
<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 personal financial planning. One typical way of addressing these
issues is to compare an individual's goals and the length of time the individual
has to attain these goals to his or her risk threshold. In addition, the
Distributor will provide information that discusses the overriding investment
philosophy of the Manager or Sub-Adviser and how that philosophy impacts,
investment disciplines employed in seeking the objectives of the Funds and other
funds in the Delaware Investments family. The Distributor may also from time to
time cite general or specific information about the institutional clients of
Delaware Investment Advisers, the Manager's affiliate, or Sub-Adviser, including
the number of such clients serviced such persons.
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
Mutual Funds III, Inc. selects brokers or dealers to execute
transactions on behalf of a Fund for the purchase or sale of portfolio
securities on the basis of its judgment of their professional capability to
provide the service. The primary consideration is to have 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. Some trades are made on a net basis where a Fund
either buys securities directly from the dealer or sells them to the dealer. In
these instances, there is no direct commission charged but there is a spread
(the difference between the buy and sell price) which is the equivalent of a
commission. When a commission is paid, the Fund involved 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, the Fund
pays a minimal share transaction cost when the transaction presents no
difficulty.
During the past three fiscal years, the aggregate dollar amounts of
brokerage commissions paid by each Fund were as follows:
---------------------------------------------------------------------
4/30/99 4/30/98 4/30/97
---------------------------------------------------------------------
Aggressive Growth Fund $237,356 $97,366 $6,768
---------------------------------------------------------------------
Growth Stock Fund $12,075 $14,280 $22,332
---------------------------------------------------------------------
Tax-Efficient Equity Fund(1) $107,351 $23,745 N/A
---------------------------------------------------------------------
(1) Date of initial public offering of Tax-Efficient Equity Fund was June 27,
1997.
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.
-31-
<PAGE>
During the fiscal year ended April 30, 1999, portfolio transactions of
the following Funds, in the amounts listed below, resulting in brokerage
commissions in the amounts listed below, were directed to brokers for brokerage
and research services provided:
-------------------------------------------------------------------------
Portfolio Transactions Brokerage Commissions
Amounts Amounts
-------------------------------------------------------------------------
Aggressive Growth Fund $6,717,992 $402,094
-------------------------------------------------------------------------
Growth Stock Fund $-0- $-0-
-------------------------------------------------------------------------
Tax-Efficient Equity Fund $54,849,734 $90,325
-------------------------------------------------------------------------
As provided in the 1934 Act and each Fund's Investment Management
Agreement, higher commissions are permitted to be paid to broker/dealers who
provide brokerage and research services than to broker/dealers who do not
provide such services if such higher commissions are deemed reasonable in
relation to the value of the brokerage and research services provided. Although
transactions are directed to broker/dealers who provide such brokerage and
research services, 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 a
Fund 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 execution. Transactions involving commingled orders are allocated in a
manner deemed equitable to each account or fund. When a combined order is
executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is believed that the ability of the accounts to participate
in volume transactions will generally be beneficial to the accounts and funds.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or fund may obtain, it is the opinion of the Manager and Mutual Funds
III, Inc.'s Board of Directors that the advantages of combined orders outweigh
the possible disadvantages of separate transactions.
-32-
<PAGE>
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"), and subject to seeking best execution,
the Funds may place orders with broker/dealers that have agreed to defray
certain expenses of the funds in the Delaware Investments family such as
custodian fees, and may, at the request of the Distributor, give consideration
to sales of such funds' shares as a factor in the selection of brokers and
dealers to execute Fund portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish a Fund's
objective in relation to anticipated movements in the general level of interest
rates. The Funds are free to dispose of portfolio securities at any time,
subject to complying with the Code and the 1940 Act, when changes in
circumstances or conditions make such a move desirable in light of the
investment objective. The Funds will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving a Fund's
investment objective. It is anticipated that Aggressive Growth Fund's portfolio
turnover rate may be greater than 100%. It is anticipated that Growth Stock
Fund's and Tax-Efficient Equity Fund's portfolio turnover rates will be less
than 100%.
The degree of portfolio activity may affect brokerage costs of a Fund
and taxes payable by a 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%. Each Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value of
the portfolio securities owned by such Fund during the particular fiscal year,
exclusive of securities whose maturities at the time of acquisition are one year
or less. A turnover rate of 100% would occur, for example, if all the
investments in a Fund's portfolio at the beginning of the year were replaced by
the end of the year. A higher portfolio turnover rate is often a normal
by-product of an enthusiastic market.
During the past two fiscal years, portfolio turnover rates were as
follows:
1999 1998
----------------------------------------------------------
Aggressive Growth Fund 313% 356%
----------------------------------------------------------
Growth Stock Fund 36% 9%
----------------------------------------------------------
Tax-Efficient Equity Fund* 48% 14%**
----------------------------------------------------------
* Date of initial public offering was June 27, 1997.
** Annualized.
Each Fund may hold securities for any period of time. A Fund's
portfolio turnover will be increased if the Fund writes a large number of call
options that 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.
-33-
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
classes of shares, and has agreed to use its best efforts to sell shares of each
Fund. See the Prospectuses for additional information on how to invest. Shares
of the Funds are offered on a continuous basis, and may be purchased through
authorized investment dealers or directly by contacting Mutual Funds III, Inc.
or the Distributor.
The minimum initial investment generally is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases of such classes
generally must be at least $100. The initial and subsequent minimum investments
for Class A Shares will be waived for purchases by officers, directors and
employees of any fund in the Delaware Investments family, the Manager or any of
the its affiliates if the purchases are made pursuant to a payroll deduction
program. Shares purchased pursuant to the Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act and shares purchased in connection with an Automatic
Investing Plan are subject to a minimum initial purchase of $250 and a minimum
subsequent purchase of $25. Accounts opened under the Asset Planner service are
subject to a minimum initial investment of $2,000 per Asset Planner Strategy
selected. There are no minimum purchase requirements for the Funds'
Institutional Classes, but certain eligibility requirements must be satisfied.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. See Investment Plans for purchase limitations
applicable to retirement plans. Mutual Funds III, Inc. will reject any purchase
order for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers are responsible for transmitting orders promptly.
Mutual Funds III, Inc. reserves the right to reject any order for the purchase
of shares of a Fund if in the opinion of management such rejection is in such
Fund's best interests. If a purchase is canceled because your check is returned
unpaid, you are responsible for any loss incurred. A Fund can redeem shares from
your account(s) to reimburse itself for any loss, and you may be restricted from
making future purchases in any of the funds in the Delaware Investments family.
Each Fund reserves the right to reject purchase orders paid by third-party
checks or checks that are not drawn on a domestic branch of a United States
financial institution. If a check drawn on a foreign financial institution is
accepted, you may be subject to additional bank charges for clearance and
currency conversion.
Each Fund also reserves the right, following shareholder notification,
to charge a service fee on non-retirement accounts that, as a result of
redemption, have remained below the minimum stated account balance for a period
of three or more consecutive months. Holders of such accounts may be notified of
their insufficient account balance and advised that they have until the end of
the current calendar quarter to raise their balance to the stated minimum. If
the account has not reached the minimum balance requirement by that time, the
Fund will charge a $9 fee for that quarter and each subsequent calendar quarter
until the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
-34-
<PAGE>
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
The NASD has adopted Conduct Rules, as amended, relating to investment
company sales charges. Mutual Funds III, Inc. and the Distributor intend to
operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 5.75%; however, lower front-end sales charges
apply for larger purchases. Class A Shares are also subject to annual 12b-1 Plan
expenses for the life of the investment. The Distributor has voluntarily elected
to waive the payment of 0.05% of the 12b-1 Plan expenses by the Tax-Efficient
Equity Fund A Class from February 1, 1998 through October 31, 1999. As a result,
the 12b-1 Plan expenses payable by Tax-Efficient Equity Fund A Class during the
waiver period will be 0.25%.
Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 5% if shares are redeemed within one year of purchase; (ii) 4% if
shares are redeemed within two years of purchase; (iii) 3% if shares are
redeemed during the third or fourth year following purchase; (iv) 2% if shares
are redeemed during the fifth year following purchase; and (v) 1% if shares are
redeemed during the sixth year following purchase. Class B Shares are also
subject to annual 12b-1 Plan expenses which are higher than those to which Class
A Shares are subject and are assessed against Class B Shares for approximately
eight years after purchase. See Automatic Conversion of Class B Shares, below.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
Institutional Class shares are purchased at the net asset value per
share without the imposition of a front-end or contingent deferred sales charge
or 12b-1 Plan expenses. See Determining Offering Price and Net Asset Value and
Plans Under Rule 12b-1 for the Fund Classes in this Part B.
Class A Shares, Class B Shares, Class C Shares and Institutional Class
shares represent a proportionate interest in a Fund's assets and will receive a
proportionate interest in that Fund's income, before application, as to Class A,
Class B and Class C Shares, of any expenses under that Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued in
the case of Class A Shares or Institutional Class shares, unless a shareholder
submits a specific request. Certificates are not issued in the case of Class B
Shares or Class C Shares or in the case of any retirement plan account including
self-directed IRAs. However, purchases not involving the issuance of
certificates are confirmed to the investor and credited to the shareholder's
account on the books maintained by Delaware Service Company, Inc. (the "Transfer
Agent"). The investor will have the same rights of ownership with respect to
such shares as if certificates had been issued. An investor that is permitted to
obtain a certificate may receive a certificate representing full share
denominations purchased by sending a letter signed by each owner of the account
to the Transfer Agent requesting the certificate. No charge is assessed by
Mutual Funds III, Inc. for any certificate issued. A shareholder may be subject
to fees for replacement of a lost or stolen certificate under certain
conditions, including the cost of obtaining a bond covering the lost or stolen
certificate. Please contact the Funds for further information. Investors who
hold certificates representing any of their shares may only redeem those shares
by written request. The investor's certificate(s) must accompany such request.
-35-
<PAGE>
Alternative Purchase Arrangements-Class A, B and C Shares
The alternative purchase arrangements of Class A Shares, Class B
Shares and Class C Shares permit investors to choose the method of purchasing
shares that is most suitable for their needs given the amount of their purchase,
the length of time they expect to hold their shares and other relevant
circumstances. Investors should determine whether, given their particular
circumstances, it is more advantageous to purchase Class A Shares and incur a
front-end sales charge and annual 12b-1 Plan expenses of up to a maximum of
0.25% of the average daily net assets of Class A Shares of Aggressive Growth
Fund and Growth Stock Fund and 0.30% of the average daily net assets of Class A
Shares of Tax-Efficient Equity Fund, or to purchase either Class B or Class C
Shares and have the entire initial purchase amount invested in the Fund with the
investment thereafter subject to a CDSC and annual 12b-1 Plan expenses. Class B
Shares are subject to a CDSC if the shares are redeemed within six years of
purchase, and Class C Shares are subject to a CDSC if the shares are redeemed
within 12 months of purchase. Class B and Class C Shares are each subject to
annual 12b-1 Plan expenses of up to a maximum of 1% (0.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
the respective Class. Class B Shares will automatically convert to Class A
Shares at the end of approximately eight years after purchase and, thereafter,
be subject to Class A Shares' annual 12b-1 Plan expenses. Unlike Class B Shares,
Class C Shares do not convert to another Class.
The higher 12b-1 Plan expenses on Class B Shares and Class C Shares
will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money. In addition, the effect of any return earned on such additional money
will diminish over time. In comparing Class B Shares to Class C Shares,
investors should also consider the duration of the annual 12b-1 Plan expenses to
which each of the classes is subject and the desirability of an automatic
conversion feature, which is available only for Class B Shares.
For the distribution and related services provided to, and the
expenses borne on behalf of, the Funds, the Distributor and others will be paid,
in the case of Class A Shares, from the proceeds of the front-end sales charge
and 12b-1 Plan fees and, in the case of Class B Shares and Class C Shares, from
the proceeds of the 12b-1 Plan fees and, if applicable, the CDSC incurred upon
redemption. Financial advisers may receive different compensation for selling
Class A Shares, Class B Shares and Class C Shares. Investors should understand
that the purpose and function of the respective 12b-1 Plans and the CDSCs
applicable to Class B Shares and Class C Shares are the same as those of the
12b-1 Plan and the front-end sales charge applicable to Class A Shares in that
such fees and charges are used to finance the distribution of the respective
Classes. See Plans Under Rule 12b-1 for the Fund Classes.
Dividends, if any, paid on Class A Shares, Class B Shares 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 $50,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges as shown in the table in the Fund Classes'
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.
-36-
<PAGE>
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 Delaware Investments funds may receive an additional
commission of up to 0.15% of the offering price in connection with sales of
Class A Shares. Such dealers must meet certain requirements in terms of
organization and distribution capabilities and their ability to increase sales.
The Distributor should be contacted for further information on these
requirements as well as the basis and circumstances upon which the additional
commission will be paid. Participating dealers may be deemed to have additional
responsibilities under the securities laws. Dealers who receive 90% or more of
the sales charge may be deemed to be underwriters under the 1933 Act.
Dealer's Commission
As described in the 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
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 six years of purchase may be
subject to a CDSC at the rates set forth above, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestment of dividends or capital gains
distributions. For purposes of this formula, the "net asset value at the time of
purchase" will be the net asset value at purchase of Class B Shares or Class C
Shares of a Fund, even if those shares are later exchanged for shares of another
Delaware Investments fund. In the event of an exchange of the shares, the "net
asset value of such shares at the time of redemption" will be the net asset
value of the shares that were acquired in the exchange. See Waiver of Contingent
Deferred Sales Charge--Class B Shares and Class C Shares under Redemption and
Exchange for the Fund Classes for a list of the instances in which the CDSC is
waived.
-37-
<PAGE>
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the same
Fund. See Automatic Conversion of Class B Shares below. Such conversion will
constitute a tax-free exchange for federal income tax purposes. Investors are
reminded that the Class A Shares into which Class B Shares will convert are
subject to Class A Shares' ongoing annual 12b-1 Plan expenses.
In determining whether a CDSC applies to a redemption of Class B
Shares, it will be assumed that shares held for more than six years are redeemed
first, followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year period.
With respect to Class C Shares, it will be assumed that shares held for more
than 12 months are redeemed first followed by shares acquired through the
reinvestment of dividends or distributions, and finally by shares held for 12
months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
Deferred Sales Charge Alternative - Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class B Shares at the time of purchase from its
own assets in an amount equal to no more than 5% of the dollar amount purchased.
