<PAGE> 1
SUPPLEMENT DATED APRIL 15, 1995
TO THE CURRENT PROSPECTUSES
OF THE FOLLOWING DELAWARE GROUP FUNDS
DELAWARE GROUP DELAWARE FUND, INC., DELAWARE GROUP TREND FUND, INC.,
DELAWARE GROUP VALUE FUND, INC., DELAWARE GROUP DECATUR FUND, INC.,
DELAWARE GROUP DELCAP FUND, INC., DELAWARE GROUP DELCHESTER HIGH-YIELD
BOND FUND, INC., DELAWARE GROUP GOVERNMENT FUND, INC., DELAWARE GROUP
TAX-FREE FUND, INC., DELAWARE GROUP TREASURY RESERVES, INC., DELAWARE
GROUP TAX-FREE MONEY, INC., DELAWARE GROUP CASH RESERVE, INC.
On March 29, 1995, shareholders of each of the above referenced Funds
or, as relevant, the series thereof, approved a new Investment Management
Agreement with Delaware Management Company, Inc. ("DMC"), an indirect
wholly-owned subsidiary of Delaware Management Holdings, Inc. ("DMH"). The
approval of new Investment Management Agreements was subject to the completion
of the merger (the "Merger") between DMH and a wholly-owned subsidiary of
Lincoln National Corporation ("Lincoln National") which occurred on April 3,
1995. Accordingly, the previous Investment Management Agreements terminated and
the new Investment Management Agreements became effective on that date.
As a result of the Merger, DMC and its two affiliates, Delaware
Service Company, Inc., the Funds' shareholder servicing, dividend disbursing
and transfer agent and Delaware Distributors, L.P., the Funds' national
distributor became indirect wholly-owned subsidiaries 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.
Under the new Investment Management Agreements, DMC will be paid at
the same annual fee rates and on the same terms as it was under the previous
Investment Management Agreements. In addition, the investment approach and
operation of each Fund and, as relevant, each series of a Fund, will remain
substantially unchanged.
PS-OTH-4/95
<PAGE> 2
NOVEMBER 9, 1994
DELAWARE GROUP OF FUNDS
U.S. GOVERNMENT FUND
INSTITUTIONAL CLASS
(SEPTEMBER 29, 1994)
DELCHESTER FUND
INSTITUTIONAL CLASS
(SEPTEMBER 29, 1994)
TREASURY RESERVES
INTERMEDIATE FUND
INSTITUTIONAL CLASS
(MAY 2, 1994)
TREND FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
DELCAP FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
DELAWARE FUND
INSTITUTIONAL CLASS
DIVIDEND GROWTH FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
DECATUR INCOME FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
DECATUR TOTAL RETURN FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
VALUE FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
INTERNATIONAL EQUITY FUND
INSTITUTIONAL CLASS
(SEPTEMBER 6, 1994)
SUPPLEMENT TO PROSEPECTUSES AS NOTED ABOVE
The following supplements the information appearing on the front cover
of the Prospectus:
Shares of this Fund are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency. Shares are not
deposits, obligations of, guaranteed or endorsed by any bank and involve
investment risks including possible loss of principal.
(over)
<PAGE> 3
Shares of the Fund are not NCUSIF insured, are not guaranteed by the credit
union, and involve investment risk, including the possible loss of principal.
Shares of the Fund are not credit union deposits.
The following replaces the catgories of eligible purchasers of
Institutional Class Shares in the section Buying Shares:
(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 Delaware Management Company, Inc. or its affiliates
and securities dealer firms with a selling agreement with Delaware Distributors,
Inc., (c) institutional advisory accounts of Delaware Management Company, Inc.
or its affiliates and those having client relationships with Delaware
Investment Advisers, a division of Delaware Management Company, Inc., 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) banks, trust companies and similar
financial institutions investing for their own account or for the account of
their trust customers for whom such financial institution is exercising
investment discretion in purchasing shares of the class; 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.
PS-NAV2-11/94-U
<PAGE> 4
- ---------------------------------------------------------------------
PROSPECTUS
SEPTEMBER 29, 1994
- ---------------------------------------------------------------------
U.S. GOVERNMENT FUND
- ---------------------------------------------------------------------
INSTITUTIONAL
- ---------------------------------------------------------------------
1818 MARKET STREET
PHILADEPHIA, PA 19103
- ---------------------------------------------------------------------
FOR MORE INFORMATION ABOUT THE U.S. GOVERNMENT
FUND INSTITUTIONAL CLASS CALL THE DELAWARE GROUP
AT 800-828-5052.
---------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- ---------------------------------------------------------------------
<S> <C>
COVER PAGE 1
- ---------------------------------------------------------------------
SYNOPSIS 2
- ---------------------------------------------------------------------
SUMMARY OF EXPENSES 3
- ---------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- ---------------------------------------------------------------------
INVESTMENT OBJECTIVES 5
- ---------------------------------------------------------------------
INVESTMENT POLICIES 5
- ---------------------------------------------------------------------
BUYING SHARES 10
- ---------------------------------------------------------------------
REDEMPTION AND EXCHANGE 12
- ---------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS 14
- ---------------------------------------------------------------------
TAXES 15
- ---------------------------------------------------------------------
CALCULATION OF NET ASSET VALUE PER SHARE 16
- ---------------------------------------------------------------------
MANAGEMENT OF THE FUND 16
- ---------------------------------------------------------------------
</TABLE>
Delaware Group Government Fund, Inc. (the "Fund") is a
professionally-managed mutual fund of the series type. This Prospectus
describes the Fund's U.S. Government Fund Institutional Class (the "Class") of
the Government Income Series (the "Series").
The objective of the Series is high current income consistent with safety
of principal by investing primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
Shares of this Class are available for purchase only by certain enumerated
institutions and are offered at net asset value without the imposition of a
front-end or contingent deferred sales charge and without a 12b-1 charge. See
Buying Shares.
This Prospectus relates only to the Class and sets forth information that
you should read and consider before you invest. Please retain it for future
reference. Part B of the Fund's registration statement, dated September 29,
1994, as it may be amended from time to time, contains additional information
about the Series and has been filed with the Securities and Exchange
Commission. Part B is incorporated by reference into this Prospectus and is
available, without charge, by writing to Delaware Distributors, Inc. at the
above address or by calling the above number. The Fund's financial statements
appear in its Annual Report, which will accompany any response to requests for
Part B.
The Series also offers the U.S. Government Fund A Class and the U.S.
Government Fund B Class. Shares of U.S. Government Fund A Class carry a
front-end sales charge and are subject to ongoing distribution expenses. Shares
of U.S. Government Fund B Class are subject to ongoing distribution expenses
and a contingent deferred sales charge upon redemption.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE> 5
SYNOPSIS
CAPITALIZATION
The Series offers the U.S. Government Fund Institutional Class, the U.S.
Government Fund A Class and the U.S. Government Fund B Class. The Series has
a present authorized capitalization of two hundred million shares of capital
stock, with a $.01 par value per share. Twenty million shares of that stock
have been allocated to the U.S. Government Fund Institutional Class, eighty
million shares have been allocated to each of the U.S. Government Fund A Class
and the U.S. Government Fund B Class. See Shares under Management of the Fund.
