<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
File No. 33-63238
File No. 811-7742
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 18 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 19
VOYAGEUR MUTUAL FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
1818 Market Street, Philadelphia, Pennsylvania 19103
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (215) 255-2923
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George M. Chamberlain, Jr., 1818 Market Street, Philadelphia, PA 19103
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(Name and Address of Agent for Service)
Approximate Date of Public Offering: August 28, 1997
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It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b)
__X__ on August 28, 1997 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
Registrant has registered an indefinite amount of securities
under the Securities Act of 1933 pursuant to Section 24(f)
of the Investment Company Act of 1940. Registrant's 24f-2 Notice
for its most recent fiscal year was filed on February 26, 1997.
<PAGE>
--- C O N T E N T S ---
This Post-Effective Amendment No. 18 to Registration File No. 33-63238 includes
the following:
1. Facing Page
2. Contents Page
3. Cross-Reference Sheet
4. Part A - Prospectuses
5. Part B - Statement of Additional Information
6. Part C - Other Information
7. Signatures
<PAGE>
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
Item No. Description Location in Prospectus
- -------- ----------- ----------------------
<S> <C> <C>
1 Cover Page................................................. Cover Page
2 Synopsis................................................... Synopsis; Summary
of Expenses
3 Condensed Financial Information............................ Financial
Highlights
4 General Description of Registrant.......................... Investment Objective and
Policies; Classes of Shares
5 Management of the Fund..................................... Management of the Fund
6 Capital Stock and Other Securities......................... The Delaware
Difference; Dividends and
Distributions; Taxes; Classes
of Shares
7 Purchase of Securities Being Offered....................... Cover Page; How to Buy
Shares; Calaculation of
Offering Price and Net Asset
Value Per Share; Management
of the Fund
8 Redemption or Repurchase................................... How to Buy Shares;
Redemption and Exchange
9 Legal Proceedings.......................................... None
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET
PART B
<TABLE>
<CAPTION>
Location in Statement of
Item No. Description Additional Information
- -------- ----------- ----------------------
<S> <C> <C>
10 Cover Page..................................................... Cover Page
11 Table of Contents.............................................. Table of Contents
12 General Information and History................................ Not Applicable
13 Investment Objectives and Policy............................... Investment Restrictions
and Policies
14 Management of the Registrant................................... Officers and Directors
15 Control Persons and Principal Holders of Securities............ Officers and Directors
16 Investment Advisory and Other Services......................... Officers and Directors;
Investment Management
Agreement; General Information;
Financial Statements
17 Brokerage Allocation........................................... Trading Practices and Brokerage
18 Capital Stock and Other Securities............................. Capitalization and
Noncumulative Voting
(under General Information)
19 Purchase, Redemption and Pricing of Securities
Being Offered.................................................. Purchasing Shares;
Determining Offering Price
and Net Asset Value Per Share;
Redemption and Repurchase;
Exchange Privilege
20 Tax Status..................................................... Distributions and Taxes
21 Underwriters................................................... Purchasing Shares
22 Calculation of Performance Data................................ Performance Information
23 Financial Statements........................................... Financial Statements
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET
PART C
<TABLE>
<CAPTION>
Item No. Description Location in Part C
- -------- ----------- ------------------
<S> <C> <C>
24 Financial Statements and Exhibits..................................... Item 24
25 Persons Controlled by or under Common Control
with Registrant....................................................... Item 25
26 Number of Holders of Securities....................................... Item 26
27 Indemnification....................................................... Item 27
28 Business and Other Connections of Investment
Adviser............................................................... Item 28
29 Principal Underwriters................................................ Item 29
30 Location of Accounts and Records...................................... Item 30
31 Management Services................................................... Item 31
32 Undertakings.......................................................... Item 32
</TABLE>
<PAGE>
Explanatory Note
This Registration Statement contains three Prospectuses (Part A) and
three Statements of Additional Information (Part B) for seven Registrants (each
of which offers its shares in one or more series): two series of Voyageur Tax
Free Funds, Inc., five series of Voyageur Intermediate Tax Free Funds, Inc.,
four series of Voyageur Insured Funds, Inc., nine series of Voyageur Investment
Trust, one series of Voyageur Investment Trust II, nine series of Voyageur
Mutual Funds, Inc. and one series of Voyageur Mutual Funds II, Inc. This
Registration Statement contains only one Part C, that of the Registrant.
A separate Registration Statement, each of which incorporates by
reference the combined Part A and Part B and includes its own Part C, is being
filed for each Registrant; however this Registration Statement contains only
those exhibits which relate to Voyageur Mutual Funds, Inc.
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific funds,
tax-free funds, money market funds, global and international funds and
closed-end equity funds give investors the ability to create a portfolio that
fits their personal financial goals. For more information, contact your
financial adviser or call Delaware Group at 800-523-4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55479
<PAGE>
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DELAWARE-VOYAGEUR TAX-FREE
MUTUAL FUNDS
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A CLASS
B CLASS
C CLASS
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PROSPECTUS
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August 28, 1997
DELAWARE
GROUP
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(not part of Prospectus)
<PAGE>
CLASS A SHARES PROSPECTUS
CLASS B SHARES AUGUST 28, 1997
CLASS C SHARES
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1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance: Nationwide 800-523-4640
Information on Existing Accounts: (SHAREHOLDERS ONLY)
Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY)
Nationwide 800-362-7500
Representatives of Financial Institutions:
Nationwide 800-659-2265
This Prospectus describes shares of each fund listed on this page
(individually, a "Fund" and collectively, the "Funds"), which is a series of an
open-end management investment company, commonly referred to as a mutual fund.
Three styles of funds are contained in this combined Prospectus: tax-free
intermediate funds (the "Tax-Free Intermediate Funds"), longer term tax-free
funds (the "Tax-Free Funds") and longer term insured municipal funds (the
"Insured Funds"). The investment objective of each Tax-Free Intermediate Fund is
to provide investors with preservation of capital and, secondarily, current
income exempt from federal income tax and the personal income tax, if any, of
the Fund's particular state, by maintaining a weighted average portfolio
maturity of 10 years or less. The investment objective of each Tax-Free Fund and
Insured Fund is to seek as high a level of current income exempt from federal
income tax and from the personal income tax, if any, of the Fund's particular
state, as is consistent with preservation of capital. The weighted average
maturity of the investment portfolio of each Tax-Free Fund and Insured Fund is
expected to be approximately 15 to 25 years. There is no assurance that any Fund
will achieve its investment objective.
<TABLE>
<CAPTION>
<S> <C>
Delaware-Voyageur Tax-Free Arizona Intermediate Fund Delaware-Voyageur Tax-Free Minnesota Intermediate Fund(1)
Delaware-Voyageur Tax-Free Arizona Insured Fund(1) Delaware-Voyageur Minnesota Insured Fund(1)
Delaware-Voyageur Tax-Free Arizona Fund Delaware-Voyageur Tax-Free Minnesota Fund(1)
Delaware-Voyageur Tax-Free California Intermediate Fund Delaware-Voyageur Tax-Free Missouri Insured Fund
Delaware-Voyageur Tax-Free California Insured Fund(1) Delaware-Voyageur Tax-Free New Mexico Fund
Delaware-Voyageur Tax-Free California Fund Delaware-Voyageur Tax-Free New York Fund
Delaware-Voyageur Tax-Free Colorado Intermediate Fund Delaware-Voyageur Tax-Free North Dakota Fund
Delaware-Voyageur Tax-Free Colorado Insured Fund Delaware-Voyageur Tax-Free Oregon Insured Fund
Delaware-Voyageur Tax-Free Colorado Fund(1) Delaware-Voyageur Tax-Free Utah Fund
Delaware-Voyageur Tax-Free Florida Intermediate Fund Delaware-Voyageur Tax-Free Washington Insured Fund
Delaware-Voyageur Tax-Free Florida Insured Fund(1) Delaware-Voyageur Tax-Free Wisconsin Fund
Delaware-Voyageur Tax-Free Florida Fund
Delaware-Voyageur Tax-Free Idaho Fund
Delaware-Voyageur Tax-Free Iowa Fund
Delaware-Voyageur Tax-Free Kansas Fund
</TABLE>
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(1) Diversified Series
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<PAGE>
Each Fund offers three retail classes of shares: "Class A Shares," "Class
B Shares" and "Class C Shares" (individually, a "Class" and collectively, the
"Classes"). These alternatives permit an investor to choose the method of
purchasing shares that is most suitable for his or her needs.
This Prospectus relates only to the Classes and sets forth information
that you should read and consider before you invest. Please retain it for future
reference. The Funds' Statement of Additional Information ("Part B" of their
respective registration statement), dated August 28, 1997, as it may be amended
from time to time, contains additional information about the Funds 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, L.P. at the above address or by calling the above
numbers. Each Fund's financial statements appear in its Annual Report for the
fiscal year ended December 31, 1996, which will accompany any response to
requests for Part B.
TABLE OF CONTENTS
Cover Page How to Buy Shares
Synopsis Redemption and Exchange
Summary of Expenses Dividends and Distributions
Financial Highlights Taxes
Investment Objectives and Policies Calculation of Offering Price and
Suitability Net Asset Value Per Share
Investment Strategy Management of the Funds
Special Risk Considerations Other Investment Policies and
The Delaware Difference Risk Considerations
Plans and Services Appendix A--Investment Illustrations
Classes of Shares Appendix B--Classes Offered
Appendix C--Ratings
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.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL FUNDS
CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE FUNDS ARE
NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY CREDIT UNION,
ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. SHARES OF
THE FUNDS ARE NOT BANK OR CREDIT UNION DEPOSITS.
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<PAGE>
SYNOPSIS
Investment Objectives
Tax-Free Intermediate Funds -- The investment objective of each Tax-Free
Intermediate Fund is to provide investors with preservation of capital and,
secondarily, current income exempt from federal income tax and the personal
income tax, if any, of the Fund's particular state, by maintaining a weighted
average portfolio maturity of 10 years or less.
Tax-Free Funds and Insured Funds -- The investment objective of each
Tax-Free Fund and Insured Fund is to seek as high a level of current income
exempt from federal income tax and from the personal income tax, if any, of the
Fund's particular state, as is consistent with preservation of capital. The
weighted average maturity of the investment portfolio of each Tax-Free Fund and
Insured Fund is expected to be approximately 15 to 25 years.
For further details, see Investment Objectives and Strategies and Other
Investment Policies and Risk Considerations.
Risk Factors and Special Considerations
Prospective investors should consider the following factors:
1. While each Fund intends to seek to qualify as a "diversified"
investment company under provisions of Subchapter M of the Internal Revenue Code
(the "Code"), certain of the Funds will not be diversified as defined by the
Investment Company Act of 1940 (the "1940 Act"). Thus, while at least 50% of a
Fund's total assets will be represented by cash, cash items, and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the Fund's total assets, it will not satisfy this test with respect to 75% of
the Fund's assets, as required by the 1940 Act's definition of "diversified." A
nondiversified portfolio is believed to be subject to greater risk because
adverse effects on the portfolio's security holdings may affect a larger portion
of the overall assets.
2. Each Fund (except for the Insured Funds) may invest up to 20% of its
assets in high-yield securities (junk bonds) and, consequently, greater risks
may be involved with an investment in such Funds. See Special Risk
Considerations.
3. Each Fund has the right to engage in options transactions, and certain
funds have the right to engage in futures transactions, for hedging purposes, to
counter-balance portfolio volatility and, in connection with futures
transactions, will maintain certain collateral in special accounts established
for the benefit of futures commission merchants. While the Funds do not engage
in options and futures for speculative purposes, there are risks that result
from the use of these instruments by the Funds, and an investor should carefully
review the descriptions of such in this Prospectus. Certain options and futures
may be considered to be derivative securities. See Options and Futures under
Other Investment Policies and Risk Considerations.
4. The Funds may invest in inverse floaters which may be considered to be
derivative securities. The interest rates attributable to inverse floaters may
move in the opposite direction to short-term interest rates at an accelerated
speed causing rapid fluctuations in the value of such securities. See Tax Exempt
Obligations under Investment Strategy.
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<PAGE>
Investment Manager, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") is the investment
manager for each Fund. The Manager also provides investment management services
to certain of the other funds in the Delaware Group. Delaware Distributors, L.P.
(the "Distributor") is the national distributor for the each 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,
accounting services and transfer agent for each Fund and for all of the other
mutual funds in the Delaware Group. For further information regarding the
Manager and the fees payable under each Fund's Investment Management Agreement,
see Summary of Expenses and Management of the Funds.
Sales Charges
The price of each of the Class A Shares of Tax-Free Funds and Insured
Funds includes a maximum front-end sales charge of 3.75% of the offering price.
The price of each of the Class A Shares of Tax-Free Intermediate Funds includes
a maximum front-end sales charge of 2.75% of the offering price. The front-end
sales charge is reduced on certain transactions of at least $100,000 but under
$1,000,000. For purchases of $1,000,000 or more, the front-end sales charge is
eliminated. Class A Shares are subject to annual 12b-1 Plan expenses for the
life of the investment.
The price of Class B Shares of each Fund is equal to the net asset value
per share. Class B Shares of Tax-Free Funds and Insured Funds are subject to a
contingent deferred sales charge ("CDSC") of: (i) 4% if shares are redeemed
within two years of purchase; (ii) 3% if shares are redeemed during the third or
fourth year following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the sixth
year following purchase. Class B Shares of Tax-Free Funds and Insured Funds are
subject to annual 12b-1 Plan expenses for approximately eight years after
purchase. Class B Shares of Tax-Free Intermediate Funds are subject to a CDSC
of: (i) 2% if shares are redeemed within two years of purchase; and (ii) 1% if
shares are redeemed during the third year following purchase. Class B Shares of
Tax-Free Intermediate Funds are subject to annual 12b-1 Plan expenses for
approximately five years after purchase. See Automatic Conversion of Class B
Shares under Classes of Shares.
The price of the Class C Shares is equal to the net asset value per
share. Class C Shares are subject to a CDSC of 1% if shares are redeemed within
12 months of purchase. Class C Shares are subject to annual 12b-1 Plan expenses
for the life of the investment.
See Classes of Shares and Distribution (12b-1) and Service under
Management of the Funds.
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments generally must be at least $100.
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. An investor may exceed these maximum purchase
limitations for Class B Shares and Class C Shares 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 and Class C Shares and generally are not subject to a CDSC. See How
to Buy Shares.
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<PAGE>
Redemption and Exchange
Class A Shares of each Fund may be redeemed or exchanged at the net asset
value calculated after receipt of the redemption or exchange request. Neither
the Funds nor the Distributor assesses a charge for redemptions or exchanges of
Class A Shares, except for certain redemptions of shares purchased at net asset
value, which may be subject to a CDSC if a dealer's commission was paid in
connection with such purchases. See Front-End Sales Charge Alternative - Class A
Shares under Classes of Shares.
Class B Shares and Class C Shares may be redeemed or exchanged at the net
asset value calculated after receipt of the redemption or exchange request
subject, in the case of redemptions, to any applicable CDSC. Neither the Funds
nor the Distributor assesses any charges other than the CDSC for redemptions or
exchanges of Class B or Class C Shares. There are certain limitations on an
investor's ability to exchange shares between the various classes of shares that
are offered. See Redemption and Exchange.
Open-End Investment Company
The shares of the Funds constitute separate series of parent entities,
which are open-end investment companies, as described under Shares. Certain of
the parent entities are organized as Minnesota corporations. Other parent
entities are organized as business trusts under the laws of the Commonwealth of
Massachusetts. The Funds which are diversified, as such term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act") are designated as
such by a footnote on the cover page of this Prospectus. All other Funds are
non-diversified. See Shares under Management of the Funds.
Shares of the Funds covered by this prospectus are not registered in all
states. Shares that are not registered in one or more states are not being
offered and sold in such states.
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<PAGE>
SUMMARY OF EXPENSES
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<CAPTION>
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Example of Expenses:
An investor in a Delaware-
Shareholder Transaction Annual Fund Operating Expenses Voyageur Fund would pay
Expenses (as a Percentage of Average Net Assets)Total Fund the following dollar amount
------------------------ After Fee Waivers and Operating of expenses on a $1,000
Reimbursement Arrangements Expenses investment assuming (a) 5%
Maximum ---------------------------------------- Without annual return and (b) redemption
Front-End Maximum Total Voluntary at the end of each period.(9)
Sales Load CDSC Fund Waiver and -------------------------------
Delaware-Voyageur Imposed on Imposed on Management 12b-1 Other Operating Reimburse-
Funds(4) Purchases Redemptions Fee(5) Fee Expenses Expenses+ ment(6) 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE LONG TERM FUNDS
Tax-Free Arizona
Class A 3.75% 1.00%(2) 0.00% 0.25% 0.22% 0.47% 1.08% $42 $52 $63 $94
Class B N/A(1) 4.00 0.00 1.00 0.22 1.22 1.78 52(3) 69(3) 87(3) 127(7)
Class C N/A(1) 1.00 0.00 1.00 0.22 1.22 1.78 22(3) 39 67 148
Tax-Free California
Class A 3.75 1.00(2) 0.00 0.20 0.00 0.20 1.29 39 44 48 62
Class B N/A(1) 4.00 0.00 0.95 0.00 0.95 2.04 50(3) 60(3) 73(3) 95(7)
Class C N/A(1) 1.00 0.00 0.95 0.00 0.95 2.04 20(3) 30 53 117
Tax-Free Colorado
Class A 3.75 1.00(2) 0.32 0.25 0.24 0.81 0.99 45 62 81 134
Class B N/A(1) 4.00 0.32 1.00 0.24 1.56 1.74 56(3) 79(3) 105(3) 165(7)
Class C N/A(1) 1.00 0.32 1.00 0.24 1.56 1.74 26(3) 49 85 186
Tax-Free Florida
Class A 3.75 1.00(2) 0.00 0.25 0.31 0.56 1.08 43 55 68 105
Class B N/A(1) 4.00 0.00 1.00 0.31 1.31 1.83 53(3) 72(3) 92(3) 137(7)
Class C N/A(1) 1.00 0.00 1.00 0.31 1.31 1.83 23(3) 42 72 158
Tax-Free Idaho
Class A 3.75 1.00(2) 0.38 0.25 0.24 0.87 0.99 46 64 84 141
Class B N/A(1) 4.00 0.38 1.00 0.24 1.62 1.74 56(3) 81(3) 108(3) 172(7)
Class C N/A(1) 1.00 0.38 1.00 0.24 1.62 1.74 26(3) 51 88 192
Tax-Free Iowa
Class A 3.75 1.00(2) 0.35 0.25 0.32 0.92 1.07 47 66 87 146
Class B N/A(1) 4.00 0.35 1.00 0.32 1.67 1.82 57(3) 83(3) 111(3) 178(7)
Class C N/A(1) 1.00 0.35 1.00 0.32 1.67 1.82 27(3) 53 91 198
Tax-Free Kansas
Class A 3.75 1.00(2) 0.29 0.25 0.29 0.83 1.04 46 63 82 136
Class B N/A(1) 4.00 0.29 1.00 0.29 1.58 1.79 56(3) 80(3) 106(3) 168(7)
Class C N/A(1) 1.00 0.29 1.00 0.29 1.58 1.79 26(3) 50 86 187
Tax-Free Minnesota
Class A 3.75 1.00(2) 0.44 0.25 0.22 0.91 0.97 46 65 86 145
Class B N/A(1) 4.00 0.44 1.00 0.22 1.66 1.72 57(3) 82(3) 110(3) 177(7)
Class C N/A(1) 1.00 0.44 1.00 0.22 1.66 1.72 27(3) 52 90 197
Tax-Free New Mexico
Class A 3.75 1.00(2) 0.33 0.25 0.42 1.00 1.17 47 68 91 155
Class B N/A(1) 4.00 0.33 1.00 0.42 1.75 1.92 58(3) 85(3) 115(3) 186(7)
Class C N/A(1) 1.00 0.33 1.00 0.42 1.75 1.92 28(3) 55 95 206
Tax-Free New York
Class A 3.75 1.00(2) 0.42 0.25 0.33 1.00 1.08 47 68 91 155
Class B N/A(1) 4.00 0.42 1.00 0.33 1.75 1.83 58(3) 85(3) 115(3) 186(7)
Class C N/A(1) 1.00 0.42 1.00 0.33 1.75 1.83 28(3) 55 95 206
Tax-Free North Dakota
Class A 3.75 1.00(2) 0.35 0.25 0.40 1.00 1.15 47 68 91 155
Class B N/A(1) 4.00 0.35 1.00 0.40 1.75 1.90 58(3) 85(3) 115(3) 186(7)
Class C N/A(1) 1.00 0.35 1.00 0.40 1.75 1.90 28(3) 55 95 206
Tax-Free Utah
Class A 3.75 1.00(2) 0.03 0.25 0.40 0.68 1.15 44 58 74 119
Class B N/A(1) 4.00 0.03 1.00 0.40 1.43 1.90 54(3) 75(3) 98(3) 151(7)
Class C N/A(1) 1.00 0.03 1.00 0.40 1.43 1.90 25(3) 45 78 171
Tax-Free Wisconsin
Class A 3.75 1.00(2) 0.46 0.25 0.29 1.00 1.04 47 68 91 155
Class B N/A(1) 4.00 0.46 1.00 0.29 1.75 1.79 58(3) 85(3) 115(3) 186(7)
Class C N/A(1) 1.00 0.46 1.00 0.29 1.75 1.79 28(3) 55 95 206
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</TABLE>
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<PAGE>
SUMMARY OF EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
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Example of Expenses:
An investor in a Delaware-
Shareholder Transaction Annual Fund Operating Expenses Voyageur Fund would pay
Expenses (as a Percentage of Average Net Assets)Total Fund the following dollar amount
------------------------ After Fee Waivers and Operating of expenses on a $1,000
Reimbursement Arrangements Expenses investment assuming (a) 5%
Maximum ---------------------------------------- Without annual return and (b) redemption
Front-End Maximum Total Voluntary at the end of each period.(9)
Sales Load CDSC Fund Waiver and -------------------------------
Delaware-Voyageur Imposed on Imposed on Management 12b-1 Other Operating Reimburse-
Funds(4) Purchases Redemptions Fee(5) Fee Expenses Expenses+ ment(6) 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE INSURED FUNDS
Arizona Insured
Class A 3.75% 1.00%(2) 0.37% 0.25% 0.22% 0.84% 0.97% $46 $63 $82 $137
Class B N/A(1) 4.00 0.37 1.00 0.22 1.59 1.72 56(3) 80(3) 107(3) 169(7)
Class C N/A(1) 1.00 0.37 1.00 0.22 1.59 1.72 26(3) 50 87 189
California Insured
Class A 3.75 1.00(2) 0.49 0.25 0.24 0.98 0.99 47 68 90 153
Class B N/A(1) 4.00 0.49 1.00 0.24 1.73 1.74 58(3) 84(3) 114(3) 184(7)
Class C N/A(1) 1.00 0.49 1.00 0.24 1.73 1.74 28(3) 54 94 204
Colorado Insured
Class A 3.75 1.00(2) 0.18 0.25 0.57 1.00 1.32 47 68 91 155
Class B N/A(1) 4.00 0.18 1.00 0.57 1.75 2.07 68(3) 95(3) 115(3) 186(7)
Class C N/A(1) 1.00 0.18 1.00 0.57 1.75 2.07 28(3) 55 95 206
Florida Insured
Class A 3.75 1.00(2) 0.26 0.25 0.36 0.87 1.11 46 64 84 141
Class B N/A(1) 4.00 0.26 1.00 0.36 1.62 1.86 56(3) 81(3) 108(3) 172(7)
Class C N/A(1) 1.00 0.26 1.00 0.36 1.62 1.86 26(3) 51 88 192
Minnesota Insured
Class A 3.75 1.00(2) 0.46 0.25 0.21 0.92 0.96 47 66 87 146
Class B N/A(1) 4.00 0.46 1.00 0.21 1.67 1.71 57(3) 83(3) 111(3) 178(7)
Class C N/A(1) 1.00 0.46 1.00 0.21 1.67 1.71 27(3) 53 91 198
Missouri Insured
Class A 3.75 1.00(2) 0.41 0.25 0.25 0.91 1.00 46 65 86 145
Class B N/A(1) 4.00 0.41 1.00 0.25 1.66 1.75 57(3) 82(3) 110(3) 177(7)
Class C N/A(1) 1.00 0.41 1.00 0.25 1.66 1.75 27(3) 52 90 197
Oregon Insured
Class A 3.75 1.00(2) 0.18 0.25 0.28 0.71 1.03 44 59 76 122
Class B N/A(1) 4.00 0.18 1.00 0.28 1.46 1.78 55(3) 76(3) 100(3) 154(7)
Class C N/A(1) 1.00 0.18 1.00 0.28 1.46 1.78 25(3) 46 80 175
Washington Insured
Class A 3.75 1.00(2) 0.00 0.25 0.25 0.50 1.25 42 53 64 98
Class B N/A(1) 4.00 0.00 1.00 0.25 1.25 2.00 53(3) 70(3) 89(3) 130(7)
Class C N/A(1) 1.00 0.00 1.00 0.25 1.25 2.00 23(3) 40 69 151
</TABLE>
- -------------------------------------------------------------------------------
-8-
<PAGE>
SUMMARY OF EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Example of Expenses:
An investor in a Delaware-
Shareholder Transaction Annual Fund Operating Expenses Voyageur Fund would pay
Expenses (as a Percentage of Average Net Assets)Total Fund the following dollar amount
------------------------ After Fee Waivers and Operating of expenses on a $1,000
Reimbursement Arrangements Expenses investment assuming (a) 5%
Maximum ---------------------------------------- Without annual return and (b) redemption
Front-End Maximum Total Voluntary at the end of each period.(9)
Sales Load CDSC Fund Waiver and -------------------------------
Delaware-Voyageur Imposed on Imposed on Management 12b-1 Other Operating Reimburse-
Funds(4) Purchases Redemptions Fee(5) Fee Expenses Expenses+ ment(6) 1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE INTERMEDIATE FUNDS
Arizona Intermediate
Class A 2.75% 1.00%(2) 0.17% 0.25% 0.58% 1.00% 1.23% $37 $58 $81 $147
Class B N/A(1) 2.00 0.17 1.00 0.58 1.75 1.98 58(3) 85(3) 105(3)(8) 186(8)
Class C N/A(1) 1.00 0.17 1.00 0.58 1.75 1.98 23(3) 55 95 206
California Intermediate
Class A 2.75 1.00(2) 0.17 0.25 0.58 1.00 1.23 37 58 81 147
Class B N/A(1) 2.00 0.17 1.00 0.58 1.75 1.98 58(3) 85(3) 105(3)(8) 186(8)
Class C N/A(1) 1.00 0.17 1.00 0.58 1.75 1.98 23(3) 55 95 206
Colorado Intermediate
Class A 2.75 1.00(2) 0.17 0.25 0.58 1.00 1.23 37 58 81 147
Class B N/A(1) 2.00 0.17 1.00 0.58 1.75 1.98 58(3) 85(3 105(3)(8) 186(8)
Class C N/A(1) 1.00 0.17 1.00 0.58 1.75 1.98 23(3) 55 95 206
Florida Intermediate
Class A 2.75 1.00(2) 0.00 0.25 0.48 0.73 1.39 35 50 67 116
Class B N/A(1) 2.00 0.00 1.00 0.48 1.48 2.14 35(3) 57(3) 81(3)(8) 157(8)
Class C N/A(1) 1.00 0.00 1.00 0.48 1.48 2.14 25(3) 47 81 177
Minnesota Intermediate
Class A 2.75 1.00(2) 0.40 0.25 0.31 0.96 0.96 37 57 79 142
Class B N/A(1) 2.00 0.40 1.00 0.31 1.71 1.71 37(3) 64(3) 92(3)(8 182(8)
Class C N/A(1) 1.00 0.40 1.00 0.31 1.71 1.71 27(3) 54 93 202
</TABLE>
- -------------------------------------------------------------------------------
(1) Class B and Class C shares are sold without a front-end sales charge, but
their Rule 12b-1 fees may cause long term shareholders to pay more than the
economic equivalent of the maximum permitted front-end sales charges.
(2) A contingent deferred sales charge of 1.00% is imposed on certain
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more.
(3) Class B and Class C share expenses would be lower assuming no redemption at
the end of the period.
(4) Delaware Distributors, L.P. (the "Underwriter") pays broker-dealers and
financial institutions an annual fee equal to 0.25% of the average daily
net assets attributable to the Class A shares (0.15% for Class A shares of
the Tax-Free Intermediate Funds), 0.25% of the average daily net assets
attributable to the Class B shares (0.15% for Class B shares of the
Tax-Free Intermediate Funds), and 1.00% of the average daily net assets
attributable to the Class C shares held by their customers. The fee is paid
quarterly commencing when such shares are sold for Class A and Class B
shares. The fee is paid quarterly commencing in the thirteenth month after
such shares are sold for Class C shares.
(5) See "Management" for the fees payable under each Fund's Investment
Management Agreement without waivers.
(6) The expense ratios reflect the effect of gross expenses attributable to
earnings credits on uninvested cash balances received by each Fund.
(7) At the end of approximately eight years after purchase, Class B shares of
the Tax-Free Funds and Insured Funds will be automatically converted into
Class A shares of the relevant Fund. The example above assumes
-9-
<PAGE>
conversion of Class B shares at the end of the eighth year. However, the
conversion may occur as late as three months after the eighth anniversary
of purchase, during which time the higher 12b-1 Plan fees payable by Class
B shares will continue to be assessed. Information for the ninth and tenth
years reflects expenses of the Class A shares. See "Conversion Feature"
under "How to Purchase Shares" for a description of the automatic
conversion feature.
(8) At the end of approximately five years after purchase, Class B shares of
Tax-Free Intermediate Funds will be automatically converted into Class A
shares of the relevant Fund. The example above assumes conversion of Class
B shares at the end of the fifth year. However, the conversion may occur as
late as three months after the fifth anniversary of purchase, during which
time the higher 12b-1 Plan fees payable by Class B shares will continue to
be assessed. Information for the sixth through tenth years reflects
expenses of the Class A shares. See "Conversion Feature" under "How to
Purchase Shares" for a description of the automatic conversion feature.
(9) The following example assumes the voluntary waiver of the management fee
and/or other payments of expenses by the Manager as discussed in this
Prospectus.
+ "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
CoreStates Bank, N.A. currently charges $7.50 per redemption for
redemptions payable by wire.
Investors utilizing the Delaware Group Asset Planner asset allocation
service also typically incur an annual maintenance fee of $35 per Strategy.
However, the annual maintenance fee is waived until further notice. See Delaware
Group Asset Planner under How to Buy Shares.
The examples contained in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown. The purpose of the above Fees and Expenses table is to
assist the investor in understanding the various costs and expenses that
investors in the Funds will bear directly or indirectly. The information set
forth in the table under the heading "Annual Fund Operating Expenses as a
Percentage of Average Net Assets After Fee Waivers and Reimbursement
Arrangements" reflects voluntary expense waivers and commitments to pay Fund
expenses to which the Manager will adhere through December 31, 1997. See
"Management - Expenses of the Funds" for a discussion of waivers that will
remain in place through April 30, 1999. Absent the voluntary waivers, total fund
operating expenses for such period would be equivalent to the corresponding
percentages disclosed under the column "Total Fund Operating Expenses Without
Voluntary Waiver and Reimbursement." The examples have been calculated based on
the "Total Fund Operating Expenses" information after voluntary fee waivers and
expense reimbursement arrangements.
-10-
<PAGE>
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial
statements of the Funds and have been audited by KPMG Peat Marwick LLP,
independent auditors. The data should be read in conjunction with the financial
statements, related notes, and the report of KPMG Peat Marwick LLP, all of which
are incorporated by reference into Part B. Further information about the Funds'
performance is contained in its Annual Report to shareholders. A copy of the
Funds' Annual Reports (including the report of KPMG Peat Marwick LLP) may be
obtained from the Funds upon request at no charge.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from
Investment
Operations Less Distributions
_______________ Net _______________
Realized
Net and Distri- Net
Asset Net Unrealized Dividends butions Asset Total
Value Invest- Gain from Net from Value from
Delaware-Voyageur Beginning ment (Loss) on Investment Capital End of Investment
State Funds of Period Income Securities Income Gains Period Return(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona
Class A - 12/31/96 $10.75 0.58 (0.01) (0.58) (0.04) $10.70 5.48%
Class A - 12/31/95(1) 10.00 0.46 0.84 (0.46) (0.09) 10.75 13.27
Class B - 12/31/96 10.74 0.51 (0.01) (0.51) (0.04) 10.69 4.84
Class B - 12/31/95(1) 10.30 0.26 0.53 (0.26) (0.09) 10.74 7.74
Class C - 12/31/96 10.76 0.50 (0.01) (0.50) (0.04) 10.71 4.70
Class C - 12/31/95(1) 10.20 0.30 0.65 (0.30) (0.09) 10.76 9.43
Arizona Insured
Class A - 12/31/96 11.15 0.53 (0.09) (0.53) -- 11.06 4.09
Class A - 12/31/95 9.86 0.54 1.31 (0.56) -- 11.15 19.10
Class A - 12/31/94 11.31 0.55 (1.37) (0.53) (0.10)(7) 9.86 (7.41)
Class A - 12/31/93 10.71 0.58 0.74 (0.58) (0.14) 11.31 12.64
Class A - 12/31/92 10.39 0.61 0.38 (0.61) (0.06) 10.71 9.86
Class A - 12/31/91(1) 10.00 0.50 0.47 (0.50) (0.08) 10.39 9.98
Class B - 12/31/96 11.14 0.45 (0.09) (0.45) -- 11.05 3.32
Class B - 12/31/95(1) 10.44 0.38 0.69 (0.37) -- 11.14 10.36
Class C - 12/31/96 11.15 0.43 (0.09) (0.43) -- 11.06 3.18
Class C - 12/31/95 9.86 0.45 1.31 (0.47) -- 11.15 18.10
Class C - 12/31/94(1) 10.48 0.27 (0.56) (0.25) (0.08)(7) 9.86 (2.84)
Tax-Free California
Class A - 12/31/96 10.64 0.60 (0.18) (0.60) (0.03) 10.43 4.21
Class A - 12/31/95(1) 10.00 0.47 0.70 (0.47) (0.06) 10.64 11.97
Class B - 12/31/96 10.65 0.56 (0.18) (0.56) (0.03) 10.44 3.77
Class B - 12/31/95(1) 9.96 0.20 0.74 (0.19) (0.06) 10.65 9.52
Class C - 12/31/96(1) 10.07 0.37 0.38 (0.37) (0.03) 10.42 7.58
California Insured
Class A - 12/31/96 10.65 0.52 (0.15) (0.52) -- 10.50 3.63
Class A - 12/31/95 9.33 0.53 1.34 (0.55) -- 10.65 20.51
Class A - 12/31/94 9.51 0.10 (0.18) (0.09) (0.01) 9.33 (0.84)
Class A - 10/31/94 11.08 0.55 (1.52) (0.54) (0.06) 9.51 (8.97)
Class A - 10/31/93 10.02 0.60 1.11 (0.60) (0.05) 11.08 17.29
Class A - 10/31/92(1) 10.00 -- 0.02 -- -- 10.02 0.20
Class B - 12/31/96 10.65 0.48 (0.15) (0.48) -- 10.50 3.22
Class B - 12/31/95 9.33 0.50 1.33 (0.51) -- 10.65 20.01
Class B - 12/31/94 9.51 0.08 (0.17) (0.08) (0.01) 9.33 (0.92)
Class B - 10/31/94(1) 10.68 0.31 (1.16) (0.30) (0.02) 9.51 (7.93)
Class C - 12/31/96 10.65 0.44 (0.19) (0.44) -- 10.46 2.47
Class C - 12/31/95(1) 10.19 0.25 0.53 (0.32) -- 10.65 7.77
- -----------------------------------------------------------------------------------------------
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------
Ratio of
Expenses
to Average
Net Assets
Ratio of Ratio Assuming
Net Expenses of Net No Voluntary
Assets to Investment Waivers
End of Average Income Portfolio and
Delaware-Voyageur Period Net to Average Turnover Reimburse-
State Funds (000s) Assets(2) Net Assets Rate ments
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax-Free Arizona
Class A - 12/31/96 $9,755 0.46% 5.43% 70.14% 1.25%
Class A - 12/31/95(1) 6,225 0.52(4) 5.19(4) 38.05 1.25(4)
Class B - 12/31/96 3,491 1.11 4.77 70.14 2.00
Class B - 12/31/95(1) 1,629 0.99(4) 4.60(4) 38.05 2.00(4)
Class C - 12/31/96 23 1.21 4.68 70.14 2.00
Class C - 12/31/95(1) 27 1.20(4) 4.65(4) 38.05 2.00(4)
Arizona Insured
Class A - 12/31/96 209,258 0.82 4.89 42.76 0.95
Class A - 12/31/95 238,114 0.69 5.07 42.96 0.95
Class A - 12/31/94 231,736 0.72 5.20 25.18 0.92
Class A - 12/31/93 263,312 0.59 5.00 33.80 1.03
Class A - 12/31/92 124,120 0.35 5.60 40.29 1.16
Class A - 12/31/91(1) 38,322 --(5) 6.58(4) 177.66 1.24(4)
Class B - 12/31/96 3,110 1.59 4.11 42.76 1.70
Class B - 12/31/95(1) 2,048 1.33(4) 4.08(4) 42.96 1.60(4)
Class C - 12/31/96 554 1.70 4.01 42.76 1.70
Class C - 12/31/95 541 1.54 4.18 42.96 1.69
Class C - 12/31/94(1) 326 1.50(4) 4.10(4) 25.18 1.71(4)
Tax-Free California
Class A - 12/31/96 1,218 0.27 5.71 7.87 1.25
Class A - 12/31/95(1) 1,012 0.46(4) 5.57(4) 39.51 1.22(4)
Class B - 12/31/96 660 0.50 5.34 7.87 2.00
Class B - 12/31/95(1) 128 0.60(4) 5.33(4) 39.51 1.93(4)
Class C - 12/31/96(1) 94 0.78 5.13(4) 7.87 2.00(4)
California Insured
Class A - 12/31/96 30,551 0.82 5.05 54.52 1.01
Class A - 12/31/95 33,860 0.70 5.23 107.45 1.02
Class A - 12/31/94 27,994 0.10(4) 6.30(4) 7.28 1.24(4)
Class A - 10/31/94 27,282 0.20 5.37 18.34 1.25
Class A - 10/31/93 12,509 -- 5.26 24.19 1.25
Class A - 10/31/92(1) 2,056 -- -- 7.31 --
Class B - 12/31/96 6,717 1.21 4.64 54.52 1.76
Class B - 12/31/95 6,029 1.10 4.75 107.45 1.75
Class B - 12/31/94 2,219 0.57(4) 5.54(4) 7.28 1.94(4)
Class B - 10/31/94(1) 1,427 0.73(4) 4.82(4) 18.34 1.95(4)
Class C - 12/31/96 55 1.58 4.02 54.52 1.77
Class C - 12/31/95(1) 53 1.53(4) 4.25(4) 107.45 1.77(4)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
-11-
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from
Investment
Operations Less Distributions
_______________ Net _______________
Realized
Net and Distri- Net
Asset Net Unrealized Dividends butions Asset Total
Value Invest- Gain from Net from Value from
Delaware-Voyageur Beginning ment (Loss) on Investment Capital End of Investment
State Funds of Period Income Securities Income Gains Period Return(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Colorado
Class A - 12/31/96 10.90 0.56 (0.13) (0.55) -- 10.78 4.08