In addition, from time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may pay additional compensation to dealers or brokers for selling
Class B Shares at the time of purchase. As discussed below, however, Class B
Shares are subject to annual 12b-1 Plan expenses and, if redeemed within six
years of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class B
Shares. Payments to the Distributor and others under the Class B 12b-1 Plan may
be in an amount equal to no more than 1% annually. The combination of the CDSC
and the proceeds of the 12b-1 Plan fees makes it possible for a Fund to sell
Class B Shares without deducting a front-end sales charge at the time of
purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class B Shares
described in this Part B, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for Class B Shares acquired as a result of the
exchange. See Redemption and Exchange.
-38-
<PAGE>
Automatic Conversion of Class B Shares
Class B Shares, other than shares acquired through reinvestment of
dividends, held for eight years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the 18th day (or next
business day) of March, June, September and December (each, a "Conversion
Date"). If the eighth anniversary after a purchase of Class B Shares falls on a
Conversion Date, an investor's Class B Shares will be converted on that date. If
the eighth anniversary occurs between Conversion Dates, an investor's Class B
Shares will be converted on the next Conversion Date after such anniversary.
Consequently, if a shareholder's eighth anniversary falls on the day after a
Conversion Date, that shareholder will have to hold Class B Shares for as long
as three additional months after the eighth anniversary of purchase before the
shares will automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve 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.
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount purchased.
As discussed below, Class C Shares are subject to annual 12b-1 Plan expenses
and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C 12b-1 Plan may
be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class C Shares as
described in this Part B. See Redemption and Exchange.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Mutual Funds III, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of each Fund (the "Plans"). Each Plan permits the relevant Fund to pay
for certain distribution, promotional and related expenses involved in the
marketing of only the class of shares to which the Plan applies. The Plans do
not apply to Institutional Classes of shares. Such shares are not included in
calculating the Plans' fees, and the Plans are not used to assist in the
distribution and marketing of shares of Institutional Classes. Shareholders of
Institutional Classes may not vote on matters affecting the Plans.
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<PAGE>
The Plans permit a Fund, pursuant to its Distribution Agreement, to pay
out of the assets of Class A Shares, Class B Shares and Class C Shares monthly
fees to the Distributor for its services and expenses in distributing and
promoting sales of shares of such classes. These expenses include, among other
things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to securities
brokers and dealers who enter into agreements with the Distributor. The Plan
expenses relating to Class B and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, each Fund may make payments out of the assets of Class A,
Class B and Class C Shares directly to other unaffiliated parties, such as
banks, who either aid in the distribution of shares of, or provide services to,
such classes.
The maximum aggregate fee payable by a Fund under its Plans, and a
Fund's Distribution Agreements, is on an annual basis, up to 0.25% of Aggressive
Growth and Growth Stock Fund's Class A Shares' average daily net assets for the
year and 0.30% of Tax-Efficient Equity Fund's Class A Shares' average daily net
assets for the year, and up to 1% (0.25% of which are service fees to be paid to
the Distributor, dealers and others for providing personal service and/or
maintaining shareholder accounts) of each of the Class B Shares' and Class C
Shares' average daily net assets for the year. Mutual Funds III, Inc.'s Board of
Directors may reduce these amounts at any time.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
reimbursement from such Fund 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 all been
approved by the Board of Directors of Mutual Funds III, Inc., including a
majority of the directors who are not "interested persons" (as defined in the
1940 Act) of Mutual Funds III, Inc. and who have no direct or indirect financial
interest in the Plans, by vote cast in person at a meeting duly called for the
purpose of voting on the Plans and such Agreements. Continuation of the Plans
and the Distribution Agreements, as amended, must be approved annually by the
Board of Directors in the same manner as specified above.
Each year, the directors must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A Shares,
Class B Shares and Class C Shares of the respective Funds and that there is a
reasonable likelihood of the Plan relating to a Fund Class providing a benefit
to that Class. The Plans and the Distribution Agreements, as amended, may be
terminated with respect to a Class at any time without penalty by a majority of
those directors who are not "interested persons" or by a majority vote of the
outstanding voting securities of the relevant Fund Class. Any amendment
materially increasing the percentage payable under the Plans must likewise be
approved by a majority vote of the outstanding voting securities of the relevant
Fund Class, as well as by a majority vote of those directors who are not
"interested persons." With respect to each Class A Shares' Plan, any material
increase in the maximum percentage payable thereunder must also be approved by a
majority of the outstanding voting securities Class B Shares of the same Fund.
Also, any other material amendment to the Plans must be approved by a majority
vote of the directors including a majority of the noninterested directors of
Mutual Funds III, Inc. having no interest in the Plans. In addition, in order
for the Plans to remain effective, the selection and nomination of directors who
are not "interested persons" of Mutual Funds III, Inc. must be effected by the
directors who themselves are not "interested persons" and who have no direct or
indirect financial interest in the Plans. Persons authorized to make payments
under the Plans must provide written reports at least quarterly to the Board of
Directors for their review.
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For the fiscal year ended April 30, 1999, 12b-1 Plan payments from
Class A Shares, Class B Shares and Class C Shares of each Fund were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Fund Growth Stock Fund Tax-Efficient Equity Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising $120 $-0- $-0- $186 $-0- $-0- $416 $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Annual/Semi-Annual Reports $2,678 $242 $-0- $1,362 $-0- $-0- $5,405 $242 $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Broker Trails $138,434 $96,898 $8,753 $89,573 $6,292 $7,521 $275,931 $146,677 $21,247
- -----------------------------------------------------------------------------------------------------------------------------------
Broker Sales Charges $-0- $110,576 $79,561 $-0- $12,972 $3,433 $-0- $180,704 $113,525
- -----------------------------------------------------------------------------------------------------------------------------------
Dealer Service Expenses $-0- $-0- $-0- $-0- $-0- $-0- $-0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Interest on Broker Sales Charges $-0- $155,967 $6,046 $-0- $4,465 $89 $-0- $224,953 $8,385
- -----------------------------------------------------------------------------------------------------------------------------------
Commissions to Wholesalers $5,736 $16,494 $26,575 $6,706 $1,183 $1,123 $13,015 $26,339 $34,983
- -----------------------------------------------------------------------------------------------------------------------------------
Promotional-Broker Meetings $-0- $-0- $239 $-0- $-0- $55 $-0- $-0- $294
- -----------------------------------------------------------------------------------------------------------------------------------
Promotional-Other $1,961 $207 $-0- $1,272 $-0- $-0- $4,618 $207 $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Telephone $-0- $-0- $-0- $-0- $-0- $-0- $-0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Prospectus Printing $4,073 $390 $-0- $3,094 $-0- $-0- $8,664 $390 $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Wholesaler Expenses $-0- $-0- $110 $-0- $-0- $-0- $-0- $-0- $110
- -----------------------------------------------------------------------------------------------------------------------------------
Other $-0- $-0- $-0- $-0- $-0- $-0- $-0- $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------------------
Total $153,002 $380,774 $121,284 $102,193 $24,912 $12,221 $308,049 $579,512 $178,544
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of Fund Classes exceed certain limits as
set by the Distributor, may receive from the Distributor an additional payment
of up to 0.25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Investments family of funds. In some instances, these
incentives or payments may be offered only to certain dealers who maintain, have
sold or may sell certain amounts of shares. The Distributor may also pay a
portion of the expense of preapproved dealer advertisements promoting the sale
of Delaware Investments fund shares.
Special Purchase Features--Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares of the Fund may be purchased at net asset value under the
Delaware Investments Dividend Reinvestment Plan and, under certain
circumstances, the Exchange Privilege and the 12-Month Reinvestment Privilege.
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<PAGE>
Purchases of Class A Shares may be made at net asset value by current
and former officers, directors and employees (and members of their families) of
the Manager, any affiliate, any of the funds in the Delaware Investments family,
certain of their agents and registered representatives and employees of
authorized investment dealers and by employee benefit plans for such entities.
Individual purchases, including those in retirement accounts, must be for
accounts in the name of the individual or a qualifying family member. Class A
Shares may also be purchased at net asset value by current and former officers,
directors and employees (and members of their families) of the Dougherty
Financial Group LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of funds in the
Delaware Investments family. Officers, directors and key employees of
institutional clients of the Manager or any of its affiliates may purchase Class
A Shares at net asset value. Moreover, purchases may be effected at net asset
value for the benefit of the clients of brokers, dealers and registered
investment advisers affiliated with a broker or dealer, if such broker, dealer
or investment adviser has entered into an agreement with the Distributor
providing specifically for the purchase of Class A Shares in connection with
special investment products, such as wrap accounts or similar fee based
programs. Investors may be charged a fee when effecting transactions in Class A
Shares through a broker or agent that offers these special investment products.
Purchases of Class A Shares of each Fund at net asset value may also be
made by the following: financial institutions investing for the account of their
trust customers if they are not eligible to purchase shares of the Institutional
Class of a Fund; any group retirement plan (excluding defined benefit pension
plans), or such plans of the same employer, for which plan participant records
are maintained on the Retirement Financial Services, Inc. (formerly known as
Delaware Investment & Retirement Services, Inc.) proprietary record keeping
system that (i) has in excess of $500,000 of plan assets invested in Class A
Shares of funds in the Delaware Investments family and any stable value account
available to investment advisory clients of the Manager or its affiliates; or
(ii) is sponsored by an employer that has at any point after May 1, 1997 had
more than 100 employees while such plan has held Class A Shares of a fund in the
Delaware Investments family and such employer has properly represented in
writting to Retirement Financial Services, Inc. that it has the requisite number
of employees and received written confirmation back from Retirement Financial
Services, Inc. See Group Investment Plans for information regarding the
applicability of the Limited CDSC.
Investments in Class A Shares made by plan level and/or participant
retirement accounts that are for the purpose of repaying a loan taken from such
accounts will be made at net asset value. Loan repayments made to a fund account
in connection with loans originated from accounts previously maintained by
another investment firm will also be invested at net asset value.
Mutual Funds III, Inc. must be notified in advance that the trade
qualifies for purchase at net asset value.
Allied Plans
Class A Shares are available for purchase by participants in certain
401(k) Defined Contribution Plans ("Allied Plans") which are made available
under a joint venture agreement between the Distributor and another institution
through which mutual funds are marketed and which allow investments in Class A
Shares of designated Delaware Investments funds ("eligible Delaware Investments
fund shares"), as well as shares of designated classes of non-Delaware
Investments funds ("eligible non-Delaware Investments fund shares"). Class B
Shares and Class C Shares are not eligible for purchase by Allied Plans.
With respect to purchases made in connection with an Allied Plan, the
value of eligible Delaware Investments and eligible non-Delaware Investments
fund shares held by the Allied Plan may be combined with the dollar amount of
new purchases by that Allied Plan to obtain a reduced front-end sales charge on
additional purchases of eligible Delaware Investments fund shares. See Combined
Purchases Privilege, below.
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<PAGE>
Participants in Allied Plans may exchange all or part of their eligible
Delaware Investments fund shares for other eligible Delaware Investments fund
shares or for eligible non-Delaware Investments fund shares at net asset value
without payment of a front-end sales charge. However, exchanges of eligible fund
shares, both Delaware Investments and non-Delaware Investments, which were not
subject to a front end sales charge, will be subject to the applicable sales
charge if exchanged for eligible Delaware Investments fund shares to which a
sales charge applies. No sales charge will apply if the eligible fund shares
were previously acquired through the exchange of eligible shares on which a
sales charge was already paid or through the reinvestment of dividends.
See Investing by Exchange.
A dealer's commission may be payable on purchases of eligible Delaware
Investments fund shares under an Allied Plan. In determining a financial
adviser's eligibility for a dealer's commission on net asset value purchases of
eligible Delaware Investments fund shares in connection with Allied Plans, all
participant holdings in the Allied Plan will be aggregated. See Class A Shares,
above.
The Limited CDSC is applicable to redemptions of net asset value
purchases from an Allied Plan on which a dealer's commission has been paid.
Waivers of the Limited CDSC, as described under Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares under Redemption and Exchange, apply to
redemptions by participants in Allied Plans except in the case of exchanges
between eligible Delaware Investments and non-Delaware Investments fund shares.
When eligible Delaware Investments fund shares are exchanged into eligible
non-Delaware Investments fund shares, the Limited CDSC will be imposed at the
time of the exchange, unless the joint venture agreement specifies that the
amount of the Limited CDSC will be paid by the financial adviser or selling
dealer. See Contingent Deferred Sales Charge for Certain Redemptions of Class A
Shares Purchased at Net Asset Value under Redemption and Exchange.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or Mutual Funds III, Inc., which provides for the holding in escrow by
the Transfer Agent of 5% of the total amount of Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Funds and of any class of
any of the other mutual funds in the Delaware Investments family (except shares
of any fund in the Delaware Investments family which do not carry a front-end
sales charge, CDSC or Limited CDSC, other than shares of Delaware Group Premium
Fund, Inc. beneficially owned in connection with the ownership of variable
insurance products, unless they were acquired through an exchange from a fund in
the Delaware Investments family which carried a front-end sales charge, CDSC or
Limited CDSC) previously purchased and still held as of the date of their Letter
of Intention toward the completion of such Letter.
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<PAGE>
Employers offering a Delaware Investments retirement plan may also
complete a Letter of Intention to obtain a reduced front-end sales charge on
investments of Class A Shares made by the plan. The aggregate investment level
of the Letter of Intention will be determined and accepted by the Transfer Agent
at the point of plan establishment. The level and any reduction in front-end
sales charge will be based on actual plan participation and the projected
investments in Delaware Investments funds that are offered with a front-end
sales charge, CDSC or Limited CDSC for a 13-month period. The Transfer Agent
reserves the right to adjust the signed Letter of Intention based on this
acceptance criteria. The 13-month period will begin on the date this Letter of
Intention is accepted by the Transfer Agent. If actual investments exceed the
anticipated level and equal an amount that would qualify the plan for further
discounts, any front-end sales charges will be automatically adjusted. In the
event this Letter of Intention is not fulfilled within the 13-month period, the
plan level will be adjusted (without completing another Letter of Intention) and
the employer will be billed for the difference in front-end sales charges due,
based on the plan's assets under management at that time. Employers may also
include the value (at offering price at the level designated in their Letter of
Intention) of all their shares intended for purchase that are offered with a
front-end sales charge, CDSC or Limited CDSC of any class. Class B Shares and
Class C Shares of a Fund and other funds in the Delaware Investments family
which offer corresponding classes of shares may also be aggregated for this
purpose.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of Class A Shares, Class B Shares and/or Class C
Shares of the Funds, as well as shares of any other class of any of the other
funds in the Delaware Investments family (except shares of any Delaware
Investments fund which do not carry a front-end sales charge, CDSC or Limited
CDSC, other than shares of Delaware Group Premium Fund, Inc. beneficially owned
in connection with the ownership of variable insurance products, unless they
were acquired through an exchange from a Delaware Investments fund which carried
a front-end sales charge, CDSC or Limited CDSC). In addition, assets held in any
stable value product available through Delaware Investments may be combined with
other Delaware Investments fund holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
-44-
<PAGE>
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other funds in the Delaware
Investments funds which offer such classes (except shares of any fund in the
Delaware Investments family which do not carry a front-end sales charge, CDSC or
Limited CDSC, other than shares of Delaware Group Premium Fund, Inc.
beneficially owned in connection with the ownership of variable insurance
products, unless they were acquired through an exchange from a Delaware
Investments fund which carried a front-end sales charge, CDSC or Limited CDSC).