INVESTMENT MANAGER, DISTRIBUTOR AND SERVICE AGENT
Delaware Management Company, Inc. (the "Manager") is the investment
manager for the Fund. The Manager or its affiliate, Delaware International
Advisers Ltd., manages the other funds in the Delaware Group. Delaware
Distributors, Inc. (the "Distributor") is the national distributor for the Fund
and for all of the other mutual funds in the Delaware Group. Delaware Service
Company, Inc. (the "Transfer Agent") is the shareholder servicing, dividend
disbursing and transfer agent for the Fund and for all of the other mutual
funds in the Delaware Group. See Management of the Fund.
PURCHASE PRICE
Shares of the Class offered by this Prospectus are available at net asset
value, without a front-end or contingent deferred sales charge and are not
subject to distribution fees under a Rule 12b-1 distribution plan. See Buying
Shares.
INVESTMENT OBJECTIVE
The objective of the Series is high current income consistent with safety
of principal by investing primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities. See Investment
Objectives.
SPECIAL CONSIDERATIONS
The Series may enter into options and futures transactions for hedging
purposes to counterbalance portfolio volatility. While the Series does not
engage in options and futures for speculative purposes, there are risks which
result from use of these instruments by the Series, and the investor should
review the descriptions of such in this Prospectus. See Options and Futures
under Investment Policies.
OPEN-END INVESTMENT COMPANY
The Fund, which was organized as a Maryland corporation in 1985, is an
open-end management investment company and the Series' portfolio of assets is
diversified. See Shares under Management of the Fund.
INVESTMENT MANAGEMENT FEES
The Manager furnishes investment management services to the Fund, subject
to the supervision and direction of the Board of Directors. Under the
Investment Management Agreement, the annual compensation paid to the Manager is
equal to .60% of its average daily net assets, less a proportionate share of
all directors' fees paid to the unaffiliated directors by the Series. See
Management of the Fund.
REDEMPTION AND EXCHANGE
Shares of the Fund are redeemed or exchanged at the net asset value
calculated after receipt of the redemption or exchange request. See Redemption
and Exchange.
2
<PAGE> 6
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ---------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) . . . . . . . . . . . . . . . . None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . None*
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . None**
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
- ---------------------------------------------------------------------------------
<S> <C>
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.59%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Other Operating Expenses . . . . . . . . . . . . . . . . . . . . . . 0.35%
----
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . 0.94%
====
</TABLE>
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Class will bear directly or
indirectly. *CoreStates Bank, N.A. currently charges $7.50 per redemption for
redemptions payable by wire. ** Exchanges are subject to the requirements of
each fund and a front-end sales charge may apply. See U.S. Government Fund A
Class and U.S. Government Fund B Class for expense information about those
classes.
The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period. As noted in the
table above, the Fund charges no redemption fees.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$10 $30 $52 $115
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delaware Group Government Fund-Government Income Series and have been audited
by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes, and the report of
Ernst & Young LLP covering such financial information and highlights, all of
which are incorporated by reference into Part B. Further information about the
Series' performance is contained in its Annual Report to shareholders. A copy
of the Series' Annual Report (including the report of Ernst & Young LLP) may be
obtained from the Fund upon request at no charge.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------
7/31/94 7/31/93 7/31/92(2) 7/31/91(1)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . . . . . . . . . . . . . . . . $9.010 $9.020 $8.700 $8.590
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . 0.739 0.791 0.792 0.774
Net Gains or Losses on Securities (both realized and unrealized) . . (1.010) (0.010) 0.320 0.110
------ ------ ----- ------
Total From Investment Operations . . . . . . . . . . . . . . . . . (0.271) 0.781 1.112 0.884
------ ------ ----- ------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net investment income) . . . . . . . . . . . . . . . (0.739) (0.791) (0.792) (0.774)
Distributions (from capital gains) . . . . . . . . . . . . . . . . . none none none none
Returns of Capital . . . . . . . . . . . . . . . . . . . . . . . . . none none none none
------ ------ ------ ------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . (0.739) (0.791) (0.792) (0.774)
------ ------ ------ ------
Net Asset Value, End of Period . . . . . . . . . . . . . . . . . . . $8.000 $9.010 $9.020 $8.700
====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.23%) 9.04% 13.27% 10.76%
- ------------
- ---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (000 omitted) . . . . . . . . . . . . . . . $14,016 $16,475 $19,421 $13,427
Ratio of Expenses to Average Daily Net Assets . . . . . . . . . . . . 0.94% 0.97% 0.91% 0.88%
Ratio of Net Investment Income to Average Daily Net Assets . . . . . 8.60% 8.74% 8.85% 8.99%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . 309% 285% 196% 149%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
YEAR ENDED
------------------
7/31/90(1) 7/31/89(1)
<S> <C> <C>
Net Asset Value, Beginning of Period . . . . . . . . . . . . . . . . $8.750 $8.650
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . 0.771 0.793
Net Gains or Losses on Securities (both realized and unrealized) . . (0.160) 0.100
------ ------
Total From Investment Operations . . . . . . . . . . . . . . . . . 0.611 0.893
------ ------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net investment income) . . . . . . . . . . . . . . . (0.771) (0.793)
Distributions (from capital gains) . . . . . . . . . . . . . . . . . none none
Returns of Capital . . . . . . . . . . . . . . . . . . . . . . . . . none none
------ ------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . (0.771) (0.793)
------ ------
Net Asset Value, End of Period . . . . . . . . . . . . . . . . . . . $8.590 $8.750
====== ======
- --------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40% 10.92%
- ------------
- --------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (000 omitted) . . . . . . . . . . . . . . . $8,359 $3,506
Ratio of Expenses to Average Daily Net Assets . . . . . . . . . . . . 0.89% 0.97%
Ratio of Net Investment Income to Average Daily Net Assets . . . . . 9.00% 9.26%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . 127% 172%
</TABLE>
- -----------------
(1) The data for the period 1989 through 1991 are derived from data of the
Government Income Series I class which, like the U.S. Government Fund
Institutional Class, (prior to May 2, 1994, referred to as U.S. Government
Fund (Institutional) class), was not subject to Rule 12b-1 distribution
expenses. Government Income Series I class was converted into U.S.
Government Fund class on June 1, 1992, pursuant to a Plan of
Recapitalization approved by shareholders of Government Income Series I
class. Prior to May 2, 1994, U.S. Government Fund A Class was known as
U.S. Government Fund class.
(2) The U.S. Government Fund Institutional Class was first offered for sale on
June 1, 1992. The data and ratios for Government Income Series I class
(see note 1) and the U.S. Government Fund (Institutional) class have been
combined for 1992. For the ten months ended May 31, 1992, the Government
Income Series I class' operating expenses and net investment income per
share were $0.068 and $0.657, respectively. For the two months ended July
31, 1992, the U.S. Government Fund Institutional Class' operating expenses
and net investment income per share were $0.014 and $0.135, respectively.
All net investment income was distributed to shareholders.