Class A - 12/31/95 9.53 0.54 1.38 (0.55) -- 10.90 20.54
Class A - 12/31/94 11.10 0.55 (1.54) (0.54) (0.04) 9.53 (9.12)
Class A - 12/31/93 10.57 0.56 0.85 (0.56) (0.32) 11.10 13.72
Class A - 12/31/92 10.27 0.58 0.45 (0.58) (0.15) 10.57 10.42
Class A - 12/31/91 10.02 0.61 0.43 (0.61) (0.18) 10.27 10.80
Class A - 12/31/90 10.00 0.64 0.02 (0.64) -- 10.02 6.81
Class A - 12/31/89 9.74 0.67 0.32 (0.67) (0.06) 10.00 10.73
Class A - 12/31/88 9.43 0.69 0.34 (0.69) (0.03) 9.74 10.57
Class A - 12/31/87(1) 9.58 0.49 (0.15) (0.49) -- 9.43 3.27
Class B - 12/31/96 10.90 0.47 (0.13) (0.46) -- 10.78 3.25
Class B - 12/31/95(1) 10.25 0.35 0.65 (0.35) -- 10.90 9.96
Class C - 12/31/96 10.90 0.46 (0.13) (0.45) -- 10.78 3.17
Class C - 12/31/95 9.53 0.45 1.37 (0.45) -- 10.90 19.44
Class C - 12/31/94(1) 10.21 0.29 (0.67) (0.27) (0.03) 9.53 (3.75)
Tax-Free Florida
Class A - 12/31/96 10.73 0.59 (0.21) (0.59) -- 10.52 3.74
Class A - 12/31/95(1) 10.00 0.47 0.75 (0.47) (0.02) 10.73 12.49
Class B - 12/31/96 10.73 0.56 (0.20) (0.56) -- 10.53 3.51
Class B - 12/31/95(1) 10.37 0.15 0.38 (0.15) (0.02) 10.73 5.10
Class C - 12/31/96 10.73 0.37 (0.21) (0.37) -- 10.52 2.97
Class C - 12/31/95(1) 10.20 0.33 0.56 (0.34) (0.02) 10.73 8.88
Florida Insured
Class A - 12/31/96 10.94 0.53 (0.23) (0.53) -- 10.71 2.90
Class A - 12/31/95 9.52 0.54 1.44 (0.56) -- 10.94 21.22
Class A - 12/31/94 9.64 0.10 (0.12) (0.09) (0.01) 9.52 (0.11)
Class A - 10/31/94 11.15 0.55 (1.46) (0.54) (0.06) 9.64 (8.38)
Class A - 10/31/93 10.11 0.58 1.12 (0.58) (0.08) 11.15 17.27
Class A - 10/31/92(1) 10.00 0.51 0.15 (0.51) (0.04) 10.11 6.74
Class B - 12/31/96 10.94 0.48 (0.23) (0.48) -- 10.71 2.40
Class B - 12/31/95 9.52 0.50 1.44 (0.52) -- 10.94 20.76
Class B - 12/31/94 9.63 0.09 (0.11) (0.08) (0.01) 9.52 (0.03)
Class B - 10/31/94(1) 10.82 0.31 (1.19) (0.30) (0.01) 9.63 (8.10)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------
Ratio of
Expenses
to Average
Net Assets
Ratio of Ratio Assuming
Net Expenses of Net No Voluntary
Assets to Investment Waivers
End of Average Income Portfolio and
Delaware-Voyageur Period Net to Average Turnover Reimburse-
State Funds (000s) Assets(2) Net Assets Rate ments
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax-Free Colorado 358,328 0.78 5.27 40.35 0.91
Class A - 12/31/96 392,815 0.76 5.18 82.83 0.93
Class A - 12/31/95 354,138 0.66 5.35 69.32 0.72
Class A - 12/31/94 399,218 0.75 4.97 58.61 0.75
Class A - 12/31/93 202,165 0.80 5.59 69.72 0.80
Class A - 12/31/92 104,863 0.82 6.15 92.42 0.82
Class A - 12/31/91 53,987 1.00 6.38 69.64 1.00
Class A - 12/31/90 34,625 1.00 6.37 33.06 1.00
Class A - 12/31/89 19,767 1.00 6.77 56.31 1.00
Class A - 12/31/88 5,546 1.00(4) 6.49(4) 92.80 1.00(4)
Class A - 12/31/87(1) 4,172 1.58 4.45 40.35 1.65
Class B - 12/31/96 1,643 1.39(4) 3.96(4) 82.83 1.60(4)
Class B - 12/31/95(1) 1,522 1.66 4.40 40.35 1.66
Class C - 12/31/96 1,042 1.66 4.20 82.83 1.66
Class C - 12/31/95 465 1.80(4) 4.23(4) 69.32 1.81(4)
Class C - 12/31/94(1)
Tax-Free Florida 5,761 0.33 5.66 70.17 1.25
Class A - 12/31/96 4,421 0.32(4) 5.26(4) 63.52 1.25(4)
Class A - 12/31/95(1) 1,635 0.76 5.23 70.17 2.00
Class B - 12/31/96 101 0.44(4) 4.88(4) 63.52 2.00(4)
Class B - 12/31/95(1) 16 1.15 4.83 70.17 2.00
Class C - 12/31/96 9 1.11(4) 4.57(4) 63.52 2.00(4)
Class C - 12/31/95(1)
Florida Insured 192,171 0.73 5.02 57.18 0.96
Class A - 12/31/96 242,425 0.51 5.24 101.48 0.95
Class A - 12/31/95 240,228 0.20(4) 6.24(4) 2.51 1.06(4)
Class A - 12/31/94 259,702 0.44 5.24 49.12 0.96
Class A - 10/31/94 289,682 0.18 5.18 53.51 1.12
Class A - 10/31/93 50,666 -- 5.38(4) 208.24 1.25(4)
Class A - 10/31/92(1) 3,222 1.24 4.51 57.18 1.72
Class B - 12/31/96 2,814 0.89 4.80 101.48 1.68
Class B - 12/31/95 1,477 0.59(4) 5.68(4) 2.51 1.81(4)
Class B - 12/31/94 1,135 1.00(4) 4.63(4) 49.12 1.28(4)
Class B - 10/31/94(1)
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
-12-
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from
Investment
Operations Less Distributions
_______________ Net _______________
Realized
Net and Distri- Net
Asset Net Unrealized Dividends butions Asset Total
Value Invest- Gain from Net from Value from
Delaware-Voyageur Beginning ment (Loss) on Investment Capital End of Investment
State Funds of Period Income Securities Income Gains Period Return(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Florida Intermediate
Class A - 12/31/96 10.56 0.42 (0.08) (0.47) -- 10.43 3.34
Class A - 12/31/95 9.64 0.44 1.01 (0.49) (0.04) 10.56 15.14
Class A - 12/31/94(1) 10.00 0.18 (0.36) (0.18) -- 9.64 (1.55)
Class B - 12/31/96 10.56 0.34 (0.09) (0.39) -- 10.42 2.47
Class B - 12/31/95(1) 10.58 0.10 0.03 (0.11) (0.04) 10.56 1.13
Class C - 12/31/96 10.55 0.33 (0.09) (0.37) -- 10.42 2.37
Class C - 12/31/95(1) 10.08 0.25 0.55 (0.29) (0.04) 10.55 7.95
Tax-Free Idaho
Class A - 12/31/96 11.02 0.58 (0.12) (0.57) -- 10.91 4.36
Class A - 12/31/95(1) 10.00 0.60 1.10 (0.60) (0.08) 11.02 17.48
Class B - 12/31/96 11.01 0.52 (0.13) (0.51) -- 10.89 3.75
Class B - 12/31/95(1) 10.50 0.42 0.59 (0.42) (0.08) 11.01 9.86
Class C - 12/31/96 11.02 0.50 (0.13) (0.49) -- 10.90 3.48
Class C - 12/31/95(1) 10.04 0.50 1.06 (0.50) (0.08) 11.02 15.81
Tax-Free Iowa
Class A - 12/31/96 9.83 0.44 (0.21) (0.44) -- 9.62 2.56
Class A - 12/31/95 8.56 0.45 1.29 (0.47) -- 9.83 20.80
Class A - 12/31/94 9.26 0.17 (0.72) (0.15) -- 8.56 (5.86)
Class A - 8/31/94(1) 10.00 0.49 (0.74) (0.49) -- 9.26 (2.67)
Class B - 12/31/96 9.83 0.38 (0.22) (0.38) -- 9.61 1.76
Class B - 12/31/95(1) 9.18 0.31 0.64 (0.30) -- 9.83 10.62
Class C - 12/31/96 9.83 0.36 (0.22) (0.36) -- 9.61 1.56
Class C - 12/31/95(1) 8.55 0.37 1.28 (0.37) -- 9.83 19.66
Tax-Free Kansas
Class A - 12/31/96 10.73 0.52 (0.17) (0.52) -- 10.56 3.43
Class A - 12/31/95 9.50 0.56 1.22 (0.55) -- 10.73 19.13
Class A - 12/31/94 9.63 0.09 (0.13) (0.09) -- 9.50 (0.38)
Class A - 10/31/94 10.85 0.57 (1.21) (0.57) (0.01) 9.63 (6.10)
Class A - 10/31/93(1) 10.00 0.56 0.85 (0.56) -- 10.85 14.49
Class B - 12/31/96 10.74 0.45 (0.17) (0.45) -- 10.57 2.69
Class B - 12/31/95(1) 10.19 0.34 0.54 (0.33) -- 10.74 8.76
Class C - 12/31/96 10.72 0.43 (0.17) (0.43) -- 10.55 2.52
Class C - 12/31/95(1) 10.20 0.32 0.51 (0.31) -- 10.72 8.29
Tax-Free Minnesota
Class A - 12/31/96 12.63 0.63 (0.23) (0.63) -- 12.40 3.33
Class A - 12/31/95 11.33 0.62 1.32 (0.64) -- 12.63 17.49
Class A - 12/31/94 12.85 0.63 (1.48) (0.61) (0.06)(6) 11.33 (6.73)
Class A - 12/31/93 12.21 0.64 0.87 (0.64) (0.23) 12.85 12.70
Class A - 12/31/92 12.07 0.70 0.23 (0.70) (0.09) 12.21 7.97
Class A - 12/31/91 11.67 0.75 0.49 (0.75) (0.09) 12.07 11.04
Class A - 12/31/90 11.68 0.77 0.02 (0.77) (0.03) 11.67 7.03
Class A - 12/31/89 11.48 0.80 0.22 (0.80) (0.02) 11.68 9.11
Class A - 12/31/88 11.16 0.80 0.32 (0.80) -- 11.48 10.31
Class A - 12/31/87 11.85 0.81 (0.66) (0.81) (0.03) 11.16 1.38
Class B - 12/31/96 12.62 0.56 (0.22) (0.56) -- 12.40 2.83
Class B - 12/31/95(1) 11.90 0.45 0.71 (0.44) -- 12.62 9.95
Class C - 12/31/96 12.63 0.54 (0.22) (0.54) -- 12.41 2.64
Class C - 12/31/95 11.33 0.53 1.32 (0.55) -- 12.63 16.62
Class C - 12/31/94(1) 11.96 0.34 (0.61) (0.32) (0.04) 11.33 (2.30)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------
Ratio of
Expenses
to Average
Net Assets
Ratio of Ratio Assuming
Net Expenses of Net No Voluntary
Assets to Investment Waivers
End of Average Income Portfolio and
Delaware-Voyageur Period Net to Average Turnover Reimburse-
State Funds (000s) Assets(2) Net Assets Rate ments
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Florida Intermediate
Class A - 12/31/96 3,159 0.66 4.63 63.06 1.25
Class A - 12/31/95 859 0.63 4.28 27.76 1.25
Class A - 12/31/94(1) 592 -- 4.19(4) -- 1.25(4)
Class B - 12/31/96 1,042 1.48 3.81 63.06 2.00
Class B - 12/31/95(1) 41 1.52(4) 3.32(4) 27.76 2.00(4)
Class C - 12/31/96 54 1.55 3.74 63.06 2.00
Class C - 12/31/95(1) 54 1.62(4) 3.10(4) 27.76 2.00(4)
Tax-Free Idaho
Class A - 12/31/96 27,684 0.60 5.29 34.68 1.10
Class A - 12/31/95(1) 13,540 0.26(4) 5.24(4) 41.97 1.25(4)
Class B - 12/31/96 4,945 1.11 4.78 34.68 1.85
Class B - 12/31/95(1) 1,977 0.79(4) 4.68(4) 41.97 1.90(4)
Class C - 12/31/96 822 1.33 4.57 34.68 1.82
Class C - 12/31/95(1) 789 1.05(4) 4.48(4) 41.97 2.00(4)
Tax-Free Iowa
Class A - 12/31/96 40,037 0.92 4.68 14.56 1.06
Class A - 12/31/95 42,374 0.72 4.88 21.67 1.06
Class A - 12/31/94 32,373 0.11(4) 5.71(4) 7.18 1.25(4)
Class A - 8/31/94(1) 38,669 0.12 4.89 119.35 1.25
Class B - 12/31/96 1,645 1.61 3.97 14.56 1.81
Class B - 12/31/95(1) 819 1.28(4) 4.06(4) 21.67 1.65(4)
Class C - 12/31/96 670 1.75 3.82 14.56 1.81
Class C - 12/31/95(1) 462 1.61(4) 3.74(4) 21.67 1.72(4)
Tax-Free Kansas
Class A - 12/31/96 10,176 0.83 4.97 56.77 1.21
Class A - 12/31/95 10,677 0.37 5.32 19.71 1.11
Class A - 12/31/94 7,355 0.01(4) 5.88(4) -- 1.25(4)
Class A - 10/31/94 6,469 0.06 5.30 38.96 1.25
Class A - 10/31/93(1) 2,057 -- 5.26(4) 28.87 1.25(4)
Class B - 12/31/96 2,402 1.61 4.16 56.77 2.00
Class B - 12/31/95(1) 677 0.94(4) 4.63(4) 19.71 1.68(4)
Class C - 12/31/96 90 1.77 4.02 56.77 2.00
Class C - 12/31/95(1) 40 1.27(4) 4.21(4) 19.71 1.79(4)
Tax-Free Minnesota
Class A - 12/31/96 428,380 0.92 5.13 27.67 0.92
Class A - 12/31/95 455,220 0.93 5.11 50.84 0.93
Class A - 12/31/94 406,497 0.90 5.29 24.26 0.90
Class A - 12/31/93 458,145 1.02 5.02 31.77 1.02
Class A - 12/31/92 331,314 0.96 5.73 23.60 1.04
Class A - 12/31/91 251,594 0.83 6.44 26.40 0.98
Class A - 12/31/90 197,629 0.82 6.68 20.54 1.02
Class A - 12/31/89 172,476 0.77 6.85 22.84 0.77
Class A - 12/31/88 150,031 0.77 7.01 9.56 0.77
Class A - 12/31/87 124,082 0.78 7.10 13.84 0.78
Class B - 12/31/96 6,233 1.50 4.53 27.67 1.67
Class B - 12/31/95(1) 2,701 1.38(4) 4.43(4) 50.84 1.63(4)
Class C - 12/31/96 3,083 1.67 4.38 27.67 1.67
Class C - 12/31/95 2,319 1.67 4.33 50.84 1.67
Class C - 12/31/94(1) 1,061 1.72(4) 4.56(4) 24.26 1.72(4)
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
-13-
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from
Investment
Operations Less Distributions
_______________ Net _______________
Realized
Net and Distri- Net
Asset Net Unrealized Dividends butions Asset Total
Value Invest- Gain from Net from Value from
Delaware-Voyageur Beginning ment (Loss) on Investment Capital End of Investment
State Funds of Period Income Securities Income Gains Period Return(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minnesota Insured
Class A - 12/31/96 10.73 0.52 (0.13) (0.52) -- 10.60 3.75
Class A - 12/31/95 9.61 0.51 1.14 (0.53) -- 10.73 17.52
Class A - 12/31/94 11.02 0.54 (1.39) (0.52) (0.04) 9.61 (7.88)
Class A - 12/31/93 10.27 0.54 0.84 (0.54) (0.09) 11.02 13.80
Class A - 12/31/92 10.07 0.59 0.25 (0.59) (0.05) 10.27 8.57
Class A - 12/31/91 9.65 0.60 0.48 (0.60) (0.06) 10.07 11.59
Class A - 12/31/90 9.64 0.61 0.02 (0.61) (0.01) 9.65 6.63
Class A - 12/31/89 9.48 0.63 0.20 (0.63) (0.04) 9.64 8.96
Class A - 12/31/88 9.19 0.67 0.29 (0.67) -- 9.48 10.70
Class A - 12/31/87(1) 9.51 0.46 (0.32) (0.46) -- 9.19 1.48
Class B - 12/31/96 10.72 0.45 (0.14) (0.45) -- 10.58 3.03
Class B - 12/31/95(1) 10.14 0.38 0.58 (0.38) -- 10.72 9.59
Class C - 12/31/96 10.73 0.44 (0.13) (0.44) -- 10.60 2.98
Class C - 12/31/95 9.61 0.43 1.14 (0.45) -- 10.73 16.63
Class C - 12/31/94(1) 10.23 0.30 (0.62) (0.28) (0.02) 9.61 (3.14)
Minnesota Intermediate
Class A - 12/31/96 11.14 0.51 (0.15) (0.51) -- 10.99 3.46
Class A - 12/31/95 10.50 0.51 0.64 (0.51) -- 11.14 11.00
Class A - 12/31/94 11.16 0.45 (0.66) (0.45) -- 10.50 (1.91)
Class A - 12/31/93 10.83 0.47 0.37 (0.47) (0.04) 11.16 7.88
Class A - 12/31/92 10.69 0.51 0.18 (0.51) (0.04) 10.83 6.62
Class A - 12/31/91 10.32 0.55 0.37 (0.55) -- 10.69 9.24
Class A - 12/31/90 10.26 0.60 0.06 (0.60) -- 10.32 6.59
Class A - 12/31/89 10.21 0.59 0.05 (0.59) -- 10.26 6.43
Class A - 12/31/88 10.17 0.53 0.04 (0.53) -- 10.21 6.02
Class A - 12/31/87 10.43 0.55 (0.25) (0.55) (0.01) 10.17 2.97
Class B - 12/31/96 11.14 0.44 (0.15) (0.44) -- 10.99 2.74
Class B - 12/31/95(1) 10.95 0.17 0.19 (0.17) -- 11.14 3.26
Class C - 12/31/96 11.13 0.43 (0.14) (0.43) -- 10.99 2.69
Class C - 12/31/95 10.50 0.42 0.63 (0.42) -- 11.13 10.18
Class C - 12/31/94(1) 10.74 0.24 (0.24) (0.24) -- 10.50 (0.03)
Missouri Insured
Class A - 12/31/96 10.54 0.52 (0.18) (0.51) -- 10.37 3.41
Class A - 12/31/95 9.27 0.52 1.29 (0.54) -- 10.54 19.96
Class A - 12/31/94 9.37 0.10 (0.11) (0.09) -- 9.27 (0.07)
Class A - 10/31/94 10.82 0.55 (1.43) (0.54) (0.03) 9.37 (8.28)
Class A - 10/31/93(1) 10.00 0.55 0.89 (0.55) (0.07) 10.82 14.74
Class B - 12/31/96 10.54 0.46 (0.18) (0.45) -- 10.37 2.93
Class B - 12/31/95 9.27 0.48 1.28 (0.49) -- 10.54 19.18
Class B - 12/31/94 9.37 0.08 (0.10) (0.08) -- 9.27 (0.14)
Class B - 10/31/94(1) 10.30 0.33 (0.94) (0.32) -- 9.37 (6.16)
Class C - 12/31/96 10.54 0.43 (0.18) (0.42) -- 10.37 2.48
Class C - 12/31/95(1) 10.36 0.06 0.17 (0.05) -- 10.54 2.24
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------
Ratio of
Expenses
to Average
Net Assets
Ratio of Ratio Assuming
Net Expenses of Net No Voluntary
Assets to Investment Waivers
End of Average Income Portfolio and
Delaware-Voyageur Period Net to Average Turnover Reimburse-
State Funds (000s) Assets(2) Net Assets Rate ments
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Minnesota Insured
Class A - 12/31/96 304,877 0.92 4.93 14.04 0.92
Class A - 12/31/95 307,734 0.87 4.92 53.72 0.92
Class A - 12/31/94 284,132 0.61 5.29 24.75 0.94
Class A - 12/31/93 311,187 0.70 4.93 18.25 1.02
Class A - 12/31/92 162,728 0.37 5.66 14.11 1.06
Class A - 12/31/91 68,250 0.78 6.13 43.68 1.16
Class A - 12/31/90 29,394 0.74 6.30 15.12 1.25
Class A - 12/31/89 8,217 0.78 6.55 28.34 1.00
Class A - 12/31/88 4,707 0.86 7.08 68.09 1.00
Class A - 12/31/87(1) 2,759 0.76(4) 7.93(4) 20.66 1.00(4)
Class B - 12/31/96 6,817 1.56 4.29 14.04 1.68
Class B - 12/31/95(1) 4,655 1.34(4) 4.15(4) 53.72 1.64(4)
Class C - 12/31/96 3,126 1.68 4.18 14.04 1.68
Class C - 12/31/95 3,166 1.66 4.11 53.72 1.67
Class C - 12/31/94(1) 1,525 1.36(4) 4.68(4) 24.75 1.68(4)
Minnesota Intermediate
Class A - 12/31/96 66,024 0.89 4.69 28.18 0.89
Class A - 12/31/95 72,405 0.91 4.61 40.28 0.91
Class A - 12/31/94 84,168 0.92 4.18 42.06 0.92
Class A - 12/31/93 75,374 0.99 4.18 19.13 0.99
Class A - 12/31/92 48,210 1.09 4.71 25.56 1.09
Class A - 12/31/91 27,268 1.23 5.35 43.39 1.23
Class A - 12/31/90 22,526 1.18 5.81 51.47 1.18
Class A - 12/31/89 21,884 0.84 5.74 68.23 0.84
Class A - 12/31/88 24,157 0.84 5.15 16.13 0.84
Class A - 12/31/87 29,063 0.84 5.14 24.79 0.84
Class B - 12/31/96 408 1.56 3.99 28.18 1.62
Class B - 12/31/95(1) 27 1.30(4) 3.93(4) 40.28 1.55(4)
Class C - 12/31/96 1,137 1.64 3.94 28.18 1.64
Class C - 12/31/95 694 1.63 3.82 40.28 1.63
Class C - 12/31/94(1) 341 1.71(4) 3.35(4) 42.05 1.71(4)
Missouri Insured
Class A - 12/31/96 49,301 0.71 5.05 28.26 1.03
Class A - 12/31/95 50,211 0.50 5.25 31.69 1.07
Class A - 12/31/94 37,790 0.11(4) 6.00(4) 8.85 1.12(4)
Class A - 10/31/94 37,384 0.15 5.39 32.02 1.13
Class A - 10/31/93(1) 30,270 -- 4.82(4) 76.51 1.25(4)
Class B - 12/31/96 10,432 1.29 4.46 28.26 1.78
Class B - 12/31/95 6,195 0.97 4.70 31.69 1.81
Class B - 12/31/94 2,742 0.60(4) 5.32(4) 8.85 1.84(4)
Class B - 10/31/94(1) 1,701 0.49(4) 4.89(4) 32.02 1.83(4)
Class C - 12/31/96 152 1.62 4.10 28.26 1.78
Class C - 12/31/95(1) 20 1.22(4) 4.09(4) 31.69 1.55(4)
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
-14-
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from
Investment
Operations Less Distributions
_______________ Net _______________
Realized
Net and Distri- Net
Asset Net Unrealized Dividends butions Asset Total
Value Invest- Gain from Net from Value from
Delaware-Voyageur Beginning ment (Loss) on Investment Capital End of Investment
State Funds of Period Income Securities Income Gains Period Return(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Free New Mexico
Class A - 12/31/96 10.89 0.54 (0.11) (0.53) -- 10.79 4.13
Class A - 12/31/95 9.59 0.52 1.33 (0.55) -- 10.89 19.64
Class A - 12/31/94 9.77 0.11 (0.20) (0.09) -- 9.59 (0.90)
Class A - 10/31/94 10.92 0.56 (1.16) (0.55) -- 9.77 (5.56)
Class A - 10/31/93 10.00 0.57 0.98 (0.57) (0.06) 10.92 15.77
Class A - 10/31/921 10.00 -- -- -- -- 10.00 --
Class B - 12/31/96 10.89 0.46 (0.11) (0.45) -- 10.79 3.39
Class B - 12/31/95 9.59 0.46 1.32 (0.48) -- 10.89 18.84
Class B - 12/31/94 9.77 0.09 (0.19) (0.08) -- 9.59 (0.98)
Class B - 10/31/94(1) 10.69 0.31 (0.93) (0.30) -- 9.77 (5.84)
Class C - 12/31/96(1) 10.41 0.28 0.37 (0.27) -- 10.79 6.30
Tax-Free New York
Class A - 12/31/96(10) 10.72 0.12 0.01 (0.12) (0.04) 10.69 1.21
Class A - 9/30/96 10.87 0.55 (0.13) (0.55) (0.02) 10.72 3.94
Class A - 9/30/95 10.74 0.57 0.17 (0.59) (0.02) 10.87 7.31
Class A - 9/30/94 10.81 0.15 (0.06) (0.16) -- 10.74 0.79
Class A - 6/30/94 11.51 0.62 (0.54) (0.62) (0.16) 10.81 0.63
Class A - 6/30/93 11.03 0.65 0.65 (0.66) (0.16) 11.51 12.19
Class A - 6/30/92 10.57 0.66 0.62 (0.66) (0.16) 11.03 12.53
Class A - 6/30/91 10.27 0.48 0.30 (0.48) -- 10.57 5.49
Class A - 9/30/90 10.50 0.67 (0.22) (0.67) (0.01) 10.27 4.44
Class A - 9/30/89 10.30 0.72 0.20 (0.72) -- 10.50 9.21
Class A - 9/30/88(1) 10.00 0.64 0.30 (0.64) -- 10.30 10.09
Class B - 12/31/96(10) 10.69 0.10 -- (0.10) (0.04) 10.65 0.95
Class B - 9/30/96 10.84 0.47 (0.13) (0.47) (0.02) 10.69 3.14
Class B - 9/30/95(1) 10.34 0.43 0.54 (0.45) (0.02) 10.84 9.46
Class C - 12/31/96(10) 10.70 0.10 -- (0.10) (0.04) 10.66 0.95
Class C - 9/30/96 10.85 0.47 (0.13) (0.47) (0.02) 10.70 3.14
Class C - 9/30/95(1) 10.79 0.21 0.06 (0.21) -- 10.85 2.54
Tax-Free North Dakota
Class A - 12/31/96 11.00 0.54 (0.13) (0.53) -- 10.88 3.89
Class A - 12/31/95 9.85 0.54 1.18 (0.57) -- 11.00 17.81
Class A - 12/31/94 11.07 0.56 (1.15) (0.53) (0.10)(8) 9.85 (5.47)
Class A - 12/31/93 10.59 0.58 0.58 (0.58) (0.10) 11.07 11.20
Class A - 12/31/92 10.34 0.62 0.34 (0.62) (0.09) 10.59 9.70
Class A - 12/31/91(1) 10.00 0.49 0.41 (0.49) (0.07) 10.34 9.23
Class B - 12/31/96 11.00 0.49 (0.13) (0.48) -- 10.88 3.39
Class B - 12/31/95 9.85 0.48 1.18 (0.51) -- 11.00 17.24
Class B - 12/31/941 10.31 0.30 (0.39) (0.27) (0.10)(8) 9.85 (0.77)
Class C - 12/31/96 11.00 0.44 (0.14) (0.43) -- 10.87 2.81
Class C - 12/31/95(1) 10.51 0.17 0.50 (0.18) -- 11.00 6.47
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------
Ratio of
Expenses
to Average
Net Assets
Ratio of Ratio Assuming
Net Expenses of Net No Voluntary
Assets to Investment Waivers
End of Average Income Portfolio and
Delaware-Voyageur Period Net to Average Turnover Reimburse-
State Funds (000s) Assets(2) Net Assets Rate ments
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax-Free New Mexico
Class A - 12/31/96 20,133 0.88 5.06 42.12 1.07
Class A - 12/31/95 21,402 0.87 5.07 55.72 1.09
Class A - 12/31/94 19,706 0.06(4) 6.38(4) 2.21 1.25(4)
Class A - 10/31/94 23,096 0.29 5.26 22.94 1.16
Class A - 10/31/93 17,302 -- 5.10 30.76 1.25
Class A - 10/31/921 361 -- -- -- --
Class B - 12/31/96 794 1.61 4.31 42.12 1.82
Class B - 12/31/95 605 1.53 4.33 55.72 1.83
Class B - 12/31/94 272 0.75(4) 5.60(4) 2.21 2.00(4)
Class B - 10/31/94(1) 264 0.98(4) 4.57(4) 22.94 1.86(4)
Class C - 12/31/96(1) 341 1.74(4) 4.21(4) 42.12 1.83(4)
Tax-Free New York
Class A - 12/31/96(10 10,044 0.97(4) 5.31(4) 5 1.12(4)
Class A - 9/30/96 10,548 1.34 5.14 12.00 1.55
Class A - 9/30/95 11,931 1.31 5.66 10.00 1.82
Class A - 9/30/94 12,797 1.09(4) 5.74(4) -- 1.09(4)
Class A - 6/30/94 12,851 0.99 5.55 4.00 1.09
Class A - 6/30/93 13,915 0.99 5.74 17.00 1.05
Class A - 6/30/92 14,943 1.00 6.15 19.00 1.26
Class A - 6/30/91 15,592 1.23(4) 6.08(4) 18.00 1.48(4)
Class A - 9/30/90 27,065 1.09 6.35 31.00 1.49
Class A - 9/30/89 23,069 0.60 6.75 11.00 1.70
Class A - 9/30/88(1) 9,260 0.45(4) 6.87(4) 18.00 2.04(4)
Class B - 12/31/96(10) 254 1.87(4) 4.43(4) 5.00 2.00(4)
Class B - 9/30/96 448 2.09 4.39 12.00 2.30
Class B - 9/30/95(1) 266 2.09(4) 4.68(4) 10.00 2.60(4)
Class C - 12/31/96(10) 53 1.84(4) 4.45(4) 5.00 2.00(4)
Class C - 9/30/96 52 2.09 4.39 12.00 2.30
Class C - 9/30/95(1) 51 2.09(4) 4.44(4) 10.00 2.60(4)
Tax-Free North Dakota
Class A - 12/31/96 33,713 0.88 5.01 57.60 1.08
Class A - 12/31/95 36,096 0.81 5.07 45.34 1.05
Class A - 12/31/94 33,829 0.46 5.36 32.60 1.14
Class A - 12/31/93 34,880 0.59 5.11 27.39 1.25
Class A - 12/31/92 15,846 0.40 5.78 26.27 1.25
Class A - 12/31/91(1) 4,914 0.16(4) 6.43(4) 126.37 1.25(4)
Class B - 12/31/96 700 1.36 4.52 57.60 1.83
Class B - 12/31/95 375 1.29 4.56 45.34 1.79
Class B - 12/31/941 144 0.99(4) 4.97(4) 32.60 1.89(4)
Class C - 12/31/96 40 1.75 4.06 57.60 1.75
Class C - 12/31/95(1) 20 1.73(4) 4.00(4) 45.34 1.73(4)
- -----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
-15-
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from
Investment
Operations Less Distributions
_______________ Net _______________
Realized
Net and Distri- Net
Asset Net Unrealized Dividends butions Asset Total
Value Invest- Gain from Net from Value from
Delaware-Voyageur Beginning ment (Loss) on Investment Capital End of Investment
State Funds of Period Income Securities Income Gains Period Return(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Oregon Insured
Class A - 12/31/96 10.05 0.48 (0.18) (0.48) -- 9.87 3.15
Class A - 12/31/95 8.92 0.49 1.14 (0.50) -- 10.05 18.71
Class A - 12/31/94 9.00 0.09 (0.09) (0.08) -- 8.92 0.06
Class A - 10/31/94 10.24 0.50 (1.24) (0.50) -- 9.00 (7.35)
Class A - 10/31/93(1) 10.00 0.13 0.24 (0.13) -- 10.24 3.64
Class B - 12/31/96 10.05 0.43 (0.18) (0.43) -- 9.87 2.61
Class B - 12/31/95 8.92 0.44 1.14 (0.45) -- 10.05 18.10
Class B - 12/31/94 9.00 0.08 (0.09) (0.07) -- 8.92 0.03
Class B - 10/31/94(1) 9.85 0.27 (0.85) (0.27) -- 9.00 (5.95)
Class C - 12/31/96 10.05 0.40 (0.17) (0.40) -- 9.88 2.38
Class C - 12/31/95(1) 9.63 0.19 0.41 (0.18) -- 10.05 6.35
Tax-Free Utah
Class A - 12/31/96 11.04 0.55 (0.20) (0.55) -- 10.84 3.35
Class A - 12/31/95 9.80 0.59 1.24 (0.59) -- 11.04 19.06
Class A - 12/31/94 9.94 0.10 (0.15) (0.09) -- 9.80 (0.41)
Class A - 10/31/94 11.07 0.60 (1.07) (0.60) (0.06) 9.94 (4.50)
Class A - 10/31/93 10.00 0.65 1.07 (0.65) -- 11.07 17.54
Class A - 10/31/92(1) 10.00 -- -- -- -- 10.00 --
Class B - 12/31/96 11.04 0.47 (0.21) (0.47) -- 10.83 2.47
Class B - 12/31/95(1) 10.63 0.30 0.39 (0.28) -- 11.04 6.60
Washington Insured
Class A - 12/31/96 10.44 0.54 (0.14) (0.54) -- 10.30 3.98
Class A - 12/31/95 9.21 0.59 1.21 (0.57) -- 10.44 19.94
Class A - 12/31/94 9.37 0.09 (0.16) (0.09) -- 9.21 (0.69)
Class A - 10/31/94 10.67 0.55 (1.26) (0.57) (0.02) 9.37 (6.85)
Class A - 10/31/93(1) 10.00 0.15 0.67 (0.15) -- 10.67 8.05
Class B - 12/31/96 10.44 0.47 (0.14) (0.46) -- 10.31 3.32
Class B - 12/31/95(1) 10.18 0.09 0.25 (0.08) -- 10.44 3.30
Class C - 12/31/96 10.43 0.45 (0.14) (0.44) -- 10.30 3.12
Class C - 12/31/95(1) 9.94 0.31 0.48 (0.30) -- 10.43 8.13
Tax-Free Wisconsin
Class A - 12/31/96 9.78 0.46 (0.14) (0.46) -- 9.64 3.49
Class A - 12/31/95 8.74 0.48 1.04 (0.48) -- 9.78 17.74
Class A - 12/31/94 9.28 0.16 (0.55) (0.15) -- 8.74 (4.12)
Class A - 8/31/94(1) 10.00 0.49 (0.72) (0.49) -- 9.28 (2.40)
Class B - 12/31/96 9.77 0.41 (0.14) (0.41) -- 9.63 2.84
Class B - 12/31/95(1) 9.39 0.28 0.37 (0.27) -- 9.77 7.08
Class C - 12/31/96 9.79 0.39 (0.13) (0.39) -- 9.66 2.74
Class C - 12/31/95(1) 9.34 0.30 0.44 (0.29) -- 9.79 8.06
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
----------------------------------------
Ratio of
Expenses
to Average
Net Assets
Ratio of Ratio Assuming
Net Expenses of Net No Voluntary
Assets to Investment Waivers
End of Average Income Portfolio and
Delaware-Voyageur Period Net to Average Turnover Reimburse-
State Funds (000s) Assets(2) Net Assets Rate ments
- -------------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oregon Insured
Class A - 12/31/96 20,913 0.71 4.92 39.54 1.07
Class A - 12/31/95 21,590 0.54 5.12 41.08 1.11
Class A - 12/31/94 14,650 0.05(4) 5.79(4) -- 1.25(4)
Class A - 10/31/94 14,086 0.03 5.17 48.98 1.25
Class A - 10/31/93(1) 4,609 -- 4.61(4) 11.08 1.25(4)
Class B - 12/31/96 4,758 1.25 4.37 39.54 1.83
Class B - 12/31/95 2,786 1.04 4.57 41.08 1.86
Class B - 12/31/94 1,303 0.60(4) 5.19(4) -- 2.00(4)
Class B - 10/31/94(1) 1,146 0.75(4) 4.43(4) 48.98 2.00(4)
Class C - 12/31/96 360 1.55 4.03 39.54 1.82
Class C - 12/31/95(1) 250 1.39(4) 4.00(4) 41.08 1.74(4)
Tax-Free Utah
Class A - 12/31/96 3,861 0.68 5.14 39.58 1.25
Class A - 12/31/95 4,142 0.38 5.51 35.28 1.25
Class A - 12/31/94 3,728 0.11(4) 6.38(4) -- 1.14(4)
Class A - 10/31/94 4,054 0.10 5.64 2.77 1.25
Class A - 10/31/93 3,913 -- 5.65 44.54 1.25
Class A - 10/31/92(1) 19 -- -- -- --
Class B - 12/31/96 397 1.46 4.34 39.58 2.00
Class B - 12/31/95(1) 363 0.92(4) 4.74(4) 35.28 2.00(4)
Washington Insured
Class A - 12/31/96 2,382 0.44 5.29 33.30 1.25
Class A - 12/31/95 2,099 0.28 5.57 50.54 1.25
Class A - 12/31/94 2,049 0.10(4) 6.18(4) -- 1.25(4)
Class A - 10/31/94 2,118 0.14 5.44 -- 1.25
Class A - 10/31/93(1) 2,108 -- 5.50(4) 45.14 1.25(4)
Class B - 12/31/96 516 1.21 4.47 33.30 2.00
Class B - 12/31/95(1) 15 1.04(4) 4.44(4) 50.54 2.00(4)
Class C - 12/31/96 19 1.37 4.36 33.30 2.00
Class C - 12/31/95(1) 19 1.30(4) 4.45(4) 50.54 2.00(4)
Tax-Free Wisconsin
Class A - 12/31/96 28,292 0.98 4.90 38.54 1.09
Class A - 12/31/95 26,449 0.88 5.05 12.10 1.09
Class A - 12/31/94 20,167 0.08(4) 5.54(4) 20.52 1.25(4)
Class A - 8/31/94(1) 16,093 0.04 4.89 86.26 1.25
Class B - 12/31/96 1,339 1.66 4.37 38.54 1.85
Class B - 12/31/95(1) 725 1.45(4) 4.31(4) 12.10 1.70(4)
Class C - 12/31/96 555 1.75 4.12 38.54 1.83
Class C - 12/31/95(1) 73 1.77(4) 4.04(4) 12.10 1.77(4)
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Highlights
-16-
<PAGE>
NOTES TO FINANCIAL HIGHLIGHTS
(1) The information is for the period from each Fund's commencement of
operations to the Fund's year end. The classes of each Fund commenced
operations on the following dates:
<TABLE>
<CAPTION>
<S> <C> <C>
Tax-Free Arizona Fund Tax-Free Idaho Fund Tax-Free North Dakota Fund
Class A March 2, 1995 Class A January 4, 1995 Class A April 1, 1991
Class B June 29, 1995 Class B March 16, 1995 Class B May 10, 1994
Class C May 13, 1995 Class C January 11, 1995 Class C July 29, 1995
Tax-Free Arizona Insured Fund Tax-Free Iowa Fund Tax-Free Oregon Insured Fund
Class A April 1, 1991 Class A September 1, 1993 Class A August 1, 1993
Class B March 10, 1995 Class B March 24, 1995 Class B March 12, 1994
Class C May 26, 1994 Class C January 4, 1995 Class C July 7, 1995
Tax-Free California Fund Tax-Free Kansas Fund Tax-Free Utah Fund
Class A March 3, 1995 Class A November 30, 1992 Class A October 5, 1992
Class B August 23, 1995 Class B April 8, 1995 Class B May 27, 1995
Class C April 9, 1996 Class C April 12, 1995
Tax-Free Washington Insured Fund
Tax-Free California Insured Fund Tax-Free Minnesota Fund Class A August 1, 1993
Class A October 15, 1992 Class B March 11, 1995 Class B October 24, 1995
Class B March 1, 1994 Class C May 4, 1994 Class C April 21, 1995
Class C April 12, 1995
Minnesota Insured Fund Tax-Free Wisconsin Fund
Tax-Free Colorado Fund Class A May 1, 1987 Class A September 1, 1993
Class A April 23, 1987 Class B March 7, 1995 Class B April 22, 1995
Class B March 22, 1995 Class C May 4, 1994 Class C March 28, 1995
Class C May 6, 1994
Tax-Free Minnesota Intermediate Fund
Tax-Free Florida Fund Class B August 15, 1995
Class A March 2, 1995 Class C April 30, 1994
Class B September 15, 1995
Class C April 22, 1995 Tax-Free Missouri Insured Fund
Class A November 2, 1992
Tax-Free Florida Insured Fund Class B March 12, 1994
Class A January 1, 1992 Class C November 11, 1995
Class B March 11, 1994
Tax-Free New Mexico Fund
Tax-Free Florida Intermediate Fund Class A October 5, 1992
Class A May 1, 1994 Class B March 3, 1994
Class B September 15, 1995 Class C May 7, 1996
Class C March 23, 1995
Tax-Free New York Fund
Class A November 6, 1987
Class B November 14, 1994
Class C April 26, 1995
</TABLE>
-17-
<PAGE>
(2) Beginning in the year ended December 31, 1995, the expense ratio reflects
the effect of gross expenses attributable to earnings credits on uninvested
cash balances received by the Fund. Prior period expense ratios have not
been adjusted.
(3) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value and does not reflect the impact of a sales charge.
(4) Adjusted to an annual basis.
(5) The Fund's adviser also paid $25,631 for Tax-Free Arizona Insured Fund for
the period ended December 31, 1991.
(6) Includes (.01) in excess of net realized gains.
(7) Includes (.06) and (.04) in excess of net realized gains for Class A and
Class C shares, respectively.
(8) Includes (.02) and (.02) in excess of net realized gains for Class A and
Class B shares, respectively.
(9) Includes (.01) in excess distributions of net investment income.
(10) Effective November 16, 1996, the Fund's shareholders approved a change of
investment adviser for Fortis Advisers, Inc. to Voyageur Fund Managers,
Inc.
-18-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Tax-Free Intermediate Fund is to
provide investors with preservation of capital and, secondarily, current income
exempt from federal income tax and the personal income tax, if any, of the
Fund's particular state, by maintaining a weighted average portfolio maturity of
10 years or less. The investment objective of each Tax-Free Fund and Insured
Fund is to seek as high a level of current income exempt from federal income tax
and from the personal income tax, if any, of the Fund's particular state, as is
consistent with preservation of capital. The weighted average maturity of the
investment portfolio of each Tax-Free Fund and Insured Fund is expected to be
approximately 15 to 25 years. Each of Tax-Free Florida Intermediate Fund,
Tax-Free Florida Fund and Tax-Free Florida Insured Fund will seek to select
investments that will enable its shares to be exempt from the Florida intangible
personal property tax.
SUITABILITY
The Funds may be suitable for the longer-term investor who is a
resident subject to income tax of the Fund's respective state. The investor
should be willing to accept the risks of investment in municipal bonds in
general and the respective state bonds in particular. The net asset value of
each Fund's shares can generally be expected to fluctuate inversely to changes
in interest rates.
The risks associated with an investment in each Fund are discussed
below and under Special Risk Considerations and Other Investment Policies and
Risk Considerations. The risks inherent in an investment in a fund that invests
in obligations of a specific state, such as the Funds, are described below under
Special Considerations.
INVESTMENT STRATEGY
The Funds which are diversified, as such term is defined in the 1940
Act are designated as such by a footnote on the cover page of this Prospectus.
All other Funds are non-diversified. Each non-diversified Fund will be able to
invest, subject to certain federal tax requirements, a relatively higher
percentage of its assets in the securities of a limited number of issuers which
may result in such Fund's securities being more susceptible to any single
economic, political or regulatory occurrence than the securities of a
diversified Fund. The investment objectives and policies of each Fund are
described below. Except where noted, an investment objective or policy
description applies to all Funds.
During times of adverse market conditions when a defensive investment
posture is warranted, each Fund may temporarily select investments without
regard to the foregoing policy. There are risks in any investment program, and
there is no assurance that a Fund's investment objective will be achieved. The
value of each Fund's shares will fluctuate with changes in the market value of
its investments. Each Fund's investment objective and certain other investment
policies explicitly designated herein as such are fundamental, which means that
they cannot be changed without the vote of its respective shareholders as
provided in the 1940 Act.
Each Fund anticipates that, in normal market conditions, it will invest
substantially all of its assets in Tax Exempt Obligations (as defined below),
the interest on which is exempt from federal income tax and from the personal
income tax, if any, of its respective state (and with respect to Tax-Free New
York Fund, New York City personal income tax). As a fundamental policy, Tax-Free
New York Fund will invest at least 80% of the value of its net assets in such
obligations under normal market conditions (not including obligations subject to
the alternative minimum tax). Up to 20% of the securities owned by each such
Fund may generate interest that is an item of tax preference for purposes of
federal and state alternative minimum tax ("AMT"), except that the Minnesota
Insured Fund may invest without limitation in such securities and the Tax-Free
Minnesota Fund may
-19-
<PAGE>
not invest in such AMT securities. Tax-Free New York Fund may also invest in
such securities which generate an item of tax preference for purposes of New
York City alternative minimum tax.
Tax-Free and Tax-Free Intermediate Funds
Each Tax-Free Fund and each Tax-Free Intermediate Fund may invest
without limitation in securities rated "investment grade," i.e., within the four
highest investment grades, at the time of investment by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Services ("S&P") or, if
unrated, judged by the Manager to be of comparable quality. Bonds included in
the lowest investment grade rating category involve certain speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher rated bonds. Up to 20% of the Tax Exempt
Obligations purchased by the Funds may be rated lower than investment grade;
however, all bonds must be rated "B" or better by Moody's or S&P (or, if
unrated, judged by the Manager to be of comparable quality). Such bonds are
often referred to as "junk" bonds or "high yield" bonds. Bonds rated below "BBB"
have a greater vulnerability to default than higher grade bonds. See Special
Risk Considerations for a discussion of the risks of investing in lower grade
Tax Exempt Obligations. A description of the ratings assigned by Moody's and S&P
is set forth in Appendix C.
The following table sets forth the weighted average percentage of total
investments with respect to the portfolios of certain Funds during the year
ended as of December 31, 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Moody's Rating
(S&P Rating) Aaa Aa A Baa Ba B Unrated
(AAA) (AA) (A) (BBB) (BB) (B) Bonds Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Funds
Colorado 32% 21% 19% 24% -- -- 4% 100%
Florida 28% 20% 17% 17% -- -- 18% 100%
Idaho 28% 11% 28% 23% -- -- 10% 100%
Kansas 58% 18% 2% 17% -- -- 5% 100%
Minnesota 54% 12% 15% 9% -- -- 10% 100%
North Dakota 38% 27% 16% 18% -- -- 1% 100%
Utah 68% 11% 10% 2% -- -- 9% 100%
Wisconsin 23% 10% 29% 7% 8% -- 23% 100%
Tax-Free Intermediate Funds
Florida 65% 8% 6% 16% -- -- 5% 100%
Minnesota 53% 10% 9% 18% -- -- 10% 100%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Insured Funds
The Tax Exempt Obligations in each Insured Fund's portfolio will
consist of (a) obligations that at all times are fully insured as to scheduled
payments of principal and interest ("insured securities") and (b) "escrow
secured" or "defeased" bonds. Insured securities may consist of bonds covered by
Primary Insurance, Market Insurance or Portfolio Insurance (as defined below).
All insurers must have a triple A-rated claims paying ability (as assigned by
either or both of Moody's and S&P) at the time of investment. Securities that
are covered by either Primary or Secondary Market Insurance will carry a
triple-A rating at the time of investment by the Fund. However, securities that
are not covered by either Primary or Secondary Market Insurance at the time of
investment (or that are not "escrow secured" or "defeased") must be covered by
Portfolio Insurance immediately after their acquisition. The Funds' Manager
anticipates that such securities, at the time of investment, generally
-20-
<PAGE>
will be rated investment grade. However, all securities in each Insured Fund's
portfolio, after application of insurance, will be rated Aaa by Moody's and/or
AAA by S&P at the time of investment. Pending the investment or reinvestment of
its assets in longer-term Tax Exempt Obligations, each Insured Fund may invest
up to 35% of its net assets in short-term tax exempt instruments, without
obtaining insurance, provided such instruments carry an A-l+ or SP-l+ short-term
rating or AAA or Aaa long-term rating by S&P or Moody's, and may invest up to
10% of its net assets in securities of tax exempt money market mutual funds. The
"insured securities" in each Insured Fund's investment portfolio are insured as
to the scheduled payment of all installments of principal and interest as they
fall due. The purpose of such insurance is to minimize credit risks to such
Funds and their shareholders associated with defaults in Tax Exempt Obligations
owned by such Funds. Such insurance does not insure against market risk and
therefore does not guarantee the market value of the securities in an Insured
Fund's investment portfolio or the value of any Insured Funds' shares.
Certain insurance companies will issue policies guaranteeing the timely
payment of principal of, and interest on, particular Tax Exempt Obligations or
on a portfolio of Tax Exempt Obligations. Insurance may be purchased by the
issuer of a Tax Exempt Obligation or by a third party at the time of issuance of
the Tax Exempt Obligation ("Primary Insurance") or by the Fund or a third party
subsequent to the original issuance of a Tax Exempt Obligation ("Secondary
Market Insurance"). In each case, a single premium is paid to the insurer by the
party purchasing the insurance when the insurance is obtained. Primary Insurance
and Secondary Market Insurance policies are non-cancelable and remain in effect
for so long as the insured Tax Exempt Obligation is outstanding and the insurer
is in business.
The Insured Funds may also purchase insurance covering certain Tax
Exempt Obligations which the Insured Funds intend to purchase for their
portfolios or which the Insured Funds already own ("Portfolio Insurance").
Portfolio Insurance policies guarantee the timely payment of principal of, and
interest on, covered Tax Exempt Obligations only while they are owned by the
Insured Funds. Such policies are non-cancelable and remain in effect until the
Fund terminates, provided the Fund pays the applicable insurance premiums and
the insurer remains in business. Tax Exempt Obligations in the Insured Funds'
portfolios covered by a Portfolio Insurance policy will not be covered by such
policy after they are sold by a Fund unless the Fund elects to obtain some form
of Secondary Market Insurance for them at the time of sale. The Insured Funds
would obtain such Secondary Market Insurance only if, in the Manager's view, it
would be economically advantageous for the Funds to do so. Further information
about insurance (including its limitations) is set forth in the Statement of
Additional Information.