If, for example, any such purchaser has previously purchased and still holds
Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $10,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $10,000 purchase would currently be 4.75%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Fund (and of the Institutional Classes
holding shares which were acquired through an exchange from one of the other
mutual funds in the Delaware Investments family offered with a front-end sales
charge) who redeem such shares have one year from the date of redemption to
reinvest all or part of their redemption proceeds in Class A Shares of that Fund
or in Class A Shares of any of the other funds in the Delaware Investments
family, subject to applicable eligibility and minimum purchase requirements, in
states where shares of such other funds may be sold, at net asset value without
the payment of a front-end sales charge. This privilege does not extend to Class
A Shares where the redemption of the shares triggered the payment of a Limited
CDSC. Persons investing redemption proceeds from direct investments in mutual
funds in the Delaware Investments family offered without a front-end sales
charge will be required to pay the applicable sales charge when purchasing Class
A Shares. The reinvestment privilege does not extend to a redemption of either
Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Funds' shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange) in connection with the features described above.
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<PAGE>
Group Investment Plans
Group Investment Plans that are not eligible to purchase shares of the
Institutional Classes may also benefit from the reduced front-end sales charges
for investments in Class A Shares, based on total plan assets. If a company has
more than one plan investing in the Delaware Investments family of funds, then
the total amount invested in all plans would be used in determining the
applicable front-end sales charge reduction upon each purchase, both initial and
subsequent, upon notification to the Fund in which the investment is being made
at the time of each such purchase. Employees participating in such Group
Investment Plans may also combine the investments made in their plan account
when determining the applicable front-end sales charge on purchases to
non-retirement investment accounts of Delaware Investments if they so notify the
Fund in connection with each purchase. For other retirement plans and special
services, see Retirement Plans for the Fund Classes under Investment Plans.
The Limited CDSC is applicable to any redemptions of net asset value
purchases made on behalf of any group retirement plan on which a dealer's
commission has been paid only if such redemption is made pursuant to a
withdrawal of the entire plan from a fund in the Delaware Investments family.
See Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value under Redemption and Exchange.
The Institutional Classes
The Institutional Class of each Fund is available for purchase only by:
(a) retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business and
rollover individual retirement accounts from such plans; (b) tax-exempt employee
benefit plans of the Manager, the Sub-Adviser or their affiliates and securities
dealer firms with a selling agreement with the Distributor; (c) institutional
advisory accounts of the Manager, the Sub-Adviser or their affiliates and those
having client relationships with Delaware Investment Advisers, a division of the
Manager, or its affiliates and their corporate sponsors, as well as subsidiaries
and related employee benefit plans and rollover individual retirement accounts
from such institutional advisory accounts; (d) a bank, trust company and similar
financial institution investing for its own account or for the account of its
trust customers for whom such financial institution is exercising investment
discretion in purchasing shares of the Class, except where the investment is
part of a program that requires payment to the financial institution of a Rule
12b-1 fee; and (e) registered investment advisers investing on behalf of clients
that consist solely of institutions and high net-worth individuals having at
least $1,000,000 entrusted to the adviser for investment purposes, but only if
the adviser is not affiliated or associated with a broker or dealer and derives
compensation for its services exclusively from its clients for such advisory
services.
Shares of the Institutional Classes are available for purchase at net
asset value, without the imposition of a front-end or contingent deferred sales
charge and are not subject to Rule 12b-1 expenses.
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<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
Fund Class in which an investor has an account (based on the net asset value in
effect on the reinvestment date) and will be credited to the shareholder's
account on that date. All dividends and distributions of the Institutional
Classes are reinvested in the accounts of the holders of such shares (based on
the net asset value in effect on the reinvestment date). A confirmation of each
distribution from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase and
add full and fractional shares to their plan accounts at any time either through
their investment dealers or by sending a check or money order to the specific
Fund and Class in which shares are being purchased. Such purchases, which must
meet the minimum subsequent purchase requirements set forth in the Prospectuses
and this Part B, are made, for Class A Shares at the public offering price, and
for Class B Shares, Class C Shares and Institutional Class shares at the net
asset value, at the end of the day of receipt. A reinvestment plan may be
terminated at any time. This plan does not assure a profit nor protect against
depreciation in a declining market.
Reinvestment of Dividends in Other Funds in the Delaware Investments Family
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions in
any of the mutual funds in the Delaware Investments family, including the Funds,
in states where their shares may be sold. Such investments will be at net asset
value at the close of business on the reinvestment date without any front-end
sales charge or service fee. The shareholder must notify the Transfer Agent in
writing and must have established an account in the fund into which the
dividends and/or distributions are to be invested. Any reinvestment directed to
a fund in which the investor does not then have an account will be treated like
all other initial purchases of a fund's shares. Consequently, an investor should
obtain and read carefully the prospectus for the fund in which the investment is
intended to be made before investing or sending money. The prospectus contains
more complete information about the fund, including charges and expenses.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Investments family may be invested in shares of
the Funds, provided an account has been established. Dividends from Class A
Shares may not be directed to Class B Shares or Class C Shares. Dividends from
Class B Shares may only be directed to other Class B Shares and dividends from
Class C Shares may only be directed to other Class C Shares.
Capital gains and/or dividend distributions for participants in the
following retirement plans are automatically reinvested into the same Delaware
Investments fund in which their investments are held: SAR/SEP, SEP/IRA, SIMPLE
IRA, SIMPLE 401(k), Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, or 403(b)(7) or 457 Deferred Compensation Plans.
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<PAGE>
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for a Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) or 457 Deferred
Compensation Plans.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to a Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
a Fund may liquidate sufficient shares from a shareholder's account to reimburse
the government or the private source. In the event there are insufficient shares
in the shareholder's account, the shareholder is expected to reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. A Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact Mutual Funds III, Inc. for
proper instructions.
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Moneyline (SM) on Demand
You or your investment dealer may request purchases of Fund Class shares
by phone using MoneyLine (SM) On Demand. When you authorize a Fund to accept
such requests from you or your investment dealer, funds will be withdrawn from
(for share purchases) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions.
It may take up to four business days for the transactions to be
completed. You can initiate this service by completing an Account Services form.
If your name and address are not identical to the name and address on your Fund
account, you must have your signature guaranteed. The Funds do not charge a fee
for this service; however, your bank may charge a fee.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the Fund
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Investments family. Shareholders of the Fund Classes may
elect to invest in one or more of the other mutual funds in the Delaware
Investments family through the Wealth Builder Option. See Wealth Builder Option
and Redemption and Exchange in the Prospectuses for the Fund Classes.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the Delaware
Investments family, subject to the conditions and limitations set forth in the
Fund Classes' Prospectuses. The investment will be made on the 20th day of each
month (or, if the fund selected is not open that day, the next business day) at
the public offering price or net asset value, as applicable, of the fund
selected on the date of investment. No investment will be made for any month if
the value of the shareholder's account is less than the amount specified for
investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Redemption and Exchange for a brief summary of the tax consequences
of exchanges. Shareholders can terminate their participation at any time by
giving written notice to their Fund.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) or 457 Deferred
Compensation Plans. This option also is not available to shareholders of the
Institutional Classes.
Asset Planner
To invest in the funds in the Delaware Investments family using the
Asset Planner asset allocation service, you should complete a Asset Planner
Account Registration Form, which is available only from a financial adviser or
investment dealer. Effective September 1, 1997, the Asset Planner Service is
only available to financial advisers or investment dealers who have previously
used this service. The Asset Planner service offers a choice of four predesigned
asset allocation strategies (each with a different risk/reward profile) in
predetermined percentages in funds in the Delaware Investments family. With the
help of a financial adviser, you may also design a customized asset allocation
strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Investments accounts into the Asset Planner service may be made at net asset
value under the circumstances described under Exchanges in the Prospectus. Also
see Buying Class A Shares at Net Asset Value. The minimum initial investment per
Strategy is $2,000; subsequent investments must be at least $100. Individual
fund minimums do not apply to investments made using the Asset Planner service.
Class A, Class B and Class C Shares are available through the Asset Planner
service. Generally, only shares within the same class may be used within the
same Strategy. However, Class A Shares of the Fund and of other funds in the
Delaware Investments family may be used in the same Strategy with consultant
class shares that are offered by certain other Delaware Investments funds.
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An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30 of each subsequent year. The fee,
payable to Delaware Service Company, Inc. to defray extra costs associated with
administering the Asset Planner service, will be deducted automatically from one
of the funds within your Asset Planner account if not paid by September 30.
However, effective November 1, 1996, the annual maintenance fee is waived until
further notice. Investors who utilize the Asset Planner for an IRA will continue
to pay an annual IRA fee of $15 per Social Security number.
Investors will receive a customized quarterly Strategy Report
summarizing all Asset Planner investment performance and account activity during
the prior period. Confirmation statements will be sent following all
transactions other than those involving a reinvestment of distributions.
Certain shareholder services are not available to investors using the
Asset Planner service, due to its special design. These include Delaphone,
Checkwriting, Wealth Builder Option and Letter of Intention. Systematic
Withdrawal Plans are available after the account has been open for two years.
Retirement Plans for the Fund Classes
An investment in a Fund may be suitable for tax-deferred retirement
plans. Delaware Investments offers a full spectrum of retirement plans,
including the 401(k) deferred compensation plan, Individual Retirement Account
("IRA") and the new Roth IRA and Education IRA.
Among the retirement plans that Delaware Investments offers, Class B
Shares are available for investment only by Individual Retirement Accounts,
SIMPLE IRAs, Roth IRAs, Education IRAs, Simplified Employee Pension Plans,
Salary Reduction Simplified Employee Pension Plans and 403(b) and 457 Deferred
Compensation Plans. The CDSC may be waived on certain redemptions of Class B
Shares and Class C Shares. See Waiver of Contingent Deferred Sales Charge under
Redemption and Exchange for a list of the instances in which the CDSC is waived.
Purchases of Class B Shares are subject to a maximum purchase
limitation of $250,000 for retirement plans. Purchases of Class C Shares must be
in an amount that is less than $1,000,000 for such plans. The maximum purchase
limitations apply only to the initial purchase of shares by the retirement plan.
Minimum investment limitations generally applicable to other investors
do not apply to retirement plans other than Individual Retirement Accounts, for
which there is a minimum initial purchase of $250 and a minimum subsequent
purchase of $25 regardless of which Class is selected. Retirement plans may be
subject to plan establishment fees, annual maintenance fees and/or other
administrative or trustee fees. Fees are based upon the number of participants
in the plan as well as the services selected. Additional information about fees
is included in retirement plan materials. Fees are quoted upon request. Annual
maintenance fees may be shared by Delaware Management Trust Company, the
Transfer Agent, other affiliates of the Manager and others that provide services
to such plans.
Certain shareholder investment services available to non-retirement
plan shareholders may not be available to retirement plan shareholders. Certain
retirement plans may qualify to purchase Institutional Class Shares. See
Institutional Classes, above. For additional information on any of the Plans and
Delaware's retirement services, call the Shareholder Service Center telephone
number.
It is advisable for an investor considering any one of the retirement
plans described below to consult with an attorney, accountant or a qualified
retirement plan consultant. for further details, including applications for any
of these plans, contact your investment dealer or the Distributor.
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Taxable distributions from the retirement plans described below may be
subject to withholding.
Please contact your investment dealer or the Distributor for the
special application forms required for the plans described below.
Prototype Profit Sharing or Money Purchase Pension Plans
Prototype Plans are available for self-employed individuals,
partnerships, corporations and other eligible forms of organizations. These
plans can be maintained as Section 401(k), profit sharing or money purchase
pension plans. Contributions may be invested only in Class A Shares and Class C
Shares.
Individual Retirement Account ("IRA")
A document is available for an individual who wants to establish an IRA
and make contributions which may be tax-deductible, even if the individual is
already participating in an employer-sponsored retirement plan. Even if
contributions are not deductible for tax purposes, as indicated below, earnings
will be tax-deferred. In addition, an individual may make contributions on
behalf of a spouse who has no compensation for the year; however, participation
may be restricted based on certain income limits.
IRA Disclosures
The Taxpayer Relief Act of 1997 provides new opportunities for
investors. Individuals have five types of tax-favored IRA accounts that can be
utilized depending on the individual's circumstances. A new Roth IRA and
Education IRA are available in addition to the existing deductible IRA and
non-deductible IRA.
Deductible and Non-Deductible IRAs
An individual can contribute up to $2,000 in his or her IRA each year.
Contributions may or may not be deductible depending upon the taxpayer's
adjusted gross income ("AGI") and whether the taxpayer is an active participant
in an employer sponsored retirement plan. Even if a taxpayer is an active
participant in an employer sponsored retirement plan, the full $2,000 is still
available if the taxpayer's AGI is below $30,000 ($50,000 for taxpayers filing
joint returns) for years beginning after December 31, 1997. A partial deduction
is allowed for married couples with income between $50,000 and $60,000, and for
single individuals with incomes between $30,000 and $40,000. These income
phase-out limits reach $80,000-$100,000 in 2007 for joint filers and
$50,000-$60,000 in 2005 for single filers. No deductions are available for
contributions to IRAs by taxpayers whose AGI after IRA deductions exceeds the
maximum income limit established for each year and who are active participants
in an employer sponsored retirement plan.
Taxpayers who are not allowed deductions on IRA contributions still can
make non-deductible IRA contributions of as much as $2,000 for each working
spouse and defer taxes on interest or other earnings from the IRAs.