4
<PAGE> 8
INVESTMENT OBJECTIVES
The investment objective of the Series described below is a matter of
fundamental policy and may not be changed without shareholder approval.
The objective of the Series is high current income consistent with safety
of principal by investing primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, including securities
issued or backed by U.S. government agencies and government-sponsored
corporations which may not be backed by the full faith and credit of the U.S.
government, such as the Export-Import Bank, Federal Housing Authority, Federal
National Mortgage Association and Federal Home Loan Banks and mortgage-backed
securities issued by nongovernment entities but collateralized by securities of
the U.S. government, its agencies and instrumentalities. The weighted average
maturity will be approximately ten years. Although these securities are
guaranteed as to principal and interest by the U.S. government or its
instrumentalities, the market value of these securities, upon which daily net
asset value is based, may fluctuate and is not guaranteed. The Series may also
invest up to 20% of its assets in (1) corporate notes and bonds rated A or
above, (2) certificates of deposit and obligations of both U.S. and foreign
banks if they have assets of at least one billion dollars, (3) commercial paper
rated P-1 by Moody's Investors Service, Inc. ("Moody's") and/or A-1 by Standard
& Poor's Corporation ("Standard & Poor's") and (4) asset-backed securities
rated Aaa by Moody's or AAA by Standard & Poor's.
U.S. government securities include U.S. Treasury securities consisting of
Treasury Bills, Treasury Notes and Treasury bonds. Some of the other government
securities in which the Series may invest include securities of the Federal
Housing Administration, the Government National Mortgage Association, the
Department of Housing and Urban Development, the Export-Import Bank, the
Farmers Home Administration, the General Services Administration, the Maritime
Administration and the Small Business Administration. The maturities of such
securities usually range from three months to 30 years.
INVESTMENT POLICIES
GNMA SECURITIES--The Series may invest in certificates of the Government
National Mortgage Association ("GNMA"). GNMA Certificates are mortgage-backed
securities. Each Certificate evidences an interest in a specific pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. Scheduled
payments of principal and interest are made to the registered holders of GNMA
Certificates. The GNMA Certificates in which the Series will invest are of the
modified pass-through type. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates at
the time such payments are due, whether or not such amounts are collected by
the issuer on the underlying mortgages. The National Housing Act provides that
the full faith and credit of the United States is pledged to the timely payment
of principal and interest by GNMA of amounts due on these GNMA Certificates.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments with maximum maturities of 30 years. The
average life is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities as the result of prepayments of
refinancing of such mortgages or foreclosure. Such prepayments are passed
through to the registered holder with the regular monthly payments of principal
and interest, and have the effect of reducing future payments. Due to the GNMA
guarantee, foreclosures impose no risk to principal investments.
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. In addition, a pool's term may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
As prepayment rates vary widely, it is not possible to accurately predict the
average life of a particular pool. However, statistics indicate that the
average life of the type of mortgages backing the majority of GNMA Certificates
is approximately 12 years. For this reason, it is standard practice to treat
GNMA Certificates as 30-year mortgage-backed securities which prepay fully in
the twelfth year. Pools of mortgages with other maturities or different
characteristics will have varying assumptions for average life. The assumed
average life of pools of mortgages having terms of less than 30 years is less
than 12 years, but typically not less than five years.
5
<PAGE> 9
The coupon rate of interest of GNMA Certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the
Certificates, but only by the amount of the fees paid to GNMA and the issuer.
Such fees in the aggregate usually amount to approximately 1/2 of 1%.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average-life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average
life of a pool of mortgage-related securities. Conversely, in periods of rising
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Prepayments generally occur when interest rates have
fallen. Reinvestments of prepayments will be at lower rates. Historically,
actual average life has been consistent with the 12-year assumption referred to
above. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificates and may
differ from the yield based on the assumed average life. Interest on GNMA
Certificates is paid monthly rather than semi-annually as for traditional
bonds.
MORTGAGE-BACKED SECURITIES--The Series may also invest in securities
issued by certain private, nongovernment corporations, such as financial
institutions, if the securities are fully collateralized at the time of
issuance by securities or certificates issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Two principal types of
mortgage-backed securities are collateralized mortgage obligations (CMOs) and
real estate mortgage investment conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. The Series will invest in such
private-backed securities only if they are 100% collateralized at the time of
issuance by securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The Series currently invests in privately-issued
CMOs and REMICs only if they are rated at the time of purchase in the two
highest grades by a nationally-recognized rating agency.
ASSET-BACKED SECURITIES--As noted and subject to the limitations set forth
above, the Series may also invest in securities which are backed by assets such
as receivables on home equity and credit card loans, and receivables regarding
automobile, mobile home and recreational vehicle loans, wholesale dealer floor
plans and leases. Such receivables are securitized in either a pass-through or
a pay-through structure. Pass-through securities provide investors with an
income stream consisting of both principal and interest payments in respect of
the receivables in the underlying pool. Pay-through asset-backed securities are
debt obligations issued usually by a special purpose entity, which are
collateralized by the various receivables and in which the payments on the
underlying receivables provide the funds to pay the debt service on the debt
obligations issued. The Series may invest in these and other types of
asset-backed securities that may be developed in the future. It is the Series'
current policy to limit asset-backed investments to those represented by
interests in credit card receivables, wholesale dealer floor plans, home equity
loans and automobile loans.
Due to the shorter maturity of the collateral backing such securities,
there is less of a risk of substantial prepayment than with mortgage-backed
securities. Such asset-backed securities do, however, involve certain risks not
associated with mortgage-backed securities, including the risk that security
interests cannot be adequately or in many cases, ever, established. In
addition, with respect to credit card receivables, a number of state and
federal consumer credit laws give debtors the right to set off certain amounts
owed on the credit cards, thereby reducing the outstanding balance. In the case
of automobile receivables, there is a risk that the holders may not have either
a proper or first security interest in all of the obligations backing such
receivables due to the large number of vehicles involved in a typical issuance
and technical requirements under state laws. Therefore, recoveries on
repossessed collateral may not always be available to support payments on the
securities. For further discussion concerning the risks of investing in such
asset-backed securities, see Part B.
6
<PAGE> 10
REPURCHASE AGREEMENTS--In order to invest its cash reserves or when in a
temporary defensive posture, the Series may enter into repurchase agreements
with banks or broker/dealers deemed to be creditworthy by the Manager, under
guidelines approved by the Board of Directors. A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Series) acquires
ownership of a debt security and the seller agrees to repurchase the obligation
at a future time and set price, thereby determining the yield during the
purchaser's holding period. Generally, repurchase agreements are of short
duration, often less than one week but on occasion for longer periods. Not more
than 10% of the Series' assets may be invested in repurchase agreements of over
seven-days' maturity or other illiquid assets. Should an issuer of a repurchase
agreement fail to repurchase the underlying security, the loss to the Series,
if any, would be the difference between the repurchase price and the market
value of the security. The Series will limit its investments in repurchase
agreements to those which the Manager under the guidelines of the Board of
Directors determines to present minimal credit risks and which are of high
quality. In addition, the Series must have collateral of at least 100% of the
repurchase price, including the portion representing the Series' yield under
such agreements which is monitored on a daily basis. Such collateral is held by
the Morgan Guaranty Trust Company of New York ("Custodian") in book entry form.