All Funds
The foregoing policies as to credit quality of portfolio investments
will apply only at the time of the purchase of a security, and the Funds are not
required to dispose of securities in the event that Moody's or S&P downgrades
its assessment of the credit characteristics of a particular issuer or, in the
case of unrated securities, in the event the Manager reassesses its view with
respect to the credit quality of the issuer thereof. In no event, however, will
more than 5% of each Fund's total assets consist of securities that have been
downgraded to a rating lower than the minimum rating in which each Fund is
permitted to invest or, in the case of unrated securities, that the Manager has
determined to have a quality lower than such minimum rating. With respect to the
Insured Funds, up to 35% of each such Fund's total assets may consist of
securities that have been downgraded to AA or Aa subsequent to initial
investment in such securities by an Insured Fund.
Each Fund may invest without limitation in short term Tax Exempt
Obligations or in taxable obligations on a temporary, defensive basis due to
market conditions or, with respect to taxable obligations, for liquidity
purposes. Such taxable obligations, whether purchased for liquidity purposes or
on a temporary, defensive basis, may include: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
-21-
<PAGE>
within the three highest grades by either Moody's or S&P; commercial paper rated
in the highest grade by either of such rating services (Prime-1 or A-1,
respectively); certificates of deposit and bankers' acceptances of domestic
banks which have capital, surplus and undivided profits of over $100 million;
high-grade taxable municipal bonds; and repurchase agreements with respect to
any of the foregoing investments. Each Fund also may hold its assets in cash and
in securities of tax exempt money market mutual funds.
Tax Exempt Obligations
As used in this Prospectus, the term "Tax Exempt Obligations" refers to
debt obligations issued by or on behalf of a state or territory or its agencies,
instrumentalities, municipalities and political subdivisions, the interest
payable on which is, in the opinion of bond counsel, excludable from gross
income for purposes of federal income tax and from the personal income tax, if
any, of the state specified in the Fund's name. The term "Tax Exempt
Obligations" also includes Derivative Tax Exempt Obligations as defined below.
In certain instances the interest on Tax Exempt Obligations may be an item of
tax preference includable in alternative minimum taxable income depending upon
the shareholder's tax status. See Taxes.
Tax Exempt Obligations are primarily debt obligations issued to obtain
funds for various public purposes such as constructing public facilities and
making loans to public institutions. The two principal classifications of Tax
Exempt Obligations are general obligation bonds and revenue bonds. General
obligation bonds are generally secured by the full faith and credit of an issuer
possessing general taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source.
Revenue bonds are payable only from the revenues derived from a particular
source or facility, such as a tax on particular property or revenues derived
from, for example, a municipal water or sewer utility or an airport. Tax Exempt
Obligations that benefit private parties in a manner different than members of
the public generally (so-called private activity bonds or industrial development
bonds) are in most cases revenue bonds, payable solely from specific revenues of
the project to be financed. The credit quality of private activity bonds is
usually directly related to the creditworthiness of the user of the facilities
(or the creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Tax Exempt Obligations, there
is a variety of types of municipal securities. Certain Tax Exempt Obligations
may carry variable or floating rates of interest whereby the rate of interest is
not fixed but varies with changes in specified market rates or indexes, such as
a bank prime rate or a tax exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Tax Exempt Obligations are zero coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
Tax Exempt Obligations also include state or municipal leases and
participation interests therein. The Funds may invest in these types of
obligation without limitation. Municipal leases are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by a Fund
will be treated as illiquid unless they are determined to be liquid pursuant to
guidelines established by the Fund's Boards of Directors or Trustees. Under
these guidelines, the Manager will consider factors including, but not limited
to (a) whether the lease can be canceled, (b) what assurance there is that the
assets represented by the lease can be sold, (c) the municipality's general
credit strength (e.g., its debt, administrative, economic and financial
characteristics), (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to
-22-
<PAGE>
the operations of the municipality (e.g., the potential for an "event of
non-appropriation"), and (e) the legal recourse in the event of failure to
appropriate. Additionally, the lack of an established trading market for
municipal lease obligations may make the determination of fair market value more
difficult. See Cooncentration Policy under Investment Policies and
Restrictions--Tax Exempt Obligations in Part B.
Each Fund may also acquire Derivative Tax Exempt Obligations, which are
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain Tax Exempt Obligations. The sponsor of these certificates or receipts
typically purchases and deposits the securities in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt, a Fund typically would be authorized to assert its rights
directly against the issuer of the underlying obligation, a Fund could be
required to assert through the custodian bank those rights as may exist against
the underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if a Fund
had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which
the underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non taxable entity, it would be subject
to state (and with respect to Tax-Free New York Fund, potentially New York City)
income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to such Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to a Fund would lose their tax exempt
character and become taxable, for federal and state purposes, in the hands of
the Fund and its shareholders. However, each Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable on
the receipts is tax exempt. If a Fund invests in custodial receipts, it is
possible that a portion of the discount at which the Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts.
The principal and interest payments on the Tax-Exempt Obligations
underlying custodial receipts or trust certificates may be allocated in a number
of ways. For example, payments may be allocated such that certain custodial
receipts or trust certificates may have variable or floating interest rates and
others may be stripped securities which pay only the principal or interest due
on the underlying Tax-Exempt Obligations. The Funds may also invest in custodial
receipts or trust certificates which are "inverse floating obligations" (also
sometimes referred to as "residual interest bonds"). These securities pay
interest rates that vary inversely to changes in the interest rates of specified
short-term Tax-Exempt Obligations or an index of short-term Tax-Exempt
Obligations. Thus, as market interest rates increase, the interest rates on
inverse floating obligations decrease. Conversely, as market rates decline, the
interest rates on inverse floating obligations increase. Such securities have
the effect of providing a degree of investment leverage, since the interest
rates on such securities will generally change at a rate which is a multiple of
the change in the interest rates of the specified Tax-Exempt Obligations or
index. As a result, the market values of inverse floating obligations will
generally be more volatile than the market values of other Tax-Exempt
Obligations and investments in these types of obligations will increase the
volatility of the net asset value of shares of the Funds.
Investments in Derivative Tax Exempt Obligations, when combined with
investments in below investment grade rated securities, will not exceed 20% of
each Fund's total assets. For a discussion of certain risks involved in
investments in Derivative Tax Exempt Obligations, see Special Risk
Considerations.
-23-
<PAGE>
Concentration Policy
As a fundamental policy, no Fund will invest 25% or more of its total
assets in the securities of any industry, although for purposes of this
limitation, tax-exempt securities and U.S. government obligations are not
considered to be part of any industry. Each Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Funds from time to time will invest 25% or more of their total
assets in a particular segment of the municipal bond market such as in housing,
health care, and/or utility obligations. In addition, Tax-Free Arizona
Intermediate Fund, Tax-Free Arizona Fund, Tax-Free California Intermediate Fund,
Tax-Free California Fund, Tax-Free Colorado Intermediate Fund, Tax-Free Colorado
Insured Fund, Tax-Free Florida Intermediate Fund, Tax-Free Florida Fund,
Tax-Free Idaho Fund and Tax-Free New York Fund may invest in transportation,
education and/or industrial obligations. In such circumstances, economic,
business, political and other changes affecting one bond might also affect other
bonds in the same segment, thereby potentially increasing market or credit risk.
For a discussion of these segments of the municipal bond market, see
Concentration Policy under Investment Policies and Restrictions -- Taxable
Obligations in Part B.
Each Fund's Board may change any of the foregoing policies that are not
specifically designated fundamental.
-24-
<PAGE>
SPECIAL RISK CONSIDERATIONS
General
The yields on Tax Exempt Obligations are dependent on a variety of
factors, including the financial condition of the issuer or other obligor
thereon or the revenue source from which debt service is payable, general
economic and monetary conditions, conditions in the relevant market, the size of
a particular issue, maturity of the obligation and the rating of the issue.
Generally, the value of Tax Exempt Obligations will tend to fall as interest
rates rise and will tend to increase as interest rates decrease. In addition,
Tax Exempt Obligations of longer maturity produce higher current yields than Tax
Exempt Obligations with shorter maturities but are subject to greater price
fluctuation due to changes in interest rates, tax laws and other general market
factors. Lower-rated Tax Exempt Obligations generally produce a higher yield
than higher-rated Tax Exempt Obligations due to the perception of a greater
degree of risk as to the payment of principal and interest. Certain Tax Exempt
Obligations held by a Fund may permit the issuer at its option to "call," or
redeem, its securities. If an issuer were to redeem securities held by a Fund
during a time of declining interest rates, the Fund may not be able to reinvest
the proceeds in securities providing the same investment return as the
securities redeemed.
In normal circumstances, each Fund (except for the Insured Funds) may
invest up to 20% of its total assets in Tax Exempt Obligations rated below
investment grade (but not rated lower than B by S&P or Moody's) or in unrated
Tax Exempt Obligations considered by the Fund's Manager to be of comparable
quality to such securities. Investment in such lower grade Tax Exempt
Obligations involves special risks as compared with investment in higher grade
Tax Exempt Obligations. The market for lower grade Tax Exempt Obligations is
considered to be less liquid than the market for investment grade Tax Exempt
Obligations, which may adversely affect the ability of a Fund to dispose of such
securities in a timely manner at a price which reflects the value of such
securities in the Manager's judgment. The market price for less liquid
securities tends to be more volatile than the market price for more liquid
securities. The lower liquidity of and the absence of readily available market
quotations for lower grade Tax Exempt Obligations may make the Manager's
valuation of such securities more difficult, and the Manager's judgment may play
a greater role in the valuation of the Fund's lower grade Tax Exempt
Obligations. Periods of economic uncertainty and changes may have a greater
impact on the market price of such bonds and, therefore, the net asset value of
any Fund investing in such obligations.
Lower grade Tax Exempt Obligations generally involve greater credit
risk than higher grade Tax Exempt Obligations and are more sensitive to adverse
economic changes, significant increases in interest rates and individual issuer
developments. Because issuers of lower grade Tax Exempt Obligations frequently
choose not to seek a rating of such securities, a Fund will rely more heavily on
the Manager's ability to determine the relative investment quality of such
securities than if such Fund invested exclusively in higher grade Tax Exempt
Obligations. A Fund may, if deemed appropriate by the Manager, retain a security
whose rating has been downgraded below B by S&P or Moody's, or whose rating has
been withdrawn. In no event, however, will more than 5% of each Fund's total
assets consist of securities that have been downgraded to a rating lower than
the minimum rating in which each Fund is permitted to invest or, in the case of
unrated securities, that have been determined by the Manager to be of a quality
lower than such minimum rating. Additional information concerning the risks
associated with instruments in lower grade Tax Exempt Obligations is included in
the Part B.
The principal and interest payments on the Derivative Tax Exempt
Obligations underlying custodial receipts may be allocated in a number of ways.
For example, payments may be allocated such that certain custodial receipts may
have variable or floating interest rates and others may be stripped securities
which pay only the principal or interest due on the underlying Tax Exempt
Obligations. The Funds may also invest in custodial receipts which are "inverse
floating obligations" (also sometimes referred to as "residual interest bonds").
These securities pay interest rates that vary inversely to changes in the
interest rates of specified short term Tax Exempt
-25-
<PAGE>
Obligations or an index of short term Tax Exempt Obligations. Thus, as market
interest rates increase, the interest rates on inverse floating obligations
decrease. Conversely, as market rates decline, the interest rates on inverse
floating obligations increase. Such securities have the effect of providing a
degree of investment leverage, since the interest rates on such securities will
generally change at a rate which is a multiple of the change in the interest
rates of the specified Tax Exempt Obligations or index. As a result, the market
values of inverse floating obligations will generally be more volatile than the
market values of other Tax Exempt Obligations and investments in these types of
obligations will increase the volatility of the net asset value of shares of the
Funds.
State Considerations
The value of Tax Exempt Obligations owned by the Funds may be adversely
affected by local political and economic conditions and developments within a
particular state. Adverse conditions in an industry significant to a local
economy could have a correspondingly adverse effect on the financial condition
of local issuers. Other factors that could affect Tax Exempt Obligations include
a change in the local, state or national economy, demographic factors,
ecological or environmental concerns, statutory limitations on the issuer's
ability to increase taxes and other developments generally affecting the
revenues of issuers (for example, legislation or court decisions reducing state
aid to local governments or mandatory additional services). A summary
description of certain factors affecting and statistics describing issuers of
Tax Exempt Obligations of each applicable state is set forth below. Such
information has been taken from publicly available offering documents relating
to the relevant state or issuers located in such state. No Fund or the Manager
has independently verified this information and no Fund or the Manager makes any
representation regarding such information. See Appendix A in Part B.
Arizona's primary economic sectors include services, trade, tourism and
manufacturing. Arizona maintained a general fund surplus of $399.9 million (on
general fund revenues of approximately $4.663 billion) for its 1996 fiscal year.
Currently there are no general obligation ratings for the state. California's
primary economic sectors are agriculture, services, trade and manufacturing. In
1994, Orange County, California filed a voluntary petition under the bankruptcy
code. Moody's and Standard & Poor's suspended, reduced to below investment grade
levels, or placed on "Credit Watch" various securities of the County and the
entities participating in the pooled investment fund. California projects a
general fund surplus of $648 million for its 1996-97 fiscal year (on estimated
revenues of approximately $48.4 billion). Currently, California's general
obligation bonds are rated A1 by Moody's, A by S&P and "A+" by Fitch Investors
Service, Inc. ("Fitch"). Colorado's economy is based primarily on services.
Colorado maintained a generally balanced budget for its 1996 fiscal year (on
general fund revenues of approximately $4.269 billion). Currently there are no
general obligation ratings for Colorado. Florida's economy is based primarily on
the services sector and tourism in particular. Florida projected unencumbered
reserves of $610.1 million for its 1996-1997 fiscal year (on estimated revenues
of approximately $15.567 billion). Currently, Florida's general obligation bonds
are rated Aa by Moody's and AA by S&P. Idaho's primary economic sectors are
services, agriculture, manufacturing and mining. Idaho maintained a fiscal year
1996 general fund surplus of approximately $11.7 million (on revenues of
approximately $1.351 billion). Currently there are no general obligation ratings
for Idaho. Iowa's primary economic sectors are services, manufacturing and
agriculture. Iowa maintained an unreserved fund balance of approximately $201.6
million (on revenues of approximately $4.405 billion) for its fiscal year 1996.
Currently there are no general obligation ratings for Iowa. Kansas' economy is
based primarily on agriculture, manufacturing, and services. Kansas projected a
positive general fund balance for its 1997 fiscal year (on estimated general
fund revenues of approximately $3.527 billion). Currently there are no general
obligation ratings for Kansas. Minnesota's economy is based primarily on
agriculture, manufacturing and services. Minnesota projects a balanced general
fund at the end of its 1997 biennium of $502.4 million (based on estimated
General Fund revenues of $19.1 billion). Currently Minnesota's general
obligation bonds are rated Aaa by Moody's, AA+ by S&P and AAA by Fitch.
Missouri's primary economic sectors are services, manufacturing and agriculture.
Missouri had a general fund surplus of $335.4 million for its 1996 fiscal year
(on revenues of approximately $5.442 billion). Currently
-26-
<PAGE>
Missouri's general obligation bonds are rated Aaa by Moody's, AAA by S&P and AAA
by Fitch. New Mexico's economy is based primarily on agriculture but also has
tourism, services and mining sectors. New Mexico projected a $144 million
general fund surplus for its 1996 fiscal year (on estimated revenues of
approximately $2.757 billion). Currently New Mexico's general obligation bonds
are rated Aa1 by Moody's and AA+ by S&P. New York's economy is based primarily
on services and tourism. New York projects a general fund balance of $358
million for its 1997 fiscal year, and a projected surplus of $1.3 billion for
its 1996-97 General Fund Financial Plan (based on total estimated revenues of
$32.966 billion). The City's 1996-99 Financial Plan successfully implemented a
$3.1 billion gap-closing program for the 1996 fiscal year. Currently, New York's
general obligation bonds are rated A by Moody's and A- by S&P. The City's
general obligation bonds are rated Baa1 by Moody's and A- by S&P. North Dakota's
economy is based primarily on agriculture and services. North Dakota projects a
positive fund balance for its 1997 biennium of $63 million (on revenues of
approximately $1.37 billion). Currently North Dakota's general obligation bonds
are rated Aa by Moody's and AA- by S&P. Oregon's economy is based primarily on
forestry, agriculture, manufacturing and tourism sectors. Oregon expects to
maintain a general fund surplus of approximately $536.3 million for its 1997
biennium (on estimated revenue of approximately $7.399 billion). Currently
Oregon's general obligation bonds are rated Aa by Moody's and AA by S&P. Utah's
economy is based primarily on services, agriculture and mining sectors. Utah
maintained a general and Uniform School fund surplus of approximately $9.1
million for its 1996 fiscal year (on estimated revenues of approximately $2.67
billion). Currently Utah's general obligation bonds are rated Aaa by Moody's,
AAA by S&P and AAA by Fitch. Washington's economy is based primarily on
manufacturing and service sectors as well as agriculture and timber production.
Washington projected a positive general fund surplus for its 1995-1997 biennium
(on estimated revenues of approximately $18.3 billion). Currently Washington's
general obligation bonds are rated Aa by Moody's and AA by S&P. Wisconsin's
economy is based primarily on agriculture, services and manufacturing. Wisconsin
maintained a general fund balance of $442 million for its 1996 fiscal year (on
estimated revenues of approximately $20.686 billion). Currently Wisconsin's
general obligation bonds are rated Aa by Moody's and AA by S&P.
-27-
<PAGE>
THE DELAWARE DIFFERENCE
PLANS AND SERVICES
The Delaware Difference is our commitment to provide you with superior
information and quality service on your investments in the Delaware Group of
funds.
SHAREHOLDER PHONE DIRECTORY
Investor Information Center
800-523-4640
Fund Information; Literature; Price; Yield and Performance Figures
Shareholder Service Center
800-523-1918
Information on Existing Investment Accounts; Wire Investments;
Wire Liquidations; Telephone Liquidations and Telephone Exchanges
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
You can call the Investor Information Center at any time for current
performance information. Current yield and total return information may also be
included in advertisements and information given to shareholders.
Yields are computed on an annual basis over a 30-day period.
Shareholder Services
During business hours, you can call the Delaware Group's Shareholder
Service Center. Our representatives can answer any questions about your account,
the Funds, various service features and other funds in the Delaware Group.
Delaphone Service
Delaphone is an account inquiry service for investors with
Touch-Tone(R) phone service. It enables you to get information on your account
faster than the mailed statements and confirmations. Delaphone also provides
current performance information on the Funds, as well as other funds in the
Delaware Group. Delaphone is available seven days a week, 24 hours a day.
Statements and Confirmations
You will receive quarterly statements of your account summarizing all
transactions during the period. A confirmation statement will be sent following
all transactions other than those involving a reinvestment of dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling the Shareholder Service Center.
Duplicate Confirmations
If your financial adviser or investment dealer is noted on your
investment application, we will send a duplicate confirmation to him or her.
This makes it easier for your adviser to help you manage your investments.
-28-
<PAGE>
Tax Information
Each year, you will receive information on the tax status of your
dividends and distributions.
Dividend Payments
Dividends, capital gains and other distributions are automatically
reinvested in your account, unless you elect to receive them in cash. You may
also elect to have the dividends earned in one fund automatically invested in
another Delaware Group fund with a different investment objective, subject to
certain exceptions and limitations.
For more information, see Additional Methods of Adding to Your
Investment - Dividend Reinvestment Plan under How to Buy Shares or call the
Shareholder Service Center.
MoneyLine(sm) Services
Delaware Group offers the following services for fast and convenient
transfer of funds between your personal bank account and your Delaware Group
fund account.
1. MoneyLine(sm) Direct Deposit Service
If you elect to have your dividends and distributions paid in
cash and such dividends and distributions are in an amount of $25 or
more, you may choose the MoneyLine(sm) Direct Deposit Service and have
such payments transferred from your Fund account to your predesignated
bank account. See Dividends and Distributions. In addition, you may
elect to have your Systematic Withdrawal Plan payments transferred from
your Fund account to your predesignated bank account through this
service.
See Systematic Withdrawal Plans under Redemption and Exchange.
2. MoneyLine(sm) On Demand
You or your investment dealer may request purchases and
redemptions of Fund shares by phone using MoneyLine(sm) On Demand. When
you authorize a Fund to accept such requests from you or your
investment dealer, funds will be withdrawn from (for share purchases)
or 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.
For each MoneyLine(sm) Service, it may take up to four business days
for the transactions to be completed. You can initiate either 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. No Fund charges a fee for MoneyLine(sm) services; however, your bank
may charge a fee. Please call the Shareholder Service Center for additional
information about these services.
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature
allows you to combine the value of your current holdings of Class A Shares,
Class B Shares and Class C Shares of a Fund with the dollar amount of new
purchases of Class A Shares of a Fund to qualify for a reduced front-end sales
charge on such purchases of Class A Shares. Under the Combined Purchases
Privilege, you may also include certain shares that you own in other funds in
the Delaware Group. See Classes of Shares.
-29-
<PAGE>
Letter of Intention
The Letter of Intention feature permits you to obtain a reduced
front-end sales charge on purchases of Class A Shares by aggregating certain of
your purchases of Delaware Group fund shares over a 13-month period.
See Classes of Shares and Part B.
12-Month Reinvestment Privilege
The 12-Month Reinvestment Privilege permits you to reinvest proceeds
from a redemption of Class A Shares, within one year of the date of the
redemption, without paying a front-end sales charge. See Part B.
Exchange Privilege
The Exchange Privilege permits you to exchange all or part of your
shares into shares of other mutual funds in the Delaware Group, subject to
certain exceptions and limitations. For additional information on exchanges, see
Investing by Exchange under How to Buy Shares and Redemption and Exchange.
Wealth Builder Option
You may elect to invest in the Funds through regular liquidations of
shares in your accounts in other funds in the Delaware Group. Investments under
this feature are exchanges and are therefore subject to the same conditions and
limitations as other exchanges of Fund shares. See Additional Methods of Adding
to Your Investment - Wealth Builder Option and Investing by Exchange under How
to Buy Shares and Redemption and Exchange.
Delaware Group Asset Planner
Delaware Group Asset Planner is an asset allocation service that gives
you, when working with a professional financial adviser, the ability to more
easily design and maintain investments in a diversified selection of Delaware
Group mutual funds. The Asset Planner service offers a choice of four
predesigned allocation strategies (each with a different risk/reward profile)
made up of separate investments in predetermined percentages of Delaware Group
funds. With the guidance of a financial adviser, you may also tailor an
allocation strategy that meets your personal needs and goals. See How to Buy
Shares.
Financial Information about the Funds
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
each Fund's investments and performance. Each Funds fiscal year ends on December
31.
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<PAGE>
CLASSES OF SHARES
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net
asset value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of 0.25% of average daily net assets of such shares. Certain purchases
of Class A Shares qualify for reduced front-end sales charges. See Front-End
Sales Charge Alternative - Class A Shares. See also Contingent Deferred Sales
Charge for Certain Redemptions of Class A Shares Purchased at Net Asset Value
and Distribution (12b-1) and Service.
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B Shares, which do not incur a front-end sales charge
when they are purchased, but are subject to a contingent deferred sales charge
if shares are redeemed within six years of purchase in the case of Tax-Free
Funds and Insured Funds, or within three years of purchase in the case of
Tax-Free Intermediate Funds. Class B Shares are 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 Tax-Free Funds
and Insured Funds for approximately eight years after purchase and of Tax-Free
Intermediate Funds for approximately five years after purchase. Class B Shares
permit all of the investor's dollars to work from the time the investment is
made. The higher 12b-1 Plan expenses paid by Class B Shares will cause such
shares to have a higher expense ratio and to pay lower dividends than Class A
Shares. Class B Shares of Tax-Free Funds and Insured Funds will automatically be
converted into Class A Shares at the end of approximately eight years after
purchase and Class B Shares of Tax-Free Intermediate Funds will automatically be
converted into Class A Shares at the end of approximately five years after
purchase. See Automatic Conversion of Class B Shares, below.
Class C Shares. An investor who elects the level sales charge
alternative acquires Class C Shares, which do not incur a front-end sales charge
when they are purchased, but are subject to a contingent deferred sales charge
if they are redeemed within 12 months of purchase. Class C Shares are 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
such shares for the life of the investment. The higher 12b-1 Plan expenses paid
by Class C Shares will cause such shares to have a higher expense ratio and to
pay lower dividends than Class A Shares. Unlike Class B Shares, Class C Shares
do not convert to another class.
The alternative purchase arrangements described above permit investors
to choose the method of purchasing shares that is most suitable 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, purchase Class B Shares and have the entire
initial purchase amount invested in a Fund with their investment being subject
to a CDSC if they redeem shares within the applicable time periods, or purchase
Class C Shares and have the entire initial purchase amount invested in a Fund
with their investment being subject to a CDSC if they redeem shares within 12
months of purchase. In addition, investors should consider the level of annual
12b-1 Plan expenses applicable to each Class. The higher 12b-1 Plan expenses on
Class B Shares and Class C Shares will be
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<PAGE>
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, and the
effect of earning a return on such additional money will diminish over time. In
comparing Class B Shares to Class C Shares, investors should also consider the
desirability of an automatic conversion feature, which is available only for
Class B Shares.
Prospective investors should refer to Appendix A--Investment
Illustrations in this Prospectus for an illustration of the potential effect
that each of the purchase options may have on a long-term shareholder's
investment.
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 the Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of the Class B Shares and the 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, Class B 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
Distribution (12b-1) and Service under Management of the Funds.
Dividends paid on Class A, Class B and Class C Shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
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 Calculation of Offering Price and Net
Asset Value Per Share.
The NASD has adopted certain rules relating to investment company sales
charges. The Funds and the Distributor intend to operate in compliance with
these rules.
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<PAGE>
Front-End Sales Charge Alternative - Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 3.75% in the case of Tax-Free Funds and
Insured Funds, or 2.75% in the case of Tax-Free Intermediate Funds.
See Calculation of Offering Price and Net Asset Value Per Share.
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following tables.
Tax-Free Funds and Insured Funds+
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Amount of Purchase Offering Offering
Price Amount Invested Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 0.00%** 3.25%
$100,000 but less than $250,000 3.00 0.00** 2.50
$250,000 but less than $500,000 2.50 0.00** 2.00
$500,000 but less than $1,000,000* 2.00 0.00** 1.75
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Intermediate Funds++
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Amount of Purchase Offering Offering
Price Amount Invested Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 2.75% 0.00%** 2.35%
$100,000 but less than $250,000 2.00 0.00** 1.75
$250,000 but less than $500,000 1.00 0.00** 0.75
$500,000 but less than $1,000,000* 1.00 0.00** 0.75
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* There is no front-end sales charge on purchases of Class A shares of $1
million or more but, under certain limited circumstances, a 1% limited
contingent deferred sales charge may apply upon redemption of such shares.
** The front-end sales charge as a percentage of the amount invested is based
on the net asset value per share of the respective Class A shares as of the
end of the most recent fiscal year. Those amounts are as follows:
-33-
<PAGE>
<TABLE>
<CAPTION>
Offering Price Offering Price
3.75% 3.00% 2.50% 2.00% 2.75% 2.00% 1.00%
--------------------------------- ---------------------
Amount Invested Amount Invested
--------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona 3.93% 3.08% 2.52% 2.06% Tax-Free Arizona Intermediate 2.80% 2.00% 1.00%
Tax-Free Arizona Insured 3.89 3.07 2.53 2.08 Tax-Free California Intermediate 2.80 2.00 1.00
Tax-Free California 3.93 3.07 2.59 2.01 Tax-Free Colorado Intermediate 2.80 2.00 1.00
Tax-Free California Insured 3.90 3.05 2.57 2.00 Tax-Free Florida Intermediate 2.78 2.01 1.05
Tax-Free Colorado 3.90 3.06 2.60 2.04 Tax-Free Minnesota Intermediate 2.82 2.00 1.00
Tax-Free Colorado Insured 3.90 3.10 2.60 2.00
Tax-Free Florida 3.90 3.14 2.57 2.00
Tax-Free Florida Insured 3.92 3.08 2.52 2.05
Tax-Free Idaho 3.94 3.12 2.57 2.02
Tax-Free Iowa 3.85 3.12 2.60 2.08
Tax-Free Kansas 3.88 3.13 2.56 2.08
Tax-Free Minnesota 3.87 3.06 2.58 2.02
Minnesota Insured 3.87 3.02 2.55 2.08
Tax-Free Missouri Insured 3.86 3.09 2.60 2.03
Tax-Free New Mexico 3.89 3.06 2.59 2.04
Tax-Free New York Fund 3.93 3.09 2.53 2.06
Tax-Free North Dakota 3.86 3.13 2.57 2.02
Tax-Free Oregon Insured 3.85 3.14 2.53 2.03
Tax-Free Washington Insured 3.88 3.11 2.52 2.04
Tax-Free Wisconsin 3.94 3.11 2.59 2.07
Tax-Free Utah 3.87 3.14 2.58 2.03
</TABLE>
*** Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
- -------------------------------------------------------------------------------
+ Tax-Free Funds and Insured Funds: Tax-Free Arizona, Tax-Free Arizona
Insured, Tax-Free California, Tax-Free California Insured, Tax-Free
Colorado, Colorado Insured Tax-Free Florida, Tax-Free Florida Insured,
Free, Tax-Free Idaho, Tax-Free Iowa, Tax-Free Kansas, Tax-Free
Minnesota, Minnesota Insured, Tax-Free Missouri Insured, Tax-Free New
Mexico, Tax-Free New York Fund, Tax-Free North Dakota, Tax-Free Oregon
Insured, Tax-Free Washington Insured, Tax-Free Wisconsin and Tax-Free
Utah.
++ Tax-Free Intermediate Funds: Tax-Free Arizona Intermediate, Tax-Free
California Intermediate, Tax-Free Colorado Intermediate, Tax-Free
Florida Intermediate and Tax-Free Minnesota Intermediate.
- -------------------------------------------------------------------------------
A Fund must be notified when a sale takes place which would qualify for
the reduced front-end sales charge on the basis of previous or current
purchases. The reduced front-end sales charge will be granted upon
confirmation of the shareholder's holdings by such Fund. Such reduced
front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
the front-end sales charge shown above. In addition, certain dealers
who enter into an agreement to provide extra training and information
on Delaware Group products and services and who increase sales of
Delaware Group funds may receive an additional commission of up to
0.15% of the offering price. Dealers who receive 90% or more of the
sales charge may be deemed to be underwriters under the 1933 Act.
- -------------------------------------------------------------------------------
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For initial purchases of Class A Shares of Tax-Free Funds and Insured
Funds of $1,000,000 or more, a dealer's commission may be paid by the
Distributor to financial advisers through whom such purchases are made in
accordance with the following schedule:
Dealer's Commission
(as a percentage of
Amount of Purchase amount purchased)
------------------ -----------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
For initial purchases of Class A shares of Tax-Free Intermediate Funds
of $1,000,000 or more, a dealer's commission may be paid by the Underwriter to
financial advisers through whom such purchases are made in accordance with the
following schedule:
Dealer's Commission
(as a percentage of
Amount of Purchase amount purchased)
------------------ -----------------
Up to $2 million 0.50%
Next $1 million up to $3 million 0.50
Next $2 million up to $5 million 0.40
Amount over $5 million 0.20
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies 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 Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Redemptions of Class A Shares purchased at net asset value may result
in the imposition of a Limited CDSC if the dealer's commission described above
was paid in connection with the purchase of those shares. See Contingent
Deferred Sales Charge for Certain Redemptions of Class A Shares Purchased at Net
Asset Value under Redemption and Exchange.
Combined Purchases Privilege
By combining your holdings of Class A Shares with your holdings of
Class B Shares and/or Class C Shares of a Fund and shares of other funds in the
Delaware Group, except those noted below, you can reduce the front-end sales
charges on any additional purchases of Class A Shares. Shares of Delaware Group
Premium Fund, Inc. beneficially owned in connection with ownership of variable
insurance products may be combined with other Delaware Group fund holdings.
Assets held in any stable value product available through the
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Delaware Group may be combined with other Delaware Group fund holdings. Shares
of other funds that do not carry a front-end sales charge or CDSC may not be
included unless they were acquired through an exchange from a Delaware Group
fund that does carry a front-end sales charge or CDSC.
This privilege permits you to combine your purchases and holdings with
those of your spouse, your children under 21 and any trust, fiduciary or
retirement account for the benefit of such family members.
It also permits you to use these combinations under a Letter of
Intention. A Letter of Intention allows you to make purchases over a 13-month
period and qualify the entire purchase for a reduction in front-end sales
charges on Class A Shares.
Combined purchases of $1,000,000 or more, including certain purchases
made at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative Class A Shares, above.
Buying Class A Shares at Net Asset Value
Class A Shares of a Fund may be purchased at net asset value under the
Delaware Group Dividend Reinvestment Plan and, under certain circumstances, the
Exchange Privilege and the 12-Month Reinvestment Privilege. See The Delaware
Difference and Redemption and Exchange for additional information.
Purchases of Class A Shares may be made at net asset value by current
and former officers, directors or trustees and employees (and members of their
families) of the Manager, any affiliate, any of the funds in the Delaware Group,
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.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware Group
funds. Officers, directors and key employees of institutional clients of the
Manager or any of its affiliates may purchase Class A Shares at net asset value.
Moreover, purchases may be effected at net asset value for the benefit of the
clients of brokers, dealers and registered investment advisers affiliated with a
broker or dealer, if such broker, dealer or investment adviser has entered into
an agreement with the Distributor providing specifically for the purchase of
Class A Shares in connection with special investment products, such as wrap
accounts or similar fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
A Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
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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 anticipates
compensating dealers or brokers for selling Tax-Free Funds and Insured Funds at
the time of purchase from its own assets in an amount equal to no more than 4%
of the dollar amount purchased. Such payments for Tax-Free Intermediate Funds
are currently anticipated to be in an amount equal to no more than 2%. In
addition, from time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may pay additional compensation to dealers or brokers for selling
Class B Shares at the time of purchase. As discussed below, however, Class B
Shares are subject to annual 12b-1 Plan expenses and, if Tax-Free Funds and
Insured Funds are redeemed within six years of purchase and Tax-Free
Intermediate Funds are redeemed within three 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 the Class B Shares
described in this Prospectus, even after the exchange. Tax-Free Funds and
Insured Funds' Class B Shares CDSC schedule may be higher than the CDSC schedule
for the Class B Shares acquired as a result of the exchange. See Redemption and
Exchange.
Automatic Conversion of Class B Shares
Class B Shares of Tax-Free Funds and Insured Funds, other than shares
acquired through reinvestment of dividends, held for eight years after purchase
are eligible for automatic conversion into Class A Shares. Class B Shares of
Tax-Free Intermediate Funds, other than shares acquired through reinvestment of
dividends, held for five years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the last business day
of the second full week of March, June, September and December (each, a
"Conversion Date"). If, as applicable, the eighth or fifth anniversary after a
purchase of Class B Shares falls on a Conversion Date, an investor's Class B
Shares will be converted on that date. If such anniversary occurs between
Conversion Dates, an investor's Class B Shares will be converted on the next
Conversion Date after the anniversary. Consequently, if a shareholder's
anniversary falls on the day after a Conversion Date, that shareholder will have
to hold Class B Shares for as long as three additional months after, as
applicable, the eighth or fifth anniversary of purchase before the shares will
automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
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
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<PAGE>
anticipates compensating 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, however, 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 the Class C Shares as
described in this Prospectus. See Redemption and Exchange.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares redeemed within prescribed periods after purchase may be
subject to a CDSC at the rates set forth below and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestments 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 the Class B Shares or the
Class C Shares of a Fund, even if those shares are later exchanged for shares of
another Delaware Group 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.
The following table sets forth the rates of the CDSC for the Class B
Shares of Tax-Free Funds and Insured Funds:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- ------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Funds and Insured
Funds will still be subject to the annual 12b-1 Plan expenses of up to 1% of
average daily net assets of those shares. See Automatic Conversion of Class B
Shares, above. Investors are reminded that the Class A Shares into which the
Class B Shares will convert are subject to ongoing annual 12b-1 Plan expenses of
up to a maximum of 0.25% of average daily net assets of such shares.
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<PAGE>
The following table sets forth the rates of the CDSC for the Class B
Shares of Tax-Free Intermediate Funds:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ -------------------
0-2 2%
3 1%
4 and thereafter None
During the fourth year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Intermediate Funds
will still be subject to the annual 12b-1 Plan expenses of up to 1% of average
daily net assets of those shares. See Automatic Conversion of Class B Shares
above. Investors are reminded that the Class A Shares into which the Class B
Shares will convert are subject to ongoing annual 12b-1 Plan expenses of up to a
maximum of 0.25% of average daily net assets representing such shares.
In determining whether a CDSC applies to a redemption of Class B Shares,
it will be assumed that Class B Shares of Tax-Free Funds and Insured Funds held
for more than six years and Class B Shares of Tax-Free Intermediate Funds held
for more than three years are redeemed first, followed by shares acquired
through the reinvestment of dividends or distributions, and finally by shares
held longest during the six-year or three-year period, as applicable. With
respect to Class C Shares, it will be assumed that shares held for more than 12
months are redeemed first followed by shares acquired through the reinvestment
of dividends or distributions, and finally by shares held for 12 months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge - Class B Shares and
Class C Shares under Redemption and Exchange.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits, as
set by the Distributor, may receive from the Distributor an additional payment
of up to 0.25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares.
Subject to pending amendments to the NASD's Rules of Fair Practice, in
connection with the promotion of Delaware Group fund shares, the Distributor
may, from time to time, pay to participate in dealer-sponsored seminars and
conferences, reimburse dealers for expenses incurred in connection with
preapproved seminars, conferences and advertising and may, from time to time,
pay or allow additional promotional incentives to dealers, which shall include
non-cash concessions, such as certain luxury merchandise or a trip to or
attendance at a business or investment seminar at a luxury resort, as part of
preapproved sales contests. Payment of non-cash compensation to dealers is
currently under review by the NASD and the Securities and Exchange Commission.
It
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<PAGE>
is likely that the NASD's Rules of Fair Practice will be amended such that the
ability of the Distributor to pay non-cash compensation as described above will
be restricted in some fashion. The Distributor intends to comply with the NASD's
Rules of Fair Practice as they may be amended.
HOW TO BUY SHARES
Purchase Amounts
Generally, the minimum initial purchase is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases of shares of any Class
generally must be $100 or more. For purchases under the Uniform Gifts to Minors
Act or Uniform Transfers to Minors Act or through an Automatic Investing Plan,
there is a minimum initial purchase of $250 and a minimum subsequent purchase of
$25.
There is a maximum purchase limitation of $250,000 on each purchase of
Class B Shares. For Class C Shares, each purchase must be in an amount that is
less than $1,000,000. An investor may exceed these maximum purchase limitations
by making cumulative purchases over a period of time. In doing so, an investor
should keep in mind that reduced front-end sales charges are available on
investments of $100,000 or more in Class A Shares, and that Class A Shares (i)
are subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and (ii) generally are not subject to a CDSC.
Investing through Your Investment Dealer
You can make a purchase of shares of the Funds through most investment
dealers who, as part of the service they provide, must transmit orders promptly.
They may charge for this service. If you want a dealer but do not have one, the
Delaware Group can refer you to one.
Investing by Mail
1. Initial Purchases--An Investment Application must be completed, signed and
sent with a check, payable to the specific Fund and Class selected to Delaware
Group at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by mailing
a check payable to the specific Fund and Class selected. Your check should be
identified with your name(s) and account number. An investment slip (similar to
a deposit slip) is provided at the bottom of transaction confirmations and
dividend statements that you will receive from your Fund. Use of this investment
slip can help expedite processing of your check when making additional
purchases. Your investment may be delayed if you send additional purchases by
certified mail.
Investing by Wire
You may purchase shares by requesting your bank to transmit funds by
wire to CoreStates Bank, N.A., ABA #031000011, account number 1412893401
(include your name(s) and your account number for the Class in which you are
investing).
1. Initial Purchases--Before you invest, telephone the Shareholder Service
Center to get an account number. If you do not call first, processing of your
investment may be delayed. In addition, you must promptly send your Investment
Application for the specific Fund and Class selected, to Delaware Group at 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 should advise the
Shareholder Service Center by telephone of each wire you send.
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<PAGE>
Investing by Exchange
If you have an investment in another mutual fund in the Delaware Group,
you may write and authorize an exchange of part or all of your investment into
shares of a Fund. If you wish to open an account by exchange, call the
Shareholder Service Center for more information. All exchanges are subject to
the eligibility and minimum purchase requirements set forth in each fund's
prospectus. See Redemption and Exchange for more complete information concerning
your exchange privileges.
Holders of Class A Shares of a Fund may exchange all or part of their
shares for certain of the shares of other funds in the Delaware Group, including
other Class A Shares, but may not exchange their Class A Shares for Class B
Shares or Class C Shares of the Fund or of any other fund in the Delaware Group.
Holders of Class B Shares of a Fund are permitted to exchange all or part of
their Class B Shares only into Class B Shares of other Delaware Group funds.
Similarly, holders of Class C Shares of a Fund are permitted to exchange all or
part of their Class C Shares only into Class C Shares of other Delaware Group
funds. See Appendix B-- Classes Offered for a list of Delaware Group funds and
the classes they offer. Class A Shares of each Fund may also be exchanged for
shares of the Voyageur money market funds. Class B Shares of a Fund and Class C
Shares of a Fund acquired by exchange will continue to carry the CDSC and, in
the case of Class B Shares, the automatic conversion schedule of the fund from
which the exchange is made. The holding period of Class B Shares of a Fund
acquired by exchange will be added to that of the shares that were exchanged for
purposes of determining the time of the automatic conversion into Class A Shares
of that Fund.
Permissible exchanges into Class A Shares of a Fund will be made without
a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of a Fund will be made without the imposition of a CDSC
by the fund from which the exchange is being made at the time of the exchange.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information if you wish to
use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize the Fund in
which you have your account to transfer a designated amount monthly from your
checking account to your Fund account. Many shareholders use this as an
automatic savings plan. Shareholders should allow a reasonable amount of time
for initial purchases and changes to these plans to become effective.
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your account for you (for example: payroll deduction, pay by phone, annuity
payments). Each Fund also accepts preauthorized recurring government and private
payments by Electronic Fund Transfer, which avoids mail time and check clearing
holds on payments such as social security, federal salaries, Railroad Retirement
benefits, etc.
* * *
Should investments through an automatic investing plan or by direct
deposit be reclaimed or returned for some reason, the Fund in which you have
your account has the right to liquidate your shares to reimburse the government
or transmitting bank. If there are insufficient funds in your account, you are
obligated to reimburse the Fund.
-41-
<PAGE>
3. MoneyLine (sm) On Demand
Through the MoneyLine (sm) On Demand service, you or your investment
dealer may call the Fund to request a transfer of funds from your predesignated
bank account to your Fund account. See MoneyLine (sm) Services under The
Delaware Difference for additional information about this service.
4. Wealth Builder Option
You can use our Wealth Builder Option to invest in a Fund through
regular liquidations of shares in your accounts in other funds in the Delaware
Group. You may also elect to invest in other mutual funds in the Delaware Group
through the Wealth Builder Option through regular liquidations of shares in your
Fund account.
Under this automatic exchange program, you can authorize regular monthly
amounts (minimum of $100 per fund) to be liquidated from your account in one or
more funds in the Delaware Group and invested automatically into any other
account in a Delaware Group mutual fund that you may specify. If in connection
with the election of the Wealth Builder Option, you wish to open a new account
to receive the automatic investment, such new account must meet the minimum
initial purchase requirements described in the prospectus of the fund that you
select. All investments under this option are exchanges and are therefore
subject to the same conditions and limitations as other exchanges noted above.
You can terminate your participation in Wealth Builder at any time by giving
written notice to the fund from which the exchanges are made. See Redemption and
Exchange.
5. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your account. Or, you may invest
your distributions in certain other funds in the Delaware Group, subject to the
exceptions noted below as well as the eligibility and minimum purchase
requirements set forth in each fund's prospectus.
Reinvestments of distributions into Class A Shares of a Fund or of other
Delaware Group funds are made without a front-end sales charge. Reinvestments of
distributions into Class B Shares of a Fund or of other Delaware Group funds or
into Class C Shares of a Fund or of other Delaware Group funds are also made
without any sales charge and will not be subject to a CDSC if later redeemed.
See Automatic Conversion of Class B Shares under Classes of Shares for
information concerning the automatic conversion of Class B Shares acquired by
reinvesting dividends.