Under the new law, a married individual is not considered an active
participant in an employer sponsored retirement plan merely because the
individual's spouse is an active participant if the couple's combined AGI is
below $150,000. The maximum deductible IRA contribution for a married individual
who is not an active participant, but whose spouse is, is phased out for
combined AGI between $150,000 and $160,000.
Conduit (Rollover) IRAs
Certain individuals who have received or are about to receive eligible
rollover distributions from an employer-sponsored retirement plan or another IRA
may rollover the distribution tax-free to a Conduit IRA. The rollover of the
eligible distribution must be completed by the 60th day after receipt of the
distribution; however, if the rollover is in the form of a direct
trustee-to-trustee transfer without going through the distributee's hand, the
60-day limit does not apply.
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A distribution qualifies as an "eligible rollover distribution" if it
is made from a qualified retirement plan, a 403(b) plan or another IRA and does
not constitute one of the following:
(1) Substantially equal periodic payments over the employee's life or
life expectancy or the joint lives or life expectancies of the employee and
his/her designated beneficiary;
(2) Substantially equal installment payments for a period certain of 10
or more years;
(3) A distribution, all of which represents a required minimum
distribution after attaining age 70 1/2;
(4) A distribution due to a Qualified Domestic Relations Order to an
alternate payee who is not the spouse (or former spouse) of the employee; and
(5) A distribution of after-tax contributions which is not includable
in income.
Roth IRAs
For taxable years beginning after December 31, 1997, non-deductible
contributions of up to $2,000 per year can be made to a new Roth IRA. The $2,000
annual limit is reduced by any contributions to a deductible or nondeductible
IRA for the same year. The maximum contribution that can be made to a Roth IRA
is phased out for single filers with AGI between $95,000 and $110,000, and for
couples filing jointly with AGI between $150,000 and $160,000. Qualified
distributions from a Roth IRA would be exempt from federal taxes. Qualified
distributions are distributions (1) made after the five-taxable year period
beginning with the first taxable year for which a contribution was made to a
Roth IRA and (2) that are (a) made on or after the date on which the individual
attains age 59 1/2, (b) made to a beneficiary on or after the death of the
individual, (c) attributed to the individual being disabled, or (d) for a
qualified special purpose (e.g., first time homebuyer expenses).
Distributions that are not qualified distributions would always be
tax-free if the taxpayer is withdrawing contributions, not accumulated earnings.
Taxpayers with AGI of $100,000 or less are eligible to convert an
existing IRA (deductible, nondeductible and conduit) to a Roth IRA. Earnings and
contributions from a deductible IRA are subject to a tax upon conversion;
however, no 10% excise tax for early withdrawal would apply. If the conversion
is done prior to January 1, 1999, then the income from the conversion can be
included in income ratably over a four-year period beginning with the year of
conversion.
Education IRAs
For taxable years beginning after December 31, 1997, an Education IRA
has been created exclusively for the purpose of paying qualified higher
education expenses. Taxpayers can make non-deductible contributions up to $500
per year per beneficiary. The $500 annual limit is in addition to the $2,000
annual contribution limit applicable to IRAs and Roth IRAs. Eligible
contributions must be in cash and made prior to the date the beneficiary reaches
age 18. Similar to the Roth IRA, earnings would accumulate tax-free. There is no
requirement that the contributor be related to the beneficiary, and there is no
limit on the number of beneficiaries for whom one contributor can establish
Education IRAs. In addition, multiple Education IRAs can be created for the same
beneficiaries, however, the contribution limit of all contributions for a single
beneficiary cannot exceed $500 annually.
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This $500 annual contribution limit for Education IRAs is phased out
ratably for single contributors with modified AGI between $95,000 and $110,000,
and for couples filing jointly with modified AGI of between $150,000 and
$160,000. Individuals with modified AGI above the phase-out range are not
allowed to make contributions to an Education IRA established on behalf of any
other individual.
Distributions from an Education IRA are excludable from gross income to
the extent that the distribution does not exceed qualified higher education
expenses incurred by the beneficiary during the year the distribution is made
regardless of whether the beneficiary is enrolled at an eligible educational
institution on a full-time, half-time, or less than half-time basis.
Any balance remaining in an Education IRA at the time a beneficiary
becomes 30 years old must be distributed, and the earnings portion of such a
distribution will be includible in gross income of the beneficiary and subject
to an additional 10% penalty tax if the distribution is not for qualified higher
educations expenses. Tax-free (and penalty-free) transfers and rollovers of
account balances from one Education IRA benefiting one beneficiary to another
Education IRA benefiting a different beneficiary (as well as redesignations of
the named beneficiary) is permitted, provided that the new beneficiary is a
member of the family of the old beneficiary and that the transfer or rollover is
made before the time the old beneficiary reaches age 30 and the new beneficiary
reaches age 18.
A company or association may establish a Group IRA or Group Roth IRA
for employees or members who want to purchase shares of a Fund.
Investments generally must be held in the IRA until age 59 1/2 in order
to avoid premature distribution penalties, but distributions generally must
commence no later than April 1 of the calendar year following the year in which
the participant reaches age 70 1/2. Individuals are entitled to revoke the
account, for any reason and without penalty, by mailing written notice of
revocation to Delaware Management Trust Company within seven days after the
receipt of the IRA Disclosure Statement or within seven days after the
establishment of the IRA, except, if the IRA is established more than seven days
after receipt of the IRA Disclosure Statement, the account may not be revoked.
Distributions from the account (except for the pro-rata portion of any
nondeductible contributions) are fully taxable as ordinary income in the year
received. Excess contributions removed after the tax filing deadline, plus
extensions, for the year in which the excess contributions were made are subject
to a 6% excise tax on the amount of excess. Premature distributions
(distributions made before age 59 1/2, except for death, disability and certain
other limited circumstances) will be subject to a 10% excise tax on the amount
prematurely distributed, in addition to the income tax resulting from the
distribution. For information concerning the applicability of a CDSC upon
redemption of Class B Shares and Class C Shares, see Contingent Deferred Sales
Charge - Class B Shares and Class C Shares under Classes of Shares in the
Prospectus for Class B Shares and Class C Shares.
Effective January 1, 1997, the 10% premature distribution penalty will
not apply to distributions from an IRA that are used to pay medical expenses in
excess of 7.5% of adjusted gross income or to pay health insurance premiums by
an individual who has received unemployment compensation for 12 consecutive
weeks. In addition, effective January 1, 1998, the new law allows for premature
distribution without a 10% penalty if (i) the amounts are used to pay qualified
higher education expenses (including graduate level courses) of the taxpayer,
the taxpayer's spouse or any child or grandchild of the taxpayer or the
taxpayer's spouse, or (ii) used to pay acquisition costs of a principle
residence for the purchase of a first-time home by the taxpayer, taxpayer's
spouse or any child or grandchild of the taxpayer or the taxpayer's spouse. A
qualified first-time homebuyer is someone who has had no ownership interest in a
residence during the past two years. The aggregate amount of distribution for
first-time home purchases cannot exceed a lifetime cap of $10,000.
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Simplified Employee Pension Plan ("SEP/IRA")
A SEP/IRA may be established by an employer who wishes to sponsor a
tax-sheltered retirement program by making contributions on behalf of all
eligible employees. Each of the Classes is available for investment by a
SEP/IRA.
Salary Reduction Simplified Employee Pension Plan ("SAR/SEP")
Although new SAR/SEP plans may not be established after December 31,
1996, existing plans may continue to be maintained by employers having 25 or
fewer employees. An employer may elect to make additional contributions to such
existing plans.
Prototype 401(K) Defined Contribution Plan
Section 401(k) of the Code permits employers to establish qualified
plans based on salary deferral contributions. Effective January 1, 1997,
non-governmental tax-exempt organizations may establish 401(k) plans. Plan
documents are available to enable employers to establish a plan. An employer may
also elect to make profit sharing contributions and/or matching contributions
with investments in only Class A Shares and Class C Shares or certain other
funds in the Delaware Investments family. Purchases under the Plan may be
combined for purposes of computing the reduced front-end sales charge applicable
to Class A Shares as set forth in the table the Prospectuses for the Fund
Classes.
Deferred Compensation Plan for Public Schools and Non-Profit Organizations
("403(b)(7)")
Section 403(b)(7) of the Code permits public school systems and certain
non-profit organizations to use mutual fund shares held in a custodial account
to fund deferred compensation arrangements for their employees. A custodial
account agreement is available for those employers who wish to purchase shares
of any of the Classes in conjunction with such an arrangement. Purchases under
the Plan may be combined for purposes of computing the reduced front-end sales
charge applicable to Class A Shares as set forth in the table the Prospectuses
for the Fund Classes.
Deferred Compensation Plan for State and Local Government Employees ("457")
Section 457 of the Code permits state and local governments, their
agencies and certain other entities to establish a deferred compensation plan
for their employees who wish to participate. This enables employees to defer a
portion of their salaries and any federal (and possibly state) taxes thereon.
Such plans may invest in shares of the Fund. Although investors may use their
own plan, there is available a Delaware Investments 457 Deferred Compensation
Plan. Interested investors should contact the Distributor or their investment
dealers to obtain further information. Purchases under the Plan may be combined
for purposes of computing the reduced front-end sales charge applicable to Class
A Shares as set forth in the table the Prospectuses for the Fund Classes.
SIMPLE IRA
A SIMPLE IRA combines many of the features of an IRA and a 401(k) Plan
but is easier to administer than a typical 401(k) Plan. It requires employers to
make contributions on behalf of their employees and also has a salary deferral
feature that permits employees to defer a portion of their salary into the plan
on a pre-tax basis. A SIMPLE IRA is available only to plan sponsors with 100 or
fewer employees.
SIMPLE 401(k)
A SIMPLE 401(k) is like a regular 401(k) except that it is available
only to plan sponsors with 100 or fewer employees and, in exchange for mandatory
plan sponsor contributions, discrimination testing is not required.
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund, its agent or certain other authorized persons.
See Distribution and Service under Investment Management Agreements and
Sub-Advisory Agreements. Orders for purchases of Class B Shares, Class C Shares
and Institutional Class shares are effected at the net asset value per share
next calculated by the Fund in which shares are being purchased after receipt of
the order by the Fund, its agent or designee. Selling dealers are responsible
for transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable front-end sales charges. Offering price and net
asset value are computed as of the close of regular trading on the New York
Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is
open. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for the days when the following holidays are
observed: New Year's Day, Presidents' Day, Martin Luther King, Jr.'s Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. When the New York Stock Exchange is closed, the Funds will generally
be closed, pricing calculations will not be made and purchase and redemption
orders will not be processed.
An example showing how to calculate the net asset value per share and,
in the case of Class A Shares, the offering price per share, will be included in
the Funds' financial statements which are incorporated by reference into this
Part B.
Each Fund's net asset value per share is computed by adding the value
of all the Fund's securities and other assets, deducting any liabilities of the
Fund, and dividing by the number of Fund shares outstanding. Expenses and fees
are accrued daily. Portfolio securities, except for bonds, which are primarily
traded on a national or foreign securities exchange are valued at the last sale
price on that exchange. Options are valued at the last reported sales price or,
if no sales are reported, at the mean between bid and asked prices. Securities
not traded on a particular day, over-the-counter securities and government and
agency securities are valued at the mean value between bid and asked prices.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Foreign securities and
the prices of foreign securities denominated in foreign currencies are
translated to U.S. dollars at the mean between the bid and offer quotations of
such currencies based on rates in effect as of the close of the London Stock
Exchange. Use of a pricing service has been approved by the Board of Directors.
Subject to the foregoing, securities for which market quotations are not readily
available and other assets are valued at fair value as determined in good faith
and in a method approved by the Board of Directors.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
that Fund. The net asset values of all outstanding shares of each Class of a
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in that Fund represented by the value of shares
of that Class. All income earned and expenses incurred by a Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in that Fund represented by the value of shares of such Classes,
except that the Institutional Classes will not incur any of the expenses under
the relevant Fund's 12b-1 Plans and Class A, Class B and Class C Shares alone
will bear the 12b-1 Plan expenses payable under their respective Plans. Due to
the specific distribution expenses and other costs that will be allocable to
each Class, the net asset value of each Class of a Fund will vary.
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REDEMPTION AND REPURCHASE
You can redeem or exchange your shares in a number of different ways.
The exchange service is useful if your investment requirements change and you
want an easy way to invest in other equity funds, tax-advantaged funds, bond
funds or money market funds. This service is also useful if you are anticipating
a major expenditure and want to move a portion of your investment into a fund
that has the checkwriting feature. Exchanges are subject to the requirements of
each fund and all exchanges of shares constitute taxable events. Further, in
order for an exchange to be processed, shares of the fund being acquired must be
registered in the state where the acquiring shareholder resides. You may want to
consult your financial adviser or investment dealer to discuss which funds in
Delaware Investments will best meet your changing objectives, and the
consequences of any exchange transaction. You may also call the Delaware
Investments directly for fund information.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after a Fund receives your request in good order,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
For example, redemption or exchange requests received in good order after the
time the offering price and net asset value of shares are determined will be
processed on the next business day. A shareholder submitting a redemption
request may indicate that he or she wishes to receive redemption proceeds of a
specific dollar amount. In the case of such a request, and in the case of
certain redemptions from retirement plan accounts, a Fund will redeem the number
of shares necessary to deduct the applicable CDSC in the case of Class B Shares
and Class C Shares, and, if applicable, the Limited CDSC in the case of Class A
Shares and tender to the shareholder the requested amount, assuming the
shareholder holds enough shares in his or her account for the redemption to be
processed in this manner. Otherwise, the amount tendered to the shareholder upon
redemption will be reduced by the amount of the applicable CDSC or Limited CDSC.
Redemption proceeds will be distributed promptly, as described below, but not
later than seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total number
of shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund in which you want to invest the proceeds.
Exchange instructions and redemption requests must be signed by the record
owner(s) exactly as the shares are registered. You may request a redemption or
an exchange by calling the Shareholder Service Center at 800-523-1918. Each Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Funds, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the respective Fund,
its agent, or certain authorized persons, subject to applicable CDSC or Limited
CDSC. This is computed and effective at the time the offering price and net
asset value are determined. See Determining Offering Price and Net Asset Value.
The Funds and the Distributor end their business days at 5 p.m., Eastern time.
This offer is discretionary and may be completely withdrawn without further
notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
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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 and Sub-Advisory 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
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, Mutual Funds
III, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which each Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of such Fund during any 90-day period
for any one shareholder.
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value, below.