Such agreements may be considered loans under the Investment Company Act of
1940 (the "1940 Act"), but the Series considers repurchase agreements contracts
for the purchase and sale of securities, and it seeks to perfect a security
interest in the collateral securities so that it has the right to keep and
dispose of the underlying collateral in the event of default.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Series 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.
OPTIONS--The Series may write put and call options on a covered basis
only, and will not engage in option writing strategies for speculative
purposes. The Series may write covered call options and secured put options
from time to time on such portion of its portfolio, without limit, as the
Manager determines is appropriate in seeking to obtain the Series' investment
objective. The Series may also purchase (i) call options to the extent that
premiums paid for such options do not exceed 2% of the Series' total assets and
(ii) put options to the extent that premiums paid for such options do not
exceed 2% of the Series' total assets.
A. COVERED CALL WRITING--A call option gives the purchaser of such option
the right to buy, and the writer, in this case the Series, has the obligation
to sell the underlying security at the exercise price during the option period.
There is no percentage limitation on writing covered call options.
The advantage to the Series of writing covered calls is that the Series
receives a premium which is additional income. The disadvantage is that if the
security rises in value the Series will lose the appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether the
net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part by a decline in the market value of the underlying security.
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If a call option expires unexercised, the Series will realize a short-term
capital gain in the amount of the premium on the option less the commission
paid. Such a gain, however, may be offset by depreciation in the market value
of the underlying security during the option period. If a call option is
exercised, the Series will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price of
the underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
Call options will be written only on a covered basis, which means that the
Series will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected,
the Series would be required to continue to hold a security which it might
otherwise wish to sell. Options written by the Series will normally have
expiration dates between three and nine months from the date written. The
exercise price of a call option may be below, equal to or above the current
market value of the underlying security at the time the option is written.
B. PURCHASING CALL OPTIONS--The Series may purchase call options to the
extent that premiums paid by the Series do not aggregate more than 2% of the
Series' total assets. When the Series purchases a call option, in return for a
premium paid by the Series to the writer of the option, the Series obtains the
right to buy the security underlying the option at a specified exercise price
at any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage is that the Series may hedge against an increase
in the price of securities which it ultimately wishes to buy. However, the
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Series upon exercise of the option.
The Series may, following the purchase of a call option, liquidate its
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same Series as the option previously purchased. The
Series will realize a profit from a closing sale transaction if the price
received on the transaction is more than the premium paid to purchase the
original call option; the Series will realize a loss from a closing sale
transaction if the price received on the transaction is less than the premium
paid to purchase the original call option.
Although the Series will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an Exchange will exist for any particular
option, or at any particular time, and for some options no secondary market on
an Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the result that the Series would be
required to exercise its options in order to realize any profit and would incur
brokerage commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any
value to the Series.
C. SECURED PUT WRITING--A put option gives the purchaser of the option the
right to sell, and the writer, in this case the Series, has the obligation to
buy the underlying security at the exercise price during the option period.
During the option period, the writer of a put option may be assigned an
exercise notice by the broker/dealer through whom the option was sold requiring
the writer to make payment of the exercise price against delivery of the
underlying security. In this event, the exercise price will usually exceed the
then market value of the underlying security. This obligation terminates upon
expiration of the put option or at such earlier time at which the writer
effects a closing purchase transaction. The operation of put options in other
respects is substantially identical to that of call options. Premiums on
outstanding put options written or purchased by the Series may not exceed 2% of
its total assets.
The advantage to the Series of writing such options is that it receives
premium income. The disadvantage is that the Series may have to purchase
securities at higher prices than the current market price when the put is
exercised.
Put options will be written only on a secured basis, which means that the
Series will maintain in a segregated account with its Custodian cash or U.S.
government securities in an amount not less than the exercise price of the
option at all times during the option period. The amount of cash or U.S.
government securities held in the segregated account will be adjusted on a
daily basis to reflect changes in the market value of the securities covered by
the put option written by the Series. Secured put options will generally be
written in circumstances where the Manager wishes to purchase the underlying
security for the Series' portfolio at a price lower than the current market
price of the security. In such event, the Series would write a secured put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay.
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<PAGE> 12
D. PURCHASING PUT OPTIONS--The Series may purchase put options to the
extent that premiums paid for such options do not exceed 2% of the Series'
total assets. The Series will, at all times during which it holds a put option,
own the security covered by such option.
The Series intends to purchase put options in order to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option ("protective puts"). The ability to
purchase put options will allow the Series to protect unrealized gain in an
appreciated security in its portfolio without actually selling the security. In
addition, the Series will continue to receive interest income on the security.
If the security does not drop in value, the Series will lose the value of the
premium paid. The Series may sell a put option which it has previously
purchased prior to the sale of the securities underlying such option. Such
sales will result in a net gain or loss depending on whether the amount
received on the sale is more or less than the premium and other transaction
costs paid on the put option which is sold.
FUTURES--The Series may invest in futures contracts and options on such
futures contracts subject to certain limitations. Futures contracts are
agreements for the purchase or sale for future delivery of securities. When a
futures contact is sold, the Series incurs a contractual obligation to deliver
the securities underlying the contract at a specified price on a specified date
during a specified future month. A purchase of a futures contract means the
acquisition of a contractual right to obtain delivery to the Series of the
securities called for by the contract at a specified price during a specified
future month.
While futures contracts provide for the delivery of securities, deliveries
usually do not occur. Contracts are generally terminated by entering into an
offsetting transaction. When the Series enters into a futures transaction, it
must deliver to the futures commission merchant selected by the Series an
amount referred to as "initial margin." This amount is maintained by the
futures commission merchant in an account at the Series' Custodian bank.
Thereafter, a "variation margin" may be paid by the Series to, or drawn by the
Series from, such account in accordance with controls set for such account,
depending upon changes in the price of the underlying securities subject to the
futures contract.
The Series may also purchase and write options to buy or sell futures
contracts. Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract, rather than actually to
purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option.
The purpose of the purchase or sale of futures contracts for the Series,
which consists of a substantial number of government securities, is to protect
the Series against the adverse effects of fluctuations in interest rates
without actually buying or selling such securities. Similarly, when it is
expected that interest rates may decline, futures contracts may be purchased to
hedge in anticipation of subsequent purchases of government securities at
higher prices.
With respect to options on futures contracts, when the Series is not fully
invested, it may purchase a call option on a futures contract to hedge against
a market advance due to declining interest rates. The writing of a call option
on a futures contract constitutes a partial hedge against declining prices of
the securities which are deliverable upon exercise of the futures contract. If
the futures price at the expiration of the option is below the exercise price,
the Series will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Series will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of government securities which the Series
intends to purchase.
If a put or call option the Series has written is exercised, the Series
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between the value of its
portfolio securities and changes in the value of its futures positions, the
Series' losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The Series will
purchase a put option on a futures contract to hedge the Series' portfolio
against the risk of rising interest rates.