Holders of Class A Shares of a Fund may not reinvest their distributions
into Class B Shares or Class C Shares of any fund in the Delaware Group,
including the Funds. Holders of Class B Shares of a Fund may reinvest their
distributions only into Class B Shares of the funds in the Delaware Group which
offer that class of shares. Similarly, holders of Class C Shares of a Fund may
reinvest their distributions only into Class C Shares of the funds in the
Delaware Group which offer that class of shares. See Appendix B--Classes Offered
for a list of the funds offering those classes of shares. For more information
about reinvestments, call the Shareholder Service Center.
Delaware Group Asset Planner
To invest in Delaware Group funds using the Delaware Group Asset Planner
asset allocation service, you should complete a Delaware Group Asset Planner
Account Registration Form, which is available only from a financial adviser or
investment dealer. As previously described, the Delaware Group Asset Planner
service offers a choice of four predesigned asset allocation strategies (each
with a different risk/reward profile) in
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predetermined percentages in Delaware Group funds. With the help of a financial
adviser, you may also design a customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Group accounts into the Asset Planner service may be made at net asset value
under the circumstances described under Investing by Exchange, above. The
minimum initial investment per Strategy is $2,000; subsequent investments must
be at least $100. Individual fund minimums do not apply to investments made
using the Asset Planner service. Class A, Class B and Class C Shares are
available through the Asset Planner service. Generally, only shares within the
same class may be used within the same Strategy. However, Class A Shares of a
Fund and of other funds in the Delaware Group may be used in the same Strategy
with consultant class shares that are offered by certain other Delaware Group
funds. See Appendix B-- Classes Offered for the funds in the Delaware Group that
offer consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is typically 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, the annual maintenance fee is waived until
further notice. See Part B.
Investors will receive a customized quarterly Strategy Report
summarizing all Delaware Group 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.
Purchase Price and Effective Date
The offering price and net asset value of Class A, Class B and Class C
Shares are determined 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 effective date of a purchase made through an investment dealer is
the date the order is received by a 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 offering price or net asset value of shares is
determined, as noted above. Purchase orders received after such time will be
effective the next business day.
The Conditions of Your Purchase
Each Fund reserves the right to reject any purchase order. 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 Group. 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.
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Each Fund also reserves the right, following shareholder notification,
to charge a service fee on non- retirement accounts that, as a result of a
redemption, have remained below the minimum stated account balance for a period
of three or more consecutive months. Holders of such accounts may be notified of
their insufficient account balance and advised that they have until the end of
the current calendar quarter to raise their balance to the stated minimum. If
the account has not reached the minimum balance requirement by that time, the
Fund will charge a $9 fee for that quarter and each subsequent calendar quarter
until the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
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REDEMPTION AND EXCHANGE
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 tax-advantaged funds, bond funds, equity
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. See Taxes.
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 the Delaware Group will best meet your changing
objectives, and the consequences of any exchange transaction. You may also call
the Delaware Group directly for fund information.
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.
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. See Purchase Price and Effective Date under
How to Buy Shares. A shareholder submitting a redemption request may indicate
that he or she wishes to receive redemption proceeds of a specific dollar
amount. In the case of such a request, a Fund will redeem the number of shares
necessary to deduct the applicable CDSC in the case of Class B 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.
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.
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There is no front-end sales charge or fee for exchanges made between
shares of funds which both carry a front-end sales charge. Any applicable
front-end sales charge will apply to exchanges from shares of funds not subject
to a front-end sales charge, except for exchanges involving assets that were
previously invested in a fund with a front-end sales charge and/or exchanges
involving the reinvestment of dividends.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of the other funds in the Delaware Group (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 Prospectus and any CDSC assessed upon redemption will be charged by the
Fund from which the Original Shares were exchanged. In an exchange of shares
from either USA B Class or Insured B Class, the CDSC schedule for such Class 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. The automatic conversion schedule of the Original Shares of the Class B
Shares of Tax-Free Funds and Insured Funds 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 the Class B Shares of Tax-Free
Funds and Insured Funds shares for a longer period of time than if the
investment in New Shares were made directly.
Various redemption and exchange methods are outlined below. Except for
the CDSC applicable to certain redemptions of Class B and Class C Shares and the
Limited CDSC applicable to certain redemptions of Class A Shares purchased at
net asset value, there is no fee charged by the Fund or the Distributor for
redeeming or exchanging your shares, but such fees could be charged in the
future. You may 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, including selection of any of
the features described below, shall continue in effect until such time as a
written revocation or modification has been received by a Fund or its agent.
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. Each signature guarantee must be supplied by
an eligible guarantor institution. Each Fund reserves the right to reject a
signature guarantee supplied by an eligible institution based on its
creditworthiness. The Funds may 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.
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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 the Delaware Group, subject to the same conditions and limitations as
other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption - Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your account
in writing that you do not wish to have such services available with respect to
your account. Each Fund reserves the right to modify, terminate or suspend these
procedures upon 60 days' written notice to shareholders. It may be difficult to
reach the Funds by telephone during periods when market or economic conditions
lead to an unusually large volume of telephone requests.
Neither the Funds nor their Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
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. Instructions received by telephone 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.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
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.
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MoneyLine (sm) On Demand
Through the MoneyLine (sm) On Demand service, you or your investment
dealer may call the Fund to request a transfer of funds from your Fund account
to your predesignated bank account. See MoneyLine (sm) Services under The
Delaware Difference for additional information about this service.
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 the Delaware Group under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
Systematic Withdrawal Plans
This plan provides shareholders with a consistent monthly (or quarterly)
payment. This is particularly useful to shareholders living on fixed incomes,
since it can provide them with a stable supplemental amount. With accounts of at
least $5,000, you may elect monthly withdrawals of $25 (quarterly $75) or more.
The Funds do not recommend any particular monthly amount, as each shareholder's
situation and needs vary. 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. Through this service, it may take up to four business days for
the transaction to be completed. There are no separate fees for this redemption
method. See MoneyLine (sm) Services under The Delaware Difference for more
information about this service.
* * *
Shareholders should not purchase additional shares while participating
in a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
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 and Class C Shares, below.
For more information on Systematic Withdrawal Plans, call the
Shareholder Service Center.
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Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
A Limited CDSC will be imposed on certain redemptions of Class A Shares
(or shares into which such Class A Shares are exchanged) made within 12 months
of purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission previously described. See
Classes of Shares.
The Limited CDSC will be paid to the Distributor and will be equal to
the lesser of 1% 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
Group 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 12 months will not
be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Group 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 12-month holding
period. The Limited CDSC is assessed if such 12-month period is not satisfied
irrespective of whether the redemption triggering its payment is of the Class A
Shares of a Fund or the 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; and (ii) redemptions by the classes of shareholders who
are permitted to purchase shares at net asset value, regardless of the size of
the purchase (see Buying Class A Shares at Net Asset Value under Classes of
Shares).
Waiver of Contingent Deferred Sales Charge - Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares in connection with the following redemptions: (i) redemptions that result
from a Fund's right to liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less than the then-effective
minimum account size; and (ii) distributions from an account if the redemption
results from the death of 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.
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In addition, the CDSC will be waived on Class B 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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DIVIDENDS AND DISTRIBUTIONS
The present policy of each Fund is to declare a distribution from net
investment income on each day that the Fund is open for business. Thus, when
redeeming shares, dividends continue to be credited up to and including the date
of redemption. Distributions of net investment income are paid monthly. Net
realized long term capital gains, if any, are distributed annually, after
utilization of any available capital loss carryovers.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if a Fund is given prior notice of Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Purchases by check earn dividends upon
conversion to Federal Funds, normally one business day after receipt.
Each Class of a Fund will share proportionately in the investment income
and expenses of that Fund, except that the per share dividends from net
investment income on Class A Shares, Class B Shares and Class C Shares will vary
due to the expenses under the 12b-1 Plan applicable to each Class. Generally,
the dividends per share on Class B Shares and Class C Shares can be expected to
be lower than the dividends per share on Class A Shares because the expenses
under the 12b-1 Plans relating to Class B Shares and Class C Shares will be
higher than the expenses under the 12b-1 Plan relating to Class A Shares. See
Distribution (12b-1) and Service under Management of the Funds.
Both dividends and distributions, if any, are automatically reinvested
in your account at net asset value, unless you elect otherwise. See The Delaware
Difference for more information on reinvestment options. Payment by check of
cash dividends will ordinarily be mailed within three business days after the
payable date.
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 your account at the
then-current net asset value and the dividend option may be changed from cash to
reinvest. If you elect to take your dividends and distributions in cash and such
dividends and distributions are in an amount of $25 or more, you may choose the
MoneyLine (sm) Direct Deposit Service and have such payments transferred from
your Fund account to your predesignated bank account. See MoneyLine (sm)
Services under The Delaware Difference for more information about this service.
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TAXES
The tax discussion set forth below is included for general information
only. Investors should consult their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in a Fund.
Each Fund 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, each 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. Each Fund intends to distribute substantially all of the its net
investment income and net capital gains, if any.
Each Fund intends to invest a sufficient portion of its assets in
municipal bonds and notes so that it will qualify to pay "exempt-interest
dividends" to shareholders. Such exempt-interest dividends distributed to
shareholders are excluded from a shareholder's gross income for federal tax
purposes.
A portion of each Fund's dividends may be derived from income on
"private activity" municipal bonds and therefore may be a preference item under
federal tax law and subject to the federal alternative minimum tax. No portion
of a Fund's distributions will be eligible for the dividends-received deduction
for corporations.
To the extent dividends are derived from taxable income on temporary
investments or short-term capital gains, they are treated as ordinary income,
whether received in cash or in additional shares. In addition, gain from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of the accrued market discount.
Distributions paid by a Fund from long-term capital gains, whether
received in cash or 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 Fund. The Funds do not seek to realize
any particular amount of capital gains during a year; rather, realized gains are
a byproduct of Fund 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 a Fund are made
shortly before the record date for a capital gains distribution, a portion of
the investment will be returned as a taxable distribution.
Dividends which are declared in October, November or December to
shareholders of record on a specified date in one of those months, 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 a Fund and received by
the shareholder on December 31 of the calendar year in which they are declared.
The sale of shares of a Fund 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
a Fund and any other fund in the Delaware Group. Any loss incurred on a sale or
exchange of Fund shares that 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 and will be disallowed to the extent of
exempt-interest dividends paid with respect to such shares. All or a portion of
the sales charge incurred in acquiring Fund shares will be excluded from the
federal tax basis of any of such shares sold or exchanged within 90 days of
their purchase (for purposes of determining gain or loss upon sale of such
shares) if the sale proceeds are reinvested in a Fund or in another fund in the
Delaware Group of funds and a sales charge that would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge excluded
from the tax basis of the shares sold will be added to the tax basis of the
shares acquired in the reinvestment.
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Exempt-interest dividends paid by each Fund, although exempt from
regular federal income tax in the hands of a shareholder, are includable in the
tax base for determining the extent to which a shareholder's Social Security
benefits would be subject to federal income tax. Shareholders are required to
disclose their receipt of tax-exempt interest on their federal income tax
returns.
The automatic conversion of Class B Shares into Class A Shares of the
relevant Fund will be tax-free for federal tax purposes. See Automatic
Conversion of Class B Shares under Classes of Shares.
The exemption of dividends for regular federal income tax purposes may
not result in similar exemptions under the laws of a particular state or local
taxing authority. It is recommended that shareholders consult their tax advisers
in this regard.
Shares of each Fund will be exempt from Pennsylvania county personal
property taxes. The Funds will report annually the percentage of interest income
earned on the municipal obligations on a state-by-state basis during the
proceeding calendar year.
Each year, you will receive information on the tax status of your Fund's
dividends and distributions.
Each 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 Investment Application your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
See Taxes in Part B for additional information on tax matters relating
to each Fund and its shareholders.
The following is a summary of certain information regarding state
taxation.
Arizona State Taxation
The portion of exempt-interest dividends that is derived from interest
income on Arizona Tax Exempt Obligations is excluded from the Arizona taxable
income of individuals, estates, trusts, and corporations. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains under Arizona law.
California State Taxation
Individual shareholders of the California Funds who are subject to
California personal income taxation will not be required to include in their
California gross income that portion of their federally tax exempt dividends
which a Fund clearly identifies as directly attributable to interest earned on
California state or municipal obligations, and dividends which a Fund clearly
identifies as directly attributable to interest earned on obligations of the
United States, the interest on which is exempt from California personal income
tax pursuant to federal law, provided that at least 50% of the value of the
Fund's total assets consists of obligations the interest on which is exempt from
California personal income taxation pursuant to federal or California law.
Distributions to individual shareholders derived from interest on state or
municipal obligations issued by governmental authorities in states other than
California, short-term capital gains and other taxable income will be taxed as
dividends for purposes of California personal income taxation. Each Fund's long
term capital gains for federal income tax purposes will be taxed as long-term
capital gains to individual shareholders of the Fund for purposes of California
personal income taxation. Gain or loss, if any, resulting from an exchange or
redemption of shares will be recognized in the year of the change or redemption.
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Colorado State Taxation
To the extent that dividends are derived from interest income on
Colorado Tax Exempt Obligations, such dividends will also be exempt from
Colorado income taxes for individuals, trusts, estates, and corporations.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains under Colorado law.
Florida State Taxation
Florida does not currently impose a tax on the income of individuals,
and individual shareholders of the Florida Funds will thus not be subject to
income tax in Florida on distributions from the Florida Funds or upon the sale
of shares held in such Funds. Florida does, however, impose a tax on intangible
personal property held by individuals as of the first day of each calendar year.
Under a rule promulgated by the Florida Department of Revenue, shares in the
Florida Funds will not be subject to the intangible property tax so long as, on
the last business day of each calendar year, all of the assets of each Fund
consist of obligations of the U. S. government and its agencies,
instrumentalities and territories, and the State of Florida and its political
subdivisions and agencies. If any Florida Fund holds any other types of assets
on that date, then the entire value of the shares in such Fund (except for the
portion of the value of the shares attributable to U. S. government obligations)
will be subject to the intangible property tax. Each Florida Fund must sell any
non-exempt assets held in its portfolio during the year and reinvest the
proceeds in exempt assets prior to December 31. Transaction costs involved in
converting the portfolio's assets to such exempt assets would likely reduce the
Florida Funds' investment return and might, in extraordinary circumstances,
exceed any increased investment return such Funds had achieved by investing in
non-exempt assets during the year. Corporate shareholders in the Florida Funds
may be subject to the Florida income tax imposed on corporations, depending upon
the domicile of the corporation and upon the extent to which income received
from such Fund constitutes "nonbusiness income" as defined by applicable Florida
law.
Idaho State Taxation
The Idaho Fund has received a ruling from the Idaho Department of
Revenue that provides that dividends paid by the Idaho Fund that are
attributable to (a) interest earned on bonds issued by the State of Idaho, its
cities and political subdivisions, and (b) interest earned on obligations of the
U.S. government or its territories and possessions will not be included in the
income of Fund shareholders subject to either the Idaho personal income tax or
the Idaho corporate franchise tax. All other dividends paid by the Idaho Fund
will be subject to the Idaho personal or corporate income tax. Capital gain
dividends qualifying as long-term capital gains for federal tax purposes will be
treated as long-term capital gains for Idaho income tax purposes. Idaho taxes
long-term capital gains at the same rates as ordinary income, while imposing
limitations on the deductibility of capital losses similar to those under
federal law.
Iowa State Taxation
The Iowa Fund has received a ruling from the Iowa Department of Revenue
and Finance dated May 21, 1993 to the effect that dividends paid by the Iowa
Fund that are attributable to (a) interest earned on bonds issued by the State
of Iowa, its political subdivisions, agencies and instrumentalities, the
interest on which is exempt from taxation by Iowa statute, and (b) interest
earned on obligations of the U.S. government or its territories and possessions
will not be included in the income of the Fund shareholders subject to either
the Iowa personal or the Iowa corporate income tax, except in the case of
shareholders that are financial institutions subject to the tax imposed by Iowa
Code ss. 422.60. All other dividends paid by the Iowa Fund will be subject to
the Iowa personal or corporate income tax. Capital gain dividends qualifying as
long-term capital gains for federal tax purposes will be treated as long-term
capital gains for Iowa income tax purposes.
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Kansas State Taxation
Individuals, trusts, estates and corporations will not be subject to
Kansas income tax on the portion of dividends derived from interest on
obligations of Kansas and its political subdivisions issued after December 31,
1987, and interest on specified obligations of Kansas and its political
subdivisions issued before January 1, 1988. The Fund intends to invest only in
Kansas obligations the interest on which is excludable from Kansas taxable
income. All remaining dividends (except for dividends, if any, derived from
interest paid on obligations of the United States, its territories and
possessions), including dividends derived from capital gains, will be includable
in the taxable income of individuals, trusts, estates, and corporations.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains. Kansas taxes
long-term capital gains at the same rates as ordinary income, while restricting
the deductibility of capital losses. Dividends received by shareholders will be
exempt from the tax on intangibles imposed by certain counties, cities and
townships.
Minnesota State Taxation
Minnesota taxable net income is based generally on federal taxable
income. The portion of exempt-interest dividends that is derived from interest
income on Minnesota Tax Exempt Obligations is excluded from the Minnesota
taxable net income of individuals, estates and trusts, provided that the portion
of the exempt-interest dividends from such Minnesota sources paid to all
shareholders represents 95 percent or more of the exempt-interest dividends paid
by the respective Fund. Exempt-interest dividends are not excluded from the
Minnesota taxable income of corporations and financial institutions. Dividends
qualifying for federal income tax purposes as capital gain dividends are to be
treated by shareholders as long-term capital gains. Minnesota has repealed the
favorable treatment of long-term capital gains, while retaining restrictions on
the deductibility of capital losses. Exempt interest dividends subject to the
federal alternative minimum tax will also be subject to the Minnesota
alternative minimum tax imposed on individuals, estates and trusts.
The 1995 Minnesota Legislature has enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included. This
provision applies to taxable years that begin during or after the calendar year
in which any such court decision becomes final, irrespective of the date on
which the obligations were issued. The Tax-Free Minnesota Intermediate Fund, the
Minnesota Insured Fund, and the Tax-Free Minnesota Fund are not aware of any
decision in which a court has held that a state's exemption of interest on its
own bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or Indian
tribes, unlawfully discriminates against interstate commerce or otherwise
contravenes the United States Constitution. Nevertheless, the Funds cannot
predict the likelihood that interest on the Minnesota Tax Exempt Obligations
held by the Funds would become taxable under this Minnesota statutory provision.
Missouri State Taxation
The portion of exempt interest dividends that is derived from interest
on Missouri Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts, and estates and of corporations subject to the Missouri
corporate income tax. All remaining dividends (except dividends attributable to
interest on obligations of the United States, its territories and possessions),
including dividends derived from capital gains, will be includable in the
taxable income of individuals, trusts, estates and corporations. Dividends
qualifying for federal income tax purposes as capital gain dividends are to be
treated by shareholders as long-term capital gains. Missouri taxes long-term
capital gains at the same rates as ordinary income, while restricting the
deductibility of capital losses.
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<PAGE>
New York State and City Taxation
The portion of exempt-interest dividends that is derived from interest
income on New York Tax-Exempt Obligations is excluded from the New York State
and New York City gross income of individuals, estates and trusts; the remaining
portion of such dividends, and dividends that are not tax-exempt interest
dividends, are included in the New York State and New York City gross income of
individuals, estates, and trusts. Exempt-interest dividends are not excluded
from the New York State and New York City gross income of corporations and
banks, and dividends from the Fund will not qualify for the New York State or
New York City dividends-received deduction for corporations and banks.
New Mexico State Taxation
The portion of exempt interest dividends that is derived from interest
on New Mexico Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts, and estates, and of corporations subject to the New Mexico
corporate income tax. The Fund will provide shareholders with an annual
statement identifying income paid to shareholders by source. All remaining
dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts, estates and corporations. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. New Mexico taxes long-term capital
gains at the same rates as ordinary income, while restricting the deductibility
of capital losses.
North Dakota State Taxation
North Dakota taxable income is based generally on federal taxable
income. The portion of exempt interest dividends that is derived from interest
income on North Dakota Tax Exempt Obligations is excluded from the North Dakota
taxable income of individuals, estates, trusts and corporations. Exempt interest
dividends are not excluded from the North Dakota taxable income of banks.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains under North Dakota
law.
Oregon State Taxation
The portion of exempt interest dividends that is derived from interest
on Oregon Tax Exempt Obligations is excluded from the taxable income of
individuals, trusts and estates. All remaining dividends (except for dividends,
if any, derived from interest paid on obligations of the United States, its
territories and possessions), including dividends derived from capital gains,
will be includable in the taxable income of individuals, trusts and estates.
Furthermore, all dividends, including exempt interest dividends, will be
includable in the taxable income of corporations subject to the Oregon
corporation excise tax. Dividends qualifying for federal income tax purposes as
capital gain dividends are to be treated by shareholders as long-term capital
gains. Oregon taxes long-term capital gains at the same rates as ordinary
income, while restricting the deductibility of capital losses.
Utah State Taxation
All exempt interest dividends, whether derived from interest on Utah Tax
Exempt Obligations or the Tax Exempt Obligations of any other state, are
excluded from the taxable income of individuals, trusts, and estates. Any
remaining dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts, and estates. Furthermore, all dividends, including
exempt interest dividends, will be includable in the taxable income of
corporations subject to the Utah corporate franchise tax. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Utah taxes long-term capital gains at
the same rates as ordinary income, while restricting the deductibility of
capital losses.
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<PAGE>
Washington State Taxation
Washington does not currently impose an income tax on individuals or
corporations. Therefore, dividends paid to shareholders will not be subject to
tax in Washington.
Wisconsin State Taxation
The Wisconsin Fund has received a ruling from the Wisconsin Department
of Revenue dated July 7, 1993 to the effect that dividends paid by the Wisconsin
Fund that are attributable to (a) interest earned on certain higher education
bonds issued by the State of Wisconsin, certain bonds issued by the Wisconsin
Housing and Economic Development authority, Wisconsin Housing Finance Authority
bonds, and public housing authority bonds and redevelopment authority bonds
issued by Wisconsin municipalities, the interest on which is exempt from
taxation by Wisconsin statute, and (b) interest earned on obligations of the U.
S. government or its territories and possessions will not be included in the
income of the Fund shareholders subject to the Wisconsin personal income tax.
Capital gain dividends qualifying as long-term capital gains for federal tax
purposes will be treated as long-term capital gains for Wisconsin income tax
purposes.
The foregoing discussion relates to federal and state taxation as of the
date of the Prospectus. See Taxes in Part B. Distributions from the Funds,
including exempt-interest dividends, may be subject to tax in other states. This
discussion is not intended as a substitute for careful tax planning. You are
urged to consult your tax adviser with specific reference to your own tax
situation.
-57-
<PAGE>
CALCULATION OF OFFERING PRICE AND NET ASSET VALUE PER SHARE
The net asset value ("NAV") per share for a Fund is computed by adding
the value of all securities and other assets in that Fund's portfolio, deducting
any liabilities of that Fund (expenses and fees are accrued daily) and dividing
by the number of that Fund's shares outstanding. Debt securities are priced on
the basis of valuations provided by an independent pricing service using methods
approved by the Board of Directors and Trustees. Short-term investments having a
maturity of less than 60 days are valued at amortized cost, which approximates
market value. All other securities are valued at their fair value as determined
in good faith and in a method approved by the Board of Directors and Trustees.
Class A Shares are purchased at the offering price per share, while
Class B Shares and Class C Shares are purchased at the NAV. The offering price
per share of Class A Shares consists of the NAV per share next computed after
the order is received, plus any applicable front-end sales charges.
The offering price and NAV 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 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 the 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 Class A Shares, Class B Shares and Class C Shares will bear only the
12b-1 Plan expenses payable under their respective Plans. Due to the specific
distribution expenses and other costs that may be allocable to each Class, the
dividends paid to each Class of a particular Fund may vary. However, the NAV per
share of each Class of a particular Fund is expected to be equivalent.
-58-
<PAGE>
MANAGEMENT OF THE FUNDS
Directors and Trustees
The business and affairs of each Fund are managed under the direction of
the Board of Directors and Trustees. Part B contains additional information
regarding the directors, trustees and officers.
Investment Manager
The Manager furnishes investment management services to each Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
supervising in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had been
retained under an investment advisory contract to act as each Fund's investment
adviser, subject to the authority of the Board of Directors or Trustees, as
appropriate for each Fund. Prior to that date, 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 ("LNC") as a result of LNC's
acquisition of DFG. LNC, headquartered in Fort Wayne, Indiana, owns and operates
insurance and investment management businesses, including Delaware Management
Holdings, Inc. ("DMH"). Affiliates of DMH serve as adviser, distributor and
transfer agent for the Delaware Group of Mutual Funds. DMH, through its
subsidiaries, is responsible for the management of approximately $32 billion.
Because LNC's acquisition of DFG resulted in a change of control of
Voyageur, the Funds' previous investment advisory agreements with Voyageur were
"assigned," as that term is defined by the Investment Company Act of 1940, and
the previous agreements therefore terminated upon the completion of the
acquisition. The Boards of Directors and Trustees of the Funds unanimously
approved new investment advisory agreements at a meeting held in person on
February 14, 1997, and called for a shareholders meeting to approve the new
agreements. At a meeting held on April 11, 1997, the shareholders of each Fund
approved its respective investment advisory agreements with either Voyageur or
the Manager to become effective after the close of business on April 30, 1997,
the date the acquisition was completed.
Beginning May 1, 1997, the Manager, an indirect, wholly-owned subsidiary
of LNC, was retained as investment manager of Tax-Free Arizona Intermediate
Fund, Tax-Free California Intermediate Fund, Tax-Free Colorado Insured Fund,
Tax-Free Colorado Intermediate Fund, the Florida Funds, and Tax-Free New York
Fund. Voyageur was retained as investment manager for the other Funds. On May
30, 1997, Voyageur was merged into the Manager and the Manager became the
investment manager for such other Funds.
Each Fund pays its respective investment manager a monthly investment
advisory and management fee equivalent on an annual basis to 0.50% of its
average daily net assets except each Tax-Free Intermediate Fund pays 0.40% of
its average daily net assets.
Andrew M. McCullagh, Jr. has had, since inception, day-to-day portfolio
management responsibility for the Tax-Free Arizona Insured and Tax-Free Arizona
Funds, Tax-Free California Insured and Tax-Free California Funds, Tax-Free
Colorado Fund, as well as the Tax-Free New Mexico Fund, Tax-Free North Dakota
Fund and Tax-Free Utah Fund. Mr. McCullagh serves as Vice President/Senior
Portfolio Manager for these Funds. Mr.
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<PAGE>
McCullagh was a Director of Voyageur and the Voyageur Fund Distributors, Inc.
from 1993 through 1995 and a Senior Tax Exempt Portfolio Manager for Voyageur
from January 1990 through May 1997. He was also President of Tax-Free Colorado
Fund and an Executive Vice President of each of the other Voyageur Funds. Mr.
McCullagh currently has over 23 years experience in municipal bond trading,
underwriting and portfolio management.
Elizabeth H. Howell has had, since 1991, day-to-day portfolio management
responsibility for the Minnesota Funds, as well as, since inception, the
Tax-Free Idaho, Tax-Free Kansas, Tax-Free Missouri, Tax-Free Oregon and Tax-Free
Washington Funds. In addition, on May 1, 1997, Ms. Howell resumed day-to-day
portfolio management responsibility for the Tax-Free Iowa and Tax-Free Wisconsin
Funds, which she managed from their inception to July 1995. Ms. Howell serves as
Vice President/Senior Portfolio Manager for these Funds. Ms. Howell was a Vice
President and Senior Tax Exempt Portfolio Manager for Voyageur from 1991 to 1997
and was a Vice President of each of the Voyageur Funds. Ms. Howell has over ten
years experience as a securities analyst and portfolio manager.
Patrick P. Coyne and Mitchell L. Conery, each a Vice President/Senior
Portfolio Manager of Tax-Free Florida Fund, Tax-Free Florida Insured Fund,
Tax-Free Florida Intermediate Fund and Tax-Free New York Fund assumed primary
responsibility for making day-to-day investment decisions for these Funds on May
1, 1997. Mr. McCullagh assists Mr. Coyne and Mr. Conery with the management of
the Florida Funds. Mr. Coyne is a graduate of Harvard University with an MBA
from the University of Pennsylvania's Wharton School. Prior to joining joined
the Delaware Group's fixed-income department in 1990, Mr. Coyne was as a manager
of Kidder, Peabody & Co. Inc.'s trading desk, and specialized in trading high
grade municipal bonds and municipal futures contracts. Mr. Coyne is a member of
the Municipal Bond Club of Philadelphia. Mr. Conery joined Delaware Group in
January 1997. He holds a bachelor's degree from Boston University and an MBA in
Finance from the State University of New York at Albany. He has served as an
investment officer with Travelers Insurance and as a research analyst with CS
First Boston and MBIA Corporation. Mr. Coyne and Mr. Conery are also Vice
Presidents/Senior Portfolio Managers for Delaware Group Tax-Free Fund, Inc. and
DMC Tax-Free Income Trust - Pennsylvania.
In making investment decisions for the Florida Funds, Mr. Coyne and Mr.
Conery regularly consult with Paul E. Suckow and other members of Delaware
Group's fixed-income department. Mr. Suckow is Executive Vice President/Chief
Investment Officer, Fixed Income of the Funds and each of the other funds in the
Delaware Group. He is a CFA charterholder and 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 1981-1985. He returned to the
Delaware Group in 1993 after eight years with Oppenheimer Manager Corporation
where he served as Executive Vice President and Director of Fixed Income.
Portfolio Trading Practices
Each Fund normally will not invest for short-term trading purposes.
However, each Fund may sell securities without regard to the length of time they
have been held. The degree of portfolio activity will affect brokerage costs of
each Fund and may affect taxes payable by such Fund's shareholders to the extent
that net capital gains are realized. Given each Fund's investment objective, it
is anticipated that the portfolio turnover rate of each Fund will not exceed
100%. During the past two fiscal years, the portfolio turnover rates for each
Fund were as follows:
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<PAGE>
Fund 1995 1996
Tax-Free Arizona Insured Fund 42.96% 42.76%
Tax-Free Arizona Fund 38.05(1) 70.14
Tax-Free California Insured Fund 107.45 54.52
Tax-Free California Fund 39.51(1) 7.87
Tax-Free Colorado Fund 82.83 40.35
Tax-Free Florida Intermediate Fund 27.76 63.06
Tax-Free Florida Insured Fund 101.48 57.18
Tax-Free Florida Fund 63.52(1) 70.17
Tax-Free Idaho Fund 41.97(1) 34.68
Tax-Free Iowa Fund 21.67 14.56
Tax-Free Kansas Fund 19.71 56.77
Tax-Free Minnesota Intermediate Fund 40.28 28.18
Minnesota Insured Fund 53.72 14.04
Tax-Free Minnesota Fund 50.84 27.67
Tax-Free Missouri Insured Fund 31.69 28.26
Tax-Free New Mexico Fund 55.72 42.12
Tax-Free New York Fund 10.00(2) 5.00(3)
Tax-Free North Dakota Fund 45.34 57.50
Tax-Free Oregon Insured Fund 41.08 39.54
Tax-Free Utah Fund 35.28 39.58
Tax-Free Washington Insured Fund 50.54 33.30
Tax-Free Wisconsin Fund 38.54 12.10
- -----------------
(1) Annualized.
(2) For the year October 1, 1994 through September 30, 1995.
(3) For the period October 1, 1996 through December 31, 1996. For the period
October 1, 1995 through September 30, 1996, the portfolio turnover rate was
12.00%.
The Manager 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 their advisory clients. These services may be used by the Manager in
servicing any of its accounts. Subject to best price and execution, the Manager
may consider a broker/dealer's sales of shares of funds in the Delaware Group of
funds in placing portfolio orders and may place orders with broker/dealers that
have agreed to defray certain expenses of such funds, such as custodian fees.
Performance Information
From time to time, each Fund may quote yield and total return
performance of its Classes in advertising and other types of literature.
The current yield for each Class will be calculated by dividing the
annualized net investment income earned by the Class during a recent 30-day
period by the maximum offering price 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 at net asset value and: (i) in
the case of Class A Shares, the impact of the maximum front-end sales charge at
the beginning of each specified period; and (ii) in the case of Class B Shares
and Class C Shares, the deduction of any applicable CDSC at the end of the
relevant period. Each presentation will include the average annual total return
for one-, five- and ten-year or life of fund periods, as relevant. Each Fund may
also advertise aggregate and average total return information concerning a Class
over additional periods of time. In addition,
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<PAGE>
each Fund may present total return information that does not reflect the
deduction of the maximum front-end sales charge or any applicable CDSC. In this
case, such total return information would be more favorable than total return
information that includes deductions of the maximum front-end sales charge or
any applicable CDSC.
Because securities prices fluctuate, investment results of the Classes
will fluctuate over time. Past performance is not considered a guarantee of
future results.
Distribution (12b-1) and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor for each Fund's shares under separate Distribution Agreements dated
March 1, 1997.
Each of the Class A Shares, Class B Shares and Class C Shares of the
Funds have a separate distribution plan under Rule 12b-1 (the "Plans"). Each
Plan permits a Fund to which the Plan relates to pay the Distributor from the
assets of its respective Classes a monthly fee for the Distributor's services
and expenses in distributing and promoting sales of shares.
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, holding special promotions
for specified periods of time, and paying distribution and maintenance fees to
brokers, dealers and others. In connection with the promotion of shares of the
Classes, the Distributor may, from time to time, pay to participate in
dealer-sponsored seminars and conferences, and reimburse dealers for expenses
incurred in connection with preapproved seminars, conferences and advertising.
The Distributor may pay or allow additional promotional incentives to dealers as
part of preapproved sales contests and/or to dealers who provide extra training
and information concerning a Class and increase sales of the Class. In addition,
each Fund may make payments from the 12b-1 Plan fees of its respective Classes
directly to others, such as banks, who aid in the distribution of Class shares
or provide services in respect of such Classes, pursuant to service agreements
with the Funds.
The 12b-1 Plan expenses relating to each of the Class B Shares and
Class C Shares of the Funds are also used to pay the Distributor for advancing
the commission costs to dealers with respect to the initial sale of such shares.
The aggregate fees paid by a Fund from the assets of the respective
Classes to the Distributor and others under the Plans may not exceed (i) 0.25%
of a Class A Shares' average daily net assets in any year, and (ii) 1% (0.25% of
which are service fees to be paid by the Fund to the Distributor, dealers and
others, for providing personal service and/or maintaining shareholder accounts)
of each Fund's Class B Shares' and Class C Shares' average daily net assets in
any year. The Funds' Class A, Class B and Class C Shares will not incur any
distribution expenses beyond these limits, which may not be increased without
shareholder approval.
While payments pursuant to the Plans may not exceed 0.25% annually with
respect to each Fund's Class A Shares, and 1% annually with respect to each
Fund's Class B Shares and Class C Shares, the Plans do not limit fees to amounts
actually expended by the Distributor. It is therefore possible that the
Distributor may realize a profit in any particular year. However, the
Distributor currently expects that its distribution expenses will likely equal
or exceed payments to it under the Plans. The Distributor may, however, incur
such additional expenses and make additional payments to dealers from its own
resources to promote the distribution of shares of the Classes. The monthly fees
paid to the Distributor under the Plans are subject to the review and approval
of the unaffiliated directors and trustees, who may reduce the fees or terminate
the Plans at any time.
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<PAGE>
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for each Fund
under a Shareholders Services Agreement. The Transfer Agent also provides
accounting services to the Funds pursuant to the terms of a separate Fund
Accounting Agreement. The directors and trustees annually review service fees
paid to the Transfer Agent.
The Distributor and the Transfer Agent are also indirect, wholly owned
subsidiaries of DMH.
Expenses
Each Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreements and those borne
by the Distributor under the Distribution Agreements.
In connection with the merger transaction described above, DMC has
agreed for a period of two years ending on April 30, 1999, to pay the operating
expenses (excluding interest expense, taxes, brokerage fees, commissions and
Rule 12b-1 fees and, with respect to the Insured Funds, premiums with respect to
Portfolio Insurance or Secondary Market Insurance) of each Fund which exceed 1%
of such Fund's average daily net assets on an annual basis up to certain limits
as set forth in detail in Part B. This agreement replaces a similar provision in
the Funds' investment advisory contracts with the Funds' predecessor investment
adviser. In addition, Delaware and the Underwriter reserve the right to
voluntarily waive their fees in whole or part and to voluntarily absorb certain
other of the Funds' expenses.
For the fiscal year ended December 31, 1996, the ratios of operating
expenses to average daily net assets for Class A Shares, Class B Shares and
Class C Shares of each Fund were as follows:
<TABLE>
<CAPTION>
Fund Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund 0.82% 1.59% 1.70%
Tax-Free Arizona Fund 0.46 1.11 1.21
Tax-Free California Insured Fund 0.27 0.50 0.78
Tax-Free California Fund 0.82 1.21 1.58
Tax-Free Colorado Fund 0.78 1.58 1.66
Tax-Free Florida Intermediate Fund 0.66 1.48 1.55
Tax-Free Florida Insured Fund 0.73 1.24 N/A
Tax-Free Florida Fund 0.33 0.76 1.15
Tax-Free Idaho Fund 0.60 1.11 1.33
Tax-Free Iowa Fund 0.92 1.61 1.75
Tax-Free Kansas Fund 0.83 1.61 1.77
Tax-Free Minnesota Intermediate Fund 0.89 1.56 1.30
Minnesota Insured Fund 0.92 1.56 1.68
Tax-Free Minnesota Fund 0.92 1.50 1.67
Tax-Free Missouri Insured Fund 0.71 1.29 1.62
Tax-Free New Mexico Fund 0.88 1.61 1.74
Tax-Free New York Fund 0.97 1.87 1.84
Tax-Free North Dakota Fund 0.88 1.36 1.75
Tax-Free Oregon Insured Fund 0.71 1.25 1.55
Tax-Free Utah Fund 0.68 1.46 N/A
Tax-Free Washington Insured Fund 0.44 1.21 1.37
Tax-Free Wisconsin Fund 0.98 1.66 1.75
</TABLE>
The ratios reflect the impact of each Class' 12b-1 Plan and the
voluntary waiver and payment of fees noted above. See Summary of Expenses for
current fee waivers and reimbursements.
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<PAGE>
Shares
The shares of the Funds constitute separate series of the parent
entities listed below. Certain of these parent entities are organized as
Minnesota corporations, and the shares of the series thereof are transferable
common stock, $.01 par value per share, of such corporations. Other parent
entities are organized as business trusts under the laws of the Commonwealth of
Massachusetts, and the shares of the series thereof represent transferable
common shares of beneficial interest. All shares of each corporation and of each
trust, are non assessable and fully transferable when issued and paid for in
accordance with the terms thereof and possess no cumulative voting, preemptive
or conversion rights. The Board of each corporation and trust is empowered to
issue other series of common stock or common shares of beneficial interest
without shareholder approval. Set forth below is a listing of the parent
entities and constituent series, form of organization and date of organization
of the parent.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Parent Form of Organization Date Organized
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Voyageur Tax-Free Funds, Inc. Minnesota Corporation November 10, 1983
Tax-Free Minnesota
Tax-Free North Dakota
Voyageur Intermediate Tax-Free Funds, Inc. Minnesota Corporation January 21, 1985
Tax-Free Arizona Intermediate
Tax-Free California Intermediate
Tax-Free Colorado Intermediate
Tax-Free Minnesota Intermediate
Voyageur Insured Funds, Inc. Minnesota Corporation January 6, 1987
Tax-Free Arizona Insured
Tax-Free Colorado Insured
Minnesota Insured
Voyageur Investment Trust Massachusetts Business Trust September 16, 1991
Tax-Free California Insured
Tax-Free Florida Insured
Tax-Free Florida
Tax-Free Kansas
Tax-Free Missouri Insured
Tax-Free New Mexico
Tax-Free Oregon Insured
Tax-Free Utah
Tax-Free Washington Insured
Voyageur Investment Trust II Massachusetts Business Trust November 16, 1993
Tax-Free Florida Intermediate
Voyageur Mutual Funds, Inc. Minnesota Corporation April 14, 1993
Tax-Free Arizona
Tax-Free California
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Tax-Free Idaho
Tax-Free Iowa
Tax-Free Wisconsin
Tax-Free New York
Voyageur Mutual Funds II, Inc. Minnesota Corporation January 13, 1987
Tax-Free Colorado
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Beginning June 9, 1997, the names of the Funds have changed as follows:
<TABLE>
<CAPTION>
<S> <C>
Previous Name New Name
Voyageur Arizona Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Arizona Intermediate Fund
Voyageur Arizona Insured Tax Free Fund Delaware-Voyageur Tax-Free Arizona Insured Fund
Voyageur Arizona Tax Free Fund Delaware-Voyageur Tax-Free Arizona Fund
Voyageur California Limited Term Tax Free Fund Delaware-Voyageur Tax-Free California Intermediate Fund
Voyageur California Insured Tax Free Fund Delaware-Voyageur Tax-Free California Insured Fund
Voyageur California Tax Free Fund Delaware-Voyageur Tax-Free California Fund
Voyageur Colorado Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Colorado Intermediate Fund
Voyageur Colorado Insured Tax Free Fund Delaware-Voyageur Tax-Free Colorado Insured Fund
Voyageur Colorado Tax Free Fund Delaware-Voyageur Tax-Free Colorado Fund
Voyageur Florida Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Florida Intermediate Fund
Voyageur Florida Insured Tax Free Fund Delaware-Voyageur Tax-Free Florida Insured Fund
Voyageur Florida Tax Free Fund Delaware-Voyageur Tax-Free Florida Fund
Voyageur Idaho Tax Free Fund Delaware-Voyageur Tax-Free Idaho Fund
Voyageur Iowa Tax Free Fund Delaware-Voyageur Tax-Free Iowa Fund
Voyageur Kansas Tax Free Fund Delaware-Voyageur Tax-Free Kansas Fund
Voyageur Minnesota Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Minnesota Intermediate Fund
Voyageur Minnesota Insured Fund Delaware-Voyageur Minnesota Insured Fund
Voyageur Minnesota Tax Free Fund Delaware-Voyageur Tax-Free Minnesota Fund
Voyageur Missouri Insured Tax Free Fund Delaware-Voyageur Tax-Free Missouri Insured Fund
Voyageur New Mexico Tax Free Fund Delaware-Voyageur Tax-Free New Mexico Fund
Voyageur New York Tax Free Fund Delaware-Voyageur Tax-Free New York Fund
Voyageur North Dakota Tax Free Fund Delaware-Voyageur Tax-Free North Dakota Fund
Voyageur Oregon Insured Tax Free Fund Delaware-Voyageur Tax-Free Oregon Insured Fund
Voyageur Utah Tax Free Fund Delaware-Voyageur Tax-Free Utah Fund
Voyageur Washington Insured Tax Free Fund Delaware-Voyageur Tax-Free Washington Insured Fund
Voyageur Wisconsin Tax Free Fund Delaware-Voyageur Tax-Free Wisconsin Fund
</TABLE>
All of the shares have noncumulative voting rights which means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so. Under Minnesota and
Massachusetts law, each 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.
Shares of each class within a Fund represent proportionate interests in
the assets of that Fund and have the same voting and other rights and
preferences as the other classes of shares of that Fund, except that, as a
general matter, holders 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, the Class B Shares of a Fund may vote
on any proposal to increase materially the fees to be paid by that Fund under
the Rule 12b-1 Plan relating to the Class A Shares.
-66-
<PAGE>
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Forward Commitments
New issues of Tax Exempt Obligations and other securities are often
purchased on a "when issued" or delayed delivery basis, with delivery and
payment for the securities normally taking place 15 to 45 days after the date of
the transaction. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the buyer enters into the
commitment. Each Fund may enter into such "forward commitments" if it holds and
maintains, until the settlement date in a segregated account, cash or liquid
securities in an amount sufficient to meet the purchase price. There is no
percentage limitation on each Fund's total assets which may be invested in
forward commitments. Tax Exempt Obligations purchased on a when-issued basis and
the securities held in a Fund's portfolio are subject to changes in value (both
generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Tax Exempt Obligations purchased on
a when-issued basis may expose a Fund to risk because they may experience such
fluctuations prior to their actual delivery. Purchasing Tax Exempt Obligations
on a when-issued basis can involve the additional risk that the yield available
in the market when the delivery takes place actually may be higher than that
obtained in the transaction itself. Any significant commitment by a Fund to the
purchase of securities on a when-issued basis may increase the volatility of the
Fund's net asset value. Although each Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, it may
dispose of a commitment prior to settlement if the Manager deems it appropriate
to do so. The Funds may realize short-term profits or losses upon the sale of
forward commitments.
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to not more
than 10% of its total assets (taken at current value), except when investing for
defensive purposes during times of adverse market conditions. Each Fund may
enter into repurchase agreements with respect to any securities which it may
acquire consistent with its investment policies and restrictions.
A repurchase agreement is a short-term investment in which the
purchaser (i.e. a Fund) 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 15% of each Fund's 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 a Fund, if any, would be the difference between
the repurchase price and the market value of the security. Each Fund will limit
its investments in repurchase agreements to those which the Manager under
guidelines of the Board of Directors and Trustees determines to present minimal
credit risks and which are of high quality. In addition, each Fund must have
collateral of at least 100% of the repurchase price, including the portion
representing the Fund's yield under such agreements, which is monitored on a
daily basis.