Class B Shares are subject to a CDSC of: (i) 5% if shares are redeemed within
one year of purchase (ii) 4% if shares are redeemed during the second year
following purchase; (iii) 3% if shares are redeemed during the third or fourth
year following purchase; (iv) 2% if shares are redeemed during the fifth year
following purchase; (v) 1% if shares are redeemed during the sixth year
following purchase; (vi) and 0% thereafter. Class C Shares are subject to a CDSC
of 1% if shares are redeemed within 12 months following purchase. See Contingent
Deferred Sales Charge - Class B Shares and Class C Shares under Purchasing
Shares. Except for the applicable CDSC or Limited CDSC and, with respect to the
expedited payment by wire described below for which, in the case of the Fund
Classes, there is currently a $7.50 bank wiring cost, neither the Funds nor the
Distributor charges a fee for redemptions or repurchases, but such fees could be
charged at any time in the future.
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Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of other funds in the Delaware Investments (in
each case, "New Shares") in a permitted exchange, will not be subject to a CDSC
that might otherwise be due upon redemption of the Original Shares. However,
such shareholders will continue to be subject to the CDSC and, in the case of
Class B Shares, the automatic conversion schedule of the Original Shares as
described in this Part B and any CDSC assessed upon redemption will be charged
by the fund from which the Original Shares were exchanged. In an exchange of
Class B Shares from a Fund, the Fund's CDSC schedule may be higher than the CDSC
schedule relating to the New Shares acquired as a result of the exchange. For
purposes of computing the CDSC that may be payable upon a disposition of the New
Shares, the period of time that an investor held the Original Shares is added to
the period of time that an investor held the New Shares. With respect to Class B
Shares, the automatic conversion schedule of the Original Shares may be longer
than that of the New Shares. Consequently, an investment in New Shares by
exchange may subject an investor to the higher 12b-1 fees applicable to Class B
Shares of a Fund for a longer period of time than if the investment in New
Shares were made directly.
Written Redemption
You can write to each Fund at 1818 Market Street, Philadelphia, PA 19103
to redeem some or all of your shares. The request must be signed by all owners
of the account or your investment dealer of record. For redemptions of more than
$50,000, or when the proceeds are not sent to the shareholder(s) at the address
of record, the Funds require a signature by all owners of the account and a
signature guarantee for each owner. A signature guarantee can be obtained from a
commercial bank, a trust company or a member of a Securities Transfer
Association Medallion Program ("STAMP"). Each Fund reserves the right to reject
a signature guarantee supplied by an eligible institution based on its
creditworthiness. The Funds may require further documentation from corporations,
executors, retirement plans, administrators, trustees or guardians.
Payment is normally mailed the next business day after receipt of your
redemption request. If your Class A Shares are in certificate form, the
certificate(s) must accompany your request and also be in good order.
Certificates are issued for Class A Shares only if a shareholder submits a
specific request. Certificates are not issued for Class B Shares or Class C
Shares.
Written Exchange
You may also write to each Fund (at 1818 Market Street, Philadelphia, PA
19103) to request an exchange of any or all of your shares into another mutual
fund in Delaware Investments, subject to the same conditions and limitations as
other exchanges noted above and in the Prospectuses.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption - Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your account
in writing that you do not wish to have such services available with respect to
your account. Each Fund reserves the right to modify, terminate or suspend these
procedures upon 60 days' written notice to shareholders. It may be difficult to
reach the Funds by telephone during periods when market or economic conditions
lead to an unusually large volume of telephone requests.
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Neither the Funds nor their Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, each Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by the
Fund Classes are generally tape recorded, and a written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, you are acknowledging prior
receipt of a prospectus for the fund into which your shares are being exchanged.
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 Fund Class redemption proceeds. If you
ask for a check, it will normally be mailed the next business day after receipt
of your redemption request to your predesignated bank account. There are no
separate fees for this redemption method, but the mail time may delay getting
funds into your bank account. Simply call the Shareholder Service Center prior
to the time the offering price and net asset value are determined, as noted
above.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in Delaware Investments under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above and in the Prospectuses. Telephone
exchanges may be subject to limitations as to amounts or frequency.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Investments family. Telephone exchanges may be subject to
limitations as to amounts or frequency. The Transfer Agent and each Fund reserve
the right to record exchange instructions received by telephone and to reject
exchange requests at any time in the future.
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Moneyline (SM) on Demand
You or your investment dealer may request redemptions of your Fund
shares by phone using MoneyLine (SM) On Demand. When you authorize a Fund to
accept such requests from you or your investment dealer, funds will be deposited
to (for share redemptions) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions. See
MoneyLine (SM) On Demand under Investment Plans.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), the Funds will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Investments funds from Timing Firms. A Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including 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)
Decatur Equity Income Fund, (2) Growth and Income Fund, (3) Delaware Fund, (4)
Limited-Term Government Fund, (5) USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware
Investments funds are available for timed exchanges. Assets redeemed or
exchanged out of Timing Accounts in Delaware Investments funds not listed above
may not be reinvested back into that Timing Account. Each Fund reserves the
right to apply these same restrictions to the account(s) of any person whose
transactions seem to follow a time pattern (as described above).
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers of
record will be permitted to make exchanges or redemptions.
Systematic Withdrawal Plans
Shareholders of Class A Shares, Class B Shares and Class C Shares who
own or purchase $5,000 or more of shares at the offering price, or net asset
value, as applicable, for which certificates have not been issued may establish
a Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or
quarterly withdrawals of $75 or more, although 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. This $5,000 minimum does not apply for a Fund's prototype retirement
plans. Shares purchased with the initial investment and through reinvestment of
cash dividends and realized securities profits distributions will be credited to
the shareholder's account and sufficient full and fractional shares will be
redeemed at the net asset value calculated on the third business day preceding
the mailing date.
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Checks are dated either the 1st or the 15th of the month, as selected by
the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital, and the share
balance may in time be depleted, particularly in a declining market.
Shareholders should not purchase additional shares while participating in a
Systematic Withdrawal Plan.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated. Premature withdrawals from
retirement plans may have adverse tax consequences.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is a participant in one of our
retirement plans or is investing in Delaware Investments funds which do not
carry a sales charge. Redemptions of Class A Shares pursuant to a Systematic
Withdrawal Plan may be subject to a Limited CDSC if the purchase was made at net
asset value and a dealer's commission has been paid on that purchase. The
applicable CDSC for Class B Shares and Class C Shares redeemed via a Systematic
Withdrawal Plan will be waived if, on the date that the Plan is established, the
annual amount selected to be withdrawn is less than 12% of the account balance.
If the annual amount selected to be withdrawn exceeds 12% of the account balance
on the date that the Systematic Withdrawal Plan is established, all redemptions
under the Plan will be subject to the applicable CDSC. Whether a waiver of the
CDSC is available or not, the first shares to be redeemed for each Systematic
Withdrawal Plan payment will be those not subject to a CDSC because they have
either satisfied the required holding period or were acquired through the
reinvestment of distributions. The 12% annual limit will be reset on the date
that any Systematic Withdrawal Plan is modified (for example, a change in the
amount selected to be withdrawn or the frequency or date of withdrawals), based
on the balance in the account on that date.
See Waiver of Contingent Deferred Sales Charge - Class B Shares and Class C
Shares, 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. This service is
not available for retirement plans.
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The Systematic Withdrawal Plan is not available to the Institutional
Classes. Shareholders should consult with their financial advisers to determine
whether a Systematic Withdrawal Plan would be suitable for them.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000 or more made on or after July 1, 1998, a
Limited CDSC will be imposed on certain redemptions of Class A Shares (or shares
into which such Class A Shares are exchanged) according to the following
schedule: (1) 1.00% if shares are redeemed during the first year after the
purchase; and (2) 0.50% if such shares are redeemed during the second year after
the purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission as described in the
Prospectus.
The Limited CDSC will be paid to the Distributor and will be assessed on
an amount equal to the lesser of : (1) the net asset value at the time of
purchase of the Class A Shares being redeemed or (2) the net asset value of such
Class A Shares at the time of redemption. For purposes of this formula, the "net
asset value at the time of purchase" will be the net asset value at purchase of
the Class A Shares even if those shares are later exchanged for shares of
another Delaware Investments fund and, in the event of an exchange of Class A
Shares, the "net asset value of such shares at the time of redemption" will be
the net asset value of the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than two years will not
be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Investments fund will not trigger the imposition of the Limited
CDSC at the time of such exchange. The period a shareholder owns shares into
which Class A Shares are exchanged will count towards satisfying the two-year
holding period. The Limited CDSC is assessed if such two year period is not
satisfied irrespective of whether the redemption triggering its payment is of
Class A Shares of a Fund or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed
that shares not subject to the Limited CDSC are the first redeemed followed by
other shares held for the longest period of time. The Limited CDSC will not be
imposed upon shares representing reinvested dividends or capital gains
distributions, or upon amounts representing share appreciation. All investments
made during a calendar month, regardless of what day of the month the investment
occurred, will age one month on the last day of that month and each subsequent
month.
Waiver of Limited Contingent Deferred Sales Charge - Class A Shares
The Limited CDSC for Class A Shares on which a dealer's commission has
been paid will be waived in the following instances: (i) redemptions that result
from a Fund's right to liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less than the then-effective
minimum account size; (ii) distributions to participants from a retirement plan
qualified under section 401(a) or 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"), or due to death of a participant in such a plan; (iii)
redemptions pursuant to the direction of a participant or beneficiary of a
retirement plan qualified under section 401(a) or 401(k) of the Code with
respect to that retirement plan; (iv) periodic distributions from an IRA, SIMPLE
IRA, or 403(b)(7) or 457 Deferred Compensation Plan due to death, disability, or
attainment of age 59 1/2, and IRA distributions qualifying under Section 72(t)
of the Internal Revenue Code; (v) returns of excess contributions to an IRA;
(vi) distributions by other employee benefit plans to pay benefits; (vii)
distributions described in (ii), (iv), and (vi) above pursuant to a systematic
withdrawal plan; and (viii) 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).
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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; (ii) returns of excess contributions to an IRA, SIMPLE IRA,
SEP/IRA, or 403(b)(7) or 457 Deferred Compensation Plan; (iii) periodic
distributions from an IRA, SIMPLE IRA, SAR/SEP, SEP/IRA, or 403(b)(7) or 457
Deferred Compensation Plan due to death, disability or attainment of age 59 1/2,
and IRA distributions qualifying under Section 72(t) of the Internal Revenue
Code; and (iv) distributions from an account if the redemption results from the
death of all registered owners 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 on 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; (ii) returns of
excess contributions to an IRA, SIMPLE IRA, 403(b)(7) or 457 Deferred
Compensation Plan, Profit Sharing Plan, Money Purchase Pension Plan, or 401(k)
Defined Contribution plan; (iii) periodic distributions from a 403(b)(7) or 457
Deferred Compensation Plan upon attainment of age 59 1/2, Profit Sharing Plan,
Money Purchase Plan, 401(k) Defined Contribution Plan upon attainment of age 70
1/2, and IRA distributions qualifying under Section 72(t) of the Internal
Revenue Code; (iv) distributions from a 403(b)(7) or 457 Deferred Compensation
Plan, Profit Sharing Plan, or 401(k) Defined Contribution Plan, under hardship
provisions of the plan; (v) distributions from a 403(b)(7) or 457 Deferred
Compensation Plan, Profit Sharing Plan, Money Purchase Pension Plan or a 401(k)
Defined Contribution Plan upon attainment of normal retirement age under the
plan or upon separation from service; (vi) periodic distributions from an IRA or
SIMPLE IRA on or after attainment of age 59 1/2; and (vii) distributions from an
account if the redemption results from the death of all registered owners of the
account (in the case of accounts established under the Uniform Gifts to Minors
or Uniform Transfers to Minors Acts or trust accounts, the waiver applies upon
the death of all beneficial owners) or a total and permanent disability (as
defined in Section 72 of the Code) of all registered owners occurring after the
purchase of the shares being redeemed.
In addition, the CDSC will be waived on Class B Shares and Class C
Shares redeemed in accordance with a Systematic Withdrawal Plan if the annual
amount selected to be withdrawn under the Plan does not exceed 12% of the value
of the account on the date that the Systematic Withdrawal Plan was established
or modified.
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DISTRIBUTIONS AND TAXES
Each Fund has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Code. As such, a Fund
will not be subject to federal income tax on net investment income and net
realized capital gains which are distributed to shareholders.
Each Class of shares of a Fund will share proportionately in the
investment income and expenses of the Fund, except that Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Mutual Funds III, Inc. currently intends to make annual payments from
each Fund's net investment income. Distributions of net capital gains, if any,
realized on sales of investments will be distributed AT LEAST annually during
the quarter following the close of the fiscal year.
All dividends and any capital gains distributions will be automatically
credited to the shareholder's account in additional shares of the same Class
unless, in the case of shareholders in the Fund Classes, the shareholder
requests in writing that such dividends and/or distributions be paid in cash.
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.
Any check in payment of dividends or other distributions which cannot
be delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. A Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the Post Office or the Fund is otherwise unable to locate the shareholder or
verify the shareholder's mailing address. These costs may include a percentage
of the account when a search company charges a percentage fee in exchange for
their location services.
Persons not subject to tax will not be required to pay taxes on
distributions.
Dividends from investment income and short-term capital gains
distributions are treated by shareholders as ordinary income for federal income
tax purposes, whether received in cash or in additional shares. Distributions of
long-term capital gains, if any, are taxable to shareholders as long-term
capital gains, regardless of the length of time an investor has held such
shares, and these gains are currently taxed at long-term capital gain rates
described below. The tax status of dividends and distributions paid to
shareholders will not be affected by whether they are paid in cash or in
additional shares. The Fund is treated as a single tax entity and capital gains
for the Fund will be calculated separately from the other funds of Mutual Funds
III, Inc..
Under the 1997 Act, as revised by 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 of holding periods:
"Mid-term capital gains" OR "28 percent rate gain": securities sold by a
Fund after July 28, 1997 that were held more than one year but not more
than 18 months. These gains will be taxable to individual investors at a
maximum rate of 28%. This category of gains applied only to gains and
distributions in 1997.
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"1997 Act long-term capital gains" OR "20 percent rate gain": securities
sold by a Fund between May 7, 1997 and July 28, 1997 that were held for
more than 12 months, and securities sold by the Fund after July 28, 1997
that were held for more than 18 months. As revised by the 1998 Act, this
rate applies to securities held for more than 12 months and sold in tax
years beginning after December 1, 1997. These gains will be taxable to
individual investors at a maximum rate of 20% for investors in the 28%
or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket. The Omnibus
Consolidated and Emergency Supplemental Appropriations Act passed in
October of 1998 included technical corrections to the 1998 Act. The
effect of this correction is that essentially all capital gain
distributions paid to shareholders during 1998 will be taxed at a
maximum rate of 20%.