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<PAGE> 13
To the extent that interest rates move in an unexpected direction, the
Series may not achieve the anticipated benefits of futures contracts or options
on futures contracts or may realize a loss. For example, if the Series is
hedged against the possibility of an increase in interest rates which would
adversely affect the price of government securities held in its portfolio and
interest rates decrease instead, the Series will lose part or all of the
benefit of the increased value of its government securities which it has
because it will have offsetting losses in its futures position. In addition, in
such situations, if the Series had insufficient cash, it may be required to
sell government securities from its portfolio to meet daily variation margin
requirements. Such sales of government securities may, but will not
necessarily, be at increased prices which reflect the rising market. The Series
may be required to sell securities at a time when it may be disadvantageous to
do so.
To the extent that the Series purchases an option on a futures contract
and fails to exercise the option prior to the exercise date, it will suffer a
loss of the premium paid. Further, with respect to options on futures
contracts, the Series may seek to close out an option position by writing or
buying an offsetting position covering the same securities or contracts and
have the same exercise price and expiration date. The ability to establish and
close out positions on options will be subject to the maintenance of a liquid
secondary market, which cannot be assured.
The Series will not enter into futures contracts to the extent that more
than 5% of the Series' assets are required as futures contract margin deposits
and will not invest in futures contracts or options thereon to the extent that
obligations relating to such transactions exceed 20% of the Series' assets.
PORTFOLIO LOAN TRANSACTIONS--The Series may loan up to 25% of its assets
to qualified broker/dealers or institutional investors for their use relating
to short sales or other security transactions.
The major risk to which the Series would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Series will only enter into loan arrangements
after a review of all pertinent facts by the Manager, subject to overall
supervision by the Board of Directors, including the creditworthiness of the
borrowing broker, dealer or institution and then only if the consideration to
be received from such loans would justify the risk. Creditworthiness will be
monitored on an ongoing basis by the Manager. See Part B.
PORTFOLIO TURNOVER--The Series may experience a high rate of portfolio
turnover, which is not expected to exceed 400%. High portfolio turnover rates
may occur, for example, if the Series writes a substantial number of covered
call options and the market prices of the underlying securities appreciate. A
100% turnover rate would occur if all of the securities in the portfolio were
sold and replaced within one year. The rate of portfolio turnover is not a
limiting factor when the Manager deems it desirable to purchase or sell
securities or to engage in options transactions. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs and may affect taxes payable by the Series' shareholders. The turnover
rate may also be affected by cash requirements from redemptions and repurchases
of the Series' shares. The degree of portfolio activity may affect brokerage
costs of the Series and taxes payable by shareholders.
For the fiscal years ended July 31, 1993 and 1994, the portfolio turnover
rates for the Series were 285% and 309%, respectively.
OTHER RESTRICTIONS--Part B sets forth other more specific investment
restrictions, some of which limit the percentage of assets of the Series which
may be invested in certain types of securities. The Fund may borrow from banks.
No investment securities will be purchased while the Series has an outstanding
borrowing. See Part B.
BUYING SHARES
The Distributor serves as the national distributor for the Fund. Shares of
the Class may be purchased directly by contacting the Fund or its agent or
through authorized investment dealers. All purchases are at net asset value.
There is no sales charge.
INVESTMENT INSTRUCTIONS GIVEN ON BEHALF OF PARTICIPANTS IN AN
EMPLOYER-SPONSORED RETIREMENT PLAN ARE MADE IN ACCORDANCE WITH PROVISIONS
CONTAINED IN THE PLAN DOCUMENT AND ARE DIRECTED BY THE EMPLOYER. EMPLOYEES
CONSIDERING PURCHASING SHARES OF THE CLASS AS PART OF THEIR RETIREMENT PROGRAM
SHOULD CONTACT THEIR EMPLOYER FOR DETAILS.
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Shares of the Class are available for purchase only by: (a) defined
contribution retirement plans with 1,000 or more eligible employees; (b)
tax-exempt employee benefit plans of the Manager or its affiliates and
securities dealer firms with a selling agreement with the Distributor; (c)
institutional advisory accounts of the Manager or its 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 (d) 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.
U.S. GOVERNMENT FUND A CLASS AND
U.S. GOVERNMENT FUND B CLASS
In addition to offering the U.S. Government Fund Institutional Class, the
Series also offers the U.S. Government Fund A Class and the U.S. Government
Fund B Class, which are described in a separate prospectus relating only to
those classes. Shares of the U.S. Government Fund A Class and U.S. Government
Fund B Class may be purchased through authorized investment dealers or directly
by contacting the Fund or its agent. The U.S. Government Fund A Class carries
a front-end sales charge and has annual 12b-1 expenses equal to a maximum of
.30%. The maximum front-end sales charge as a percentage of the offering price
is 4.75% (4.99% as a percentage of the amount invested) and is reduced on
certain transactions of $100,000 or more. The U.S. Government Fund B Class has
no front-end sales charge and is subject to annual 12b-1 expenses equal to a
maximum of 1%. Shares of the U.S. Government Fund B Class and certain shares of
U.S. Government Fund A Class may be subject to a contingent deferred sales
charge upon redemption. Sales or service compensation available in respect of
such classes, therefore, differs from that available in respect of the U.S.
Government Fund Institutional Class. All three classes of shares have a
proportionate interest in the underlying portfolio of securities of the Series.
Total Operating Expenses incurred by the U.S. Government Fund A Class as a
percentage of average daily net assets for the fiscal year ended July 31, 1994
were 1.23%. Such expenses expected to be incurred by the U.S. Government Fund B
Class are 1.94% based on the expenses of the U.S. Government Fund A Class
during the fiscal year ended July 31, 1994. To obtain a prospectus relating to
the U.S. Government Fund A Class and the U.S. Government Fund B Class, contact
the Distributor.
HOW TO BUY SHARES
The Fund makes it easy to invest by mail, by wire, by exchange and by
arrangement with your investment dealer. In all instances, investors must
qualify to purchase the Class.
INVESTING DIRECTLY BY MAIL
1. Initial Purchases--An Investment Application must be completed, signed and
sent with a check payable to U.S. Government Fund Institutional Class, to 1818
Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to U.S. Government Fund Institutional Class. Your
check should be identified with your name(s) and account number.
INVESTING DIRECTLY BY WIRE
You may purchase shares by requesting your bank to transmit funds by wire
to CoreStates Bank, N.A., ABA #031000011, account number 0114-2596 (include
your name(s) and your account number for the class in which you are investing).
1. Initial Purchases--Before you invest, telephone the Fund's Client Services
Department at 800-828-5052 to get an account number. If you do not call first,
it may delay processing your investment. In addition, you must promptly send
your Investment Application to U.S. Government Fund Institutional Class, 1818
Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments anytime by wiring
funds to CoreStates Bank, N.A., as described above. You must advise your Client
Services Representative by telephone at 800-828-5052 prior to sending your
wire.
INVESTING BY EXCHANGE
If you have an investment in another mutual fund in the Delaware Group and
you qualify to purchase shares of the Class, you may write and authorize an
exchange of part or all of your investment into the Class. Shares of the U.S.
Government Fund B Class and the Class B Shares of the other funds in the
Delaware Group offering such a class of shares may not be exchanged into the
Class. If you wish to open an account by exchange, call your Client Services
Representative at 800-828-5052 for more information.