Reverse Repurchase Agreements
Certain Funds (Tax-Free Arizona Intermediate Fund, Tax-Free Arizona
Fund, Tax-Free California Intermediate Fund, Tax-Free California Fund, Tax-Free
Colorado Intermediate Fund, Tax-Free Colorado Insured Fund, Tax-Free Florida
Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund and Tax-Free New
York Fund) may engage in "reverse repurchase agreements" with banks and
securities dealers with respect to not more than 10% of the Fund's total assets.
Reverse repurchase agreements are ordinary repurchase agreements in which the
Fund is the seller of, rather than the investor in, securities and agrees to
repurchase them at an agreed upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of
-67-
<PAGE>
the securities because it avoids certain market risks and transaction costs.
Because certain of the incidents of ownership of the security are retained by
the Fund, reverse repurchase agreements are considered a form of borrowing by
the Fund from the buyer, collateralized by the security. At the time a Fund
enters into a reverse repurchase agreement, cash or liquid having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be marked to market daily and maintained throughout the
period of the obligation. Reverse repurchase agreements may be used as a means
of borrowing for investment purposes subject to the 10% limitation set forth
above. This speculative technique is referred to as leveraging. Leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by income from or
appreciation of the securities purchased. Because the Funds do not currently
intend to utilize reverse repurchase agreements in excess of 10% of total
assets, the Funds believe the risks of leveraging due to use of reverse
repurchase agreements to principal are reduced. The Manager believes that the
limited use of leverage may facilitate the Funds' ability to provide current
income without adversely affecting the Funds' ability to preserve capital.
Options and Futures
Each Fund may utilize put and call transactions, and certain Funds (see
Futures Contracts and Options on Futures Contracts below) may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See Investment Policies and Restrictions--Options and Futures Transactions in
Part B. Options and futures may be used to attempt to protect against possible
declines in the market value of a Fund's portfolio resulting from downward
trends in the debt securities markets (generally due to a rise in interest
rates), to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio or to
establish a position in the securities markets as a temporary substitute for
purchasing particular securities. The use of options and futures is a function
of market conditions. Other transactions may be used by the Funds in the future
for hedging purposes as they are developed to the extent deemed appropriate by
the Board.
Options on Securities
Each Fund may write (i.e., sell) covered put and call options and
purchase put and call options on the securities in which it may invest and on
indices of securities in which it may invest, to the extent such put and call
options are available.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, a Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, a Fund would
be in a position to realize a gain if, during the option period, the price of
the security declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by a Fund were permitted to expire without being
sold or exercised, its premium would be lost by the Fund.
If a put option written by a Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by a Fund were exercised, the Fund would be obligated to
-68-
<PAGE>
sell the underlying security at the exercise price. The risk involved in writing
a put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction as described in Appendix B to Part B. The Fund retains the premium
received from writing a put or call option whether or not the option is
exercised.
Over-the-counter options are purchased or written by a Fund in
privately negotiated transactions. Such options are illiquid, and it may not be
possible for a Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when the Manager believes
it would be advantageous to do so. Over the counter options are subject to each
Fund's 15% illiquid investment limitation. See Appendix B to the Statement of
Additional Information for a further discussion of the general characteristics
and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Funds would not be subject absent the use of this
strategy. If the Manager's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (a) dependence on the
Manager's ability to predict correctly movements in the direction of interest
rates and securities prices; (b) imperfect correlation between the price of
options and movements in the prices of the securities being hedged; (c) the fact
that the skills needed to use these strategies are different from those needed
to select portfolio securities; (d) the possible absence of a liquid secondary
market for any particular instrument at any time; and (e) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences.
See Investment Policies and Restrictions-- Risks of Transactions in Futures
Contracts and Options in Part B for further discussion and see Appendix B for a
discussion of closing transactions and other risks.
Futures Contracts and Options on Futures Contracts
Certain Funds (Tax-Free Arizona Intermediate Fund, Tax-Free Arizona
Fund, Tax-Free California Intermediate Fund, Tax-Free California Fund, Tax-Free
Colorado Intermediate Fund, Tax-Free Colorado Insured Fund, Tax-Free Florida
Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund and Tax-Free New
York Fund) may enter into contracts for the purchase or sale for future delivery
of fixed income securities or contracts based on financial indices including any
index of securities in which the Fund may invest ("futures contracts") and may
purchase and write put and call options to buy or sell futures contracts
("options on futures contracts"). A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. The purchaser of a
futures contract on an index agrees to take or make delivery of an amount of
cash equal to the difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current contract value") and
the price at which the contract was originally struck. Options on futures
contracts to be written or purchased by the Fund will be traded on exchanges or
over the counter. The successful use of such instruments draws upon the
Manager's experience with respect to such instruments and usually depends upon
the Manager's ability to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of futures contracts or options on futures contracts or may
realize losses and would thus be in a worse position than if such strategies had
not been used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in the prices of
the securities hedged or used for cover will not be perfect.
-69-
<PAGE>
A Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements. To the extent required to
comply with applicable Securities and Exchange Commission releases and staff
positions, when purchasing a futures contract or writing a put option, the Fund
will maintain in a segregated account cash liquid securities equal to the value
of such contracts, less any margin on deposit. In addition, the rules and
regulations of the Commodity Futures Trading Commission currently require that,
in order to avoid "commodity pool operator" status, the Fund must 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. There are no other numerical
limits on a Fund's use of futures contracts and options on futures contracts.
For a discussion of the tax treatment of futures contracts and options on
futures contracts, see Taxes in Part B. For a further discussion of the general
characteristics and risks of futures, see Appendix B to Part B.
Investment Restrictions
Each Fund has adopted certain investment restrictions in addition to
those set forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the restriction providing
that no Fund may borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of its total assets (10%
for Tax-Free Colorado Fund) (certain Funds may also borrow money in the form of
reverse repurchase agreements up to 10% of total assets). Also, certain Funds
may not, as a matter of fundamental policy invest more than 15% of their net
assets in illiquid securities and pledge, hypothecate, mortgage or otherwise
encumber their assets in excess of 10% of net assets. See "Investment Policies
and Restrictions--Investment Restrictions" in the Statement of Additional
Information. Each Fund also has a number of non-fundamental investment
restrictions which may be changed by the Fund's Board without the shareholder
approval. These include restrictions providing that no Fund may (a) invest more
than 5% of its total assets in securities of any single investment company or
(b) invest more than 10% of its total assets in securities of two or more
investment companies. To the extent that a Fund invests in the securities of
other open-end investment companies, the Manager will take appropriate action to
avoid subjecting such Fund's shareholders to duplicate management and other fees
and expenses.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
-70-
<PAGE>
APPENDIX A--INVESTMENT ILLUSTRATIONS
TAX-FREE FUNDS AND INSURED FUNDS
Illustrations of the Potential Impact on Investment Based on Purchase Option
$10,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
-------------------------------------- --------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
0 9,625 10,000 10,000 9,625 10,000 10,000
1 10,192 10,630 10,630 10,192 10,230 10,530+
2 10,905 11,300 11,300
3 11,669 12,012 12,012
4 12,485 12,768 12,768
5 13,359 13,573 13,573
6 14,294 14,428 14,428
7 15,295 15,337 15,337
8 16,366+ 16,303 16,303
9 17,511 17,444* 17,330
10 18,737 18,665* 18,422
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
------------------------------------- ------------------------------------
Class A Class B Class C Class A Class B Class C
------- ------- ------- -------- ------- -------
9,625 10,000 10,000 9,625 10,000 10,000
10,192 10,630 10,630 10,192 10,630 10,630
10,905 11,300 11,300 10,905 11,300 11,300
11,669 11,712 12,012+ 11,669 12,012 12,012
12,485 12,768 12,768
13,359 13,373 13,573+
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the eighth year.
<PAGE>
$250,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
-------------------------------------- ------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,750 265,750 260,813 255,750 263,250+
2 279,069 282,492 282,492
3 298,604 300,289 300,289
4 319,507+ 319,207 319,207
5 341,872 339,318 339,318
6 365,803 360,695 360,695
7 391,409 383,418 383,418
8 418,808 407,574 407,574
9 448,124 436,104* 433,251
10 479,493 466,631* 460,546
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
------------------------------------ --------------------------------------
Class A Class B Class C Class A Class B Class C
-------- ------- ------- ------- ------- -------
243,750 250,000 250,000 243,750 250,000 250,000
260,813 265,750 265,750 260,813 265,750 265,750
279,069 282,492 282,492 279,069 282,492 282,492
298,604 292,789 300,289+ 298,604 300,289 300,289
319,507+ 319,207 319,207
341,872 334,318 339,318
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the eighth year.
Assumes a hypothetical return for Class A of 7% per year, a hypothetical return
for Class B of 6.25% for years 1-8 and 7% for years 9-10, and a hypothetical
return for Class C of 6.25% per year. Hypothetical returns vary due to the
different expense structure for each Class and do not represent actual
performance.
Class A purchase subject to appropriate sales charge breakpoint (3.75% @
$10,000; 3.00% @ $100,000; 2.50% @ $250,000; 2.00% @ 500,000).
Class B purchase assessed appropriate CDSC upon redemption (4%-4%-3%-3%-2%-1% in
years 1-2-3-4-5-6).
Class C purchase assessed 1% CDSC upon redemption in year 1.
Figures marked "+" identify which class offers the greater return potential
based on investment amount, the holding period and the expense structure for
each Class.
-71-
<PAGE>
APPENDIX A--INVESTMENT ILLUSTRATIONS
TAX-FREE INTERMEDIATE FUNDS
Illustrations of the Potential Impact on Investment Based on Purchase Option
$10,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
-------------------------------------- -------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
0 9,725 10,000 10,000 9,725 10,000 10,000
1 10,211 10,425 10,425 10,211 10,215 10,225+
2 10,722 10,868 10,868
3 11,258 11,329 11,329
4 11,821+ 11,811 11,811
5 12,412 12,313 12,313
6 13,032 12,929* 12,867
7 13,684 13,575* 13,382
8 14,368 14,254* 13,951
9 15,086 14,967* 14,544
10 15,841 15,715* 15,162
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
------------------------------------- ------------------------------------
Class A Class B Class C Class A Class B Class C
------- -------- ------- -------- -------- -------
9,725 10,000 10,000 9,725 10,000 10,000
10,211 10,425 10,425 10,211 10,425 10,425
10,722 10,868 10,868 10,722 10,868 10,868
11,258 11,230 11,330+ 11,258 11,330 11,330
11,820+ 11,811 11,811
12,411 12,313 12,313
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the fifth year.
<PAGE>
$250,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
-------------------------------------- ------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 245,500 250,000 250,000 245,500 250,000 250,000
1 259,875 260,625 260,625 259,875 255,625 258,125+
2 272,869 271,702 271,701
3 286,512+ 283,249 283,249
4 300,838 295,287 295,287
5 315,880 307,837 307,837
6 331,674 323,228* 320,920
7 348,257 339,390* 334,559
8 365,670 356,359* 348,778
9 383,954 374,177* 363,601
10 403,151 392,886* 379,054
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
------------------------------------ --------------------------------------
Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- -------
247,500 250,000 250,000 247,500 250,000 250,000
259,875 260,625 260,625 259,875 260,625 260,625
272,869 271,701 271,702 272,869 271,702 271,702
286,512+ 280,749 283,249 286,512+ 283,249 283,249
300,838 295,287 295,287
315,880 307,837 309,837
</TABLE>
*This assumes that Class B Shares were converted to Class A Shares at the end of
the fifth year.
Assumes a hypothetical return for Class A of 5% per year, a hypothetical return
for Class B of 4.25% for years 1-5 and 5% for years 6-10, and a hypothetical
return for Class C of 4.25% per year. Hypothetical returns vary due to the
different expense structures for each class and do not represent actual
performance.
Class A purchase subject to appropriate sales charge breakpoint (2.75% @
$10,000; 2.00% @ 100,000; 1.00% @ $250,000; 1.00% @ $500,000).
Class B purchase assessed appropriate CDSC upon redemption (2%-2%-1% in years
1-2-3).
Class C purchase assessed 1% CDSC upon redemption in year 1.
Figures marked "+" identify which class offers the greater return potential
based on investment amount, the holding period and the expense structure for
each Class.
-72-
<PAGE>
APPENDIX B--CLASSES OFFERED
<TABLE>
<CAPTION>
Growth of Capital A Class B Class C Class Consultant Class
<S> <C> <C> <C> <C>
Aggressive Growth Fund x x x -
Trend Fund x x x -
Enterprise Fund x x x -
DelCap Fund x x x -
Small Cap Value Fund x x x -
U.S. Growth Fund x x x -
Growth Stock Fund x x x -
Tax-Efficient Equity Fund x x x -
Total Return
Blue Chip Fund x x x -
Quantum Fund x x x -
Devon Fund x x x -
Decatur Total Return Fund x x x -
Decatur Income Fund x x x -
Delaware Fund x x x -
International Diversification
Emerging Markets Fund x x x -
New Pacific Fund x x x -
World Growth Fund x x x -
International Equity Fund x x x -
Global Assets Fund x x x -
Global Bond Fund x x x -
Current Income
Delchester Fund x x x -
Strategic Income Fund x x x -
Corporate Income Fund x x x -
Federal Bond Fund x x x -
U.S. Government Fund x x x -
Delaware-Voyageur US Government
Securities Fund x x x -
Limited-Term Government Fund x x x -
</TABLE>
(Not Part of Prospectus)
-73-
<PAGE>
APPENDIX B--CLASSES OFFERED - (CON'T)
<TABLE>
<CAPTION>
Tax-Free Income A Class B Class C Class Consultant Class
<S> <C> <C> <C> <C>
National High Yield Municipal Bond Fund x x x -
Tax-Free USA Fund x x x -
Tax-Free Insured Fund x x x -
Tax-Free USA Intermediate Fund x x x -
Delaware-Voyageur Tax-Free Arizona Insured Fund x x x -
Delaware-Voyageur Tax-Free Arizona Fund x x x -
Delaware-Voyageur Tax-Free California Insured Fund x x x -
Delaware-Voyageur Tax-Free California Fund x x x -
Delaware-Voyageur Tax-Free Colorado Fund x x x -
Delaware-Voyageur Tax-Free Florida Insured Fund x x x -
Delaware-Voyageur Tax-Free Florida Intermediate Fund x x x -
Delaware-Voyageur Tax-Free Florida Fund x x x -
Delaware-Voyageur Tax-Free Idaho Fund x x x -
Delaware-Voyageur Tax-Free Iowa Fund x x x -
Delaware-Voyageur Tax-Free Kansas Fund x x x -
Delaware-Voyageur Minnesota High Yield Municipal Bond Fund x x x -
Delaware-Voyageur Minnesota Insured Fund x x x -
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund x x x -
Delaware-Voyageur Tax-Free Minnesota Fund x x x -
Delaware-Voyageur Tax-Free Missouri Insured Fund x x x -
Delaware-Voyageur Tax-Free New Mexico Fund x x x -
Delaware-Voyageur Tax-Free New York Fund x x x -
Delaware-Voyageur Tax-Free North Dakota Fund x x x -
Delaware-Voyageur Tax-Free Oregon Insured Fund x x x -
Tax-Free Pennsylvania Fund x x x -
Delaware-Voyageur Tax-Free Utah Fund x x x -
Delaware-Voyageur Tax-Free Washington Insured Fund x x x -
Delaware-Voyageur Tax-Free Wisconsin Fund x x x -
Money Market Funds
Delaware Cash Reserve x x x x
U.S. Government Money Fund x - - x
Tax-Free Money Fund x - - x
</TABLE>
(Not Part of Prospectus)
-74-
<PAGE>
APPENDIX C
Descriptions of Bond Ratings
Description of Standard and Poor's Ratings Services ("S&P") and
Moody's Investors Service, Inc. ("Moody's") ratings:
S&P's Ratings for Municipal Bonds
An S&P municipal bond rating is a current assessment of the
creditworthiness of an object with respect to a specific obligation. S&P's
letter ratings may be modified by the addition of a plus or minus sign, which is
used to show relative standing within the major rating categories, except in the
AAA (Prime Grade) category.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable, and will
include: (1) likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA is the highest rating assigned by S&P. An issuer's capacity to
pay interest and repay the principal is extremely strong. Debt rated AA has a
very strong capacity to pay interest and repay principal and differs from the
higher 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. Debt rated BB and B (as
well as debt rated CCC, C and C) is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation within this category, B represents a somewhat higher degree of
speculation and C represents the highest degree of speculation of these ratings.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal repayments. Debt rated B has a
greater vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal.
S&P Ratings for Municipal Notes
SP-1--The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
SP-2--The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
-75-
<PAGE>
Aaa--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.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what generally are 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 risks appear somewhat larger than in Aaa securities. A--Bonds
which are rated A possess many favorable investment 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.
Baa--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. Ba--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. B--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.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. A short-term rating designated VMIG, may also be assigned an issue having
a demand feature. The municipal obligations bearing the designation MIG 1/VMIG 1
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. The municipal obligations bearing the designation are
ample although not so large as in the preceding group.
Description of S&P A-1+ and A-1 Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest,
commercial paper rating assigned by S&P. Paper rated A-1+ must possess
overwhelming safety characteristics regarding timely payment. Commercial paper
rated A-1 must have a degree of safety that is either overwhelming or very
strong.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and will normally be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation and well established access
to a range of financial markets and assured sources of alternate liquidity.
-76-
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific funds,
tax-free funds, money market funds, global and international funds and
closed-end equity funds give investors the ability to create a portfolio that
fits their personal financial goals. For more information, shareholders of the
Fund Classes should contact their financial adviser or call Delaware Group at
800-523-4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55402
<PAGE>
- -------------------------------------------------------------------------------
Voyageur Tax Free Funds, Inc.
Voyageur Intermediate Tax-Free Funds, Inc.
Voyageur Insured Funds, Inc.
Voyageur Investment Trust
Voyageur Investment Trust II
Voyageur Mutual Funds, Inc.
Voyageur Mutual Funds II, Inc.
- -------------------------------------------------------------------------------
A CLASS
- -------------------------------------------------------------------------------
B CLASS
- -------------------------------------------------------------------------------
C CLASS
- -------------------------------------------------------------------------------
PART B
STATEMENT OF
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
AUGUST 28, 1997
DELAWARE
GROUP
---------
<PAGE>
Table of
Contents
COVER PAGE..................................................... 1
SYNOPSIS ...................................................... 2
SUMMARY OF EXPENSES............................................ 4
FINANCIAL HIGHLIGHTS .......................................... 6
INVESTMENT OBJECTIVES AND POLICIES
Suitability.................................................. 7
Investment Strategy ........................................ 7
THE DELAWARE DIFFERENCE .......................................11
Plans and Services ..........................................11
CLASSES OF SHARES .............................................13
HOW TO BUY SHARES .............................................18
REDEMPTION AND EXCHANGE .......................................21
DIVIDENDS AND DISTRIBUTIONS ..................................25
TAXES .........................................................26
CALCULATION OF OFFERING PRICE AND
NET ASSET VALUE PER SHARE ....................................28
MANAGEMENT OF THE FUND.........................................29
OTHER INVESTMENT POLICIES AND
RISK CONSIDERATIONS...........................................32
APPENDIX A--INVESTMENT
ILLUSTRATIONS ................................................37
APPENDIX B--CLASSES OFFERED ..................................38
<PAGE>
Delaware-Voyageur Minnesota
High Yield Municipal
Bond Fund
1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance:
Nationwide 800-523-4640
Information on Existing Accounts:
(SHAREHOLDERS ONLY)
Nationwide 800-523-1918
Dealer Services:
(BROKER/DEALERS ONLY)
Nationwide 800-362-7500
Representatives of Financial Institutions:
Nationwide 800-659-2265
This Prospectus describes the shares of the Delaware-Voyageur Minnesota
High Yield Municipal Bond Fund series (the "Fund") (formerly known as Voyageur
Minnesota High Yield Municipal Bond Fund) of Voyageur Mutual Funds, Inc.
("Mutual Funds, Inc."), a professionally-managed mutual fund of the series
type.
The Fund offers Class A Shares, Class B Shares and Class C Shares. Each
class is referred to individually as a "Class" and collectively as the
"Classes."
The investment objective of the Fund is to seek a high level of current
income exempt from federal income tax and from Minnesota personal income tax
primarily through investment in a portfolio of medium-and lower-grade Municipal
Obligations. The weighted average maturity of the investment portfolio of the
Fund is expected to be approximately 15 to 25 years. There is no assurance that
the Fund will achieve its investment objective.
The Fund may invest in medium- and lower-grade Municipal Obligations rated
between BBB and B-(inclusive) by Standard & Poor's Ratings Group or Fitch
Investors Service, LP, Baa and B3 (inclusive) by Moody's Investors Service,
Inc., comparably rated short-term Municipal Obligations and non-rated Municipal
Obligations determined by the Fund's investment adviser to be of comparable
quality. The Fund may also invest in higher rated securities. Investment in
medium- and lower-grade Municipal Obligations involves special risks as
<PAGE>
compared with investment in higher-grade municipal securities, including
potentially greater sensitivity to a general economic downturn or to a
significant increase in interest rates, greater market price volatility and less
liquid secondary market trading. See Risk Considerations under Investment
Objective and Policies. Investment in the Fund may not be appropriate for all
investors.
This Prospectus sets forth certain information that you should read and
consider. The Statement of Additional Information ("Part B") of Mutual Funds,
Inc.'s registration statement dated August 28, 1997, as it may be amended from
time to time, contains additional information about the Fund 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, L.P. at the above address or by calling the above
telephone numbers.
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.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL FUNDS
CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE FUND ARE
NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY CREDIT UNION,
ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. SHARES OF
THE FUND ARE NOT BANK OR CREDIT UNION DEPOSITS.
1
<PAGE>
Synopsis
Investment Objective
The investment objective of the Fund is to seek a high level of current
income exempt from federal income tax and from Minnesota personal income tax
primarily through investment in a portfolio of medium-and lower-grade Municipal
Obligations. The weighted average maturity of the investment portfolio of the
Fund is expected to be approximately 15-25 years.
Risk Factors and Special Considerations
The Fund is nondiversified investment company under the Investment Company
Act of 1940 Act (the "1940 Act") and may be subject to greater risks than if the
Fund were diversified. See Diversification and State Considerations under
Investment Objective and Policies. The Fund invests primarily in high yield
securities, commonly known as "junk bonds", and greater risks may be involved
with an investment in the Fund than an investment in a mutual fund comprised
primarily of investment grade bonds. See Risk Considerations under Investment
Objective and Policies.
Investment Manager, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") furnishes investment
management services to the Fund, subject to the supervision and direction of
Mutual Funds, Inc.'s Board of Directors. The Manager also provides investment
management services to certain of the other funds in the Delaware Group.
Delaware Distributors, L.P. (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, accounting services and transfer agent for the Fund and for
all of the other mutual funds in the Delaware Group. See Summary of Expenses and
Management of the Fund for further information regarding the Manager and the
fees payable under the Fund's Investment Management Agreement.
<PAGE>
Sales Charges
The price of Class A Shares of the Fund includes a maximum front-end sales
charge of 3.75% of the offering price, which is equivalent to 3.93%, based upon
the net asset value of Class A Shares as of the Fund's most recent fiscal year.
The front-end sales charge is reduced on certain transactions of at least
$100,000 but under $1,000,000. There is no front-end sales charge on purchases
of $1,000,000 or more. Class A Shares are subject to annual 12b-1 Plan expenses
for the life of the investment.
The price of Class B Shares is equal to the net asset value per share.
Class B Shares are subject to a contingent deferred sales charge ("CDSC") of:
(i) 4% if shares are redeemed within two years of purchase; (ii) 3% if shares
are redeemed during the third or fourth year following purchase; (iii) 2% if
shares are redeemed during the fifth year following purchase; (iv) 1% if shares
are redeemed during the sixth year following purchase; and (v) 0% thereafter.
Class B Shares are subject to annual 12b-1 Plan expenses for approximately eight
years after purchase. See Deferred Sales Charge Alternative -- Class B Shares
and Automatic Conversion of Class B Shares under Classes of Shares.
The price of Class C Shares is equal to the net asset value per share.
Class C Shares are subject to a CDSC of 1% if shares are redeemed within 12
months of purchase. Class C Shares are subject to annual 12b-1 Plan expenses
for the life of the investment.
See Classes of Shares and Distribution (12b-1) and Service under
Management of the Fund.
2
<PAGE>
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments must generally be at least $100.
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. An investor may exceed these maximum purchase
limitations for Class B Shares and Class C Shares 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 and Class C Shares and generally are not subject to a
CDSC. See How to Buy Shares.
Redemption and Exchange
Class A Shares of the Fund may be redeemed or exchanged at the net asset
value calculated after receipt of the redemption or exchange request. Neither
the Fund nor the Distributor assesses a charge for redemptions or exchanges of
Class A Shares, except for certain redemptions of shares purchased at net asset
value, which may be subject to a CDSC if a dealer's commission was paid in
connection with such purchases. See Front-End Sales Charge Alternative -- Class
A Shares under Classes of Shares.
Class B Shares and Class C Shares may be redeemed or exchanged at the net
asset value calculated after receipt of the redemption or exchange request
subject, in the case of redemptions, to any applicable CDSC. Neither the Fund
nor the Distributor assesses any charges other than the CDSC for redemptions or
exchanges of Class B or Class C Shares. There are certain limitations on an
investor's ability to exchange shares between the various classes of shares
that are offered. See Redemption and Exchange.
Open-End Investment Company
Mutual Funds, Inc., which was organized as a Minnesota corporation in April
1993, is an open-end management investment company. The Fund's portfolio of
assets is non-diversified as defined by the 1940 Act. The Fund is one of several
series of Mutual Funds, Inc. See Shares under Management of the Fund.
3
<PAGE>
Summary of
Expenses
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C Shares follows:
<TABLE>
<CAPTION>
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- ----------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) ............... 3.75% None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percent-
age of offering price) None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original
purchase price or redemption
proceeds, whichever is lower) ... None* 4.00%** 1.00%***
Redemption Fees .................. None**** None**** None****
</TABLE>
<TABLE>
<CAPTION>
Annual Operating Expenses Class A Class B Class C
(as a percentage of average daily net assets) Shares Shares Shares
- ----------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
Management Fees (after voluntary waivers) ... 0.00% 0.00% 0.00%
12b-1 Plan Expenses (including service fees) 0.25%+ 1.00%+ 1.00%+
Other Operating Expenses (after voluntary
payments) ................................. 0.05% 0.05% 0.05%
-------- -------- --------
Total Operating Expenses (after voluntary
waivers and payments) .................. 0.30%++ 1.05%++ 1.05%++
======== ======== ========
</TABLE>
*Class A purchases of $1 million or more may be made at net asset value.
However, if in connection with any such purchase a dealer commission is paid
to the financial adviser through whom such purchase is effected, a CDSC of
1% will be imposed on certain redemptions within 12 months of purchase
("Limited CDSC"). See Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption
and Exchange.
**Class B Shares of the Fund are subject to a CDSC of: (i) 4% if shares are
redeemed within two years of purchase; (ii) 3% if shares are redeemed during
the third or fourth year following purchase; (iii) 2% if shares are redeemed
during the fifth year following purchase; (iv) 1% if shares are redeemed
during the sixth year following purchase; and (v) 0% thereafter. See
Deferred Sales Charge Alternative - Class B Shares under Classes of Shares.
***Class C Shares of the Fund are subject to a CDSC of 1% if shares are
redeemed within 12 months of purchase. See Level Sales Charge
Alternative--Class C Shares under Classes of Shares.
****CoreStates Bank, N.A. currently charges $7.50 per redemption for
redemptions payable by wire.
+Class A Shares, Class B Shares and Class C Shares are subject to separate
12b-1 Plans. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by rules of the
National Association of Securities Dealers, Inc. (the "NASD"). See
Distribution (12b-1) and Service under Management of the Fund.
++The Manager has elected voluntarily to waive that portion, if any, of the
annual management fees payable by the new Fund and to pay certain expenses
of that Fund to the extent necessary to ensure that the Total Operating
Expenses of the Class A Shares, the Class B Shares and the Class C Shares of
the Fund, including each such Class' 12b-1 fees, do not exceed 0.30%, 1.05%
and 1.05%, respectively, through December 31, 1997. If the voluntary expense
waivers were not in effect, the Total Operating Expenses, as a percentage of
average daily net assets, would be 1.39%, 2.14% and 2.14%, respectively, for
the Class A Shares, the Class B Shares and the Class C Shares of the Fund,
reflecting management fees of 0.65%. See Expenses under Management of the
Fund for a discussion of the waivers that will remain in place through April
30, 1999. "Other Operating Expenses" are based on estimated amounts for the
current fiscal year.
Investors utilizing the Delaware Group Asset Planner asset allocation
service also typically incur an annual maintenance fee of $35 per strategy.
However, effective November 1, 1996, the annual maintenance fee is waived until
further notice. See Delaware Group Asset Planner under How to Buy Shares.
4
<PAGE>
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, (2) redemption and no redemption at the end of each time period and
(3) for Class B Shares and Class C Shares, payment of a CDSC at the time of
redemption, if applicable. The following example assumes the voluntary waiver
of the management fee by the Manager as discussed in this Prospectus.
<TABLE>
<CAPTION>
Assuming Redemption Assuming No Redemption
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares $411 $47 $54 $74 $41 $47 $54 $74
Class B Shares 51 63 78 107\2 11 33 58 107\2
Class C Shares 21 33 58 121 11 33 58 128
</TABLE>
1\Generally, no redemption charge is assessed upon redemption of Class A Shares.
Under certain circumstances, however, a Limited CDSC, which has not been
reflected in this calculation, may be imposed on certain redemptions within 12
months of purchase. See Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption
and Exchange.
2\At the end of approximately eight years after purchase, Class B Shares will be
automatically converted into Class A Shares. The example above assumes
conversion of Class B Shares at the end of the eighth year. However, the
conversion may occur as late as three months after the eighth anniversary of
purchase, during which time the higher 12b-1 Plan fees payable by Class B
Shares will continue to be assessed. Information for the ninth and tenth years
reflects expenses of the Class A Shares. See Automatic Conversion of Class B
Shares under Class of Shares for a description of the automatic conversion
feature.
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above tables is to assist the investor in understanding
the various costs and expenses that an investor in any of the Classes will bear
directly or indirectly.
5
<PAGE>
Financial
Highlights
The following financial highlights are derived from the financial
statements of Voyageur Mutual Funds, Inc. - Delaware-Voyageur Minnesota High
Yield Municipal Bond Fund and have been audited by KPMG Peat Marwick LLP,
independent auditors. The data should be read in conjunction with the financial
statements, related notes, and the report of KPMG Peat Marwick LLP, all of
which are incorporated by reference into Part B. Further information about the
Fund's performance is contained in its Annual Report to shareholders. A copy of
the Fund's Annual Report (including the report of KPMG Peat Marwick LLP) may be
obtained from Mutual Funds, Inc. upon request at no charge.
<TABLE>
<CAPTION>
Period Ended December 31, 1996
Class A\1 Class B\2 Class C\3
---------- ---------- ---------
<S> <C> <C> <C>
Net Asset value Beginning of period ........................ $ 10.00 $ 9.78 $ 9.99
Operations
Net Investment Income ....................................... 0.35 0.29 0.30
Net Realized and Unrealized Gain (Loss) on Securities ...... 0.18 0.41 0.19
--------- --------- ---------
Total ................................................... 0.53 0.70 0.49
--------- --------- ---------
Distributions to shareholders
From Net Investment Income ................................. (0.35) (0.29) (0.30)
Net Asset Value End of Period .............................. $ 10.18 $ 10.19 $ 10.18
========= ========= =========
Total Investment Return\4 .................................... 5.40% 7.29% 5.02%
Net Assets End of Period (000s) ........................... $ 6,068 $ 2,738 $ 900
Ratios
Ratio of Expenses to Average Net Assets/6 .................. 0.24%\5 0.95%\5 0.99%\5
Ratio of Expenses to Average Net Assets
(assuming no voluntary waivers and reimbursements) ......... 1.25%\5 2.00%\5 2.00%\5
Ratio of Net Investment Income to Average Net Assets ......... 5.78%\5 5.14%\5 4.90%\5
Portfolio Turnover Rate .................................... 14.97% 14.97% 14.97%
</TABLE>
Notes to Financial Highlights
\1Period from June 4, 1996 (commencement of operations) to December 31, 1996.
\2Period from June 12, 1996 (commencement of operations) to December 31, 1996.
\3Period from June 7, 1996 (commencement of operations) to December 31, 1996.
\4Total investment return is based on the change in net asset value on a share
during the period and assumes reinvestment of distributions at net asset value
and does not reflect the impact of a sales charge.
\5Annualized.
\6The expense ratio reflects the effect of gross expenses attributable to
earnings credits on uninvested cash received by the Fund.
6
<PAGE>
Investment Objective
And Policies
The investment objective of the Fund is to seek a high level of current
income exempt from federal income tax and from Minnesota personal income tax
primarily through investment in a portfolio of medium-and lower-grade Municipal
Obligations. The weighted average maturity of the investment portfolio of the
Fund is expected to be approximately 15-25 years.
SUITABILITY
The Fund may be suitable for investors interested in high current income
flow exempt from federal income tax. The net asset value of each Class may
fluctuate in response to the condition of individual municipalities and general
market and economic conditions and, as a result, the Fund is not appropriate for
a short-term investor.
The types of securities in which the Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
restricted securities have the potential for higher yields, they are more
speculative and increase the credit risk of the Fund's portfolio. Changes in the
market value of the portfolio securities will not affect interest income from
such securities, but will be reflected in the Fund's net asset value. Investors
should be willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these securities.
Ownership of Fund shares can reduce the bookkeeping and administrative
inconveniences that would be connected with direct purchases of the type of
securities in which the Fund invests. Investors should not consider a purchase
of Fund shares as equivalent to a complete investment program. The Delaware
Group includes a family of funds, generally available through registered
dealers, which may be used in concert to create a more complete investment
program.
There are risks in any investment program, and there is no assurance that
the Fund's investment objective will be achieved. The value of the Fund's
shares will fluctuate with changes in the market value of its investments.
INVESTMENT STRATEGY
The Fund will attempt to invest 100% (and as a matter of fundamental policy
during normal circumstances will invest at least 80%) of the value of its net
assets in Municipal Obligations the interest on which is exempt from regular
federal income tax and from Minnesota personal income tax. The Fund may invest
without limit in securities that generate interest that is an item of tax
preference for purposes of federal and state alternative minimum tax ("AMT"). In
normal circumstances the weighted average maturity of the investment portfolio
of the Fund is expected to be approximately 15 to 25 years. However, if the
Manager determines that market conditions warrant a shorter average maturity,
the Fund's investments will be adjusted accordingly. During times of adverse
market conditions when a defensive investment posture is warranted, the Fund may
temporarily select investments without regard to the foregoing policies. The
Fund will invest at least 65% of its total assets, except under abnormal market
or economic situations, in medium- and lower-grade Municipal Obligations rated,
at the time of investment, between BBB and B- (inclusive) by Standard & Poor's
Ratings Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), and BBB and B- (inclusive) by Fitch Investors Service, LP
("Fitch"), and Municipal Obligations determined by the Fund's investment adviser
to be of comparable quality.
<PAGE>
Medium-grade Municipal Obligations are rated BBB by S&P or Fitch, Baa by
Moody's or determined by the Manager to be of comparable quality. Municipal
Obligations rated BBB by S&P or Fitch generally are regarded by S&P or Fitch as
having an adequate capacity to pay interest and repay principal; adverse
economic conditions or changing circumstances are, however, more likely in
S&P's or Fitch's view to lead to a weakened capacity to pay interest and repay
principal as compared with higher rated Tax exempt Obligations. Municipal
Obligations rated Baa by Moody's generally are considered by Moody's as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. In Moody's view, 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. In Moody's
view, such securities lack outstanding investment characteristics and have
speculative characteristics as well.
The Fund may invest in lower-grade Municipal Obligations rated, at the
time of investment, no lower than B- by S&P or Fitch or B3 by Moody's, and in
municipal securities determined by the Fund's investment adviser to be of
comparable quality. Municipal Obligations rated B by S&P or Fitch generally are
regarded by S&P or Fitch, on balance, as predominantly speculative with respect
to capacity to pay interest or repay principal in accordance with the terms of
the obligations. While such securities will likely have some quality and
protective characteristics, in S&P's or Fitch's view these are outweighed by
large uncertainties or major risk exposure to adverse conditions. Securities
rated B by Moody's are viewed by Moody's as generally lacking characteristics
of the desirable investment. In Moody's view, assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
The Fund will not make initial investments in Municipal Obligations rated,
at the time of investment, below B- by S&P or Fitch or below B3 by Moody's, or
in Municipal Obligations determined by the Fund's investment adviser to be of
comparable quality. The Fund may retain Municipal Obligations which are
downgraded after investment. There is no minimum rating with respect to
securities that the Fund may hold if downgraded after investment. See Appendix
A to Part B for a description of Municipal Obligations ratings.
7
<PAGE>
Investment in medium- and lower-grade securities involves special risks as
compared with investment in higher-grade securities, including potentially
greater sensitivity to a general economic downturn or to a significant increase
in interest rates, greater market price volatility and less liquid secondary
market trading. See Risks Considerations below. There can be no
assurance that the Fund will achieve its investment objective, and the Fund may
not be an appropriate investment for all investors. Furthermore, interest on
certain "private activity" obligations in which the Fund may invest is treated
as a preference item for the purpose of calculating the federal and state
alternative minimum tax and, accordingly, a portion of the income produced by
the Fund may be taxable under the federal and state alternative minimum tax. The
Fund may not be a suitable investment for investors who are already subject to
the alternative minimum tax or who would become subject to the alternative
minimum tax as a result of an investment in the Fund. See Taxes.
The following table sets forth the weighted average percentage of total
investments with respect to the portfolio of the Fund during the year ended as
of December 31, 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Rating Aaa Aa A Baa Ba B Unrated
(S&P Rating) (AAA) (AA) (A) (BBB) (BB) (B) Bonds Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Minnesota High Yield
Municipal Bond Fund 9% 7% 16% 17% 3% 7% 41% 100%
- -----------------------------------------------------------------------------------------------------
</TABLE>
At times the Manager may judge that conditions in the markets for medium
and lower grade Municipal Obligations make pursuing the Fund's basic investment
strategy of investing primarily in such Municipal Obligations inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade Municipal Obligations and in Municipal
Obligations determined by the Fund's investment adviser to be of comparable
quality. Although such higher grade Municipal Obligations generally entail less
credit risk, such higher grade Municipal Obligations may have a lower yield than
medium and lower grade Municipal Obligations, and investment in such higher
grade Municipal Obligations may result in a lower yield to Fund shareholders.
The Fund's investment adviser may also judge that conditions in the markets for
long- and intermediate-term Municipal Obligations in general make pursuing the
Fund's basic investment strategy inconsistent with the best interests of the
Fund's shareholders. At such times, the Fund may pursue strategies primarily
designed to reduce fluctuations in the value of the Fund's assets, including
investing the Fund's assets in high-quality, short-term Municipal Obligations
and in high-quality, short-term taxable securities. See Taxes.
The Fund may invest without limitation in short term Municipal Obligations
or in taxable obligations on a temporary, defensive basis due to market
conditions or, with respect to taxable obligations, for liquidity purposes.
Such taxable obligations, whether purchased for liquidity purposes or on a
temporary, defensive basis, may include: obligations of the U.S. government,
its agencies or instrumentalities; other debt securities rated within the three
highest grades by either Moody's, Fitch or S&P; commercial paper rated in the
highest grade by any of such rating services (Prime-1, F-1+ or A-1,
respectively); certificates of deposit and bankers' acceptances of domestic
banks which have capital, surplus and undivided profits of over $100 million;
high-grade taxable municipal bonds; and repurchase agreements with respect to
any of the foregoing investments. The Fund also may hold its assets in cash and
in securities of tax-exempt money market mutual funds.
<PAGE>
Diversification
The Fund is nondiversified investment company. This means that the Manager
has the flexibility to invest as much as 50% of the Fund's assets in as few as
two issuers provided no single issuer accounts for more than 25% of the
portfolio. The remaining 50% of the portfolio must be diversified so that no
more than 5% of the Fund's assets is invested in the securities of a single
issuer. The Fund may invest without limitation in U.S. government and government
agency securities backed by the U.S. government, its agencies or
instrumentalities. Because the Fund may invest its assets in fewer issuers, the
value of Fund shares may increase or decrease more rapidly than if the Fund were
fully diversified. If the Fund were to invest more than 5% of its assets in a
single issuer, the Fund would be affected more than a fully-diversified fund in
the event that issuer encountered difficulties in satisfying its financial
obligations.
Risks Considerations
General
The yields on Municipal Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and
monetary conditions, conditions in the relevant market, the size of a
particular issue, maturity of the obligation and the rating of the issue.
Generally, the value of Municipal Obligations will tend to fall as interest
rates rise and will tend to increase as interest rates decrease. In addition,
Municipal Obligations of longer maturity generally produce higher current
yields than Municipal Obligations with shorter maturities but are subject to
greater price fluctuation due to changes in interest rates, tax laws and other
general market factors. Lower rated Municipal Obligations generally produce a
higher yield than higher rated Municipal Obligations due to the perception of a
greater degree of risk as to the payment of principal and interest. Certain
Municipal Obligations held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed.
8
<PAGE>
Special Risk Considerations Regarding
Medium- and Lower-Grade Municipal
Obligations
The Fund invests in medium- and lower-grade Municipal Obligations.
Municipal Obligations which are in the medium and lower grade categories
generally offer a higher current yield than is offered by higher-grade Municipal
Obligations but they also generally involve greater price volatility and greater
credit and market risk. Credit risk relates to the issuer's ability to make
timely payment of interest and principal when due. Market risk relates to the
changes in market value that occur as a result of variation in the level of
prevailing interest rates and yield relationships in the municipal securities
market. Debt securities rated BB or below by S&P or Fitch and B or below by
Moody's are commonly referred to as "junk bonds." Although the Fund primarily
will invest in medium- and lower-grade Municipal Obligations, the Fund may
invest in higher-grade Municipal Obligations for temporary defensive purposes.
Such investments may result in lower current income than if the Fund were fully
invested in medium and lower-grade securities.
The value of the Fund's portfolio securities can be expected to fluctuate
over time. When interest rates decline, the value of a portfolio invested in
fixed-income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed-income
securities generally can be expected to decline. However, the secondary market
prices of medium- and lower-grade Municipal Obligations are less sensitive to
changes in interest rates and are more sensitive to adverse economic changes or
individual issuer developments than are the secondary market prices of
higher-grade debt securities. Such events also could lead to a higher incidence
of defaults by issuers of medium- and lower-grade Municipal Obligations as
compared with historical default rates. In addition, changes in interest rates
and periods of economic uncertainty can be expected to result in increased
volatility in the market price of the Municipal Obligations in the Fund's
portfolio and thus in the net asset value of the Fund. Also, adverse publicity
and investor perceptions, whether or not based on rational analysis, may affect
the value and liquidity of medium- and lower-grade Municipal Obligations. The
secondary market value of Municipal Obligations structured as zero-coupon
securities and payment-in-kind securities may be more volatile in response to
changes in interest rates than debt securities which pay interest periodically
in cash. Investment in such securities also involves certain tax considerations.
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium- and lower-grade Municipal Obligations to pay
interest and to repay principal, to meet projected financial goals and to obtain
additional financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.
<PAGE>
To the extent that there is no established retail market for some of the
medium- or lower-grade Municipal Obligations in which the Fund may invest,
trading in such securities may be relatively inactive. The Fund's investment
adviser has contracted with Muller Data Corporation as pricing agent and the
investment adviser is responsible for determining the net asset value of the
Fund, subject to the supervision of the Board of Directors. During periods of
reduced market liquidity and in the absence of readily available market
quotations for medium- and lower-grade Municipal Obligations held in the Fund's
portfolio, the ability of the pricing agent to value the Fund's securities
becomes more difficult and the pricing agent's use of judgment may play a
greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
The Fund may invest in zero-coupon and payment-in-kind Municipal
Obligations. Zero-coupon securities are debt obligations that do not entitle
the holder to any periodic payment of interest prior to maturity or a specified
date when the securities begin paying current interest. They are issued and
traded at discount from their face amounts or par value, which discount varies
depending on the time remaining until cash payments begin, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer. The Internal Revenue Code of 1986, as amended, requires that regulated
investment companies distribute at least 90% of their net investment income
each year, including tax-exempt and non-cash income. Accordingly, although the
Fund will receive no coupon payments on zero-coupon securities prior to their
maturity, the Fund is required, in order to maintain its desired tax treatment,
to include in its distributions to shareholders in each year any income
attributable to zero-coupon securities that is in excess of 10% of the Fund's
net investment income in that year. The Fund may be required to borrow or to
liquidate portfolio securities at a time that it otherwise would not have done
so in order to make such distributions. Payment-in-kind securities are
securities that pay interest through the issuance of additional securities.