"Qualified 5-year gains": For individuals in the 15% bracket, qualified
5-year gains are net gains on securities held for more than 5 years
which are sold after December 31, 2000. For individual who are subject
to tax at higher rate brackets, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for
more than 5 years. Taxpayers subject to tax at a higher rate 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 5-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.
A portion of the Fund's dividends may qualify for the
dividends-received deduction for corporations provided in the federal income tax
law. The portion of dividends paid by the Fund that so qualifies will be
designated each year in a notice mailed to Fund shareholders, and cannot exceed
the gross amount of dividends received by such Fund from domestic (U.S.)
corporations that would have qualified for the dividends-received deduction in
the hands of the Fund if the Fund was a regular corporation. The availability of
the dividends-received deduction is subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. Under the 1997 Act, the amount that the Fund may designate as
eligible for the dividends-received deduction will be reduced or eliminated if
the shares on which the dividends earned by the Fund were debt-financed or held
by the Fund for less than a 46-day period during a 90-day period beginning 45
days before the ex-dividend date and ending 45 days after the ex-dividend date.
Similarly, if your Fund shares are debt-financed or held by you for less than a
46-day period during a 90-day period beginning 45 days before the ex-dividend
date and ending 45 days after the ex-dividend date, then the dividends-received
deduction for Fund dividends on your shares may also be reduced or eliminated.
Even if designated as dividends eligible for the dividends-received deduction,
all dividends (including any deducted portion) must be included in your
alternative minimum taxable income calculation. For the fiscal year ended April
30, 1999, 3% of Aggressive Growth Fund's dividends from net investment income
and 23% of Growth Stock Fund's dividends from net investment income qualified
for the corporate dividends-received deduction.
Shareholders will be notified annually by Mutual Funds III, Inc. as to
the federal income tax status of dividends and distributions paid by the Fund.
See also Other Tax Requirements under Accounting and Tax Issues.
-65-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-ADVISORY AGREEMENT
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to the Funds, subject to the
supervision and direction of Mutual Funds III, Inc.'s Board of Directors. The
Sub-Adviser, located at 90 South Seventh Street, Suite 4400, Minneapolis, MN
55402, serves as a Sub-Adviser to Growth Stock Fund and is responsible for the
day-to-day investment management of the Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Investments family since 1938. On April 30, 1999, the Manager and its
affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $47 billion in assets in
the various institutional or separately managed (approximately $28,114,500,000)
and investment company (approximately $19,630,410,000) accounts.
The Investment Management Agreements for Aggressive Growth Fund and
Tax-Efficient Equity Fund are each dated April 1, 1999 and were approved by
shareholders on March 17, 1999. The Investment Management Agreement for Growth
Stock Fund is dated April 15, 1999 and was approved by shareholders on April 13,
1999. 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 Directors or by vote of a majority of the
outstanding voting securities of the Fund to which the Agreement relates, and
only if the terms and the renewal thereof have been approved by the vote of a
majority of the directors of Mutual Funds III, Inc. who are not parties thereto
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. Each Agreement is terminable without
penalty on 60 days' notice by the directors of Mutual Funds III, Inc. or by the
Manager. Each Agreement will terminate automatically in the event of its
assignment.
Under their respective Investment Management Agreements, Aggressive
Growth Fund and Tax-Efficient Equity Fund each pay the Manager a monthly
investment advisory fee rate based on average daily net assets on an annual
basis as follows:
---------------------------------------------
0.75% in the first $500 million
0.70% on the next $500 million
0.65% on the next $1.5 billion
0.60% on the average daily net assets
in excess of $2.5 billion
---------------------------------------------
Under Growth Stock Fund's Investment Management Agreement, the Fund
pays Manager a monthly investment advisory fee rate based on average daily net
assets on an annual basis as follows:
---------------------------------------------
0.65% on the first $500 million
0.60% on the next $500 million
0.55% on the next $1.5 billion
0.50% on the average daily net assets
in excess of $2.5 billion
---------------------------------------------
The Manager elected voluntarily to waive that portion, if any, of the
annual management fees payable by Aggressive Growth Fund and Growth Stock Fund
and to pay certain expenses of each Fund to the extent necessary to ensure that
the Total Operating Expenses of each Fund (exclusive of applicable 12b-1 plan
payments, taxes, interest, brokerage commissions, extraordinary expenses but
including 12b-1 fees, as applicable) do not exceed, on an annual basis, 1.50% of
average daily net assets from June 9, 1997 through June 30, 1999.
-66-
<PAGE>
The Manager has contracted to waive that portion, if any, of the annual
management fees payable by Aggressive Growth Fund and to pay certain expenses of
the Fund to the extent necessary to ensure that the Total Operating Expenses of
the Fund (exclusive of applicable 12b-1 plan payments, taxes, interest,
brokerage commissions, extraordinary expenses but including 12b-1 fees, as
applicable) do not exceed, on an annual basis, 1.50% of average daily net assets
through June 30, 2000.
The Manager has elected voluntarily to waive that portion, if any, of
the annual management fees payable by Tax-Efficient Equity Fund and to pay
certain expenses of the Fund to the extent necessary to ensure that the Total
Operating Expenses of the Fund (exclusive of applicable 12b-1 plan payments,
taxes, interest, brokerage commissions, extraordinary expenses but including
12b-1 fees, as applicable) do not exceed, on an annual basis, 1.20% of average
daily net assets from the commencement of operations through October 31, 1999.
Pursuant to the terms of a Sub-Advisory Agreement with the Manager, the
Sub-Adviser participates in the management of Growth Stock Fund's assets, is
responsible for day-to-day investment management of the Fund, makes investment
decisions for the Fund in accordance with the Fund's investment objectives and
stated policies and places orders on behalf of the Fund to effect the investment
decisions made. The Manager continues to have ultimate responsibility for all
investment advisory services in connection with the management of the Fund
pursuant to the Investment Management Agreement and supervises the Sub-Adviser's
performance of such services. For the services provided to the Manager, the
Manager pays the Sub-Adviser an annual sub-advisory fee equal to 0.325% of
Growth Stock Fund's average daily net assets. For the fiscal year ended April
30, 1999, the Sub-Adviser was paid $151,020 under the Sub-Advisory Agreement.
On April 30, 1999, the total net assets of the Funds were as follows:
---------------------------------------------------
Aggressive Growth Fund $289,136,022
---------------------------------------------------
Growth Stock Fund $53,289,646
---------------------------------------------------
Tax-Efficient Equity Fund $89,682,197
---------------------------------------------------
Investment management fees incurred for the last three fiscal years
with respect to each Fund follows. Prior to May 1, 1997 fees were paid to the
Funds' previous investment manager, Voyageur Fund Managers, Inc.
<TABLE>
<CAPTION>
Fund April 30, 1999 April 30, 1998 April 30, 1997
- ---- -------------- -------------- --------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,266,260 earned $155,146 earned $56,982 earned
$745,513 paid $71,189 paid $10,532 paid
$520,747 waived $83,957 waived $46,450 waived
Growth Stock Fund $459,855 earned $412,380 earned $332,347 incurred
$447,391 paid $378,549 paid $332,347 paid
$12,464 waived $33,831 waived $-0- waived
Tax-Efficient Equity Fund(1) $396,715 earned $54,805 earned N/A
$315,054 paid $17,083 paid N/A
$81,661 waived $37,772 waived N/A
</TABLE>
(1) Date of initial public offering was June 27, 1997.
-67-
<PAGE>
Under the general supervision of the Board of Directors, the Manager
makes and executes all investment decisions for the Funds. The Manager pays the
salaries of all directors, officers and employees of Mutual Funds III, Inc. who
are affiliated with the Manager. Each Fund pays all of its other expenses.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as each Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, Aggressive Growth and Growth Stock Funds' previous
investment advisory agreements with Voyageur were "assigned", as that term is
defined by the Investment Company Act of 1940, and the previous agreements
therefore terminated upon the completion of the acquisition. The Board of
Directors of those Funds unanimously approved new advisory agreements at a
meeting held in person on February 14, 1997, and called for a shareholders
meeting to approve the new agreements. At a meeting held on April 11, 1997, the
shareholders of Aggressive Growth Fund and Growth Stock Fund approved its
respective Investment Management Agreement with the Manager, an indirect
wholly-owned subsidiary of LNC, to become effective after the close of business
on April 30, 1997, the date the acquisition was completed. At that meeting,
shareholders of Voyageur Growth Stock Fund also approved a Sub-Advisory
Agreement between the Manager and the Sub-Adviser to take effect at the same
time as the Investment Management Agreement.
Beginning May 1, 1997, Delaware Management Company became the Funds'
investment manager, and for Growth Stock Fund, Voyageur Asset Management LLC
became the sub-adviser. The Investment Management Agreement into which each
Fund's investment manager entered and, in the case of Voyageur Growth Stock
Fund, the Sub-Advisory Agreement between the Manager and the Sub-Adviser, had an
initial term of two years and was renewable each year only so long as such
renewal and continuance were specifically approved at least annually by the
Board of Directors or by vote of a majority of the outstanding voting securities
of the Fund to which the Agreement relates, and only if the terms and the
renewal thereof were approved by the vote of a majority of the directors of
Mutual Funds III, Inc. who were 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.
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 a Distribution Agreement dated April 30, 1997 for
Aggressive Growth Fund and Growth Stock Fund and June 26, 1997 for Tax-Efficient
Equity Fund. The Distributor is an affiliate of the Manager and bears all of the
costs of promotion and distribution, except for payments by the Funds on behalf
of Class A, Class B and Class C Shares under their respective 12b-1 Plans. The
Distributor is an indirect, wholly owned subsidiaries of Delaware Management
Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
the Funds' shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
June 26, 1997. The Transfer Agent also provides accounting services to the Funds
pursuant to the terms of a separate Fund Accounting Agreement. The Transfer
Agent is also an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc.
The Funds have authorized one or more brokers to accept on their behalf
purchase and redemption orders in addition to the Transfer Agent. Such brokers
are authorized to designate other intermediaries to accept purchase and
redemption orders on the behalf of the Funds. For purposes of pricing, the Funds
will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Investors may be charged a fee when effecting transactions through a
broker or agent.
-68-
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Mutual Funds III, Inc. are managed under
the direction of its Board of Directors.
Certain officers and directors of Mutual Funds III, Inc. hold identical
positions in each of the other funds in the Delaware Investments family. On May
31, 1999, Mutual Funds III, Inc.'s officers and directors owned less than 1% of
the outstanding shares of each Class of each Fund.
As of May 31, 1999, management believes the following shareholders held
of record 5% or more of the outstanding shares of a Class:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Aggressive Growth Fund Merrill Lynch, Pierce, Fenner & 675,996.830 10.88%
A Class Smith For the Sole Benefit of its
Customers Attn: Fund Administration
SEC# 97D44 4800 Deer Lake Drive
East,+ 2nd Floor
Jacksonville, FL 32246-6484
Aggressive Growth Fund Merrill Lynch, Pierce, Fenner & 770,305.410 14.61%
B Class Smith For the Sole Benefit of its
Customers Attn: Fund Administration
SEC# 97HPO 4800 Deer Lake Drive
East, 2nd Floor
Jacksonville, FL 32246-6484
Aggressive Growth Fund Merrill Lynch, Pierce, Fenner & 564,558.990 32.68%
C Class Smith For the Sole Benefit of its
Customers Attn: Fund Administration
SEC# 97D45 4800 Deer Lake Drive East
- 2nd Floor
Jacksonville, FL 32246-6484
Aggressive Growth Fund RS DMC Employee Profit Sharing Plan 250,658.800 32.38%
Institutional Class Delaware Management Company P/S Trust
c/o Rick Seidel
1818 Market Street
Philadelphia, PA 19103-3682
T. Rowe Price Trust 227,770.080 29.42%
For the Benefit of Interface Inc.
4555 Painters Mill Rd.
Owings Mills, MD 21117-4903
RS DMTC 457 Deferred Comp Plan 78,905.900 10.19%
PGW 457 Plan
Attn: Retirement Plans
1818 Market Street
Philadelphia, PA 19103-3638
</TABLE>
-69-
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Aggressive Growth Fund Charles Schwab and Co., Inc. 59,725.850 7.71%
Institutional Class Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Chase Manhattan Bank CF 46,158.900 5.96%
Delaware Group Foundation Funds
Balanced Portfolio
Attn: Marisol Gordon
Global Investment Services
3 Metrotech Center 8th Floor
Brooklyn, NY 11201-3800
Chase Manhattan Bank CF 44,586.190 5.76%
Delaware Group Foundation Funds
Growth Portfolio
Attn: Marisol Gordon
Global Investment Services
3 Metrotech Center 8th Floor
Brooklyn, NY 11201-3800
Growth Stock Fund Charles Schwab and Co., Inc. 76,978.740 5.23%
A Class Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Growth Stock Fund Merrill Lynch, Pierce, Fenner & 9,372.930 5.93%
B Class Smith For the Sole Benefit of its
Customers Attn: Fund Administration
SEC# 97HN9 4800 Deer Lake Drive East
- 2nd Floor
Jacksonville, FL 32246-6484
Growth Stock Fund Merrill Lynch, Pierce, Fenner & 7,626.810 13.21%
C Class Smith For the Sole Benefit of its
Customers Attn: Fund Administration
SEC# 97HN7 4800 Deer Lake Drive East
- 2nd Floor
Jacksonville, FL 32246-6484
Emery Jahnke 4,265.770 7.39%
Ann Jahnke JT TEN
2402 Lilac Lane
Fargo, ND 58102
</TABLE>
-70-
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Growth Stock Fund RS DMTC 401(k) Plan 36,528.870 58.23%
Institutional Class First Sierra Financial 401(k) Plan
Attn: Retirement Plans
1818 Market Street
Philadelphia, PA 19103-3638
RS DMTC P/S Plan 24,819.270 39.56%
Columbia Diagnostics Inc. P/S
Attn: Retirement Plans
1818 Market Street
Philadelphia, PA 19103
Tax-Efficient Equity Fund Merrill Lynch, Pierce, Fenner & Smith 203,058.910 5.79%
A Class For the Sole Benefit of its Customers
Attention: Fund Administration SEC# 97RJ4
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Tax-Efficient Equity Fund Merrill Lynch, Pierce, Fenner & Smith 310,231.730 8.76%
B Class For the Sole Benefit of its Customers
Attention: Fund Administration SEC# 97RJ7
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Tax-Efficient Equity Fund Merrill Lynch, Pierce, Fenner & Smith 158,404.460 14.66%
C Class For the Sole Benefit of its Customers
Attention: Fund Administration SEC# 97RJ9
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Tax-Efficient Equity Fund Delaware Management Business 1.000 99.90%
Institutional Class Trust-DIA
Attn: Joseph H. Hastings
1818 Market Street, 17th Floor
Philadelphia, PA 19103-3602
</TABLE>
DMH Corp., Delvoy, Inc., Delaware Management Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Management Company, Inc. , Delaware Investment Advisers (a series of Delaware
Management Business Trust), Delaware Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware Management Trust Company,
Delaware International Holdings Ltd., Founders Holdings, Inc., Delaware
International Advisers Ltd., Delaware Capital Management, Inc. and Retirement
Financial Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National was completed. DMH and the
Manager are indirect, wholly owned subsidiaries, and subject to the ultimate
control, of Lincoln National. Lincoln National, with headquarters in Fort Wayne,
Indiana, is a diversified organization with operations in many aspects of the
financial services industry, including insurance and investment management.