INVESTING THROUGH YOUR INVESTMENT DEALER
You can make a purchase of Class shares through most investment dealers
who, as part of the service they provide, must transmit orders promptly. They
may charge for this service.
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PURCHASE PRICE AND EFFECTIVE DATE
The purchase price (net asset value) is determined as of the close of
regular trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern
time) on days when such exchange is open.
The effective date of a purchase made through an investment dealer is the
date the order is received by the Fund. The effective date of a direct purchase
is the day your wire, electronic transfer or check is received, unless it is
received after the time the share price is determined, as noted above. Those
received after such time will be effective the next business day.
THE CONDITIONS OF YOUR PURCHASE
The Fund reserves the right to reject any purchase or exchange. If a
purchase is cancelled because your check is returned unpaid, you are
responsible for any loss incurred. The 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 Group. The Fund
reserves the right, upon 60 days' written notice, to redeem accounts that
remain under $1,000 as a result of redemptions.
REDEMPTION AND EXCHANGE
REDEMPTION AND EXCHANGE REQUESTS MADE ON BEHALF OF PARTICIPANTS IN AN
EMPLOYER-SPONSORED RETIREMENT PLAN ARE MADE IN ACCORDANCE WITH PROVISIONS
CONTAINED IN THE PLAN DOCUMENT AND ARE DIRECTED BY THE EMPLOYER. EMPLOYEES
SHOULD THEREFORE CONTACT THEIR EMPLOYER FOR DETAILS.
Your shares will be redeemed or exchanged based on the net asset value
next determined after we receive your request in good order. Redemption and
exchange requests received in good order after the time the net asset value of
shares is determined, as noted above, will be processed the next business day.
See Purchase Price and Effective Date under Buying Shares. Except as otherwise
noted below, for a redemption request to be in "good order," you must provide
your Class account number, account registration, and the total number of shares
or dollar amount of the transaction. With regard to exchanges, you must also
provide the name of the fund you want to receive 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 Fund at 800-828-5052.
The Fund will not honor written redemption requests of shareholders who
recently purchased Class shares by check until it is reasonably satisfied the
purchase check has cleared, which may take up to 15 days from the purchase
date. The Fund will not honor telephone redemptions for Class shares recently
purchased by check unless it is reasonably satisfied that the purchase check
has cleared. You can avoid this potential delay if you purchase shares by
wiring Federal Funds. The 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.
Shares of the Class may be exchanged into any other Delaware Group mutual
fund provided: (1) the investment satisfies the eligibility and other
requirements set forth in the prospectus of the fund being acquired, including
the payment of any applicable front-end sales charge; and (2) the shares of the
fund being acquired are in a state where that fund is registered. If exchanges
are made into other shares that are eligible for purchase only by those
permitted to purchase shares of the Class, such exchanges will be exchanged at
net asset value. Shares of the Class may not be exchanged into the Class B
Shares of the funds in the Delaware Group. The Fund reserves the right to
reject exchange requests at any time. The Fund may suspend or terminate, or
amend the terms of, the exchange privilege upon 60 days' written notice to
shareholders.
Different redemption and exchange methods are outlined below. There is no
fee charged by the Fund or the Distributor for redeeming or exchanging your
shares. You may also have your investment dealer arrange to have your shares
redeemed or exchanged. Your investment dealer may charge for this service.
All authorizations given by shareholders with respect to an account,
including selection of any of the features described below, shall continue in
effect until revoked or modified in writing and until such time as such written
revocation or modification has been received by the Fund or its agent.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and carefully
read that fund's prospectus before buying shares in an exchange. The prospectus
contains more complete information about the fund, including charges and
expenses.
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CHECKWRITING FEATURE
YOU CAN REQUEST SPECIAL CHECKS BY MARKING THE BOX ON THE INVESTMENT
APPLICATION.
The checks must be drawn for $500 or more and, unless otherwise indicated
on the Investment Application or your checkwriting authorization form, must be
signed by all owners of the account.
Because the value of shares fluctuates, you cannot use checks to close
your account. The Checkwriting Feature is not available for Retirement Plans.
See Part B for additional information.
WRITTEN REDEMPTION AND EXCHANGE
You can write to the Fund at 1818 Market Street, Philadelphia, PA 19103 to
redeem some or all of your Class shares or to request an exchange of any or all
your Class shares into another mutual fund in the Delaware Group, subject to
the same conditions and limitations as other exchanges noted above. 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 Fund requires a signature by
all owners of the account and may require a signature guarantee. Each signature
guarantee must be supplied by an eligible guarantor institution. The Fund
reserves the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness. The Fund may require further
documentation from corporations, executors, retirement plans, administrators,
trustees or guardians.
The redemption request is effective at the net asset value next determined
after it is received in good order. Payment is normally mailed the next
business day, but no later than seven days, after receipt of your request. The
Fund does not issue certificates for shares unless you submit a specific
request. If your shares are in certificate form, the certificate must accompany
your request and also be in good order.
Shareholders also may submit their written request for redemption or
exchange by facsimile transmission at the following number: 215-972-8864.
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 shares in certificate form, you can only redeem
or exchange by written request and you must return your certificates.
The Telephone Redemption service enabling redemption proceeds to be mailed
to the account address of record and the Telephone Exchange service, both of
which are described below, are automatically provided unless the Fund receives
written notice from the shareholder to the contrary. The 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 Fund by telephone
during periods when market or economic conditions lead to an unusually large
volume of telephone requests.
Neither the Fund nor the Transfer Agent is responsible for any shareholder
loss incurred in acting upon written or telephone instructions for redemption
or exchange of Class shares which are reasonably believed to be genuine. With
respect to such telephone transactions, the Fund will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. A written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, the shareholder is acknowledging
prior receipt of a prospectus for the fund into which shares are being
exchanged.
TELEPHONE REDEMPTION--CHECK TO YOUR ADDRESS
OF RECORD
You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your record address. Checks will be payable to
the shareholder(s) of record. Payment is normally mailed the next business day,
but no more than seven days, after receipt of the request.
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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, the Fund requires a written authorization and may require that you
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. CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted
from your redemption. If you ask for a check, it will normally be mailed the
next business day, but no later than seven days, after receipt of your request
to your predesignated bank account. There are no fees for this method, but the
mail time may delay getting funds into your bank account. Simply call your
Client Services Representative prior to the time the net asset value is
determined, as noted above.
TELEPHONE EXCHANGE
You or your investment dealer of record can exchange shares into any fund
in the Delaware Group under the same registration. As with the written exchange
service, telephone exchanges are subject to the same conditions and limitations
as other exchanges noted above. Telephone exchanges may be subject to
limitations as to amounts or frequency.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares a dividend to all shareholders of record at the time the
net asset value per share is determined. See Purchase Price and Effective Date
under Buying Shares. Thus, when redeeming shares, dividends continue to be
credited up to and including the date of redemption.
Purchases of Class shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if the Fund is given prior notice of Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning
dividends on the date the wire is received. Purchases by check earn dividends
upon conversion to Federal Funds, normally one business day after receipt.