Such securities generally are more volatile in response to changes in interest
rates and are more speculative investments than are securities that pay
interest periodically in cash.
9
<PAGE>
The Fund's investment adviser seeks to minimize the risks involved in
investing in medium- and lower-grade Municipal Obligations through multiple
portfolio holdings, careful investment analysis, and attention to current
developments and trends in the economy and financial and credit markets. The
Fund will rely on the investment adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In its analysis, the investment
adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulator
matters. The Fund's investment adviser may consider the credit ratings of
Moody's, Fitch, and S&P in evaluating Municipal Obligations, although it does
not rely primarily on these ratings. Such ratings evaluate only the safety of
principal and interest payments, not market value risk. Additionally, because
the creditworthiness of an issuer may change more rapidly than is able to be
timely reflected in changes in credit ratings, the Fund's investment adviser
continuously monitors the issuers of Municipal Obligations held in the Fund's
portfolio.
Municipal Obligations generally are not listed for trading on any national
securities exchange, and many issuers of medium- and lower-grade Municipal
Obligations choose not to have a rating assigned to their obligations by any
national recognized statistical rating organization. The amount of information
available about the financial condition of an issuer of unlisted or unrated
securities generally is not as extensive as that which is available with respect
to issuers of listed or rated securities. Because of the nature of medium- and
lower- rated Municipal Obligations, achievement by the Fund of its investment
objective may be more dependent on the credit analysis of the Fund's investment
adviser than is the case for an investment company which invests primarily in
exchange listed higher-grade securities.
<PAGE>
State Considerations
The value of Municipal Obligations owned by the Fund may be adversely
affected by local political and economic conditions and developments within
Minnesota. Adverse conditions in an industry significant to the local economy
could have a correspondingly adverse effect on the financial condition of local
issuers. Other factors that could affect Municipal Obligations include a change
in the local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to
local governments or mandatory additional services). A description of certain
factors affecting and statistics describing issuers of Municipal Obligations in
Minnesota is set forth in Part B. Generally, the structure of the State's
economy parallels the structure of the United States economy as a whole. There
are, however, employment concentrations in durable goods and non-durable goods
manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
The Minnesota Department of Finance February 1996 Forecast has projected that,
under current laws, the State will complete its current biennium June 30, 1997
with a $15 million surplus, plus a $350 million cash flow account balance, plus
a $220 million budget reserve. Currently Minnesota's general obligation bonds
are rated Aaa by Moody's, AA+ by S&P and AAA by Fitch. See Special Factors
Affecting the Fund under Investment Restrictions and Policies in Part B.
* * *
The Fund's investment objective and certain other investment policies
explicitly designated herein as such are fundamental, which means that they
cannot be changed without the vote of the Fund's shareholders as provided in
the 1940 Act.
For additional information on the Fund's investment policies and certain
risks associated with investments in certain types of securities, see Other
Investment Policies and Risk Considerations.
10
<PAGE>
The Delaware
Difference
PLANS AND SERVICES
The Delaware Difference is our commitment to provide you with superior
information and quality service on your investments in the Delaware Group of
funds.
SHAREHOLDER PHONE DIRECTORY
Investor Information Center
800-523-4640
Fund Information; Literature Price;
Yield and Performance Figures
Shareholder Service Center
800-523-1918
Information on Existing Regular Investment Accounts; Wire Investments;
Wire Liquidations; Telephone Liquidations and Telephone Exchanges
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
You can call the Investor Information Center at any time for current
performance information. Current yield and total return information may also be
included in advertisements and information given to shareholders. Yields are
computed on an annual basis over a 30-day period.
Shareholder Services
During business hours, you can call the Delaware Group's Shareholder
Service Center. Our representatives can answer any questions about your
account, the Fund, various service features and other funds in the Delaware
Group.
Delaphone Service
Delaphone is an account inquiry service for investors with Touch-Tone(R)
phone service. It enables you to get information on your account faster than
the mailed statements and confirmations. Delaphone also provides current
performance information on the Fund, as well as other funds in the Delaware
Group. Delaphone is available seven days a week, 24 hours a day.
<PAGE>
Dividend Payments
Dividends, capital gains and other distributions are automatically
reinvested in your account, unless you elect to receive them in cash. You may
also elect to have the dividends earned in one fund automatically invested in
another Delaware Group fund with a different investment objective, subject to
certain exceptions and limitations.
For more information, see Additional Methods of Adding to Your Investment
- - Dividend Reinvestment Plan under How to Buy Shares or call the Shareholder
Service Center.
MoneyLine(sm) Services
Delaware Group offers the following services for fast and convenient
transfer of funds between your personal bank account and your Delaware Group
fund account.
1. MoneyLine(sm) Direct Deposit Service
If you elect to have your dividends and distributions paid in cash and
such dividends and distributions are in an amount of $25 or more, you may
choose the MoneyLine(sm) Direct Deposit Service and have such payments
transferred from your Fund account to your predesignated bank account. See
Dividends and Distributions. In addition, you may elect to have your
Systematic Withdrawal Plan payments transferred from your Fund account to
your predesignated bank account through this service. See Systematic
Withdrawal Plans under Redemption and Exchange.
2. MoneyLine(sm) On Demand
You or your investment dealer may request purchases and redemptions of
Fund shares by using MoneyLine(sm) On Demand. When you authorize the Fund
to accept such requests from you or your investment dealer, funds will be
withdrawn from (for share purchases) or 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 a $50,000 maximum limit for MoneyLine(sm) On Demand
transactions.
11
<PAGE>
For each MoneyLine(sm) Service, it may take up to four business days for
the transactions to be completed. You can initiate either service by completing
an Account Services form. If the name and address on your designated bank
account are not identical to the name and address on your Fund account, you
must have your signature guaranteed. The Fund does not charge a fee for
MoneyLine(sm) services; however, your bank may change a fee. Please call the
Shareholder Service Center for additional information about these services.
Statements and Confirmations
You will receive quarterly statements of your account summarizing all
transactions during the period. A confirmation statement will be sent following
all transactions other than those involving a reinvestment of dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling the Shareholder Service Center.
Duplicate Confirmations
If your financial adviser or investment dealer is noted on your investment
application, we will send a duplicate confirmation to him or her. This makes it
easier for your adviser to help you manage your investments.
Tax Information
Each year, Mutual Funds, Inc. will mail to you information on the tax
status of your dividends and distributions.
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature allows
you to combine the value of your current holdings of Class A Shares, Class B
Shares and Class C Shares of the Fund with the dollar amount of new purchases of
Class A Shares to qualify for a reduced front-end sales charge on such purchases
of Class A Shares. Under the Combined Purchases Privilege, you may also include
certain shares that you own in other funds in the Delaware Group. See Classes of
Shares.
Letter of Intention
The Letter of Intention feature permits you to obtain a reduced front-end
sales charge on purchases of Class A Shares by aggregating certain of your
purchases of Delaware Group fund shares over a 13-month period. See Classes of
Shares and Part B.
<PAGE>
12-Month Reinvestment Privilege
The 12-Month Reinvestment Privilege permits you to reinvest proceeds from
a redemption of Class A Shares, within one year of the date of the redemption,
without paying a front-end sales charge. See Part B.
Exchange Privilege
The Exchange Privilege permits shareholders to exchange all or part of
their shares into shares of the other funds in the Delaware Group, subject to
certain exceptions and limitations. For additional information on exchanges,
see Investing by Exchange under How to Buy Shares and Redemption and Exchange.
Wealth Builder Option
You may elect to invest in the Fund through regular liquidations of shares
in your accounts in other funds in the Delaware Group. Investments under this
feature are exchanges and are therefore subject to the same conditions and
limitations as other exchanges of Fund shares. See Additional Methods of Adding
to Your Investment - Wealth Builder Option and Investing by Exchange under How
to Buy Shares, and Redemption and Exchange.
Delaware Group Asset Planner
Delaware Group Asset Planner is an asset allocation service that gives
you, working with a professional financial adviser, the ability to more easily
design and maintain investments in a diversified selection of Delaware Group
mutual funds. The Asset Planner service offers a choice of four predesigned
allocation strategies (each with a different risk/reward profile) made up of
separate investments in predetermined percentages of Delaware Group funds. With
the guidance of a financial adviser, you may also tailor an allocation strategy
that meets your personal needs and goals. See Delaware Group Asset Planner
under How to Buy Shares.
Financial Information about the Fund
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
the Fund's investments and performance. Mutual Funds, Inc.'s fiscal year ends
on December 31.
12
<PAGE>
Classes of
Shares
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net asset
value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of 0.25% of average daily net assets of such shares. Certain purchases
of Class A Shares qualify for reduced front-end sales charges. See Front-End
Sales Charge Alternative - Class A Shares, below. See also Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange and Distribution (12b-1) and Service under
Management of the Fund.
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B Shares, which do not incur a front-end sales
charge when they are purchased, but are subject to a contingent deferred sales
charge if they are redeemed within six years of purchase. Class B Shares are
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 such shares for approximately eight years after purchase. Class B
Shares permit all of the investor's dollars to work from the time the
investment is made. The higher 12b-1 Plan expenses paid by Class B Shares will
cause such shares to have a higher expense ratio and to pay lower dividends
than Class A Shares. At the end of approximately eight years after purchase,
the Class B Shares will automatically be converted into Class A Shares and,
thereafter, for the remainder of the life of the investment, the annual 0.25%
12b-1 Plan fee for the Class A Shares will apply. See Automatic Conversion of
Class B Shares, below.
<PAGE>
Class C Shares. An investor who elects the level sales charge alternative
acquires Class C Shares, which do not incur a front-end sales charge when they
are purchased, but are subject to a contingent deferred sales charge if they
are redeemed within 12 months of purchase. Class C Shares are 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 such
shares for the life of the investment. The higher 12b-1 Plan expenses paid by
Class C Shares will cause such shares to have a higher expense ratio and to pay
lower dividends than Class A Shares. Unlike Class B Shares, Class C Shares do
not convert to another class.
The alternative purchase arrangements described above permit investors to
choose the method of purchasing shares that is most suitable 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, purchase Class B Shares and have the entire
initial purchase amount invested in the Fund with their investment being
subject to a CDSC if they redeem shares within six years of purchase, or
purchase Class C Shares and have the entire initial purchase amount invested in
the Fund with their investment being subject to a CDSC if they redeem shares
within 12 months of purchase. In addition, investors should consider the level
of annual 12b-1 Plan expenses applicable to each 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 comparing Class B Shares to
Class C Shares, investors should also consider the desirability of an automatic
conversion feature, which is available only for Class B Shares.
13
<PAGE>
Prospective investors should refer to Appendix A--Investment Illustrations
in this Prospectus for an illustration of the potential effect that each of the
purchase options may have on a long-term shareholder's investment.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Fund, the Distributor and others will be paid, in the
case of the Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of the Class B Shares and the 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, Class B 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 12b-1 Distribution Plans - Class A,
Class B and Class C Shares.
Dividends paid on Class A, Class B and Class C Shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount, except that, when assessed, 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 Calculation of Offering
Price and Net Asset Value Per Share.
The NASD has adopted certain rules relating to investment company sales
charges. Mutual Funds, Inc. and the Distributor intend to operate in compliance
with these rules.
Front-End Sales Charge Alternative - Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 3.75%. See Calculation of Offering Price and
Net Asset Value Per Share.
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following table.
Class A Shares
- -----------------------------------------------------------------------
Dealer's
Front-End Sales Charge Commission***
as % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- ----------------------------- ---------- ------------ --------------
Less than $100,000 3.75% 3.93% 3.25%
$100,000 but under $250,000 3.00 3.05 2.50
$250,000 but under $500,000 2.50 2.55 2.00
$500,000 but
under $1,000,000* 2.00 2.06 1.75
*There is no front-end sales charge on purchases of Class A Shares of $1
million or more but, under certain limited circumstances, a 1% Limited
CDSC may apply upon redemption of such shares.
**Based upon the net asset value of Class A Shares as of the Fund's most
recent fiscal year.
***Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
<PAGE>
-----------------------------------
The Fund must be notified when a sale takes place which would qualify for the
reduced front-end sales charge on the basis of previous or current purchases.
The reduced front-end sales charge will be granted upon confirmation of the
shareholder's holdings by the Fund. Such reduced front-end sales charges are
not retroactive.
From time to time, upon written notice to all of its dealers, the Distributor
may hold special promotions for specified periods during which the
Distributor may reallow to dealers up to the full amount of the front-end
sales charge shown above. In addition, certain dealers who enter into an
agreement to provide extra training and information on Delaware Group
products and services and who increase sales of Delaware Group funds may
receive an additional commission of up to 0.15% of the offering price.
Dealers who receive 90% or more of the sales charge may be deemed to be
underwriters under the Securities Act of 1933.
-------------------------------------
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 made in accordance with the following schedule:
Dealer's Commission
--------------------
Amount of Purchase (as a percentage of
- ---------------------------------- amount purchased)
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies may be aggregated with those of the Class A Shares
of the Fund. Financial advisers also may be eligible for a dealer's commission
in connection with certain purchases made under a Letter of Intention or
pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for payment
of the dealer's commission, unless a dealer's commission or similar payment has
not been previously paid on the assets being exchanged. The schedule and
program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Redemptions of Class A Shares purchased at net asset value may result in
the imposition of a Limited CDSC if the dealer's commission described above was
paid in connection with the purchase of those shares. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange.
14
<PAGE>
Combined Purchases Privilege
By combining your holdings of Class A Shares with your holdings of Class B
Shares and/or Class C Shares of the Fund and shares of the other funds in the
Delaware Group, except those noted below, you can reduce the front-end sales
charges on any additional purchases of Class A Shares. Shares of Delaware Group
Premium Fund, Inc. beneficially owned in connection with ownership of variable
insurance products may be combined with other Delaware Group fund holdings. In
addition, assets held in any stable value product available through the Delaware
Group may be combined with other Delaware Group fund holdings. Shares of other
funds that do not carry a front-end sales charge or CDSC may not be included
unless they were acquired through an exchange from a Delaware Group fund that
does carry a front-end sales charge or CDSC.
This privilege permits you to combine your purchases and holdings with
those of your spouse, your children under 21 and any trust, fiduciary or
retirement account for the benefit of such family members.
It also permits you to use these combinations under a Letter of Intention.
A Letter of Intention allows you to make purchases over a 13-month period and
qualify the entire purchase for a reduction in front-end sales charges on Class
A Shares.
Combined purchases of $1,000,000 or more, including certain purchases made
at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative Class A Shares, above.
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased at net asset value under the Delaware
Group Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege. See The Delaware Difference
and Redemption and Exchange for additional information.
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 Group, 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.
<PAGE>
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware
Group funds. Officers, directors and key employees of institutional clients of
the Manager or any of its affiliates may purchase Class A Shares at net asset
value. Moreover, purchases may be effected at net asset value for the benefit
of the clients of brokers, dealers and registered investment advisers
affiliated with a broker or dealer, if such broker, dealer or investment
adviser has entered into an agreement with the Distributor providing
specifically for the purchase of Class A Shares in connection with special
investment products, such as wrap accounts or similar fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest monthly
dividend checks and/or repayment of invested capital into Class A Shares of any
of the funds in the Delaware Group at net asset value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
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 anticipates
compensating 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 4% 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, if any, are paid to
the Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class
B Shares. Payments to the Distributor and others under the Class B 12b-1 Plan
may be in an amount equal to no more than 1% annually. The combination of the
CDSC and the proceeds of the 12b-1 Plan fees makes it possible for the Fund to
sell Class B Shares without deducting a front-end sales charge at the time of
purchase.
15
<PAGE>
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class B Shares
described in this Prospectus, even after the exchange. Such CDSC schedule may
be higher than the CDSC schedule for the Class B Shares acquired as a result of
the exchange. See Redemption and Exchange.
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 last business day
of the second full week 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. See Taxes.
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 anticipates
compensating 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, however, 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, if any, are paid to
the Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class 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.
<PAGE>
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class C Shares
as described in this Prospectus. See Redemption and Exchange.
Contingent Deferred Sales Charge--Class B Shares and Class C Shares
Class B Shares redeemed within six years of purchase may be subject to a
CDSC at the rates set forth below and Class C Shares redeemed within 12 months
of purchase may be subject to a CDSC of 1%. CDSCs are charged as a percentage
of the dollar amount subject to the CDSC. The charge will be assessed on an
amount equal to the lesser of the net asset value at the time of purchase of
the shares being redeemed or the net asset value of those shares at the time of
redemption. No CDSC will be imposed on increases in net asset value above the
initial purchase price, nor will a CDSC be assessed on redemptions of shares
acquired through reinvestments 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 the Class B Shares or the Class C Shares of
the Fund, as the case may be, even if those shares are later exchanged for
shares of another Delaware Group 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.
The following table sets forth the rates of the CDSC for the Class B
Shares of the Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- -------------------------- --------------------
0-2 4%
3 3%
4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. See Automatic Conversion of Class B Shares, above. Investors are
reminded that the Class A Shares into which the Class B Shares will convert are
subject to ongoing annual 12b-1 Plan expenses of up to a maximum of 0.25% of
average daily net assets of such shares.
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.
16
<PAGE>
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge - Class B and Class C
Shares under Redemption and Exchange.
Other Payments to Dealers--Class A, Class B and Class C Shares
From time to time at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits, as
set by the Distributor, may receive from the Distributor an additional payment
of up to 0.25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares.
Subject to pending amendments to the NASD's Rules of Fair Practice, in
connection with the promotion of Delaware Group fund shares, the Distributor
may, from time to time, pay to participate in dealer-sponsored seminars and
conferences, reimburse dealers for expenses incurred in connection with
preapproved seminars, conferences and advertising and may, from time to time,
pay or allow additional promotional incentives to dealers, which shall include
non-cash concessions, such as certain luxury merchandise or a trip to or
attendance at a business or investment seminar at a luxury resort, as part of
preapproved sales contests. Payment of non-cash compensation to dealers is
currently under review by the NASD and the Securities and Exchange Commission.
It is likely that the NASD's Rules of Fair Practice will be amended such that
the ability of the Distributor to pay non-cash compensation as described above
will be restricted in some fashion. The Distributor intends to comply with the
NASD's Rules of Fair Practice as they may be amended.
17
<PAGE>
How To
Buy Shares
Purchase Amounts
Generally, the minimum initial purchase is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases of shares of any Class
generally must be $100 or more. For purchases under a Uniform Gifts to Minors
Act or Uniform Transfers to Minors Act or through an Automatic Investing Plan,
there is a minimum initial purchase of $250 and a minimum subsequent purchase
of $25.
There is a maximum purchase limitation of $250,000 on each purchase of
Class B Shares. For Class C Shares, each purchase must be in an amount that is
less than $1,000,000. An investor may exceed these maximum purchase limitations
by making cumulative purchases over a period of time. In doing so, an investor
should keep in mind that reduced front-end sales charges are available on
investments of $100,000 or more in Class A Shares, and that Class A Shares (i)
are subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and (ii) generally are not subject to a CDSC.
Investing through Your Investment Dealer
You can make a purchase of shares of the Fund through most investment
dealers who, as part of the service they provide, must transmit orders
promptly. They may charge for this service. If you want a dealer but do not
have one, we can refer you to one.
Investing by Mail
1. Initial Purchases--An Investment Application must be completed, signed and
sent with a check payable to the Fund and Class selected, to Delaware Group at
1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the Fund and Class selected. Your check should be
identified with your name(s) and account number. An investment slip (similar to
a deposit slip) is provided at the bottom of transaction confirmations and
dividend statements that you will receive from Mutual Funds, Inc. Use of this
investment slip can help expedite processing of your check when making
additional purchases. Your investment may be delayed if you send additional
purchases by certified mail.
Investing by Wire
You may purchase shares by requesting your bank to transmit funds by wire
to CoreStates Bank, N.A., ABA #031000011, account number 1412893401 (include
your name(s) and your account number for the Fund and Class in which you are
investing).
<PAGE>
1. Initial Purchases--Before you invest, telephone the Shareholder Service
Center to get an account number. If you do not call first, processing of your
investment may be delayed. In addition, you must promptly send your Investment
Application to the Fund and Class selected, to Delaware Group at 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 should advise the
Shareholder Service Center by telephone of each wire you send.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware Group,
you may write and authorize an exchange of part or all of your investment into
shares of the Fund. If you wish to open an account by exchange, call the
Shareholder Service Center for more information. All exchanges are subject to
the eligibility and minimum purchase requirements set forth in each fund's
prospectus. See Redemption and Exchange for more complete information
concerning your exchange privilege.
Holders of Class A Shares may exchange all or part of their shares for
certain of the shares of other funds in the Delaware Group, including other
Class A Shares, but may not exchange their Class A Shares for Class B Shares or
Class C Shares of the Fund or of any other fund in the Delaware Group. Holders
of Class B Shares of the Fund are permitted to exchange all or part of their
Class B Shares only into Class B Shares of other Delaware Group funds.
Similarly, holders of Class C Shares of the Fund are permitted to exchange all
or part of their Class C Shares only into Class C Shares of other Delaware
Group funds. See Appendix B--Classes Offered for a list of funds that offer
Class A, Class B, Class C and Consultant Class Shares. Class B Shares of the
Fund and Class C Shares of the Fund acquired by exchange will continue to carry
the CDSC and, in the case of Class B Shares, the automatic conversion schedule
of the fund from which the exchange is made. The holding period of Class B
Shares of the Fund acquired by exchange will be added to that of the shares
that were exchanged for purposes of determining the time of the automatic
conversion into Class A Shares of the Fund.
18
<PAGE>
Permissible exchanges into Class A Shares of the Fund will be made without
a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of the Fund will be made without the imposition of a
CDSC by the fund from which the exchange is being made at the time of the
exchange.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information if you wish to
use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize Mutual Funds,
Inc. to transfer a designated amount monthly from your checking account to your
Fund account. Many shareholders use this as an automatic savings plan.
Shareholders should allow a reasonable amount of time for initial purchases and
changes to these plans to become effective.
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your Fund account for you (for example: payroll deduction, pay by phone,
annuity payments). The Fund also accepts preauthorized recurring government and
private payments by Electronic Fund Transfer, which avoids mail time and check
clearing holds on payments such as social security, federal salaries, Railroad
Retirement benefits, etc.
* * *
Should investments through an automatic investing plan or by direct
deposit be reclaimed or returned for some reason, Mutual Funds, Inc. has the
right to liquidate your shares to reimburse the government or transmitting
bank. If there are insufficient funds in your account, you are obligated to
reimburse the Fund.
3. MoneyLine(sm) On Demand
Through the MoneyLine(sm) On Demand service, you or your investment dealer
may call the Fund to request a transfer of funds from your predesignated bank
account to your Fund account. See MoneyLine(sm) Services under The Delaware
Difference for additional information about this service.
4. Wealth Builder Option
You can use our Wealth Builder Option to invest in the Fund through
regular liquidations of shares in your accounts in other funds in the Delaware
Group. You may also elect to invest in other mutual funds in the Delaware Group
through the Wealth Builder Option through regular liquidations of shares in
your Fund account.
<PAGE>
Under this automatic exchange program, you can authorize regular monthly
amounts (minimum of $100 per fund) to be liquidated from your account in one or
more funds in the Delaware Group and invested automatically into any other
Delaware Group account that you may specify. If in connection with the election
of the Wealth Builder Option, you wish to open a new account to receive the
automatic investment, such new account must meet the minimum initial purchase
requirements described in the prospectus of the fund that you select. All
investments under this option are exchanges and are therefore subject to the
same conditions and limitations as other exchanges noted above. You can
terminate your participation at any time by written notice to the fund from
which the exchanges are made. See Redemption and Exchange.
5. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your Fund account. Or, you may
invest your distributions in certain other funds in the Delaware Group, subject
to the exceptions noted below as well as the eligibility and minimum purchase
requirements set forth in each fund's prospectus.
Reinvestments of distributions into Class A Shares of the Fund or of other
Delaware Group funds are made without a front-end sales charge. Reinvestments
of distributions into Class B Shares of the Fund or of other Delaware Group
funds or into Class C Shares of the Fund or of other Delaware Group funds are
also made without any sales charge and will not be subject to a CDSC if later
redeemed. See Automatic Conversion of Class B Shares under Classes of Shares
for information concerning the automatic conversion of Class B Shares acquired
by reinvesting dividends.
Holders of Class A Shares of the Fund may not reinvest their distributions
into Class B Shares or Class C Shares of any fund in the Delaware Group,
including the Fund. Holders of Class B Shares of the Fund may reinvest their
distributions only into Class B Shares of the funds in the Delaware Group which
offer that class of shares. Similarly, holders of Class C Shares of the Fund
may reinvest their distributions only into Class C Shares of the funds in the
Delaware Group which offer that class of shares. See Appendix B--Classes
Offered for a list of the funds offering those classes of shares. For more
information about reinvestments, call the Shareholder Service Center.
19
<PAGE>
Delaware Group Asset Planner
To invest in Delaware Group funds using the Delaware Group Asset Planner
asset allocation service, you should complete a Delaware Group Asset Planner
Account Registration Form, which is available only from a financial adviser or
investment dealer. As previously described, the Delaware Group Asset Planner
service offers a choice of four predesigned asset allocation strategies (each
with a different risk/reward profile) in predetermined percentages in Delaware
Group funds. With the help of a financial adviser, you may also design a
customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Group accounts into the Asset Planner service may be made at net asset value
under the circumstances described under Investing by Exchange, above. 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 Group may be used in the same Strategy
with consultant class shares that are offered by certain other Delaware Group
funds. See Appendix B--Classes Offered for the funds in the Delaware Group that
offer consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is typically due at
the time of initial investment and by September 30th 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 30th. See Part B.
Investors will receive a customized quarterly Strategy Report summarizing
all Delaware Group 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.
<PAGE>
Purchase Price and Effective Date
The offering price and net asset value of the Class A, Class B and Class C
Shares are determined 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 effective date of a purchase made through an investment dealer is the
date the order is received by the Fund in which the shares are being purchased.
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 offering
price or net asset value of shares is determined, as noted above. Purchase
orders 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 order. If a purchase is
canceled 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 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.
The Fund also reserves the right, following shareholder notification, to
charge a service fee on non-retirement accounts that, as a result of a
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 in which the account is held 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.
The 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.
20
<PAGE>
Redemption and
Exchange
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, bond funds, tax-advantaged 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. See Taxes.
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 the Delaware Group will best meet your changing
objectives, and the consequences of any exchange transaction. You may also call
the Delaware Group directly for fund information.
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.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after the 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. See Purchase Price and Effective Date under
How to Buy Shares. 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, the Fund will redeem the number of shares
necessary to deduct the applicable CDSC in the case of Class B 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.
<PAGE>
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. The Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
The Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared, 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. 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.
There is no front-end sales charge or fee for exchanges made between
shares of funds which both carry a front-end sales charge. Any applicable
front-end sales charge will apply to exchanges from shares of funds not subject
to a front-end sales charge, except for exchanges involving assets that were
previously invested in a fund with a front-end sales charge and/or exchanges
involving the reinvestment of dividends.
21
<PAGE>
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of other funds in the Delaware Group (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 Prospectus 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 the 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 the Fund for a longer period of time than if the investment in New
Shares were made directly.
Various redemption and exchange methods are outlined below. Except for the
CDSC applicable to certain redemptions of Class B and Class C Shares and the
Limited CDSC applicable to certain redemptions of Class A Shares purchased at
net asset value, there is no fee charged by the Fund or the Distributor for
redeeming or exchanging your shares, but such fees could be charged in the
future. You may 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, including selection of any of
the features described below, shall continue in effect until such time as a
written revocation or modification has been received by the Fund or its agent.
Written Redemption
You can write to the 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 Fund requires a signature by all owners of the account and a
signature guarantee for each owner. 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.
<PAGE>
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 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 the Fund (at 1818 Market Street, Philadelphia, PA
19103) to request an exchange of any or all of your shares into another mutual
fund in the Delaware Group, subject to the same conditions and limitations as
other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption--Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your
account in writing that you do not wish to have such services available with
respect to your account. 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 its Transfer Agent is responsible for any shareholder
loss incurred in acting upon written or telephone instructions for redemption
or exchange of Fund shares which are reasonably believed to be genuine. With
respect to such telephone transactions, the Fund will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, the Fund or its Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Instructions received by telephone 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.
22
<PAGE>
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.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
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.
MoneyLine(sm) On Demand
Through the MoneyLine(sm) On Demand service, you or your investment dealer
may call the Fund to request a transfer of funds from your Fund account to your
predesignated bank account. See MoneyLine(sm) Services under The Delaware
Difference for additional information about this service.
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 the Delaware Group under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
<PAGE>
Systematic Withdrawal Plans
This plan provides shareholders with a consistent monthly (or quarterly)
payment. This is particularly useful to shareholders living on fixed incomes,
since it can provide them with a stable supplemental amount. With accounts of at
least $5,000, you may elect monthly withdrawals of $25 (quarterly $75) or more.
The Fund does not recommend any particular monthly amount, as each shareholder's
situation and needs vary. 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 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. See MoneyLine(sm) Services under The Delaware Difference for
more information about this service.
* * *
Shareholders should not purchase additional shares while participating in
a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
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 and Class C Shares, below.
For more information on Systematic Withdrawal Plans, call the Shareholder
Service Center.
23
<PAGE>
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
A Limited CDSC will be imposed on certain redemptions of Class A Shares
(or shares into which such Class A Shares are exchanged) made within 12 months
of purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission previously described. See
Classes of Shares.
The Limited CDSC will be paid to the Distributor and will be equal to the
lesser of 1% 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 Group
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 12 months will not
be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Group 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 12-month holding
period. The Limited CDSC is assessed if such 12-month period is not satisfied
irrespective of whether the redemption triggering its payment is of Class A
Shares of the 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.
<PAGE>
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 the Fund's right to liquidate a shareholder's account if the
aggregate net asset value of the shares held in the account is less than the
then-effective minimum account size and (ii) 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 Classes of Shares).
Waiver of Contingent Deferred Sales Charge-- Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares in connection with the following redemptions: (i) redemptions that
result from the Fund's right to liquidate a shareholder's account if the
aggregate net asset value of the shares held in the account is less than the
then-effective minimum account size and (ii) distributions from an account if
the redemption results from the death of 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 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.
24
<PAGE>
Dividends and
Distrbutions
The Fund declares a dividend to all shareholders of record at the time the
offering price of shares is determined. See Purchase Price and Effective Date
under How to Buy Shares. Thus, when redeeming shares, dividends continue to be
credited up to and including the date of redemption.
The Fund's dividends are declared daily and paid monthly. Payment by check
of cash dividends will ordinarily be mailed within three business days after
the payable date. Distributions from net realized securities profits, if any,
will be distributed once a year.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if 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 Fund will share proportionately in the investment income
and expenses of the Fund, except that the per share dividends from net
investment income on the Class A Shares, the Class B Shares and the Class C
Shares will vary due to the expenses under the 12b-1 Plan applicable to each
Class. Generally, the dividends per share on Class B Shares and Class C Shares
can be expected to be lower than the dividends per share on Class A Shares
because the expenses under the 12b-1 Plans relating to Class B and Class C
Shares will be higher than the expenses under the 12b-1 Plan relating to Class
A Shares. See Distribution (12b-1) and Service under Management of the Fund.
<PAGE>
Both dividends and distributions, if any, are automatically reinvested in
your account at net asset value unless you elect otherwise. 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 your account at the then-current net asset value
and the dividend option may be changed from cash to reinvest. If you elect to
take your dividends and distributions in cash and such dividends and
distributions are in an amount of $25 or more, you may choose the MoneyLine
Direct Deposit Service and have such payments transferred from your Fund
account to your predesignated bank account. See MoneyLine(sm) Services under
The Delaware Difference for more information about this service.
25
<PAGE>
Taxes
The tax discussion set forth below is included for general information
only. Investors should consult their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in the Fund.
The Fund 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 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.
The Fund is treated as a separate entity for federal income tax purposes.
The Fund 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 those investors who are subject
to income taxes as ordinary income, whether received in cash or in additional
shares. No portion of the Fund's dividends will be eligible for the
dividends-received deduction for corporations.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or 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 Fund. The Fund does not seek
to realize any particular amount of capital gains during a year; rather,
realized gains are a by-product of Fund 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
Fund 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.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, 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 Fund and received
by the shareholder on December 31 of the calendar year in which they are
declared.
<PAGE>
The sale of shares of the Fund 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 the Fund and any other fund in the Delaware Group. Any loss incurred on
a sale or exchange of Fund shares that 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. All or a portion of the sales
charge incurred in acquiring Fund shares will be excluded from the federal tax
basis of any of such shares sold or exchanged within 90 days of their purchase
(for purposes of determining gain or loss upon the sale of such shares) if the
sale proceeds are reinvested in the Fund or in another fund in the Delaware
Group of funds and a sales charge that would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment.
The automatic conversion of Class B Shares into Class A Shares at the end
of approximately eight years after purchase will be tax-free for federal tax
purposes. See Automatic Conversion of Class B Shares under Classes of 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 Fund are exempt from
Pennsylvania county personal property taxes.
Each year, Mutual Funds, Inc. will mail to you information on the tax
status of the dividends and distributions paid by the Fund in which you hold
shares. 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 Fund.
26
<PAGE>
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 Investment Application your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986 to finance private
activities are treated as an item of tax preference for purposes of computing
the alternative minimum tax for individuals, estates and trusts.
Minnesota State Taxation
Minnesota taxable net income is based generally on federal taxable income.
The portion of exempt-interest dividends that is derived from interest income on
Minnesota Municipal Obligations is excluded from the Minnesota taxable net
income of individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents 95 percent or more of the exempt-interest dividends paid by the
Fund. Exempt-interest dividends are not excluded from the Minnesota taxable
income of corporations and financial institutions. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Minnesota has repealed the favorable
treatment of long-term capital gains, while retaining restrictions on the
deductibility of capital losses. Exempt-interest dividends subject to the
federal alternative minimum tax will also be subject to the Minnesota
alternative minimum tax imposed on individuals, estates and trusts.
The 1995 Minnesota Legislature enacted a statement of intent that interest
on obligations of Minnesota governmental units and Indian tribes be included in
net income of individuals, estates and trusts for Minnesota income tax purposes
if a court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states is so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. The Fund is not aware of any decision in which a court
has held that a state's exemption of interest on its own bonds or those of its
political subdivisions or Indian tribes, but not of interest on the bonds of
other states or their political subdivisions or Indian tribes, unlawfully
discriminates against interstate commerce or otherwise contravenes the United
States Constitution. Nevertheless, the Fund cannot predict the likelihood that
interest on the Minnesota Municipal Obligations held by the Fund would become
taxable under this Minnesota statutory provision.
The foregoing discussion relates to federal and state taxation as of the
date of the Prospectus. See Distributions and Taxes in Part B. This discussion
is not intended as a substitute for careful tax planning. You are urged to
consult your tax adviser with specific reference to your own tax situation.
See Accounting and Tax Issues and Distributions and Taxes in Part B for
additional information on tax matters relating to the Fund and its
shareholders.
27
<PAGE>
Calculation of Offering
Price And Net Asset
Value Per Share
The net asset value ("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. Debt securities are priced on the basis of valuations provided by
an independent pricing service using methods approved by the Fund's Board of
Directors. Short-term investments having a maturity of less than 60 days are
valued at amortized cost, which approximates market value. All other securities
are valued at their fair value as determined in good faith and in a method
approved by Mutual Funds, Inc.'s Board of Directors.
Class A Shares are purchased at the offering price per share, while Class
B Shares and Class C Shares are purchased at the NAV per share. The offering
price per share of Class A Shares consists of the NAV per share next computed
after the order is received, plus any applicable front-end sales charges.
The offering price and NAV 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 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.
28
<PAGE>
Management of
the Fund
Directors
The business and affairs of Mutual Funds, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Mutual Funds, Inc.'s directors and officers.
Investment Manager
The Manager furnishes investment management services to the Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
The Manager is an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc. ("DMH"). On April 3, 1995, a merger between DMH and a wholly
owned subsidiary of Lincoln National Corporation ("Lincoln National") was
completed. DMH and the Manager are now 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.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had been
retained under an investment advisory contract to act as the Fund's investment
adviser, subject to the authority of the Board of Directors. Voyageur was an
indirect, wholly owned subsidiary of Dougherty Financial Group, Inc. ("DFG").
After the close of business on April 30, 1997, Voyageur became an indirect,
wholly owned subsidiary of Lincoln National, as a result of Lincoln National's
acquisition of DFG.
<PAGE>
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, the Fund's previous investment advisory agreement with
Voyageur was "assigned," as that term is defined by the 1940 Act, and the
previous agreement therefore was terminated upon the completion of the
acquisition. The Board of Directors of the Fund unanimously approved a new
investment advisory agreement at the meeting held in person on February 14,
1997, and called for a shareholders meeting to approve the new agreement. At a
meeting held on April 11, 1997, the shareholders of the Fund approved the
investment advisory agreement with Voyageur to become effective after the close
of business on April 30, 1997, the date the acquisition was completed. On May
30, 1997, Voyageur was merged into the Manager and the Manager became the
investment manager for the Fund.
The Manager administers the affairs of and is ultimately responsible for
the investment management of the Fund under an Investment Management Agreement
with Mutual Funds, Inc. on behalf of the Fund dated April 30, 1997. Under the
Investment Management Agreement for the Fund, the Manager is paid an annual fee
equal to 0.65% of the average daily net assets of the Fund.
Elizabeth H. Howell has had primary responsibility for making day-to-day
investment decisions for the Fund since 1991. Ms. Howell is a Vice
President/Senior Portfolio Manager of the Fund and has over ten years
experience as a securities analyst and portfolio manager. Since 1991, Ms.
Howell has also had the day-to-day portfolio management responsibility for the
Delaware-Voyageur Tax-Free Minnesota Fund, Delaware-Voyageur Tax-Free Minnesota
Intermediate Fund and Delaware-Voyageur Minnesota Insured Fund, as well as,
since inception, the Delaware-Voyageur Tax-Free Idaho Fund, Delaware-Voyageur
Tax-Free Kansas Fund, Delaware-Voyageur Tax-Free Missouri Insured Fund,
Delaware-Voyageur Tax-Free Oregon Insured Fund and Delaware-Voyageur Tax-Free
Washington Insured Fund.
29
<PAGE>
Portfolio Trading Practices
The Fund normally will not invest for short-term trading purposes.
However, the Fund may sell securities without regard to the length of time they
have been held. The degree of portfolio activity will affect brokerage costs of
the Fund and may affect taxes payable by the Fund's shareholders. A turnover
rate of 100% would occur if all the investments in the Fund's portfolio at the
beginning of the year were replaced by the end of the year. From the period
June 4, 1996 (date of initial sale) through December 31, 1996, the portfolio
turnover rate of the Fund was 14.97%, annualized.
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 to their advisory clients. These services may be used by the Manager in
servicing any of its accounts. Subject to best price and execution, the Fund
may consider a broker/dealer's sales of shares of funds in the Delaware Group
of funds in placing portfolio orders and may place orders with broker/dealers
that have agreed to defray certain expenses of such funds, such as custodian
fees.
Performance Information
From time to time, the Fund may quote yield or total return performance of
the Classes in advertising and other types of literature.
The current yield for each Class will be calculated by dividing the
annualized net investment income earned by that Class during a recent 30-day
period by the maximum offering price 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 at net asset value and: (i) in the case of
Class A Shares, the impact of the maximum front-end sales charge at the
beginning of each specified period; and (ii) in the case of Class B Shares and
Class C Shares, the deduction of any applicable CDSC at the end of the relevant
period. Each presentation will include the average annual total return for one-,
five- and ten-year periods, as relevant. The Fund may also advertise aggregate
and average total return information concerning a Class over additional periods
of time. In addition, the Fund may present total return information that does
not reflect the deduction of the maximum front-end sales charge or any
applicable CDSC. In this case, such total return information would be more
favorable than total return information that includes the deductions of the
maximum front-end sales charge or any applicable CDSC.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not a guarantee of future results.
<PAGE>
Distribution (12b-1) and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement with Mutual
Funds, Inc. dated as of March 1, 1997.
Mutual Funds, Inc. has adopted a separate distribution plan under Rule
12b-1 for each of the Class A Shares, Class B Shares and Class C Shares of the
Fund (the "Plans"). The Plans permit the Fund to pay the Distributor from the
assets of the respective Classes a monthly fee for the Distributor's services
and expenses in distributing and promoting sales of shares. 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, holding special promotions for specified periods
of time, and paying distribution and maintenance fees to brokers, dealers and
others. In connection with the promotion of shares of the Classes, the
Distributor may, from time to time, pay to participate in dealer-sponsored
seminars and conferences, and reimburse dealers for expenses incurred in
connection with preapproved seminars, conferences, and advertising. The
Distributor may pay or allow additional promotional incentives to dealers as
part of preapproved sales contests and/or to dealers who provide extra training
and information concerning a Class and increase sales of the Class. In
addition, the Fund may make payments from the 12b-1 plan fees of its respective
Class directly to others, such as banks, who aid in the distribution of Class
shares or provide services in respect of a Class, pursuant to service
agreements with Mutual Funds, Inc.
The 12b-1 Plan expenses relating to each of the Class B Shares and Class C
Shares are also used to pay the Distributor for advancing the commission costs
to dealers with respect to the initial sale of such shares.
The aggregate fees paid by the Fund from the assets of its Classes to the
Distributor and others under the Plans may not exceed (i) 0.25% of the Class A
Shares' average daily net assets in any year, and (ii) 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 in any year. The Class
A, Class B and Class C Shares will not incur any distribution expenses beyond
these limits, which may not be increased without shareholder approval.
While payments pursuant to the Plans may not exceed 0.25% annually with
respect to the Class A Shares, and 1% annually with respect to each of the
Class B Shares and the Class C Shares, the Plans do not limit fees to amounts
actually expended by the Distributor. It is therefore possible that the
Distributor may realize a profit in any particular year. However, the
Distributor currently expects that its distribution expenses will likely equal
or exceed payments to it under the Plans. The Distributor may, however incur
such additional expenses and make additional payments to dealers from its own
resources to promote the distribution of shares of the Classes. The monthly
fees paid to the Distributor under the Plans are subject to the review and
approval of Mutual Funds, Inc.'s unaffiliated directors, who may reduce the
fees or terminate the Plans at any time.
30
<PAGE>
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for the Fund
pursuant to an amended and restated agreement dated as of April 30, 1997. The
Transfer Agent also provides accounting services to the Fund pursuant to the
terms of a separate Fund Accounting Agreement. The directors of Mutual Funds,
Inc. annually review service fees paid to the Transfer Agent.
The Distributor and the Transfer Agent are also indirect, wholly owned
subsidiaries of DMH.
Expenses
The Fund is responsible for all of its own expenses other than those borne
by the Manager under the Investment Management Agreement and those borne by the
Distributor under the Distribution Agreement. In connection with the merger
transaction described above, the Manager has agreed for a period of two years
ending on April 30, 1999, to pay the operating expenses (excluding interest
expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of the Fund
which exceed 1% of the
Fund's average daily net assets on an annual basis up to certain limits as set
forth in detail Part B. This agreement replaces a similar provision in the
Fund's investment advisory contracts with the Fund's predecessor investment
adviser.
The Manager and the Distributor reserve the right to voluntarily waive
their fees in whole or part and to voluntarily absorb certain other of the
Fund's expenses. See Summary of Expenses for current fee waivers and
reimbursements. The ratios of expenses to average daily net assets (after
voluntary waivers and payments) for the Class A Shares, Class B Shares and Class
C Shares of the Fund for the last fiscal year was as follows:
Period ended
12/31/96
Class A Shares \1 0.24%*
Class B Shares \2 0.95%*
Class C Shares \3 0.99%*
*Annualized
\1Period from June 4, 1996 (commencement of operations) to December 31, 1996.
\2Period from June 12, 1996 (commencement of operations) to December 31, 1996.
\3Period from June 7, 1996 (commencement of operations) to December 31, 1996.
<PAGE>
Shares
Mutual Funds, Inc. is an open-end management investment company. The Fund's
portfolio of assets is diversified as defined by the 1940 Act. Commonly known as
a mutual fund, Mutual Funds, Inc. was organized as a Minnesota corporation in
April 1993. In addition to the Fund, Mutual Fund, Inc. presently offers eight
other series of shares, the Delaware-Voyageur Tax-Free Iowa Fund,
Delaware-Voyageur Tax-Free Wisconsin Fund, Delaware-Voyageur Tax-Free Idaho
Fund, Delaware-Voyageur Tax-Free Arizona Fund, Delaware-Voyageur Tax-Free
California Fund, Delaware-Voyageur Tax-Free New York Fund and National High
Yield Municipal Bond Fund. Fund shares have a par value of $.01, equal voting
rights, except as noted below, and are equal in all other respects. Each fund
will vote separately on any matter which affects only that fund. Shares of each
fund have a priority over shares of any other Mutual Funds, Inc. in the assets
and income of that fund.