As noted under Investment Management Agreements and Sub-Advisory
Agreement, after the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National as a result of Lincoln
National's acquisition of DFG.
-71-
<PAGE>
Directors and principal officers of Mutual Funds III, Inc. are noted
below along with their ages and their business experience for the past five
years. Unless otherwise noted, the address of each officer and director is One
Commerce Square, Philadelphia, PA 19103.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Director/officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
*Wayne A. Stork (62) Chairman, Director and/or Trustee of Mutual Funds III, Inc. and each of the
other 32 investment companies in the Delaware Investments family.
Chairman and Director of Delaware Management Holdings, Inc.
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.
- ---------------------------------------------------------------------------------------------------------------------------
- ----------------------
* Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-72-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard G. Unruh, Jr. (59) Executive Vice President and Chief Investment Officer, Equities of Mutual
Funds III, Inc., each of the other 32 investment companies in the Delaware
Investments family Delaware Management Holdings, Inc., Delaware Management
Company (a series of Delaware Management Business Trust) and Delaware
Capital Management, Inc.
Chief Executive Officer/Chief Investment Officer/DIA Equity of Delaware
Investment Advisers (a series of Delaware Management Business Trust)
Executive Vice President and Director/Trustee of Delaware Management
Company, Inc. and Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-73-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
David K. Downes (59) President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Director and/or Trustee of Mutual Funds III, Inc. and each of the
other 32 investment companies in the Delaware Investments family.
President and Director of Delaware Management Company, Inc.
President of Delaware Management Company (a series of Delaware Management
Business Trust)
President, Chief Executive Officer and Director of Delaware Capital
Management, Inc.
Chairman, President, Chief Executive Officer and Director of Delaware
Service Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and Director of
Delaware International Holdings Ltd.
Chairman and Director of Delaware Management Trust Company and Retirement
Financial Services, Inc.
Executive Vice President, Chief Operating Officer, Chief Financial Officer
of Delaware Management Holdings, Inc., Founders CBO Corporation, Delaware
Investment Advisers (a series of Delaware Management Business Trust) and
Delaware Distributors, L.P.
Executive Vice President, Chief Financial Officer, Chief Administrative
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>
-74-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard J. Flannery (41) Executive Vice President/General Counsel of Mutual Funds III, Inc. and each
of the other 32 investment companies in the Delaware Investments family,
Delaware Management Holdings, Inc., Delaware Distributors, L.P., Delaware
Management Company (a series of Delaware Management Business Trust),
Delaware Investment Advisers (a series of Delaware Management Business
Trust) and Founders CBO Corporation.
Executive Vice President/General Counsel and Director of Delaware
International Holdings Ltd., Founders Holdings, Inc., Delvoy, Inc., DMH
Corp., Delaware Management Company, Inc., Delaware Service Company, Inc.,
Delaware Capital Management, Inc., Retirement Financial Services, Inc.,
Delaware Distributors, Inc. and Delaware Management Business Trust.
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.
- ---------------------------------------------------------------------------------------------------------------------------
Walter P. Babich (71) Director and/or Trustee of Mutual Funds III, Inc. and each of the other 32
investment companies in the Delaware Investments family
460 North Gulph Road, King of Prussia, PA 19406
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and from
1988 to 1991, he was a partner of I&L Investors.
- ---------------------------------------------------------------------------------------------------------------------------
Director and/or Trustee of Mutual Funds III, Inc. and each of the 32 other
investment companies in the Delaware Investments family.
Anthony D. Knerr (60)
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.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-75-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Ann R. Leven (58) Director and/or Trustee of Mutual Funds III, Inc. and each of the other 32
other investment companies in the Delaware Investments family
785 Park Avenue, New York, NY 10021
Treasurer, National Gallery of Art
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer of the
Smithsonian Institution, Washington, DC, and from 1975 to 1992, she was
Adjunct Professor of Columbia Business School.
- ---------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison (63) Director and/or Trustee of Mutual Funds III, Inc. and each of the other 32
investment companies in the Delaware Investments family
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402
President and Chief Executive Officer, MLM Partners, Inc.
Mr. Madison has also been Chairman of the Board of Communications Holdings,
Inc. since 1996. From February to September 1994, Mr. Madison served as Vice
Chairman--Office of the CEO of The Minnesota Mutual Life Insurance Company
and from 1988 to 1993, he was President of U.S. WEST Communications--Markets.
- ---------------------------------------------------------------------------------------------------------------------------
Charles E. Peck (73) Director and/or Trustee of Mutual Funds III, Inc. and each of the other 32
investment companies in the Delaware Investments family
P.O. Box 1102, Columbia, MD 21044
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of The
Ryland Group, Inc., Columbia, MD.
- ---------------------------------------------------------------------------------------------------------------------------
Jan L. Yeomans (50) Director and/or Trustee of Mutual Funds III, Inc. and 32 other investment
companies in the Delaware Investments family.
Building 220-13W-37, St. Paul, MN 55144
Vice President and Treasurer, 3M Corporation.
From 1987-1994, Ms. Yeomans was Director of Benefit Funds and Financial
Markets for the 3M Corporation; Manager of Benefit Fund Investments for the
3M Corporation, 1985-1987; Manager of Pension Funds for the 3M Corporation,
1983-1985; Consultant--Investment Technology Group of Chase Econometrics,
1982-1983; Consultant for Data Resources, 1980-1982; Programmer for the
Federal Reserve Bank of Chicago, 1970-1974.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-76-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------- -------------------------------------------------------------------------------
<S> <C>
Joseph H. Hastings (49) Senior Vice President/Corporate Controller of Mutual Funds III, Inc. and
each of the other 32 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., Retirement Financial Services,
Inc., Founders Holdings, Inc. and Delaware Management Business Trust
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
During the past five years, Mr. Hastings has served in various executive
capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof (36) Senior Vice President and Treasurer of Mutual Funds III, Inc. and each of
the other 32 investment companies in the Delaware Investments family.
Senior Vice President/Investment Accounting of Delaware Service Company,
Inc. and Delaware Capital Management, Inc.
Senior Vice President and Treasurer/ Investment Accounting of Delaware
Distributors, L.P. , Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of
Delaware Management Business Trust) Delaware International Holdings, Inc.
and Founders Holdings, Inc.
Senior Vice President and Assistant Treasurer of Founders CBO Corporation
Before joining Delaware Investments in 1995, Mr. Bishof was a Vice President
for Bankers Trust, New York, NY from 1994 to 1995, a Vice President for CS
First Boston Investment Management, New York, NY from 1993 to 1994 and an
Assistant Vice President for Equitable Capital Management Corporation, New
York, NY from 1987 to 1993.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-77-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Gerald S. Frey (53) Vice President/Senior Portfolio Manager of Mutual Funds III, Inc., of
the other 32 investment companies in the Delaware Investments family, Delaware
Management Company (a series of Delaware Management Business Trust) and Delaware
Investment Advisers (a series of Delaware Management Business Trust)
Before joining Delaware Investments in 1996, Mr. Frey was a Senior Director
with Morgan Grenfell Capital Management, New York, NY from 1986 to 1995.
- ---------------------------------------------------------------------------------------------------------------------------
Frank X. Morris (37) Vice President/Senior Portfolio Manager of Mutual Funds III, Inc., the
other 32 investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Before joining Delaware Investments in 1997, he served as vice president and
director of equity research at PNC Asset Management. Mr. Morris is president
of the Financial Analysis Society of Philadelphia and is a member of the
Association of Investment Management and Research and the National
Association of Petroleum Investment Analysts.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-78-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation received from the
Mutual Funds III, Inc. and the total compensation received from all investment
companies in the Delaware Investments family for which he or she serves as a
director or trustee for the fiscal year ended April 30, 1999 and an estimate of
annual benefits to be received upon retirement under the Delaware Group
Retirement Plan for Directors/Trustees as of April 30, 1999.
Only the independent directors/trustees of the Fund receive compensation from
the Fund.
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement Estimated From the
Aggregate Benefits Annual Investment
Compensation Accrued as Benefits Companies in
From the Part of Fund Upon Delaware
Name Mutual Funds III, Inc. Expenses Retirement(1) Investments(2)
- ---- ---------------------- ------------ ------------- ------------------
<S> <C> <C> <C> <C>
W. Thacher Longstreth(3) $ 881 None $38,000 $57,191
Ann R. Leven $1,023 None $38,000 $66,334
Walter P. Babich $1,003 None $38,000 $64,501
Anthony D. Knerr $1,015 None $38,000 $65,334
Charles E. Peck $ 988 None $38,000 $61,167
Thomas F. Madison $1,013 None $38,000 $64,918
Jan L. Yeomans (4) $ 237 None $38,000 $ 9,452
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director/trustee who, at the time
of his or her retirement from the Board, has attained the age of 70 and
served on the Board for at least five continuous years, is entitled to
receive payments from each investment company in the Delaware Investments
family for which he or she serves as a director or trustee for a period
equal to the lesser of the number of years that such person served as a
director or trustee or the remainder of such person's life. The amount of
such payments will be equal, on an annual basis, to the amount of the
annual retainer that is paid to directors/trustees of each investment
company at the time of such person's retirement. If an eligible
director/trustee retired as of April 30, 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 for which he or
she served as director or trustee, based on the number of investment
companies in the Delaware Investments family as of that date.
(2) Each independent director currently receives a total annual retainer fee
of $38,000 for serving as a director or trustee for all 33 investment
companies in Delaware Investments, plus $3,145 for each Board Meeting
attended. Ann R. Leven, Anthony D. Knerr and Thomas F. Madison serve on
Mutual Funds III, Inc.'s audit committee; Ms. Leven is the chairperson.
Members of the audit committee currently receive additional annual
compensation of $5,000 from all investment companies, in the aggregate,
with the exception of the chairperson, who receives $6,000.
(3) W. Thacher Longstreth retired from the Board of Directors of Mutual Funds
III, Inc. on March 17, 1999. The compensation shown in the table is the
amount Mr. Longstreth received from May 1, 1998 through March 17, 1999.
(4) Jan L. Yeomans joined the Board of Directors of Mutual Funds III, Inc. on
March 17, 1999. The compensation shown is the amount Ms. Yeomans received
from March 17, 1999 through April 30, 1999.
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GENERAL INFORMATION
Mutual Funds III, Inc. is an open-end, registered management investment
company. Each Fund operates as a diversified fund as defined under the
Investment Company Act of 1940 Act (the "1940 Act"). Mutual Funds III, Inc. was
organized as a Minnesota corporation in January 1985.
The Manager is the investment manager of the Funds. The Manager also
provides investment management services to certain of the other funds in the
Delaware Investments family. While investment decisions of the Funds are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for the Funds.
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 C.
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.
The Distributor acts as national distributor for each of the Funds and for
the other mutual funds in the Delaware Investments family. Prior to May 31,
1997, Voyageur Fund Distributors, Inc. served as the national distributor for
the Funds. In its capacity as such, VFD or DDLP, as applicable, received net
commissions from each Fund on behalf of Class A Shares, after reallowances to
dealers, as follows:
Aggressive Growth Fund
Fiscal Total Amount Amounts Net
Year of Underwriting Reallowed Commission
Ended Commission to Dealers to VFD/DDLP
------ --------------- ---------- -----------
4/30/99 $1,617,618 $1,380,262 $237,356
4/30/98 539,592 448,884 90,708
4/30/97 11,275 10,057 1,218
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<TABLE>
<CAPTION>
Growth Stock Fund
Fiscal Total Amount Amounts Net
Year of Underwriting Reallowed Commission
Ended Commission to Dealers to VFD/DDLP
----- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
4/30/99 $131,348 $117,147 $14,201
4/30/98 54,276 45,298 8,978
4/30/97 74,010 63,921 10,089
Tax-Efficient Equity Fund
Fiscal Total Amount Amounts Net
Year of Underwriting Reallowed Commission
Ended Commission to Dealers to DDLP
----- ---------- ---------- -------
4/30/99 $107,351 $573,229 $680,580
4/30/98(1) 212,088 175,433 36,655
(1) Date of initial public offering was June 27, 1997.
VFD or DDLP, as applicable, received Limited CDSC payments with respect
to Class A Shares of each Fund as follows:
Limited Cdsc Payments
Tax-efficient
Fiscal Aggressive Growth Growth Stock Equity
Year Ended Fund a Class Fund a Class Fund a Class(1)
---------- ------------ ------------ ---------------
4/30/99 $167 $-0- $-0-
4/30/98 -0- 1,926 -0-
4/30/97 -0- -0- N/A
(1) Date of initial public offering was June 27, 1997.
VFD or DDLP, as applicable, received CDSC payments with respect to
Class B Shares of each Fund as follows:
Cdsc Payments
Tax-efficient
Fiscal Aggressive Growth Growth Stock Equity
Year Ended Fund B Class(1) Fund B Class (2) Fund B Class(3)
---------- --------------- ---------------- ---------------
4/30/99 $105,060 $12,461 $32,667
4/30/98 8,533 8,324 310
4/30/97 508 414 N/A
</TABLE>
(1) Date of initial public offering was April 16, 1996.
(2) Date of initial public offering was September 8, 1995.
(3) Date of initial public offering was June 27, 1997.