Each class of the Series will share proportionately in the investment
income and expenses of the Series, except that the Class will not incur any
distribution fees under the 12b-1 Plans which apply to the U.S. Government Fund
A Class and the U.S. Government Fund B Class.
The Series' dividends are declared daily and paid monthly on the first
business day following the end of each month. Dividends and distributions, if
any, will be automatically reinvested in a shareholder's account at net asset
value. Any net short-term capital gains after deducting any net long-term
capital losses (including carryforwards) and, pursuant to an Exemptive Order
under Section 19(b) of the Investment Company Act, any long-term gains that
would have been short-term gains except for 60/40 treatment under Section
1256(a) of the Internal Revenue Code may be distributed quarterly, but in the
discretion of the Fund's Board of Directors, might be distributed less
frequently. Any distribution from net long-term realized securities profits
will be made twice a year. The first payment normally would be made during the
first quarter of the next fiscal year. The second payment would be made near
the end of the calendar year to comply with certain requirements of the
Internal Revenue Code. During the fiscal year ended July 31, 1994, dividends
totaling $0.74 per share of the Class were paid from net investment income.
14
<PAGE> 18
TAXES
The Series has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). As such, the Series 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.
The Series intends to distribute substantially all of its net investment
income and net capital gains, if any. Dividends from net investment income or
net short-term capital gains will be taxable to investors who are subject to
income tax as ordinary income, even though received in additional shares. No
portion of the Series' distributions will be eligible for the
dividends-received deduction for corporations.
Distributions paid by the Series from long-term capital gains, received in
additional shares, are taxable to those investors who are subject to income
taxes as long-term capital gains, regardless of the length of time an investor
has owned shares in the Series. The Series does not seek to realize any
particular amount of capital gains during a year; rather, realized gains are a
byproduct of Series management activities. Consequently, capital gains
distributions may be expected to vary considerably from year to year. Also, for
those investors subject to tax, if purchases of shares in the Series are made
shortly before the record date for a dividend or capital gains distribution, a
portion of the investment will be returned as a taxable distribution.
Dividends which are declared in October, November or December but which,
for operational reasons, may not be paid to the shareholder until the following
January, will be treated for tax purposes as if paid by the Series and received
by the shareholder on December 31 of the calendar year in which they are
declared.
The sale of shares of the Series is a taxable event and may result in a
capital gain or loss to shareholders subject to tax. Capital gain or loss may
be realized from an ordinary redemption of shares or an exchange of shares
between two mutual funds (or two portfolios or series of a mutual fund). Any
loss incurred on sale or exchange of the Series' shares which had been held for
six months or less will be treated as a long-term capital loss to the extent of
capital gain dividends received with respect to such shares.
In addition to federal taxes, shareholders may be subject to state and
local taxes on distributions. Distributions of interest income and capital
gains realized from certain types of U.S. government securities may be exempt
from state personal income taxes. Shares of the Series are exempt from
Pennsylvania county personal property taxes.
Each year, the Fund will mail you information on the tax status of the
Series' dividends and distributions. Shareholders will also receive each year
information as to the portion of dividend income that is derived from U.S.
government securities that are exempt from state income tax. Of course,
shareholders who are not subject to tax on their income would not be required
to pay tax on amounts distributed to them by the Series.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration Form your proper
Taxpayer Identification Number and by certifying that you are not subject to
backup withholding.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers concerning
the federal, state, local or foreign tax consequences of an investment in the
Series.
See Accounting and Tax Issues and Taxes in Part B for additional
information on tax matters relating to the Series and its shareholders.
15
<PAGE> 19
CALCULATION OF NET ASSET
VALUE PER SHARE
The purchase and redemption price of the Class is the net asset value
("NAV") per share next determined after the order is received. The NAV is
computed as of the close of regular trading on the New York Stock Exchange
(ordinarily, 4 p.m., Eastern time) on days when such exchange is open.
The NAV per share is computed by adding the value of all securities and
other assets in the portfolio, deducting any liabilities (expenses and fees are
accrued daily) and dividing by the number of shares outstanding. U.S.
government securities are valued at the mean between the bid and asked prices.
Options are valued at the last reported sale price or, if no sales are
reported, at the mean between the last reported bid and asked prices. Any
short-term investments having a maturity of less than 60 days are valued at
amortized cost, which approximates market value. Non-Exchange-traded options
are valued at fair value using a mathematical model. All other securities are
valued at their fair value by an independent pricing service using methods
approved by the Fund's Board of Directors.
Each of the Series' three classes will bear, pro-rata, all of the common
expenses of the Fund. The net asset values of all outstanding shares of each
class of the Fund will be computed on a pro-rata basis for each outstanding
share based on the proportionate participation in the Fund represented by the
value of shares of that class. All income earned and expenses incurred by the
Fund will be borne on a pro-rata basis by each outstanding share of a class,
based on each class' percentage in the Fund represented by the value of shares
of such classes, except that the Class will not incur any of the expenses under
the Series' 12b-1 Plans and U.S. Government Fund A and B Classes alone will
bear the 12b-1 Plan fees payable under their respective Plans. Due to the
specific distribution expenses and other costs that will be allocable to each
class, the dividends paid to each class of the Fund may vary. However, the NAV
per share of each class is expected to be equivalent.
MANAGEMENT OF THE FUND
DIRECTORS
The business and affairs of the Fund are managed under the direction of
its Board of Directors. Part B contains additional information regarding the
directors and officers.
INVESTMENT MANAGER
The Manager furnishes investment management services to the Series.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On July 31, 1994, the Manager and its affiliate,
Delaware International Advisers Ltd., were supervising in the aggregate more
than $26 billion in assets in the various institutional (approximately
$16,728,470,000) and investment company (approximately $9,578,226,000)
accounts.
The Manager is an indirect, wholly-owned subsidiary of Delaware Management
Holdings, Inc. ("DMH"). By reason of its percentage ownership of DMH common
stock and through a Voting Trust Agreement with certain other DMH shareholders,
Legend Capital Group, L.P. ("Legend") controls DMH and the Manager. As General
Partners of Legend, Leonard M. Harlan and John K. Castle have the ability to
direct the voting of more than a majority of the shares of DMH common stock and
thereby control the Manager.
The Manager manages the Series' portfolio and makes investment decisions
which are implemented by the Fund's Trading Department. The Manager also pays
the salaries of all the directors, officers and employees of the Fund who are
affiliated with the Manager. For these services, the annual compensation paid
to the Manager is equal to .60% of its average daily net assets, less a
proportionate share of all directors' fees paid to the unaffiliated directors
by the Series. Investment management fees paid by the Series for the fiscal
year ended July 31, 1994 were 0.59% of average daily net assets.
Roger A. Early has assumed primary responsibility for making day-to-day
investment decisions for the Fund as of July 18, 1994. Mr. Early has an
undergraduate degree in economics from the University of Pennsylvania's Wharton
School and an MBA in finance and accounting from the University of Pittsburgh.
He is also a CPA and a CFA. Prior to joining the Delaware Group, Mr. Early was
a portfolio manager for Federated Investment Counseling's fixed income group,
with over $1 billion in assets.