All of the shares have noncumulative voting rights which means that the
holders of more than 50% of Mutual Funds, Inc.'s shares voting for the election
of directors can elect 100% of the directors if they choose to do so. Under
Minnesota law, Mutual Funds, Inc. 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.
Shares of each Class represent proportionate interests in the assets of
the Fund and have the same voting and other rights and preferences as the other
classes of the Fund. The shareholders of Class A Shares, Class B Shares and
Class C Shares may vote only on matters affecting the 12b-1 Plan that relates
to the class of shares that they hold. However, Class B Shares of a Fund may
vote on any proposal to increase materially the fees to be paid by the Fund
under the 12b-1 Plan relating to Class A Shares.
Beginning June 9, 1997, the name of Voyageur Minnesota High Yield
Municipal Bond Fund changed to Delaware-Voyageur Minnesota High Yield Municipal
Bond Fund.
31
<PAGE>
Other Investment Policies
and Risk Considerations
Municipal Obligations
As used in this Prospectus, the term "Municipal Obligations" refers to
debt obligations issued by or on behalf of a state or territory or its
agencies, instrumentalities, municipalities and political subdivisions. The
term "Municipal Obligations" also includes Derivative Municipal Obligations as
defined below.
Municipal Obligations are primarily debt obligations issued to obtain funds
for various public purposes such as constructing public facilities and making
loans to public institutions. The two principal classifications of Municipal
Obligations are general obligation bonds and revenue bonds. General obligation
bonds are generally secured by the full faith and credit of an issuer possessing
general taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or revenue source. Revenue bonds are
payable only from the revenues derived from a particular source or facility,
such as a tax on particular property or revenues derived from, for example, a
municipal water or sewer utility or an airport. Municipal Obligations that
benefit private parties in a manner different than members of the public
generally (so-called private activity bonds or industrial development bonds) are
in most cases revenue bonds, payable solely from specific revenues of the
project to be financed. The credit quality of private activity bonds is usually
directly related to the creditworthiness of the user of the facilities (or the
creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Municipal Obligations, there is
a variety of types of municipal securities. Certain Municipal Obligations may
carry variable or floating rates of interest whereby the rate of interest is
not fixed but varies with changes in specified market rates or indexes, such as
a bank prime rate or a tax-exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Municipal Obligations are zero-coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero-coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
<PAGE>
Municipal Obligations also include state or municipal leases and
participation interests therein. The Fund may invest in these types of
obligations without limitation. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities such as fire, sanitation or police vehicles or
telecommunications equipment, buildings or other capital assets. Municipal
lease obligations, except in certain circumstances, are considered illiquid by
the staff of the Securities and Exchange Commission. Municipal lease
obligations held by the Fund will be treated as illiquid unless they are
determined to be liquid pursuant to guidelines established by Mutual Funds,
Inc.'s Board of Directors. Under these guidelines, the Fund's investment
adviser will consider factors including, but not limited to (1) whether the
lease can be canceled, (2) what assurance there is that the assets represented
by the lease can be sold, (3) the municipality's general credit strength (e.g.,
its debt, administrative, economic and financial characteristics), (4) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
non-appropriation"), and (5) the legal recourse in the event of failure to
appropriate. Additionally, the lack of an established trading market for
municipal lease obligations may make the determination of fair market value
more difficult. See Investment Policies and Restrictions--
Municipal Obligations in Part B.
The Fund may also acquire Derivative Municipal Obligations, which are
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain Municipal Obligations. The underwriter of these certificates or
receipts typically purchases and deposits the securities in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt, the Fund typically would be authorized to assert its
rights directly against the issuer of the underlying obligation, the Fund could
be required to assert through the custodian bank those rights as may exist
against the underlying issuer. Thus, in the event the underlying issuer fails
to pay principal and/or interest when due, the Fund may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Fund had purchased a direct obligation of the issuer.
32
<PAGE>
In addition, in the event that the trust or custodial account in which the
underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to the Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to the Fund would lose their tax-exempt
character and become taxable, for federal and state purposes, in the hands of
the Fund and its shareholders. However, the Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable on
the receipts is tax-exempt. If the Fund invests in custodial receipts, it is
possible that a portion of the discount at which the Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts.
The principal and interest payments on the Derivative Municipal Obligations
underlying custodial receipts may be allocated in a number of ways. For example,
payments may be allocated such that certain custodial receipts may have variable
or floating interest rates and others may be stripped securities which pay only
the principal or interest due on the underlying Municipal Obligations. The Fund
may also invest in custodial receipts which are "inverse floating obligations"
(also sometimes referred to as "residual interest bonds"). These securities pay
interest rates that vary inversely to changes in the interest rates of specified
short term Municipal Obligations or an index of short-term Municipal
Obligations. Thus, as market interest rates increase, the interest rates on
inverse floating obligations decrease. Conversely, as market rates decline, the
interest rates on inverse floating obligations increase. Such securities have
the effect of providing a degree of investment leverage, since the interest
rates on such securities will generally change at a rate which is a multiple of
the change in the interest rates of the specified Municipal Obligations or
index. As a result, the market values of inverse floating obligations will
generally be more volatile than the market values of other Municipal Obligations
and investments in these types of obligations will increase the volatility of
the net asset value of shares of the Fund.
<PAGE>
Forward Commitments
New issues of Municipal Obligations and other securities are often
purchased on a "when issued" or delayed delivery basis, with delivery and
payment for the securities normally taking place 15 to 45 days after the date
of the transaction. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the buyer enters into the
commitment. The Fund may enter into such "forward commitments" if it holds, and
maintains until the settlement date in a segregated account, cash or liquid
securities in an amount sufficient to meet the purchase price. There is no
percentage limitation on the Fund's total assets which may be invested in
forward commitments. Municipal Obligations purchased on a when-issued basis and
the securities held in the Fund's portfolio are subject to changes in value
(both generally changing in the same way, i.e., appreciating when interest
rates decline and depreciating when interest rates rise) based upon the
public's perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Municipal Obligations purchased on
a when-issued basis may expose the Fund to risk because they may experience
such fluctuations prior to their actual delivery. Purchasing Municipal
Obligations on a when-issued basis can involve the additional risk that the
yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. Any significant commitment
by the Fund to the purchase of securities on a when-issued basis may increase
the volatility of the Fund's net asset value. Although the Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, it may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. The Fund may realize
short-term profits or losses upon the sale of forward commitments.
33
<PAGE>
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. A
security is considered illiquid if it cannot be sold in the ordinary course of
business within seven days at approximately the price at which it is valued.
Illiquid securities may offer a higher yield than securities which are more
readily marketable, but they may not always be marketable on advantageous
terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the
over-the-counter markets. The Fund may be restricted in its ability to sell
such securities at a time when the Fund's investment adviser deems it advisable
to do so. In addition, in order to meet redemption requests, the Fund may have
to sell other assets, rather than such illiquid securities, at a time which is
not advantageous.
Certain securities in which the Fund may invest, including municipal lease
obligations, certain restricted securities and commercial paper issued pursuant
to the private placement exemption of Section 4(2) of the Securities Act of
1933, historically have been considered illiquid by the staff of the Securities
and Exchange Commission. In accordance with more recent staff positions,
however, the Fund will treat such securities as liquid and not subject to the
above 15% limitation when they have been determined to be liquid by the Fund's
investment adviser subject to the oversight of and pursuant to procedures
adopted by the Fund's Board of Directors. See Investment Policies and
Restrictions--Illiquid Investments in Part B.
Repurchase Agreements
The Fund may enter into repurchase agreements with respect to not more
than 10% of its total assets (taken at current value), except when investing
for defensive purposes during times of adverse market conditions. The Fund may
enter into repurchase agreements with respect to any securities which it may
acquire consistent with its investment policies and restrictions.
In order to invest its short-term cash reserves or when in a temporary
defensive posture, the Fund 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 Fund) 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. Should an issuer of a repurchase
agreement fail to repurchase the underlying security, the loss to the Fund, if
any, would be the difference between the repurchase price and the market value
of the security. The Fund will limit its investments in repurchase agreements
to those which the Manager under guidelines of the Board of Directors
determines to present minimal credit risks and which are of high quality. In
addition, the Fund must have collateral of at least 100% of the repurchase
price, including the portion representing the Fund's yield under such
agreements, which is monitored on a daily basis.
34
<PAGE>
Reverse Repurchase Agreements
The Fund may engage in "reverse repurchase agreements" with banks and
securities dealers with respect to not more than 10% of its total assets.
Reverse repurchase agreements are ordinary repurchase agreements in which the
Fund is the seller of, rather than the investor in, securities and agrees to
repurchase them at an agreed upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transaction costs. Because
certain of the incidents of ownership of the security are retained by the Fund,
reverse repurchase agreements are considered a form of borrowing by the Fund
from the buyer, collateralized by the security. At the time the Fund enters into
a reverse repurchase agreement, cash, or liquid securities having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be marked to market daily and maintained throughout the
period of the obligation. Reverse repurchase agreements may be used as a means
of borrowing for investment purposes subject to the 10% limitation set forth
above. This speculative technique is referred to as leveraging. Leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by income from or
appreciation of the securities purchased. Because the Fund does not currently
intend to utilize reverse repurchase agreements in excess of 10% of total
assets, the Fund believes the risks of leveraging due to use of reverse
repurchase agreements to principal are reduced. The Fund's investment adviser
believes that the limited use of leverage may facilitate the Fund's ability to
provide high current income.
<PAGE>
Options and Futures
The Fund may utilize put and call transactions and may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See Investment Restrictions and Policies--Options and Futures in Part B. Options
and futures may be used to attempt to protect against possible declines in the
market value of the Fund's portfolio resulting from downward trends in the debt
securities markets (generally due to a rise in interest rates), to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio or to establish a position in the
securities markets as a temporary substitute for purchasing particular
securities. The use of options and futures is a function of market conditions.
Other transactions may be used by the Fund in the future for hedging purposes as
they are developed to the extent deemed appropriate by the Board.
Options on Securities
The Fund may write (i.e., sell) covered put and call options and purchase
put and call options on the securities in which it may invest and on indices of
securities in which it may invest, to the extent such put and call options are
available.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, the Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the
period by more than the amount of the premium. In purchasing a put option, the
Fund would be in a position to realize a gain if, during the option period, the
price of the security declined by an amount in excess of the premium paid. It
would realize a loss if the price of the security increased or remained the
same or did not decrease during that period by more than the amount of the
premium. If a put or call option purchased by the Fund were permitted to expire
without being sold or exercised, its premium would be lost by the Fund.
35
<PAGE>
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction as described in Appendix B to Part B. The Fund retains the premium
received from writing a put or call option whether or not the option is
exercised.
Over-the-counter options are purchased or written by the Fund in privately
negotiated transactions. Such options are illiquid, and it may not be possible
for the Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when the Manager believes
it would be advantageous to do so. Over-the-counter options are subject to the
Fund's 15% illiquid investment limitation. See Appendix B to Part B for a
further discussion of the general characteristics and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Fund would not be subject absent the use of this
strategy. If the Manager's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (a)dependence on the
Manager's ability to predict correctly movements in the direction of interest
rates and security prices; (b) imperfect correlation between the price of
options and movements in the prices of the securities being hedged; (c) the fact
that the skills needed to use these strategies are different from those needed
to select portfolio securities; (d) the possible absence of a liquid secondary
market for any particular instrument at any time; and (e) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences.
See Investment Restrictions and Policies --Risks of Transactions in Futures
Contracts and Options and Appendix B in Part B for further discussion and
for a discussion of closing transactions and other risks.
<PAGE>
Futures Contracts and Options on Futures Contracts
The Fund may enter into contracts for the purchase or sale for future
delivery of fixed income securities or contracts based on financial indices
including any index of securities in which the Fund may invest ("futures
contracts") and may purchase and write put and call options to buy or sell
futures contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
The purchaser of a futures contract on an index agrees to take or make delivery
of an amount of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the contract
("current contract value") and the price at which the contract was originally
struck. Options on futures contracts to be written or purchased by the Fund
will be traded on exchanges or over-the-counter. The successful use of such
instruments draws upon the Manager's experience with respect to such
instruments and usually depends upon the Manager's ability to forecast interest
rate movements correctly. Should interest rates move in an unexpected manner,
the Fund may not achieve the anticipated benefits of futures contracts or
options on futures contracts or may realize losses and would thus be in a worse
position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the prices of the securities hedged or used
for cover will not be perfect.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements. To the extent required
to comply with applicable Securities and Exchange Commission releases and staff
positions, when purchasing a futures contract or writing a put option, the Fund
will maintain in a segregated account cash or liquid securities equal to the
value of such contracts, less any margin on deposit. In addition, the rules and
regulations of the Commodity Futures Trading Commission currently require that,
in order to avoid "commodity pool operator" status, the Fund must 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. There are no other numerical
limits on the Fund's use of futures contracts and options on futures contracts.
For a discussion of the tax treatment of futures contracts and options on
futures contracts, see Taxes in Part B. For a further discussion of the general
characteristics and risks of futures, see Appendix B to Part B.
36
<PAGE>
Concentration Policy
As a fundamental policy, the Fund may not invest 25% or more of its total
assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting
one bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk. For a discussion of these
segments of the municipal bond market, see Investment Policies and
Restrictions--Concentration Policy in Part B.
Mutual Funds, Inc.'s Board may change any of the foregoing policies that
are not specifically designated fundamental.
Investment Restrictions
The Fund has adopted certain investment restrictions in addition to those
set forth above, which are set forth in their entirety in Part B. Certain of
these restrictions are fundamental and cannot be changed without shareholder
approval, including the restriction providing that the Fund may not borrow
money, except from banks for temporary or emergency purposes in an amount not
exceeding 20% of the value of its total assets (the Fund may also borrow money
in the form of reverse repurchase agreements up to 10% of total assets). See
Investment Policies and Restrictions--Investment Restrictions in Part B.
The Fund also has a number of non-fundamental investment restrictions
which may be changed by Mutual Funds, Inc.'s Board without shareholder
approval. These include restrictions providing that the Fund may not (i) invest
more than 5% of its total assets in securities of any single investment
company, (ii) invest more than 10% of its total assets in securities of two or
more investment companies, (iii) invest more than 15% of its net assets in
illiquid securities or (iv) pledge, hypothecate, mortgage or otherwise encumber
its assets in excess of 10% of net assets. If the Fund invests in securities of
other investment companies, the return on any such investments will be reduced
by the operating expenses, including investment advisory and administrative
fees, of such investment companies.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
37
<PAGE>
Appendix A--
Investment Illustrations
Illustrations of the Potential Impact on Investment Based on Purchase Option
$10,000 Purchase
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
----------------------------------- --------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ ---------- ------------ --------- --------- --------- ----------
0 9,625 10,000 10,000 9,625 10,000 10,000
1 10,192 10,625 10,625 10,192 10,225 10,525+
2 10,905 11,289 11,289
3 11,669 11,995 11,995
4 12,485 12,744 12,744
5 13,359 13,541 13,541
6 14,294 14,387 14,387
7 15,295+ 15,286 15,286
8 16,366 16,242 16,242
9 17,511 17,379* 17,257
10 18,737 18,595* 18,335
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
-------------------------------- -------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ --------- --------- ---------- --------- --------- ---------
0 9,625 10,000 10,000 9,625 10,000 10,00
1 10,192 10,625 10,625 10,192 10,625 10,62
2 10,905 11,289 11,289 10,905 11,289 11,28
3 11,669 11,695 11,995+ 11,669 11,995 11,99
4 12,485 12,744 12,74
5 13,359 13,341 13,541+
6
7
8
9
10
*This assumes that Class B Shares were converted to Class A Shares at the end
of the eighth year.
<PAGE>
$250,000 Purchase
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
---------------------------------- ---------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ ----------- ---------- --------- --------- --------- -----------
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,625 265,625 260,813 255,625 263,125+
2 279,069 282,227 282,227
3 298,604 299,866 299,866
4 319,507+ 318,607 318,607
5 341,872 338,520 338,520
6 365,803 359,678 359,678
7 391,409 382,158 382,158
8 418,808 406,043 406,043
9 448,124 434,466* 431,420
10 479,493 464,878* 458,384
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
--------------------------------- ---------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ --------- --------- ----------- ----------- --------- ---------
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,625 265,625 260,813 265,625 265,625
2 279,069 282,227 282,227 279,069 282,227 282,227
3 298,604 292,366 300,866+ 298,604 299,866 299,866
4 319,507+ 318,607 318,607
5 341,872 333,520 338,520
6
7
8
9
10
*This assumes that Class B Shares were converted to Class A Shares at the end
of the eighth year.
Assumes a hypothetical return for Class A of 7% per year, a hypothetical return
for Class B of 6.25% for years 1-8 and 7% for years 9-10, and a hypothetical
return for Class C of 6.25% per year. Hypothetical returns vary due to the
different expense structure for each Class and do not represent actual
performance.
Class A purchase subject to appropriate sales charge breakpoint (3.75% @
$10,000; 3.00% @ $100,000; 2.50% @ $250,000; 2.00% @ $500,000).
Class B purchase assessed appropriate CDSC upon redemption (4%-4%-3%-3%-2%-1%
in years 1-2-3-4-5-6).
Class C purchase assessed 1% CDSC upon redemption in year 1.
Figures marked "+" identify which Class offers the greater return potential
based on investment amount, the holding period and the expense structure of
each Class.
38
<PAGE>
Appendix B--
Classes Offered
Consultant
A Class B Class C Class Class
Growth of Capital
Aggressive Growth Fund x x x --
Trend Fund x x x --
Enterprise Fund x x x --
DelCap Fund x x x --
Small Cap Value Fund x x x --
U.S. Growth Fund x x x --
Growth Stock Fund x x x --
Tax-Efficient Equity Fund x x x --
- -------------------------------------------------------------------------------
Total Return x x x --
Blue Chip Fund x x x --
Quantum Fund x x x --
Devon Fund x x x --
Decatur Total Return Fund x x x --
Decatur Income Fund x x x --
Delaware Fund x x x --
- -------------------------------------------------------------------------------
International Diversification x x x --
Emerging Markets Fund x x x --
New Pacific Fund x x x --
World Growth Fund x x x --
International Equity Fund x x x --
Global Assets Fund x x x --
Global Bond Fund x x x --
- -------------------------------------------------------------------------------
Current Income
Delchester Fund x x x --
Strategic Income Fund x x x --
Corporate Income Fund x x x --
Federal Bond Fund x x x --
U.S. Government Fund x x x --
Delaware-Voyageur US Government
Securities Fund x x x --
Limited-Term Government Fund x x x --
(Not Part of Prospectus)
39
<PAGE>
APPENDIX B--CLASSES OFFERED -- (Continued)
<TABLE>
<CAPTION>
Consultant
A Class B Class C Class Class
<S> <C> <C> <C> <C>
Tax-Free Income
National High Yield Municipal Bond Fund x x x --
Tax-Free USA Fund x x x --
Tax-Free Insured Fund x x x --
Tax-Free USA Intermediate Fund x x x --
Delaware-Voyageur Tax-Free Arizona Insured
Fund x x x --
Delaware-Voyageur Tax-Free Arizona Fund x x x --
Delaware-Voyageur Tax-Free California Insured
Fund x x x --
Delaware-Voyageur Tax-Free California Fund x x x --
Delaware-Voyageur Tax-Free Colorado Fund x x x --
Delaware-Voyageur Tax-Free Florida Insured
Fund x x x --
Delaware-Voyageur Tax-Free Florida Intermediate
Fund x x x --
Delaware-Voyageur Tax-Free Florida Fund x x x --
Delaware-Voyageur Tax-Free Idaho Fund x x x --
Delaware-Voyageur Tax-Free Iowa Fund x x x --
Delaware-Voyageur Tax-Free Kansas Fund x x x --
Delaware-Voyageur Minnesota High Yield
Municipal Bond Fund x x x --
Delaware-Voyageur Minnesota Insured Fund x x x --
Delaware-Voyageur Tax-Free Minnesota
Intermediate Fund x x x --
Delaware-Voyageur Tax-Free Minnesota Fund x x x --
Delaware-Voyageur Tax-Free Missouri Insured
Fund x x x --
Delaware-Voyageur Tax-Free New Mexico Fund x x x --
Delaware-Voyageur Tax-Free New York Fund x x x --
Delaware-Voyageur Tax-Free North Dakota
Fund x x x --
Delaware-Voyageur Tax-Free Oregon Insured
Fund x x x --
Tax-Free Pennsylvania Fund x x x --
Delaware-Voyageur Tax-Free Utah Fund x x x --
Delaware-Voyageur Tax-Free Washington
Insured Fund x x x --
Delaware-Voyageur Tax-Free Wisconsin Fund x x x --
- --------------------------------------------------------------------------------------------
Money Market Funds
Delaware Cash Reserve x x x x
U.S. Government Money Fund x -- -- x
Tax-Free Money Fund x -- -- x
</TABLE>
(Not Part of Prospectus)
40
<PAGE>
The Delaware Group includes funds
with a wide range of investment objectives.
Stock funds, income funds, national and
state-specific funds, tax-free funds, money market funds,
global and international funds and
closed-end equity funds give investors
the ability to create a portfolio that fits their
personal financial goals. For more information,
contact your financial adviser or call
Delaware Group at 800-523-4640.
Investment Manager
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
National Distributor
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
Shareholder Servicing
Dividend Disbursing,
Accounting Services
and Transfer Agent
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
Independent Auditors
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
Custodian
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55479
DELAWARE
GROUP
========
Philadelphia o London
LOGO Printed in the U.S.A. on recycled paper.
P-313[--]PP8/97
<PAGE>
Table of
Contents
COVER PAGE.....................................................1
SYNOPSIS ......................................................2
SUMMARY OF EXPENSES............................................4
FINANCIAL HIGHLIGHTS ..........................................6
INVESTMENT OBJECTIVE AND POLICIES
Suitability..................................................7
Investment Strategy ........................................7
THE DELAWARE DIFFERENCE ......................................11
Plans and Services .........................................11
CLASSES OF SHARES ............................................13
HOW TO BUY SHARES ............................................18
REDEMPTION AND EXCHANGE ......................................21
DIVIDENDS AND DISTRIBUTIONS .................................25
TAXES ........................................................26
CALCULATION OF OFFERING PRICE AND
NET ASSET VALUE PER SHARE ...................................27
MANAGEMENT OF THE FUND........................................28
OTHER INVESTMENT POLICIES AND
RISK CONSIDERATIONS..........................................32
APPENDIX A--INVESTMENT
ILLUSTRATIONS ...............................................37
APPENDIX B--CLASSES OFFERED .................................38
<PAGE>
National High Yield
Municipal Bond Fund
1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance:
Nationwide 800-523-4640
Information on Existing Accounts:
(SHAREHOLDERS ONLY)
Nationwide 800-523-1918
Dealer Services:
(BROKER/DEALERS ONLY)
Nationwide 800-362-7500
Representatives of Financial Institutions:
Nationwide 800-659-2265
This Prospectus describes the shares of National High Yield Municipal Bond
Fund (the "Fund") (formerly known as Voyageur National High Yield Municipal
Bond Fund) of Voyageur Mutual Funds, Inc. ("Mutual Funds, Inc.") a
professionally-managed mutual fund of the series type.
The Fund offers Class A Shares, Class B Shares and Class C Shares. Each
class is referred to individually as a "Class" and collectively as the
"Classes."
The investment objective of the Fund is to seek a high level of current
income exempt from federal income tax primarily through investment in a
portfolio of medium- and lower-grade Municipal Obligations. The weighted
average maturity of the investment portfolio of the Fund is expected to be
approximately 15 to 25 years. There is no assurance that the Fund will achieve
its investment objective.
The Fund may invest in medium- and lower-grade Municipal Obligations rated
between BBB and B- (inclusive) by Standard & Poor's Ratings Services or Fitch
Investors Service LP, Baa and B3 (inclusive) by Moody's Investors Service,
Inc., comparably rated short-term Municipal Obligations and non-rated Municipal
Obligations determined by the Fund's investment adviser to be of comparable
quality. The Fund may also invest in higher rated securities. Investment in
medium- and lower-grade Municipal Obligations involves special risks as
compared with investment in higher-grade municipal securities, including
<PAGE>
potentially greater sensitivity to a general economic downturn or to a
significant increase in interest rates, greater market price volatility and less
liquid secondary market trading. See Risk Considerations under Investment
Objective and Policies. Investment in the Fund may not be appropriate for all
investors.
This Prospectus sets forth certain information that you should read and
consider. The Statement of Additional Information ("Part B") of Mutual Funds,
Inc.'s registration statement dated August 28, 1997, as it may be amended from
time to time, contains additional information about the Fund 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, L.P. at the above address or by calling the above
telephone numbers.
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.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL FUNDS
CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE FUND ARE
NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY CREDIT UNION,
ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. SHARES OF
THE FUND ARE NOT BANK OR CREDIT UNION DEPOSITS.
1
<PAGE>
Synopsis
Investment Objective
The investment objective of the Fund is to seek a high level of current
income exempt from federal income tax primarily through investment in a
portfolio of medium- and lower-grade Municipal Obligations. The weighted
average maturity of the investment portfolio of the Fund is expected to be
approximately 15 to 25 years.
Risk Factors and Special Considerations
The Fund is a nondiversified investment company under the Investment
Company Act of 1940 Act (the "1940 Act") and may be subject to greater risks
than if the Fund were diversified. See Diversification under Investment
Objective and Policies. The Fund invests primarily in high yield securities,
commonly known as "junk bonds," and greater risks may be involved with an
investment in the Fund than an investment in a mutual fund comprised primarily
of investment grade bonds. See Risk Considerations under Investment Objective
and Policies.
Investment Manager, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") furnishes investment
management services to the Fund, subject to the supervision and direction of
Mutual Funds, Inc.'s Board of Directors. The Manager also provides investment
management services to certain of the other funds in the Delaware Group.
Delaware Distributors, L.P. (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, accounting services and transfer agent for the Fund and for
all of the other mutual funds in the Delaware Group. See Summary of Expenses and
Management of the Fund for further information regarding the Manager and the
fees payable under the Fund's Investment Management Agreement.
Sales Charges
The price of Class A Shares of the Fund includes a maximum front-end sales
charge of 3.75% of the offering price, which is equivalent to 3.94%, based upon
the net asset value of Class A Shares as of the Fund's most recent fiscal year.
The front-end sales charge is reduced on certain transactions of at least
$100,000 but under $1,000,000. There is no front-end sales charge on purchases
of $1,000,000 or more. Class A Shares are subject to annual 12b-1 Plan expenses
for the life of the investment.
<PAGE>
The price of Class B Shares is equal to the net asset value per share.
Class B Shares are subject to a contingent deferred sales charge ("CDSC") of:
(i) 4% if shares are redeemed within two years of purchase; (ii) 3% if shares
are redeemed during the third or fourth year following purchase; (iii) 2% if
shares are redeemed during the fifth year following purchase; (iv) 1% if shares
are redeemed during the sixth year following purchase; and (v) 0% thereafter.
Class B Shares are subject to annual 12b-1 Plan expenses for approximately
eight years after purchase. See Deferred Sales Charge Alternative - Class B
Shares and Automatic Conversion of Class B Shares under Classes of Shares.
The price of Class C Shares is equal to the net asset value per share.
Class C Shares are subject to a CDSC of 1% if shares are redeemed within 12
months of purchase. Class C Shares are subject to annual 12b-1 Plan expenses
for the life of the investment.
See Classes of Shares and Distribution (12b-1) and Service under
Management of the Fund.
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments must generally be at least $100.
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. An investor may exceed these maximum purchase
limitations for Class B Shares and Class C Shares 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 and Class C Shares and generally are not subject to a
CDSC. See How to Buy Shares.
2
<PAGE>
Redemption and Exchange
Class A Shares of the Fund may be redeemed or exchanged at the net asset
value calculated after receipt of the redemption or exchange request. Neither
the Fund nor the Distributor assesses a charge for redemptions or exchanges of
Class A Shares, except for certain redemptions of shares purchased at net asset
value, which may be subject to a CDSC if a dealer's commission was paid in
connection with such purchases. See Front-End Sales Charge Alternative - Class
A Shares under Classes of Shares.
Class B Shares and Class C Shares may be redeemed or exchanged at the net
asset value calculated after receipt of the redemption or exchange request
subject, in the case of redemptions, to any applicable CDSC. Neither the Fund
nor the Distributor assesses any charges other than the CDSC for redemptions or
exchanges of Class B or Class C Shares. There are certain limitations on an
investor's ability to exchange shares between the various classes of shares
that are offered. See Redemption and Exchange.
Open-End Investment Company
Mutual Funds, Inc., which was organized as a Minnesota corporation in
April 1993, is an open-end management investment company. The Fund's portfolio
of assets is non-diversified as defined by the 1940 Act. The Fund is one of
several series of Mutual Funds, Inc. See Shares under Management of the Fund.
3
<PAGE>
Summary of
Expenses
Shareholder Transaction Expenses Class A Class B Class C
- ----------------------------------- ---------- ---------- ---------
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) ............... 3.75% None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percent-
age of offering price) None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original
purchase price or redemption
proceeds, whichever is lower) ... None* 4.00%** 1.00%***
Redemption Fees .................. None**** None**** None****
Annual Operating Expenses
(as a percentage of average daily net assets) Class A Class B Class C
- ----------------------------------------------- --------- --------- --------
Management Fees (after voluntary fee waivers) 0.58% 0.58% 0.58%
12b-1 Plan Expenses (including service fees) 0.25%+ 1.00%+ 1.00%+
Other Operating Expenses (after voluntary
payments) ................................. 0.01% 0.01% 0.01%
------ ------ -------
Total Operating Expenses (after voluntary
waivers and payments) .................. 0.84%++ 1.59%++ 1.59%++
======= ======= =======
*Class A purchases of $1 million or more may be made at net asset value.
However, if in connection with any such purchase a dealer commission is paid
to the financial adviser through whom such purchase is effected, a CDSC of
1% will be imposed on certain redemptions within 12 months of purchase
("Limited CDSC"). See Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption
and Exchange.
**Class B Shares of the Fund are subject to a CDSC of: (i) 4% if shares are
redeemed within two years of purchase; (ii) 3% if shares are redeemed during
the third or fourth year following purchase; (iii) 2% if shares are redeemed
during the fifth year following purchase; (iv) 1% if shares are redeemed
during the sixth year following purchase; and (v) 0% thereafter. See
Deferred Sales Charge Alternative - Class B Shares under Classes of Shares.
***Class C Shares of the Fund are subject to a CDSC of 1% if shares are
redeemed within 12 months of purchase. See Level Sales Charge
Alternative--Class C Shares under Classes of Shares.
****CoreStates Bank, N.A. currently charges $7.50 per redemption for
redemptions payable by wire.
+Class A Shares, Class B Shares and Class C Shares are subject to separate
12b-1 Plans. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by rules of the
National Association of Securities Dealers, Inc. (the "NASD"). See
Distribution (12b-1) and Service under Management of the Fund.
++The Manager has elected voluntarily to waive that portion, if any, of the
annual management fees payable by the new Fund and to pay certain expenses
of that Fund to the extent necessary to ensure that the Total Operating
Expenses of the Class A Shares, the Class B Shares and the Class C Shares of
the Fund, including each such Class' 12b-1 fees, do not exceed 0.84%, 1.59%
and 1.59%, respectively, through December 31, 1997. If the voluntary expense
waivers were not in effect, the Total Operating Expenses, as a percentage of
average daily net assets, would be 0.91%, 1.66% and 1.66%, respectively, for
the Class A Shares, the Class B Shares and the Class C Shares of the Fund,
reflecting management fees of 0.65%. See Expenses under Management of the
Fund for a discussion of the waivers that will remain in place through April
30, 1999. "Other Operating Expenses" are based on estimated amounts for the
current fiscal year.
Investors utilizing the Delaware Group Asset Planner asset allocation
service also typically incur an annual maintenance fee of $35 per strategy.
However, effective November 1, 1996, the annual maintenance fee is waived until
further notice. See Delaware Group Asset Planner under How to Buy Shares.
4
<PAGE>
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, (2) redemption and no redemption at the end of each time period and
(3) for Class B Shares and Class C Shares, payment of a CDSC at the time of
redemption, if applicable. The following example assumes the voluntary waiver
of the management fee by the Manager as discussed in this Prospectus.
<TABLE>
<CAPTION>
Assuming Redemption Assuming No Redemption
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares $46\1 $63 $ 82 $ 137 $46 $63 $82 $ 137
Class B Shares 56 80 107 169\2 16 50 87 169\2
Class C Shares 26 50 87 189 16 50 87 189
</TABLE>
\1Generally, no redemption charge is assessed upon redemption of Class A Shares.
Under certain circumstances, however, a Limited CDSC, which has not been
reflected in this calculation, may be imposed on certain redemptions within 12
months of purchase. See Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption
and Exchange.
\2At the end of approximately eight years after purchase, Class B Shares will be
automatically converted into Class A Shares. The example above assumes
conversion of Class B Shares at the end of the eighth year. However, the
conversion may occur as late as three months after the eighth anniversary of
purchase, during which time the higher 12b-1 Plan fees payable by Class B
Shares will continue to be assessed. Information for the ninth and tenth years
reflects expenses of the Class A Shares. See Automatic Conversion of Class B
Shares under Class of Shares for a description of the automatic conversion
feature.
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of the above tables is to assist the investor in understanding
the various costs and expenses that investors in any of the Classes will bear
directly or indirectly.
5
<PAGE>
Financial
Highlights
The following financial highlights are derived from the financial statements of
Voyageur Mutual Funds, Inc. - National High Yield Municipal Bond Fund and have
been audited by KPMG Peat Marwick LLP, independent auditors. The data should be
read in conjunction with the financial statements, related notes, and the
report of KPMG Peat Marwick LLP, all of which are incorporated by reference
into Part B. Further information about the Fund's performance is contained in
its Annual Report to shareholders. A copy of the Fund's Annual Report
(including the report of KPMG Peat Marwick LLP) may be obtained from Mutual
Funds, Inc. upon request at no charge.
Effective with the close of business on November 8, 1996, the Fund
acquired the assets and assumed all identified liabilities of Great Hall
National Tax-Exempt Fund, in a tax-free exchange by issuing new shares. The
Fund had no assets or liabilities prior to the acquisition. Consequently, the
information presented for the Fund represents the financial history of Great
Hall National Tax-Exempt Fund.
<TABLE>
<CAPTION>
Class A
Year Ended July 31,
--------------------------------------------------
Period
from
Aug 1,
to
Dec 31,
1996\7 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.19 $ 10.17 $ 10.17 $ 10.50 $ 10.22
---------- --------- --------- --------- ---------
Operations
Net investment income 0.260 0.625 0.648 0.624 0.652
Realized and unrealized gains
(losses) on investments, net 0.210 0.148 0.045 (0.313) 0.280
---------- --------- --------- --------- ---------
Total from operations 0.470 0.773 0.693 0.311 0.932
---------- --------- --------- --------- ---------
Distributions to shareholders
From investment income (0.260) (0.625) (0.648) (0.624) (0.652)
From net realized gains -- (0.128) (0.045) (0.017) --
---------- --------- --------- --------- ---------
Net asset value, end of year $ 10.40 $ 10.19 $ 10.17 $ 10.17 $ 10.50
========== ========= ========= ========= =========
Total return\3 4.52% 7.78% 7.16% 2.99% 9.45%
Net assets at end of year (000s
omitted) $ 59,105 $ 63,460 $ 66,357 $ 72,172 $ 58,048
Ratio of expenses to average daily
net assets\2,6 0.87%\4 0.85% 0.79% 0.91% 1.01%
Ratio of net investment income to
average daily net assets\2 6.06%\4 6.10% 6.45% 5.98% 6.32%
Portfolio turnover rate 7.51% 0.00% 8.45% 27.88% 16.36%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class B
Period
from
Dec. 18,
to
Dec 31,
1992 1991 1990 1989 1988 1987\1 1996(5)
----------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.65 $ 9.63 $ 9.68 $ 9.25 $ 9.31 $ 9.60 $ 10.37
--------- --------- --------- --------- --------- ---------- ----------
Operations
Net investment income 0.703 0.697 0.669 0.692 0.714 0.653 0.010
Realized and unrealized gains
(losses) on investments, net 0.570 0.020 (0.050) 0.430 (0.060) (0.290) 0.030
--------- --------- --------- --------- --------- ---------- ----------
Total from operations 1.273 0.717 0.619 1.122 0.654 0.363 0.040
--------- --------- --------- --------- --------- ---------- ----------
Distributions to shareholders
From investment income (0.703) (0.697) (0.669) (0.692) (0.714) (0.653) (0.01)
From net realized gains -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------- ----------
Net asset value, end of year $ 10.22 $ 9.65 $ 9.63 $ 9.68 $ 9.25 $ 9.31 $ 10.40
========= ========= ========= ========= ========= ========== ==========
Total return\3 13.84% 7.76% 6.69% 12.55% 7.35% 3.66% 0.43%
Net assets at end of year (000s
omitted) $ 43,166 $ 46,812 $ 36,439 $ 34,519 $ 23,190 $ 16,833 $ 88
Ratio of expenses to average daily
net assets\2,6 0.84% 0.96% 1.23% 1.02% 0.68% 0.26%\4 1.45%\4
Ratio of net investment income to
average daily net assets\2 7.15% 7.26% 6.99% 7.36% 7.71% 6.76%\4 4.65%\4
Portfolio turnover rate 14.50% 13.52% 33.49% 15.76% 20.40% 11.33% 7.51%
</TABLE>
\1For the period September 22, 1986 (commencement of operation of the Fund)
through July 31, 1987.
\2Various Fund fees and expenses were voluntarily waived or absorbed during the
periods referred to above. Had the Fund paid all expenses, the Class A ratios
of expenses and net investment income to average daily net assets would have
been 1.07%/5.86% for the period ended December 31, 1996, and for periods ended
July 31, as follows: 0.96%/5.99% in 1996, 0.90%/6.34% in 1995, 1.01%/5.88% in
1994, 1.24%/6.09% in 1993, 1.14%/6.85% in 1992, 1.26%/6.96% in 1991,
1.23%/6.99% in 1990, 1.20%/7.18% in 1989, 1.21%/7.18% in 1988 and 1.06%/5.96%
in 1987. For Class B these ratios would have been 1.66%/4.44% for the period
ended December 31, 1997.
\3Total return does not reflect payment of a sales charge.
\4Annualized.
\5For the period December 18, 1996 (commencement of operations) through
December 31,1996.
\6Beginning in the year ended December 31, 1996, the expense ratio reflects the
effect of gross expenses attributable to earnings credits on uninvested cash
balances received by the Fund.
\7On November 6, 1996, the Fund's shareholders approved a change of investment
adviser from I.F.G. Asset Management Services, Inc. to Voyageur Fund Managers,
Inc.
6
<PAGE>
Investment Objective
and Policies
The investment objective of the Fund is to seek a high level of current
income exempt from federal income tax primarily through investment in a
portfolio of medium- and lower-grade Municipal Obligations. The weighted
average maturity of the investment portfolio of the Fund is expected to be
approximately 15 to 25 years. There is no assurance that the Fund will achieve
its investment objective.
SUITABILITY
The Fund may be suitable for investors interested in high current
income flow exempt from federal income tax. The net asset value of each Class
may fluctuate in response to the condition of individual municipalities and
general market and economic conditions and, as a result, the Fund is not
appropriate for a short-term investor.
The types of securities in which the Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
restricted securities have the potential for higher yields, they are more
speculative and increase the credit risk of the Fund's portfolio. Changes in the
market value of the portfolio securities will not affect interest income from
such securities, but will be reflected in the Fund's net asset value. Investors
should be willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these securities.
Ownership of Fund shares can reduce the bookkeeping and administrative
inconveniences that would be connected with direct purchases of the type of
securities in which the Fund invests. Investors should not consider a purchase
of Fund shares as equivalent to a complete investment program. The Delaware
Group includes a family of funds, generally available through registered
dealers, which may be used in concert to create a more complete investment
program.
There are risks in any investment program, and there is no assurance that
the Fund's investment objective will be achieved. The value of the Fund's
shares will fluctuate with changes in the market value of its investments.
INVESTMENT STRATEGY
The Fund will attempt to invest 100% (and as a matter of fundamental policy
during normal circumstances will invest at least 80%) of the value of its net
assets in Municipal Obligations the interest on which is exempt from regular
federal income tax. The Fund may invest without limit in securities that
generate interest that is an item of tax preference for purposes of federal
alternative minimum tax ("AMT"). In normal circumstances the weighted average
maturity of the investment portfolio of the Fund is expected to be approximately
15 to 25 years. However, if the Manager determines that market conditions
warrant a shorter average maturity, the Fund's investments will be adjusted
accordingly. During times of adverse market conditions when a defensive
investment posture is warranted, the Fund may temporarily select investments
without regard to the foregoing policies.
In normal market or economic situations, the Fund will invest at least 65%
of its total assets in medium-and lower-grade Municipal Obligations rated, at
the time of investment, between BBB and B-(inclusive) by Standard & Poor's
Ratings Services ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service,
Inc. ("Moody's"), or BBB and B- (inclusive) by Fitch Investors Service LP
("Fitch"), or Municipal Obligations determined by the Manager to be of
comparable quality.
<PAGE>
Medium-grade Municipal Obligations are rated BBB by S&P or Fitch, Baa by
Moody's or determined by the Manager to be of comparable quality. Municipal
Obligations rated BBB by S&P or Fitch generally are regarded by S&P or Fitch as
having an adequate capacity to pay interest and repay principal; adverse
economic conditions or changing circumstances are, however, more likely in
S&P's or Fitch's view to lead to a weakened capacity to pay interest and repay
principal as compared with higher rated Tax-exempt Obligations. Municipal
Obligations rated Baa by Moody's generally are considered by Moody's as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. In Moody's view, 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. In Moody's
view, such securities lack outstanding investment characteristics and have
speculative characteristics as well.
The Fund may invest in lower-grade Municipal Obligations rated, at the
time of investment, no lower than B- by S&P or Fitch or B3 by Moody's, or in
municipal securities determined by the Manager to be of comparable quality.
Municipal Obligations rated B by S&P or Fitch generally are regarded by S&P or
Fitch, on balance, as predominantly speculative with respect to capacity to pay
interest or repay principal in accordance with the terms of the obligations.
While such securities will likely have some quality and protective
characteristics, in S&P's or Fitch's view these are outweighed by large
uncertainties or major risk exposure to adverse conditions. Securities rated B
by Moody's are viewed by Moody's as generally lacking characteristics of the
desirable investment. In Moody's view, assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
The Fund will not make initial investments in Municipal Obligations rated,
at the time of investment, below B- by S&P or Fitch or below B3 by Moody's, or
in Municipal Obligations determined by the Manager to be of comparable quality.
The Fund may retain Municipal Obligations which are downgraded after
investment. There is no minimum rating with respect to securities that the Fund
may hold if downgraded after investment. See Appendix A to Part B for a
description of Municipal Obligations ratings.
7
<PAGE>
Investment in medium- and lower-grade securities involves special risks as
compared with investment in higher-grade securities, including potentially
greater sensitivity to a general economic downturn or to a significant increase
in interest rates, greater market price volatility and less liquid secondary
market trading. See Risks Considerations below. There can be no assurance that
the Fund will achieve its investment objective, and the Fund may not be an
appropriate investment for all investors. Furthermore, interest on certain
"private activity" obligations in which the Fund may invest is treated as a
preference item for the purpose of calculating the federal alternative minimum
tax and, accordingly, a portion of the income produced by the Fund may be
taxable under the federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the alternative
minimum tax or who would become subject to the alternative minimum tax as a
result of an investment in the Fund. See Taxes.
The following table sets forth the weighted average percentage of total
investments with respect to the portfolio of the Fund during the year ended as
of December 31, 1996.
<TABLE>
<CAPTION>
Moody's Rating Aaa Aa A Baa Ba B Unrated
(S&P Rating) (AAA) (AA) (A) (BBB) (BB) (B) Bonds Total
- --------------------- ------- ------ ----- ------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
National High Yield
Municipal Bond Fund 0% 2% 2% 5% 6% -- 85% 100%
- -------------------- -- -- -- -- -- -- --- ----
</TABLE>
At times the Manager may judge that conditions in the markets for medium-
and lower-grade Municipal Obligations make pursuing the Fund's basic investment
strategy of investing primarily in such Municipal Obligations inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade Municipal Obligations and in Municipal
Obligations determined by the Manager to be of comparable quality. Although such
higher grade Municipal Obligations generally entail less credit risk, such
higher grade Municipal Obligations may have a lower yield than medium and lower
grade Municipal Obligations and investment in such higher grade Municipal
Obligations may result in a lower yield to Fund shareholders. The Manager may
also judge that conditions in the markets for long- and intermediate-term
Municipal Obligations in general make pursuing the Fund's basic investment
strategy inconsistent with the best interests of the Fund's shareholders. At
such times, the Fund may pursue strategies primarily designed to reduce
fluctuations in the value of the Fund's assets, including investing the Fund's
assets in high-quality, short-term Municipal Obligations and in high-quality,
short-term taxable securities. See Taxes.