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VFD or DDLP, as applicable, received CDSC payments with respect to
Class C Shares of each Fund as follows:
CDSC Payments
<TABLE>
<CAPTION>
Fiscal Aggressive Growth Growth Stock Tax-Efficient Equity
Year Ended Fund C Class(1) Fund C Class (2) Fund C Class(3)
---------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
4/30/99 $25,175 $245 $6,068
4/30/98 1,220 55 19
4/30/97 -0- -0- N/A
</TABLE>
(1) Date of initial public offering was May 20, 1994.
(2) Date of initial public offering was October 21, 1995.
(3) Date of initial public offering was June 27, 1997.
Effective as of May 1, 1997, all such payments described above have
been paid to the Distributor.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for each Fund and for the
other mutual funds in the Delaware Investments family. The Transfer Agent is
paid a fee by each Fund for providing these services consisting of an annual per
account charge of $5.50 plus transaction charges for particular services
according to a schedule. Compensation is fixed each year and approved by the
Board of Directors, including a majority of the unaffiliated directors. The
Transfer Agent also provides accounting services to each Fund. Those services
include performing all functions related to calculating each Fund's net asset
value and providing all financial reporting services, regulatory compliance
testing and other related accounting services. For its services, the Transfer
Agent is paid a fee based on total assets of all funds in the Delaware
Investments family for which it provides such accounting services. Such fee is
equal to 0.25% multiplied by the total amount of assets in the complex for which
the Transfer Agent furnishes accounting services, where such aggregate complex
assets are $10 billion or less, and 0.20% of assets if such aggregate complex
assets exceed $10 billion. The fees are charged to each fund, including each
Fund, on an aggregate pro-rata basis. The asset-based fee payable to the
Transfer Agent is subject to a minimum fee calculated by determining the total
number of investment portfolios and associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of Aggressive Growth and
Growth Stock Funds' securities and cash. The Chase Manhattan Bank ("Chase"), 4
Chase Metrotech Center, Brooklyn, NY 11245, is custodian of Tax-Efficient Equity
Fund's securities and cash. As custodian for a Fund, Norwest or, as relevant,
Chase maintains a separate account or accounts for the Fund; receives, holds and
releases portfolio securities on account of the Fund; receives and disburses
money on behalf of the Fund; and collects and receives income and other payments
and distributions on account of the Fund's portfolio securities.
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Capitalization
Mutual Funds III, Inc. has a present authorized capitalization of 10
trillion shares of capital stock with a $.01 par value per share.
The Board of Directors has allocated the following number of shares to
each Fund and their respective classes:
Aggressive Growth Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Institutional Class 1 billion
Growth Stock Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Institutional Class 1 billion
Tax-Efficient Equity Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Institutional Class 1 billion
While shares of Mutual Funds III, Inc. have equal voting rights on
matters affecting the Funds, each Fund would vote separately on any matter which
it is directly affected by, such as any change in its fundamental investment
policies and as otherwise prescribed by the 1940 Act. Shares of each Fund have a
priority in that Fund's assets, and in gains on and income from the portfolio of
that Fund.
All shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable and, except as described above, have
equal voting rights.
Shares of each Class of a Fund represent a proportionate interest in
the assets of such Fund, and have the same voting and other rights and
preferences as the other classes of that Fund, except that shares of a Fund's
Institutional Class may not vote on any matter affecting the Fund Classes' Plans
under Rule 12b-1. Similarly, as a general matter, shareholders of Class A
Shares, Class B Shares and Class C Shares of a Fund may vote only on matters
affecting the 12b-1 Plan that relates to the Class of shares that they hold.
However, Class B Shares may vote on any proposal to increase materially the fees
to be paid by a Fund under the 12b-1 Plan relating to its Class A Shares.
General expenses of a Fund will be allocated on a pro-rata basis to the classes
according to asset size, except that expenses of the 12b-1 Plans of each Fund's
Class A, Class B and Class C Shares will be allocated solely to those classes.
Beginning June 9, 1997, the names of Voyageur Aggressive Growth Fund
changed to Aggressive Growth Fund series, Voyageur Growth Stock Fund changed to
Growth Stock Fund series and Voyageur Tax-Efficient Equity Fund changed to
Tax-Efficient Equity Fund series. Beginning August 29, 1997, each Fund began
offering Institutional Class shares.
Noncumulative Voting
Mutual Funds III, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of the shares of Mutual Funds III, Inc.
Voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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APPENDIX A -- RATINGS
Earnings and Dividend Rankings for Common Stocks
- ------------------------------------------------
Standard & Poor's 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:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no
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substitute for complete analysis. They cannot take into account potential
effects of management changes, internal company policies not yet fully reflected
in the earnings and dividend record, public relations standing, recent
competitive shifts, and a host of other factors that may be relevant to
investment status and decision.
Commercial Paper Ratings
Standard & Poor's Ratings Group. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations. Prime-2 Strong capacity for repayment of short-term
promissory obligations. Prime-3 Acceptable capacity for repayment of
short-term promissory obligations.
Corporate Bond Ratings
Standard & Poor's Ratings Group. Its ratings for corporate bonds have
the following definitions:
Investment grade:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as
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"Investment Grade" ratings) generally are regarded as eligible for bank
investment. Also, the laws of various states governing legal investments impose
certain rating or other standards for obligations eligible for investment by
savings banks, trust companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. Its ratings for corporate bonds include
the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Preferred Stock Rating
Standard & Poor's Ratings Group. Its ratings for preferred stock have
the following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
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A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Moody's Investors Service, Inc. Its ratings for preferred stock include
the following:
An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "baa" is considered to be medium-grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
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An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or preference
stock. Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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APPENDIX B--STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS
Stock Index Futures Contracts
- -----------------------------
To the extent described in the Prospectus and Statement of Additional
Information, each Fund may purchase and sell stock index futures contracts,
options thereon and options on stock indexes. Stock index futures contracts are
commodity contracts listed on commodity exchanges. They presently include
contracts on the Standard & Poor's 500 Stock Index (the "S&P 500 Index") and
such other broad stock market indexes as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index, as well as narrower
"sub-indexes" such as the S&P 100 Energy Stock Index and the New York Stock
Exchange Utilities Stock Index. A stock index assigns relative values to common
stocks included in the index and the index fluctuates with the value of the
common stocks so included. A futures contract is a legal agreement between a
buyer or seller and the clearing house of a futures exchange in which the
parties agree to make a cash settlement on a specified future date in an amount
determined by the stock index on the last trading day of the contract. The
amount is a specified dollar amount (usually $100 or $500) times the difference
between the index value on the last trading day and the value on the day the
contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The S&P 500 Index
assigns relative weightings to the common stocks included in the Index, and the
Index fluctuates with changes in the market values of those common stocks. In
the case of S&P 500 Index futures contracts, the specified multiple is $500.
Thus, if the value of the S&P 500 Index were 150, the value of one contract
would be $75,000 (150 x $500). Unlike other futures contracts, a stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract with the settlement amount being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example (excluding any transaction costs), if a
Fund enters into one futures contract to buy the S&P 500 Index at a specified
future date at a contract value of 150 and the S&P 500 Index is at 154 on that
future date, the Fund will gain $500 x (154-150) or $2,000. If a Fund enters
into one futures contract to sell the S&P 500 Index at a specified future date
at a contract value of 150 and the S&P 500 Index is at 152 on that future date,
the Fund will lose $500 x (152-150) or $1,000.
Unlike the purchase or sale of an equity security, no price would be
paid or received by a Fund upon entering into stock index futures contracts.
Upon entering into a contract, a Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount of
cash or U.S. Treasury bills equal to a portion of the contract value. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve borrowing funds by the Fund to finance
the transactions. Rather, the initial margin is in the nature of a performance
bond or good faith deposit on the contract that is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied.
Subsequent payments, called "variation margin," to and from the broker
would be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short positions in the contract more or less
valuable, a process known as "marking to the market." For example, when a Fund
enters into a contract in which it benefits from a rise in the value of an index
and the price of the underlying stock index has risen, such Fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, if the price of the underlying stock index declines, such Fund would
be required to make a variation margin payment to the broker equal to the
decline in value.
Each Fund intends to use stock index futures contracts and related
options for hedging and not for speculation. Hedging permits a Fund to gain
rapid exposure to or protect itself from changes in the market. For
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example, a Fund may find itself with a high cash position at the beginning of a
market rally. Conventional procedures of purchasing a number of individual
issues entail the lapse of time and the possibility of missing a significant
market movement. By using futures contracts, the Fund can obtain immediate
exposure to the market and benefit from the beginning stages of a rally. The
buying program can then proceed, and once it is completed (or as it proceeds),
the contracts can be closed. Conversely, in the early stages of a market
decline, market exposure can be promptly offset by entering into stock index
futures contracts to sell units of an index and individual stocks can be sold
over a longer period under cover of the resulting short contract position.
Each Fund may enter into contracts with respect to any stock index or
sub-index. To hedge a Fund's portfolio successfully, however, such Fund must
enter into contracts with respect to indexes or sub-indexes whose movements will
have a significant correlation with movements in the prices of such Fund's
portfolio securities.
Options on Stock Index Futures Contracts. To the extent described in
the Prospectus and/or Statement of Additional Information each Fund may
purchase and sell put and call options on stock index futures contracts which
are traded on a recognized exchange or board of trade as a hedge against changes
in the market, and will enter into closing transactions with respect to such
options to terminate existing positions. An option on a stock index futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract at a specified exercise
price at any time prior to the expiration date of the option. A call option
gives the purchaser of such option the right to buy, and it obliges its writer
to sell, a specified underlying futures contract at a specified exercise price
at any time prior to the expiration date of the option. A purchaser of a put
option has the right to sell, and the writer has the obligation to buy, such
contract at the exercise price during the option period. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's future margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the stock index futures contract on the expiration date. Each Fund will
pay a premium for purchasing options on stock index futures contracts. Because
the value of the option is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net asset value of a Fund. In connection with the writing of options on
stock index futures contracts, a Fund will make initial margin deposits and make
or receive maintenance margin payments that reflect changes in the market value
of such options. Premiums received from the writing of an option are included in
initial margin deposits.
Purchase of Put Options on Futures Contracts. Each Fund will purchase
put options on futures contracts if the Fund's investment adviser or sub-adviser
anticipates a market decline. A put option on a stock index futures contract
becomes more valuable as the market declines. By purchasing put options on stock
index futures contracts at a time when a Fund's investment adviser or
sub-adviser expects the market to decline, such Fund will seek to realize a
profit to offset the loss in value of its portfolio securities.
Purchase of Call Options on Futures Contracts. A Fund will purchase
call options on stock index futures contracts if the Fund's investment adviser
anticipates a market rally. The purchase of a call option on a stock index
futures contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. A call option on such a contract becomes more
valuable as the market appreciates. A Fund will purchase a call option on a
stock index futures contract to hedge against a market advance when the Fund is
holding cash. A Fund can take advantage of the anticipated rise in the value of
equity securities without actually
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buying them until the market is stabilized. At that time, the options can be
liquidated and the Fund's cash can be used to buy portfolio securities.
Writing Call Options on Futures Contracts. A Fund will write call
options on stock index futures contracts if the Fund's investment adviser
anticipates a market decline. As the market declines, a call option on such a
contract becomes less valuable. If the futures contract price at expiration of
the option is below the exercise price, the option will not be exercised and the
Fund will retain the full amount of the option premium. Such amount provides a
partial hedge against any decline that may have occurred in the Fund's portfolio
securities.
Writing Put Options on Futures Contracts. A Fund will write put options
on stock index futures contracts if the Fund's investment adviser anticipates a
market rally. As the market appreciates, a put option on a stock index futures
contract becomes less valuable. If the futures contract price at expiration of
the option has risen due to market appreciation and is above the exercise price,
the option will not be exercised and the Fund will retain the full amount of the
option premium. Such amount can then be used by a Fund to buy portfolio
securities when the market has stabilized.
Risks Relating to Options on Stock Index Futures Contracts. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when a purchase of a call or put option on a
futures contract would result in a loss to a Fund when the purchase or sale of a
futures contract would not result in a loss, such as when there is no movement
in the underlying index.
The writing of a put or call option on a futures contract involves
risks similar to those relating to transactions in futures contracts as
described in the Prospectus and Statement of Additional Information. By writing
a call option, a Fund, in exchange for the receipt of a premium, becomes
obligated to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. The loss
incurred by the Fund in writing options on futures contracts may exceed the
amount of the premium received.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Finally, a Fund's purchase or sale of put or call options on stock
index futures contracts will be based upon predictions as to anticipated market
trends by the Fund's investment adviser or sub-adviser, which could prove to be
inaccurate. Even if the expectations of the Fund's investment adviser or
sub-adviser are correct, there may be an imperfect correlation between the
change in the value of the options and of the Fund's portfolio securities.
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FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditors for Voyageur
Mutual Funds III, Inc. and, in its capacity as such, audits the annual financial
statements of the Funds. Each Fund's Statement of Net Assets, Statement of
Operations, Statement of Changes in Net Assets, Financial Highlights and Notes
to Financial Statements, as well as the reports of Ernst & Young LLP,
independent auditors, for the fiscal year ended April 30, 1999 are included in
Voyageur Mutual Funds III, Inc.'s Annual Reports to shareholders. The financial
statements and financial highlights, the notes relating thereto and the reports
of Ernst & Young LLP listed above are incorporated by reference from the Annual
Reports into this Part B. Mutual Funds III, Inc.'s previous auditors audited the
financial highlights of the Funds for the fiscal periods ending on or before
April 30, 1997.
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Delaware Investments includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific tax-exempt
funds, money market funds, global and international funds and closed-end funds
give investors the ability to create a portfolio that fits their personal
financial goals. For more information, shareholders of the Fund Classes should
contact their financial adviser or call Delaware Investments at 800-523-1918,
and shareholders of the Institutional Class should contact Delaware Investments
at 800-510-4015.
INVESTMENT MANAGER
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
Growth Stock Fund:
Voyageur Asset Management LLP
90 South Seventh Street, Suite 4300
Minneapolis, MN 55402
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIANS
Tax-Efficient Equity Fund:
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
Aggressive Growth Fund
Growth Stock Fund:
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55402
<PAGE>
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AGGRESSIVE GROWTH FUND
GROWTH STOCK FUND
TAX-EFFICIENT EQUITY FUND
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A CLASSES
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B CLASSES
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C CLASSES
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INSTITUTIONAL CLASSES
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VOYAGEUR
MUTUAL FUNDS III, INC.
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PART B
STATEMENT OF
ADDITIONAL INFORMATION
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JULY 16, 1999
DELAWARE
INVESTMENTS
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