In making investment decisions for the Fund, Mr. Early consults regularly
with Paul E. Suckow, Dorothea M. Dutton and Gary A. Reed.
16
<PAGE> 20
Mr. Suckow is the Manager's Chief Investment Officer for fixed income. A
Chartered Financial Analyst, he is a graduate of Bradley University with an MBA
from Western Illinois University. Mr. Suckow was a fixed income portfolio
manager at the Delaware Group from 1981 to 1985. He returned to the Delaware
Group in 1993 after eight years with Oppenheimer Management Corporation.
Ms. Dutton is a graduate of the University of Washington. Prior to joining
the Delaware Group in 1986 as a vice president for fixed income, she was the
Senior Investment Officer for fixed income for the California State Teachers'
Retirement System. A Chartered Financial Analyst, Ms. Dutton is a member of the
Financial Analysts of Philadelphia and the Fixed Income Analysts' Society.
Mr. Reed holds an AB in Economics from the University of Chicago and an MA
in Economics from Columbia University. He began his career in 1978 with the
Equitable Life Assurance Company in New York City, where he specialized in
credit analysis. Prior to joining the Delaware Group in 1989, Mr. Reed was Vice
President and Manager of the fixed income department at Irving Trust Company in
New York.
PORTFOLIO TRADING PRACTICES
Portfolio trades are generally made on a net basis without brokerage
commissions. However, the price may include a mark-up or mark-down. Banks,
brokers or dealers are selected by the Manager to execute the Series' portfolio
transactions.
The Fund uses its best efforts to obtain the best available price and most
favorable execution for portfolio transactions. Orders may be placed with
brokers or dealers who provide brokerage and research services to the Manager
or its advisory clients. These services may be used by the Manager in servicing
any of its accounts. Subject to best price and execution, the Series may
consider a broker/dealer's sales of Series shares in placing portfolio orders
and may place orders with broker/dealers that have agreed to defray certain
Series expenses such as custodian fees.
PERFORMANCE INFORMATION
From time to time, the Series may quote yield or total return performance
of the Class in advertising and other types of literature. The current yield
for the Class will be calculated by dividing the annualized net investment
income earned by the Class during a recent 30-day period by the net asset value
per share on the last day of the period. The yield formula provides for
semi-annual compounding which assumes that net investment income is earned and
reinvested at a constant rate and annualized at the end of a six-month period.
Total return will be based on a hypothetical $1,000 investment, reflecting the
reinvestment of all distributions. Each presentation will include the average
annual total return for one-, five- and ten-year periods. The Series may also
advertise aggregate and average total return information concerning the Class
over additional periods of time.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not an indication of future results.
STATEMENTS AND CONFIRMATIONS
You will receive quarterly statements of your account as well as
confirmations of all investments and redemptions. You should examine statements
and confirmations immediately and promptly report any discrepancy by calling
your Client Services Representative.
FINANCIAL INFORMATION ABOUT THE FUND
Each fiscal year, you will receive an annual report containing financial
statements audited by Ernst & Young LLP (the Fund's independent auditors), and
an unaudited semi-annual report. These reports provide detailed information
about the Series' investments and performance. The Fund's fiscal year ends on
July 31.
17
<PAGE> 21
DISTRIBUTION AND SERVICE
The Distributor, Delaware Distributors, Inc., serves as the national
distributor for the Fund under an Amended and Restated Distribution Agreement
dated as of May 2, 1994. It bears all of the costs of promotion and
distribution.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for the Series
under an Agreement dated June 29, 1988. The unaffiliated directors review
service fees paid to the Transfer Agent. Certain recordkeeping and other
shareholder services that otherwise would be performed by the Transfer Agent
may be performed by certain other entities and the Transfer Agent may elect to
enter into an agreement to pay such other entities for those services. In
addition, participant account maintenance fees may be assessed for certain
recordkeeping provided as part of retirement plan and administration service
packages. These fees are based on the number of participants in the plan and
the various services selected by the employer. Fees will be quoted upon request
and are subject to change.
The Distributor and the Transfer Agent are also indirect, wholly-owned
subsidiaries of DMH.
EXPENSES
The Series is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Amended and Restated Distribution Agreement. The
ratio of operating expenses to average daily net assets for the Class was 0.94%
for the fiscal year ended July 31, 1994.
SHARES
The Fund is an open-end management investment company, currently offering
one series of shares and the Series' portfolio of assets is diversified.
Commonly known as a mutual fund, the Fund was organized as a Maryland
corporation on April 23, 1985.
The Series' shares have a par value of $.01, equal voting rights, except
as noted below, and are equal in all other respects. All Fund shares have
noncumulative voting rights which means that the holders of more than 50% of
the Fund's shares voting for the election of directors can elect 100% of the
directors if they choose to do so. Under Maryland law, the Fund is not
required, and does not intend, to hold annual meetings of shareholders unless,
under certain circumstances, it is required to do so under the 1940 Act.
Shareholders of 10% or more of the Fund's shares may request that a special
meeting be called to consider the removal of a director.
The Series also offers the U.S. Government Fund A Class and the U.S.
Government Fund B Class which represent proportionate interests in the assets
of the Series and have the same voting and other rights and preferences as the
Class, except that shares of the Class are not subject to, and may not vote on
matters affecting, the Series' Distribution Plans under Rule 12b-1 relating to
the U.S. Government Fund A Class and the U.S. Government Fund B Class.
Until May 31, 1992, the Series offered shares of two retail classes of
shares, Government Income Series II class (now the U.S. Government Fund A
Class) and the Government Income Series I class. Shares of Government Income
Series I class were offered with a sales charge, but without the imposition of
a Rule 12b-1 fee. Effective June 1, 1992, following shareholder approval of a
plan of recapitalization on May 8, 1992, shareholders of the Government Income
Series I class had their shares converted into shares of the Government Income
Series II class and became subject to the latter class' Rule 12b-1 charges.
Effective at the same time, following approval by shareholders, the name of the
Government Income Series II class was changed to the U.S. Government Fund
class. Prior to May 2, 1994, the Class was known as U.S. Government Fund
(Institutional) class and U.S. Government Fund A Class was known as the U.S.
Government Fund class. The U.S. Government Fund B Class was not offered prior
to May 2, 1994.
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<PAGE> 22
SHARES OF THIS SERIES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES ARE NOT
DEPOSITS, OBLIGATIONS OF, GUARANTEED OR ENDORSED BY ANY BANK.
- --------------------------------------------------------------------------------
For more information contact the Delaware
Group at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, Inc.
1818 Market Street
Philadelphia, PA 19103
<TABLE>
<S> <C>
SHAREHOLDER SERVICING, [PHOTO OF GEORGE WASHINGTON CROSSING THE DELAWARE RIVER]
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
</TABLE>
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Morgan Guaranty Trust Company of New York
60 Wall Street
New York, NY 10260
P-041/9-94/RRD
Printed in the U.S.A.
U.S.
GOVERNMENT
FUND
- ----------
INSTITUTIONAL
PROSPECTUS
SEPTEMBER 29, 1994
DELAWARE
GROUP
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