The Fund may invest without limitation in short-term Municipal Obligations
or in taxable obligations on a temporary, defensive basis due to market
conditions or, with respect to taxable obligations, for liquidity purposes.
Such taxable obligations, whether purchased for liquidity purposes or on a
temporary, defensive basis, may include: obligations of the U.S. government,
its agencies or instrumentalities; other debt securities rated within the three
highest grades by either Moody's, Fitch or S&P; commercial paper rated in the
<PAGE>
highest grade by any of such rating services (Prime-1, F-1+ or A-1,
respectively); certificates of deposit and bankers' acceptances of domestic
banks which have capital, surplus and undivided profits of over $100 million;
high-grade taxable municipal bonds; and repurchase agreements with respect to
any of the foregoing investments. The Fund also may hold its assets in cash and
in securities of tax-exempt money market mutual funds.
Diversification
The Fund is a nondiversified investment company. This means that the
Manager has the flexibility to invest as much as 50% of the Fund's assets in as
few as two issuers provided no single issuer accounts for more than 25% of the
portfolio. The remaining 50% of the portfolio must be diversified so that no
more than 5% of the Fund's assets is invested in the securities of a single
issuer. The Fund may invest without limitation in U.S. government and government
agency securities backed by the U.S. government, its agencies or
instrumentalities. Because the Fund may invest its assets in fewer issuers, the
value of Fund shares may increase or decrease more rapidly than if the Fund were
fully diversified. If the Fund were to invest more than 5% of its assets in a
single issuer, the Fund would be affected more than a fully-diversified fund in
the event that issuer encountered difficulties in satisfying its financial
obligations.
Risk Considerations
General
The yields on Municipal Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and
monetary conditions, conditions in the relevant market, the size of a
particular issue, maturity of the obligation and the rating of the issue.
Generally, the value of Municipal Obligations will tend to fall as interest
rates rise and will tend to increase as interest rates decrease. In addition,
Municipal Obligations of longer maturity generally produce higher current
yields than Municipal Obligations with shorter maturities but are subject to
greater price fluctuation due to changes in interest rates, tax laws and other
general market factors. Lower rated Municipal Obligations generally produce a
higher yield than higher rated Municipal Obligations due to the perception of a
greater degree of risk as to the payment of principal and interest. Certain
Municipal Obligations held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed.
8
<PAGE>
Special Risks Considerations Regarding Medium- and Lower-Grade Municipal
Obligations
The Fund invests in medium- and lower-grade Municipal Obligations.
Municipal Obligations which are in the medium and lower grade categories
generally offer a higher current yield than is offered by higher-grade
Municipal Obligations but they also generally involve greater price volatility
and greater credit and market risk. Credit risk relates to the issuer's ability
to make timely payment of interest and principal when due. Market risk relates
to the changes in market value that occur as a result of variation in the level
of prevailing interest rates and yield relationships in the municipal
securities market. Debt securities rated BB or below by S&P or Fitch and B or
below by Moody's are commonly referred to as "junk bonds." Although the Fund
primarily will invest in medium- and lower-grade Municipal Obligations, the
Fund may invest in higher-grade Municipal Obligations for temporary defensive
purposes. Such investments may result in lower current income than if the Fund
were fully invested in medium and lower-grade securities.
The value of the Fund's portfolio securities can be expected to fluctuate
over time. When interest rates decline, the value of a portfolio invested in
fixed-income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed-income
securities generally can be expected to decline. However, the secondary market
prices of medium- and lower-grade Municipal Obligations are less sensitive to
changes in interest rates and are more sensitive to adverse economic changes or
individual issuer developments than are the secondary market prices of
higher-grade debt securities. Such events also could lead to a higher incidence
of defaults by issuers of medium- and lower-grade Municipal Obligations as
compared with historical default rates. In addition, changes in interest rates
and periods of economic uncertainty can be expected to result in increased
volatility in the market price of the Municipal Obligations in the Fund's
portfolio and thus in the net asset value of the Fund. Also, adverse publicity
and investor perceptions, whether or not based on rational analysis, may affect
the value and liquidity of medium- and lower-grade Municipal Obligations. The
secondary market value of Municipal Obligations structured as zero-coupon
securities and payment-in-kind securities may be more volatile in response to
changes in interest rates than debt securities which pay interest periodically
in cash. Investment in such securities also involves certain tax considerations.
<PAGE>
Increases in interest rates and changes in the economy may adversely
affect the ability of issuers of medium- and lower-grade Municipal Obligations
to pay interest and to repay principal, to meet projected financial goals and
to obtain additional financing. In the event that an issuer of securities held
by the Fund experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings, the
Fund may incur additional expenses and may determine to invest additional
assets with respect to such issuer or the project or projects to which the
Fund's portfolio securities relate. Further, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of interest or the repayment of principal on its portfolio
holdings, and the Fund may be unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
medium- or lower-grade Municipal Obligations in which the Fund may invest,
trading in such securities may be relatively inactive. The Manager has
contracted with Muller Data Corporation as pricing agent and the Manager is
responsible for determining the net asset value of the Fund, subject to the
supervision of the Board of Directors. During periods of reduced market
liquidity and in the absence of readily available market quotations for
medium-and lower-grade Municipal Obligations held in the Fund's portfolio, the
ability of the pricing agent to value the Fund's securities becomes more
difficult and the pricing agent's use of judgment may play a greater role in
the valuation of the Fund's securities due to the reduced availability of
reliable objective data. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which such
a market does exist. Further, the Fund may have more difficulty selling such
securities in a timely manner and at their stated value than would be the case
for securities for which an established retail market does exist.
9
<PAGE>
The Fund may invest in zero-coupon and payment-in-kind Municipal
Obligations. Zero-coupon securities are debt obligations that do not entitle
the holder to any periodic payment of interest prior to maturity or a specified
date when the securities begin paying current interest. They are issued and
traded at discount from their face amounts or par value, which discount varies
depending on the time remaining until cash payments begin, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer. The Internal Revenue Code of 1986, as amended, requires that regulated
investment companies distribute at least 90% of their net investment income
each year, including tax-exempt and non-cash income. Accordingly, although the
Fund will receive no coupon payments on zero-coupon securities prior to their
maturity, the Fund is required, in order to maintain its desired tax treatment,
to include in its distributions to shareholders in each year any income
attributable to zero-coupon securities that is in excess of 10% of the Fund's
net investment income in that year. The Fund may be required to borrow or to
liquidate portfolio securities at a time that it otherwise would not have done
so in order to make such distributions. Payment-in-kind securities are
securities that pay interest through the issuance of additional securities.
Such securities generally are more volatile in response to changes in interest
rates and are more speculative investments than are securities that pay interest
periodically in cash.
The Manager seeks to minimize the risks involved in investing in medium-
and lower-grade Municipal Obligations through multiple portfolio holdings,
careful investment analysis, and attention to current developments and trends
in the economy and financial and credit markets. The Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of an issue. In its analysis, the Manager will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulator matters. The Manager may consider the credit ratings
of Moody's, Fitch, and S&P in evaluating Municipal Obligations, although it
does not rely primarily on these ratings. Such ratings evaluate only the safety
of principal and interest payments, not market value risk. Additionally,
because the creditworthiness of an issuer may change more rapidly than is able
to be timely reflected in changes in credit ratings, the Manager monitors the
issuers of Municipal Obligations held in the Fund's portfolio on an ongoing
basis.
<PAGE>
Municipal Obligations generally are not listed for trading on any national
securities exchange, and many issuers of medium- and lower-grade Municipal
Obligations choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. The amount of
information available about the financial condition of an issuer of unlisted or
unrated securities generally is not as extensive as that which is available
with respect to issuers of listed or rated securities. Because of the nature of
medium- and lower-rated Municipal Obligations, achievement by the Fund of its
investment objective may be more dependent on the credit analysis of the
Manager than is the case for an investment company which invests primarily in
exchange listed higher-grade securities.
* * *
The Fund's investment objective and certain other investment policies
explicitly designated herein as such are fundamental, which means that they
cannot be changed without the vote of the Fund's shareholders as provided in
the 1940 Act.
For additional information on the Fund's investment policies and certain
risks associated with investments in certain types of securities, see Other
Investment Policies and Risk Considerations.
10
<PAGE>
The Delaware
Difference
PLANS AND SERVICES
The Delaware Difference is our commitment to provide you with superior
information and quality service on your investments in the Delaware Group of
funds.
SHAREHOLDER PHONE DIRECTORY
Investor Information Center
800-523-4640
Fund Information; Literature Price;
Yield and Performance Figures
Shareholder Service Center
800-523-1918
Information on Existing Regular Investment Accounts; Wire Investments;
Wire Liquidations; Telephone Liquidations and Telephone Exchanges
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
You can call the Investor Information Center at any time for current
performance information. Current yield and total return information may also be
included in advertisements and information given to shareholders. Yields are
computed on an annual basis over a 30-day period.
Shareholder Services
During business hours, you can call the Delaware Group's Shareholder
Service Center. Our representatives can answer any questions about your
account, the Fund, various service features and other funds in the Delaware
Group.
<PAGE>
Delaphone Service
Delaphone is an account inquiry service for investors with Touch-Tone(R)
phone service. It enables you to get information on your account faster than
the mailed statements and confirmations. Delaphone also provides current
performance information on the Fund, as well as other funds in the Delaware
Group. Delaphone is available seven days a week, 24 hours a day.
Dividend Payments
Dividends, capital gains and other distributions are automatically
reinvested in your account, unless you elect to receive them in cash. You may
also elect to have the dividends earned in one fund automatically invested in
another Delaware Group fund with a different investment objective, subject to
certain exceptions and limitations.
For more information, see Additional Methods of Adding to Your
Investment--Dividend Reinvestment Plan under How to Buy Shares or call the
Shareholder Service Center.
MoneyLine(sm) Services
Delaware Group offers the following services for fast and convenient
transfer of funds between your personal bank account and your Delaware Group
fund account.
1. MoneyLine(sm) Direct Deposit Service
If you elect to have your dividends and distributions paid in cash
and such dividends and distributions are in an amount of $25 or more,
you may choose the MoneyLine(sm) Direct Deposit Service and have such
payments transferred from your Fund account to your predesignated bank
account. See Dividends and Distributions. In addition, you may elect
to have your Systematic Withdrawal Plan payments transferred from your
Fund account to your predesignated bank account through this service.
See Systematic Withdrawal Plans under Redemption and Exchange.
2. MoneyLine(sm) On Demand
You or your investment dealer may request purchases and redemptions
of Fund shares by using MoneyLine(sm) On Demand. When you authorize
the Fund to accept such requests from you or your investment dealer,
funds will be withdrawn from (for share purchases) or 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 a $50,000 maximum limit for
MoneyLine(sm) On Demand transactions.
11
<PAGE>
For each MoneyLine(sm) Service, it may take up to four business days for
the transactions to be completed. You can initiate either service by completing
an Account Services form. If the name and address on your designated bank
account are not identical to the name and address on your Fund account, you
must have your signature guaranteed. The Fund does not charge a fee for
MoneyLine(sm) services; however, your bank may change a fee. Please call the
Shareholder Service Center for additional information about these services.
Statements and Confirmations
You will receive quarterly statements of your account summarizing all
transactions during the period. A confirmation statement will be sent following
all transactions other than those involving a reinvestment of dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling the Shareholder Service Center.
Duplicate Confirmations
If your financial adviser or investment dealer is noted on your investment
application, we will send a duplicate confirmation to him or her. This makes it
easier for your adviser to help you manage your investments.
Tax Information
Each year, Mutual Funds, Inc. will mail to you information on the tax
status of your dividends and distributions.
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature allows
you to combine the value of your current holdings of Class A Shares, Class B
Shares and Class C Shares of the Fund with the dollar amount of new purchases
of Class A Shares to qualify for a reduced front-end sales charge on such
purchases of Class A Shares. Under the Combined Purchases Privilege, you may
also include certain shares that you own in other funds in the Delaware Group.
See Classes of Shares.
Letter of Intention
The Letter of Intention feature permits you to obtain a reduced front-end
sales charge on purchases of Class A Shares by aggregating certain of your
purchases of Delaware Group fund shares over a 13-month period. See Classes of
Shares and Part B.
<PAGE>
12-Month Reinvestment Privilege
The 12-Month Reinvestment Privilege permits you to reinvest proceeds from
a redemption of Class A Shares, within one year of the date of the redemption,
without paying a front-end sales charge. See Part B.
Exchange Privilege
The Exchange Privilege permits shareholders to exchange all or part of
their shares into shares of the other funds in the Delaware Group, subject to
certain exceptions and limitations. For additional information on exchanges,
see Investing by Exchange under How to Buy Shares and Redemption and Exchange.
Wealth Builder Option
You may elect to invest in the Fund through regular liquidations of shares
in your accounts in other funds in the Delaware Group. Investments under this
feature are exchanges and are therefore subject to the same conditions and
limitations as other exchanges of Fund shares. See Additional Methods of Adding
to Your Investment - Wealth Builder Option and Investing by Exchange under How
to Buy Shares, and Redemption and Exchange.
Delaware Group Asset Planner
Delaware Group Asset Planner is an asset allocation service that gives
you, working with a professional financial adviser, the ability to more easily
design and maintain investments in a diversified selection of Delaware Group
mutual funds. The Asset Planner service offers a choice of four predesigned
allocation strategies (each with a different risk/reward profile) made up of
separate investments in predetermined percentages of Delaware Group funds. With
the guidance of a financial adviser, you may also tailor an allocation strategy
that meets your personal needs and goals. See Delaware Group Asset Planner
under How to Buy Shares.
Financial Information about the Fund
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
the Fund's investments and performance. Mutual Funds, Inc.'s fiscal year ends
on December 31.
12
<PAGE>
Classes
of Shares
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net asset
value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of 0.25% of average daily net assets of such shares. Certain purchases
of Class A Shares qualify for reduced front-end sales charges. See Front-End
Sales Charge Alternative - Class A Shares, below. See also Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange and Distribution (12b-1) and Service under
Management of the Fund.
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B Shares, which do not incur a front-end sales
charge when they are purchased, but are subject to a contingent deferred sales
charge if they are redeemed within six years of purchase. Class B Shares are
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 such shares for approximately eight years after purchase. Class B
Shares permit all of the investor's dollars to work from the time the
investment is made. The higher 12b-1 Plan expenses paid by Class B Shares will
cause such shares to have a higher expense ratio and to pay lower dividends
than Class A Shares. At the end of approximately eight years after purchase,
the Class B Shares will automatically be converted into Class A Shares and,
thereafter, for the remainder of the life of the investment, the annual 0.25%
12b-1 Plan fee for the Class A Shares will apply. See Automatic Conversion of
Class B Shares, below.
<PAGE>
Class C Shares. An investor who elects the level sales charge alternative
acquires Class C Shares, which do not incur a front-end sales charge when they
are purchased, but are subject to a contingent deferred sales charge if they
are redeemed within 12 months of purchase. Class C Shares are 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 such
shares for the life of the investment. The higher 12b-1 Plan expenses paid by
Class C Shares will cause such shares to have a higher expense ratio and to pay
lower dividends than Class A Shares. Unlike Class B Shares, Class C Shares do
not convert to another class.
The alternative purchase arrangements described above permit investors to
choose the method of purchasing shares that is most suitable 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, purchase Class B Shares and have the entire
initial purchase amount invested in the Fund with their investment being
subject to a CDSC if they redeem shares within six years of purchase, or
purchase Class C Shares and have the entire initial purchase amount invested in
the Fund with their investment being subject to a CDSC if they redeem shares
within 12 months of purchase. In addition, investors should consider the level
of annual 12b-1 Plan expenses applicable to each 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 comparing Class B Shares to
Class C Shares, investors should also consider the desirability of an automatic
conversion feature, which is available only for Class B Shares.
13
<PAGE>
Prospective investors should refer to Appendix A--Investment Illustrations
in this Prospectus for an illustration of the potential effect that each of the
purchase options may have on a long-term shareholder's investment.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Fund, the Distributor and others will be paid, in the
case of the Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of the Class B Shares and the 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, Class B 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
12b-1 Distribution Plans - Class A, Class B and Class C Shares.
Dividends paid on Class A, Class B and Class C Shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount, except that, when assessed, 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 Calculation of Offering
Price and Net Asset Value Per Share.
The NASD has adopted certain rules relating to investment company sales
charges. Mutual Funds, Inc. and the Distributor intend to operate in compliance
with these rules.
Front-End Sales Charge Alternative - Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 3.75%. See Calculation of Offering Price and
Net Asset Value Per Share.
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following table.
Class A Shares
Front-End Sales Dealer's
Charge as % of Commission***
Amount of Purchase Offering Amount as % of
Price Invested** Offering Price
---------- ------------ ---------------
Less than $100,000 3.75% 3.94% 3.25%
$100,000 but under $250,000 3.00 3.08 2.50
$250,000 but under $500,000 2.50 2.60 2.00
$500,000 but under $1,000,000* 2.00 2.02 1.75
*There is no front-end sales charge on purchases of Class A Shares of $1
million or more but, under certain limited circumstances, a 1% Limited
CDSC may apply upon redemption of such shares.
**Based upon the net asset value of Class A Shares as of the Fund's most
recent fiscal year..
***Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
<PAGE>
- ----------------------------
The Fund must be notified when a sale takes place which would qualify for the
reduced front-end sales charge on the basis of previous or current purchases.
The reduced front-end sales charge will be granted upon confirmation of the
shareholder's holdings by the Fund. Such reduced front-end sales charges are
not retroactive.
From time to time, upon written notice to all of its dealers, the Distributor
may hold special promotions for specified periods during which the Distributor
may reallow to dealers up to the full amount of the front-end sales charge
shown above. In addition, certain dealers who enter into an agreement to
provide extra training and information on Delaware Group products and services
and who increase sales of Delaware Group funds may receive an additional
commission of up to 0.15% of the offering price. Dealers who receive 90% or
more of the sales charge may be deemed to be underwriters under the Securities
Act of 1933.
- ----------------------------
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 made in accordance with the following schedule:
Dealer's Commission
Amount of Purchase --------------------------------------
- ---------------------------------- (as a percentage of amount purchased)
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies may be aggregated with those of the Class A Shares
of the Fund. Financial advisers also may be eligible for a dealer's commission
in connection with certain purchases made under a Letter of Intention or
pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for payment
of the dealer's commission, unless a dealer's commission or similar payment has
not been previously paid on the assets being exchanged. The schedule and
program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Redemptions of Class A Shares purchased at net asset value may result in
the imposition of a Limited CDSC if the dealer's commission described above was
paid in connection with the purchase of those shares. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange.
14
<PAGE>
Combined Purchases Privilege
By combining your holdings of Class A Shares with your holdings of Class B
Shares and/or Class C Shares of the Fund and shares of the other funds in the
Delaware Group, except those noted below, you can reduce the front-end sales
charges on any additional purchases of Class A Shares. Shares of Delaware Group
Premium Fund, Inc. beneficially owned in connection with ownership of variable
insurance products may be combined with other Delaware Group fund holdings. In
addition, assets held in any stable value product available through the
Delaware Group may be combined with other Delaware Group fund holdings. Shares
of other funds that do not carry a front-end sales charge or CDSC may not be
included unless they were acquired through an exchange from a Delaware Group
fund that does carry a front-end sales charge or CDSC.
This privilege permits you to combine your purchases and holdings with
those of your spouse, your children under 21 and any trust, fiduciary or
retirement account for the benefit of such family members.
It also permits you to use these combinations under a Letter of Intention.
A Letter of Intention allows you to make purchases over a 13-month period and
qualify the entire purchase for a reduction in front-end sales charges on Class
A Shares.
Combined purchases of $1,000,000 or more, including certain purchases made
at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative - Class A Shares, above.
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased at net asset value under the Delaware
Group Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege. See The Delaware Difference
and Redemption and Exchange for additional information.
<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 Group, 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.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware
Group funds. Officers, directors and key employees of institutional clients of
the Manager or any of its affiliates may purchase Class A Shares at net asset
value. Moreover, purchases may be effected at net asset value for the benefit
of the clients of brokers, dealers and registered investment advisers
affiliated with a broker or dealer, if such broker, dealer or investment
adviser has entered into an agreement with the Distributor providing
specifically for the purchase of Class A Shares in connection with special
investment products, such as wrap accounts or similar fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest monthly
dividend checks and/or repayment of invested capital into Class A Shares of any
of the funds in the Delaware Group at net asset value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
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 anticipates
compensating 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 4% 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, if any, are paid to
the Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class
B Shares. Payments to the Distributor and others under the Class B 12b-1 Plan
may be in an amount equal to no more than 1% annually. The combination of the
CDSC and the proceeds of the 12b-1 Plan fees makes it possible for the Fund to
sell Class B Shares without deducting a front-end sales charge at the time of
purchase.
15
<PAGE>
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class B Shares
described in this Prospectus, even after the exchange. Such CDSC schedule may
be higher than the CDSC schedule for the Class B Shares acquired as a result of
the exchange. See Redemption and Exchange.
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 last business
day of the second full week 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. See Taxes.
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 anticipates
compensating 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, however, 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, if any, are paid to
the Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class 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.
<PAGE>
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class C Shares
as described in this Prospectus. See Redemption and Exchange.
Contingent Deferred Sales Charge--
Class B Shares and Class C Shares
Class B Shares redeemed within six years of purchase may be subject to a
CDSC at the rates set forth below and Class C Shares redeemed within 12 months
of purchase may be subject to a CDSC of 1%. CDSCs are charged as a percentage
of the dollar amount subject to the CDSC. The charge will be assessed on an
amount equal to the lesser of the net asset value at the time of purchase of
the shares being redeemed or the net asset value of those shares at the time of
redemption. No CDSC will be imposed on increases in net asset value above the
initial purchase price, nor will a CDSC be assessed on redemptions of shares
acquired through reinvestments 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 the Class B Shares or the Class C Shares of
the Fund, as the case may be, even if those shares are later exchanged for
shares of another Delaware Group 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.
The following table sets forth the rates of the CDSC for the Class B
Shares of the Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Year After Dollar Amount
Purchase Made Subject to Charge)
- --------------------------- --------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. See Automatic Conversion of Class B Shares, above. Investors are
reminded that the Class A Shares into which the Class B Shares will convert are
subject to ongoing annual 12b-1 Plan expenses of up to a maximum of 0.25% of
average daily net assets of such shares.
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.
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<PAGE>
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge - Class B and Class C
Shares under Redemption and Exchange.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits, as
set by the Distributor, may receive from the Distributor an additional payment
of up to 0.25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares.
Subject to pending amendments to the NASD's Rules of Fair Practice, in
connection with the promotion of Delaware Group fund shares, the Distributor
may, from time to time, pay to participate in dealer-sponsored seminars and
conferences, reimburse dealers for expenses incurred in connection with
preapproved seminars, conferences and advertising and may, from time to time,
pay or allow additional promotional incentives to dealers, which shall include
non-cash concessions, such as certain luxury merchandise or a trip to or
attendance at a business or investment seminar at a luxury resort, as part of
preapproved sales contests. Payment of non-cash compensation to dealers is
currently under review by the NASD and the Securities and Exchange Commission.
It is likely that the NASD's Rules of Fair Practice will be amended such that
the ability of the Distributor to pay non-cash compensation as described above
will be restricted in some fashion. The Distributor intends to comply with the
NASD's Rules of Fair Practice as they may be amended.
17
<PAGE>
How to
Buy Shares
Purchase Amounts
Generally, the minimum initial purchase is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases of shares of any Class
generally must be $100 or more. For purchases under a Uniform Gifts to Minors
Act or Uniform Transfers to Minors Act or through an Automatic Investing Plan,
there is a minimum initial purchase of $250 and a minimum subsequent purchase
of $25.
There is a maximum purchase limitation of $250,000 on each purchase of
Class B Shares. For Class C Shares, each purchase must be in an amount that is
less than $1,000,000. An investor may exceed these maximum purchase limitations
by making cumulative purchases over a period of time. In doing so, an investor
should keep in mind that reduced front-end sales charges are available on
investments of $100,000 or more in Class A Shares, and that Class A Shares (i)
are subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and (ii) generally are not subject to a CDSC.
Investing through Your Investment Dealer
You can make a purchase of shares of the Fund through most investment
dealers who, as part of the service they provide, must transmit orders
promptly. They may charge for this service. If you want a dealer but do not
have one, we can refer you to one.
Investing by Mail
1. Initial Purchases--An Investment Application must be completed, signed and
sent with a check payable to the Fund and Class selected, to Delaware Group at
1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the Fund and Class selected. Your check should be
identified with your name(s) and account number. An investment slip (similar to
a deposit slip) is provided at the bottom of transaction confirmations and
dividend statements that you will receive from Mutual Funds, Inc. Use of this
investment slip can help expedite processing of your check when making
additional purchases. Your investment may be delayed if you send additional
purchases by certified mail.
Investing by Wire
You may purchase shares by requesting your bank to transmit funds by wire
to CoreStates Bank, N.A., ABA #031000011, account number 1412893401 (include
your name(s) and your account number for the Fund and Class in which you are
investing).
<PAGE>
1. Initial Purchases--Before you invest, telephone the Shareholder Service
Center to get an account number. If you do not call first, processing of your
investment may be delayed. In addition, you must promptly send your Investment
Application to the Fund and Class selected, to Delaware Group at 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 should advise the
Shareholder Service Center by telephone of each wire you send.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware Group,
you may write and authorize an exchange of part or all of your investment into
shares of the Fund. If you wish to open an account by exchange, call the
Shareholder Service Center for more information. All exchanges are subject to
the eligibility and minimum purchase requirements set forth in each fund's
prospectus. See Redemption and Exchange for more complete information
concerning your exchange privilege.
Holders of Class A Shares may exchange all or part of their shares for
certain of the shares of other funds in the Delaware Group, including other
Class A Shares, but may not exchange their Class A Shares for Class B Shares or
Class C Shares of the Fund or of any other fund in the Delaware Group. Holders
of Class B Shares of the Fund are permitted to exchange all or part of their
Class B Shares only into Class B Shares of other Delaware Group funds.
Similarly, holders of Class C Shares of the Fund are permitted to exchange all
or part of their Class C Shares only into Class C Shares of other Delaware
Group funds. See Appendix B--Classes Offered for a list of funds that offer
Class A, Class B, Class C and Consultant Class Shares. Class B Shares of the
Fund and Class C Shares of the Fund acquired by exchange will continue to carry
the CDSC and, in the case of Class B Shares, the automatic conversion schedule
of the fund from which the exchange is made. The holding period of Class B
Shares of the Fund acquired by exchange will be added to that of the shares
that were exchanged for purposes of determining the time of the automatic
conversion into Class A Shares of the Fund.
Permissible exchanges into Class A Shares of the Fund will be made without
a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were
acquired through the reinvestment of dividends). Permissible
18
<PAGE>
exchanges into Class B Shares or Class C Shares of the Fund will be made
without the imposition of a CDSC by the fund from which the exchange is being
made at the time of the exchange.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information if you wish to
use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize Mutual Funds,
Inc. to transfer a designated amount monthly from your checking account to your
Fund account. Many shareholders use this as an automatic savings plan.
Shareholders should allow a reasonable amount of time for initial purchases and
changes to these plans to become effective.
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your Fund account for you (for example: payroll deduction, pay by phone,
annuity payments). The Fund also accepts preauthorized recurring government and
private payments by Electronic Fund Transfer, which avoids mail time and check
clearing holds on payments such as social security, federal salaries,
Railroad Retirement benefits, etc.
* * *
Should investments through an automatic investing plan or by direct
deposit be reclaimed or returned for some reason, Mutual Funds, Inc. has the
right to liquidate your shares to reimburse the government or transmitting
bank. If there are insufficient funds in your account, you are obligated to
reimburse the Fund.
3. MoneyLine(sm) On Demand
Through the MoneyLine(sm) On Demand service, you or your investment dealer
may call the Fund to request a transfer of funds from your predesignated bank
account to your Fund account. See MoneyLine(sm) Services under The Delaware
Difference for additional information about this service.
4. Wealth Builder Option
You can use our Wealth Builder Option to invest in the Fund through
regular liquidations of shares in your accounts in other funds in the Delaware
Group. You may also elect to invest in other mutual funds in the Delaware Group
through the Wealth Builder Option through regular liquidations of shares in
your Fund account.
<PAGE>
Under this automatic exchange program, you can authorize regular monthly
amounts (minimum of $100 per fund) to be liquidated from your account in one or
more funds in the Delaware Group and invested automatically into any other
Delaware Group account that you may specify. If in connection with the election
of the Wealth Builder Option, you wish to open a new account to receive the
automatic investment, such new account must meet the minimum initial purchase
requirements described in the prospectus of the fund that you select. All
investments under this option are exchanges and are therefore subject to the
same conditions and limitations as other exchanges noted above. You can
terminate your participation at any time by written notice to the fund from
which the exchanges are made. See Redemption and Exchange.
5. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your Fund account. Or, you may
invest your distributions in certain other funds in the Delaware Group, subject
to the exceptions noted below as well as the eligibility and minimum purchase
requirements set forth in each fund's prospectus.
Reinvestments of distributions into Class A Shares of the Fund or of other
Delaware Group funds are made without a front-end sales charge. Reinvestments
of distributions into Class B Shares of the Fund or of other Delaware Group
funds or into Class C Shares of the Fund or of other Delaware Group funds are
also made without any sales charge and will not be subject to a CDSC if later
redeemed. See Automatic Conversion of Class B Shares under Classes of Shares
for information concerning the automatic conversion of Class B Shares acquired
by reinvesting dividends.
Holders of Class A Shares of the Fund may not reinvest their distributions
into Class B Shares or Class C Shares of any fund in the Delaware Group,
including the Fund. Holders of Class B Shares of the Fund may reinvest their
distributions only into Class B Shares of the funds in the Delaware Group which
offer that class of shares. Similarly, holders of Class C Shares of the Fund
may reinvest their distributions only into Class C Shares of the funds in the
Delaware Group which offer that class of shares. See Appendix B--Classes
Offered for a list of the funds offering those classes of shares. For more
information about reinvestments, call the Shareholder Service Center.
19
<PAGE>
Delaware Group Asset Planner
To invest in Delaware Group funds using the Delaware Group Asset Planner
asset allocation service, you should complete a Delaware Group Asset Planner
Account Registration Form, which is available only from a financial adviser or
investment dealer. As previously described, the Delaware Group Asset Planner
service offers a choice of four predesigned asset allocation strategies (each
with a different risk/reward profile) in predetermined percentages in Delaware
Group funds. With the help of a financial adviser, you may also design a
customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Group accounts into the Asset Planner service may be made at net asset value
under the circumstances described under Investing by Exchange, above. 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 Group may be used in the same Strategy
with consultant class shares that are offered by certain other Delaware Group
funds. See Appendix B--Classes Offered for the funds in the Delaware Group that
offer consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is typically due at
the time of initial investment and by September 30th 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 30th. See Part B.
Investors will receive a customized quarterly Strategy Report summarizing
all Delaware Group 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.
<PAGE>
Purchase Price and Effective Date
The offering price and net asset value of the Class A, Class B and Class C
Shares are determined 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 effective date of a purchase made through an investment dealer is the
date the order is received by the Fund in which the shares are being purchased.
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 offering
price or net asset value of shares is determined, as noted above. Purchase
orders 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 order. If a purchase is
canceled 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 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.
The Fund also reserves the right, following shareholder notification, to
charge a service fee on non-retirement accounts that, as a result of a
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 in which the account is held 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.
The 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.
20
<PAGE>
Redemption and
Exchange
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, bond funds, tax-advantaged 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. See Taxes.
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 the Delaware Group will best meet your changing
objectives, and the consequences of any exchange transaction. You may also call
the Delaware Group directly for fund information.
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.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after the 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. See Purchase Price and Effective Date under
How to Buy Shares. 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, the Fund will redeem the number of shares
necessary to deduct the applicable CDSC in the case of Class B 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.
<PAGE>
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. The Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
The Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared, 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. 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.
There is no front-end sales charge or fee for exchanges made between
shares of funds which both carry a front-end sales charge. Any applicable
front-end sales charge will apply to exchanges from shares of funds not subject
to a front-end sales charge, except for exchanges involving assets that were
previously invested in a fund with a front-end sales charge and/or exchanges
involving the reinvestment of dividends.
21
<PAGE>
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of other funds in the Delaware Group (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 Prospectus 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 the 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 the Fund for a longer period of time than if the
investment in New Shares were made directly.
Various redemption and exchange methods are outlined below. Except for the
CDSC applicable to certain redemptions of Class B and Class C Shares and the
Limited CDSC applicable to certain redemptions of Class A Shares purchased at
net asset value, there is no fee charged by the Fund or the Distributor for
redeeming or exchanging your shares, but such fees could be charged in the
future. You may 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, including selection of any of
the features described below, shall continue in effect until such time as a
written revocation or modification has been received by the Fund or its agent.
Written Redemption
You can write to the 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 Fund requires a signature by all owners of the account and a
signature guarantee for each owner. 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.
<PAGE>
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 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 the Fund (at 1818 Market Street, Philadelphia, PA
19103) to request an exchange of any or all of your shares into another mutual
fund in the Delaware Group, subject to the same conditions and limitations as
other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption--Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your
account in writing that you do not wish to have such services available with
respect to your account. 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 its Transfer Agent is responsible for any shareholder
loss incurred in acting upon written or telephone instructions for redemption
or exchange of Fund shares which are reasonably believed to be genuine. With
respect to such telephone transactions, the Fund will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, the Fund or its Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Instructions received by telephone 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.
22
<PAGE>
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.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
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.
MoneyLine(sm) On Demand
Through the MoneyLine(sm) On Demand service, you or your investment dealer
may call the Fund to request a transfer of funds from your Fund account to your
predesignated bank account. See MoneyLine(sm) Services under The Delaware
Difference for additional information about this service.
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 the Delaware Group under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
<PAGE>
Systematic Withdrawal Plans
This plan provides shareholders with a consistent monthly (or quarterly)
payment. This is particularly useful to shareholders living on fixed incomes,
since it can provide them with a stable supplemental amount. With accounts of
at least $5,000, you may elect monthly withdrawals of $25 (quarterly $75) or
more. The Fund does not recommend any particular monthly amount, as each
shareholder's situation and needs vary. 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 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. See MoneyLine(sm) Services under The Delaware Difference for
more information about this service.
* * *
Shareholders should not purchase additional shares while participating in
a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
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 and Class C Shares, below.
For more information on Systematic Withdrawal Plans, call the Shareholder
Service Center.
23
<PAGE>
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
A Limited CDSC will be imposed on certain redemptions of Class A Shares
(or shares into which such Class A Shares are exchanged) made within 12 months
of purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission previously described. See
Classes of Shares.
The Limited CDSC will be paid to the Distributor and will be equal to the
lesser of 1% 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 Group
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 12 months will not be
subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Group 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 12-month holding
period. The Limited CDSC is assessed if such 12-month period is not satisfied
irrespective of whether the redemption triggering its payment is of Class A
Shares of the 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.
<PAGE>
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 the Fund's right to liquidate a shareholder's account if the
aggregate net asset value of the shares held in the account is less than the
then-effective minimum account size and (ii) 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 Classes of Shares).
Waiver of Contingent Deferred Sales Charge -- Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares in connection with the following redemptions: (i) redemptions that
result from the Fund's right to liquidate a shareholder's account if the
aggregate net asset value of the shares held in the account is less than the
then-effective minimum account size and (ii) distributions from an account if
the redemption results from the death of 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 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.
24
<PAGE>
Dividends and
Distributions
The Fund declares a dividend to all shareholders of record at the time the
offering price of shares is determined. See Purchase Price and Effective Date
under How to Buy Shares. Thus, when redeeming shares, dividends continue to be
credited up to and including the date of redemption.
The Fund's dividends are declared daily and paid monthly. Payment by check
of cash dividends will ordinarily be mailed within three business days after
the payable date. Distributions from net realized securities profits, if any,
will be distributed once a year.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if 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 Fund will share proportionately in the investment income
and expenses of the Fund, except that the per share dividends from net
investment income on the Class A Shares, the Class B Shares and the Class C
Shares will vary due to the expenses under the 12b-1 Plan applicable to each
Class. Generally, the dividends per share on Class B Shares and Class C Shares
can be expected to be lower than the dividends per share on Class A Shares
because the expenses under the 12b-1 Plans relating to Class B and Class C
Shares will be higher than the expenses under the 12b-1 Plan relating to Class
A Shares. See Distribution (12b-1) and Service under Management of the Fund.
Both dividends and distributions, if any, are automatically reinvested in
your account at net asset value unless you elect otherwise. 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 your account at the then-current net asset value
and the dividend option may be changed from cash to reinvest. If you elect to
take your dividends and distributions in cash and such dividends and
distributions are in an amount of $25 or more, you may choose the MoneyLine
Direct Deposit Service and have such payments transferred from your Fund
account to your predesignated bank account. See MoneyLine(sm) Services under
The Delaware Difference for more information about this service.
25
<PAGE>
Taxes
The tax discussion set forth below is included for general information
only. Investors should consult their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in the Fund.
The Fund 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 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.
The Fund is treated as a separate entity for federal income tax purposes.
The Fund 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 those investors who are subject
to income taxes as ordinary income, whether received in cash or in additional
shares. No portion of the Fund's dividends will be eligible for the
dividends-received deduction for corporations.
Distributions of net interest income from tax-exempt obligations that are
designated by the Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. Distributions paid by the Fund from
long-term capital gains, whether received in cash or 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
Fund. The Fund does not seek to realize any particular amount of capital gains
during a year; rather, realized gains are a by-product of Fund 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 Fund 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.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, 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 Fund and received
by the shareholder on December 31 of the calendar year in which they are
declared.
The sale of shares of the Fund 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 the Fund and any other fund in the Delaware Group. Any loss incurred on
a sale or exchange of Fund shares that had been held for six months or less
will be treated as a long-term capital loss to the extent of capital gain
<PAGE>
dividends received with respect to such shares. All or a portion of the sales
charge incurred in acquiring Fund shares will be excluded from the federal tax
basis of any of such shares sold or exchanged within 90 days of their purchase
(for purposes of determining gain or loss upon the sale of such shares) if the
sale proceeds are reinvested in the Fund or in another fund in the Delaware
Group of funds and a sales charge that would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986 to finance private
activities are treated as an item of tax preference for purposes of computing
the alternative minimum tax for individuals, estates and trusts.
The automatic conversion of Class B Shares into Class A Shares at the end
of approximately eight years after purchase will be tax-free for federal tax
purposes. See Automatic Conversion of Class B Shares under Classes of 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 Fund are exempt from
Pennsylvania county personal property taxes.
Each year, Mutual Funds, Inc. will mail to you information on the tax
status of the dividends and distributions paid by the Fund in which you hold
shares. 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 Fund.
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 Investment Application your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
See Accounting and Tax Issues and Distributions and Taxes in Part B for
additional information on tax matters relating to the Fund and its
shareholders.
26
<PAGE>
Calculation of
Offering Price and
Net Asset Value Per Share
The net asset value ("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. Debt securities are priced on the basis of valuations provided by
an independent pricing service using methods approved by the Fund's Board of
Directors. Short-term investments having a maturity of less than 60 days are
valued at amortized cost, which approximates market value. All other securities
are valued at their fair value as determined in good faith and in a method
approved by Mutual Funds, Inc.'s Board of Directors.
Class A Shares are purchased at the offering price per share, while Class
B Shares and Class C Shares are purchased at the NAV per share. The offering
price per share of Class A Shares consists of the NAV per share next computed
after the order is received, plus any applicable front-end sales charges.
The offering price and NAV 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 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.
27
<PAGE>
Management of
the Fund
Directors
The business and affairs of Mutual Funds, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Mutual Funds, Inc.'s directors and officers.
Investment Manager
The Manager furnishes investment management services to the Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
The Manager is an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc. ("DMH"). On April 3, 1995, a merger between DMH and a wholly
owned subsidiary of Lincoln National Corporation ("Lincoln National") was
completed. DMH and the Manager are now 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.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had been
retained under an investment advisory contract to act as the Fund's investment
adviser, subject to the authority of the Board of Directors. Voyageur was an
indirect, wholly owned subsidiary of Dougherty Financial Group, Inc. ("DFG").
After the close of business on April 30, 1997, Voyageur became an indirect,
wholly owned subsidiary of Lincoln National, as a result of Lincoln National's
acquisition of DFG.
<PAGE>
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, the Fund's previous investment advisory agreement with
Voyageur was "assigned," as that term is defined by the 1940 Act, and the
previous agreement therefore was terminated upon the completion of the
acquisition. The Board of Di rectors of the Fund unanimously approved a new
investment advisory agreement at the meeting held in person on February 14,
1997, and called for a shareholders meeting to approve the new agreement. At a
meeting held on April 11, 1997, the shareholders of the Fund approved the
investment advisory agreement with Voyageur to become effective after the
close of business on April 30, 1997, the date the acquisition was completed.
On May 30, 1997, Voyageur was merged into the Manager, and the Manager became
the investment manager for the Fund.
The Manager administers the affairs of and is ultimately responsible for
the investment management of the Fund under an Investment Management Agreement
with Mutual Funds, Inc. on behalf of the Fund dated April 30, 1997. Under the
Investment Management Agreement for the Fund, the Manager is paid an annual fee
equal to 0.65% of the average daily net assets of the Fund.
Patrick P. Coyne and Mitchell L. Conery, each a Vice President/Senior
Portfolio Manager of the Fund, assumed primary responsibility for making the
day-to-day investment decisions for the Fund on May 1, 1997. Mr. Coyne is a
graduate of Harvard University with an MBA from University of Pennsylvania's
Wharton School. Prior to joining the Delaware Group's fixed-income department
in 1990, Mr. Coyne was a manager at Kidder, Peabody & Co. Inc's trading desk,
and specialized in trading high grade municipal bonds and municipal futures
contracts. Mr. Coyne is a member of the Municipal Bond Club of Philadelphia.
Mr. Conery joined Delaware Group in 1997. He holds a bachelor's degree from
Boston University and an MBA in Finance at the State University of New York in
Albany. He has served as an investment officer with Travelers Insurance and as
a research analyst with CS First Boston and MBIA Corporation. Mr. Coyne and Mr.
Conery are also Vice Presidents/Senior Portfolio Managers for Delaware-Voyageur
Tax-Free Florida Fund, Delaware-Voyageur Tax-Free Florida Insured Fund and
Delaware-Voyageur Tax-Free Florida Intermediate Fund, Delaware-Voyageur
Tax-Free New York Fund, Delaware Group Tax-Free Fund, Inc. and DMC Tax-Free
Income Trust--Pennsylvania.
28
<PAGE>
In making such investment decisions for the Fund, Mr. Coyne and Mr. Conery
regularly consult with Paul E. Suckow and other members of the Delaware Group's
fixed-income department. Mr. Suckow is Executive Vice President/Chief
Investment Officer, Fixed Income of the Funds and each of the other funds in
the Delaware Group. He is a CFA charterholder and 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 1981-1985. He
returned to the Delaware Group in 1993 after eight years with Oppenheimer
Management Corporation where he served as Executive Vice President and Director
of Fixed Income.
Portfolio Trading Practices
The Fund normally will not invest for short-term trading purposes.
However, the Fund may sell securities without regard to the length of time they
have been held. The degree of portfolio activity will affect brokerage costs of
the Fund and may affect taxes payable by the Fund's shareholders. A turnover
rate of 100% would occur if all the investments in the Fund's portfolio at the
beginning of the year were replaced by the end of the year. The Fund's
portfolio turnover rates were 8.45% for the fiscal year ended July 31, 1995 and
0.00% for the fiscal year ended July 31, 1996. For the period August 1, 1996
through December 31, 1996, the Fund's portfolio turnover rate was 7.51%.
The Fund 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 to their advisory clients. These services may be used by the Manager in
servicing any of its accounts. Subject to best price and execution, the Fund
may consider a broker/dealer's sales of shares of funds in the Delaware Group
of funds in placing portfolio orders and may place orders with broker/dealers
that have agreed to defray certain expenses of such funds, such as custodian
fees.
<PAGE>
Performance Information
From time to time, the Fund may quote yield or total return performance of
the Classes in advertising and other types of literature.
The current yield for each Class will be calculated by dividing the
annualized net investment income earned by that Class during a recent 30-day
period by the maximum offering price 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 at net asset value and: (i) in the case
of Class A Shares, the impact of the maximum front-end sales charge at the
beginning of each specified period; and (ii) in the case of Class B Shares and
Class C Shares, the deduction of any applicable CDSC at the end of the relevant
period. Each presentation will include the average annual total return for
one-, five- and ten-year periods, as relevant. The Fund may also advertise
aggregate and average total return information concerning a Class over
additional periods of time. In addition, the Fund may present total return
information that does not reflect the deduction of the maximum front-end sales
charge or any applicable CDSC. In this case, such total return information
would be more favorable than total return information that includes the
deductions of the maximum front-end sales charge or any applicable CDSC.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not a guarantee of future results.
29
<PAGE>
Distribution (12b-1) and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement with Mutual
Funds, Inc. dated as of March 1, 1997.
Mutual Funds, Inc. has adopted a separate distribution plan under Rule
12b-1 for each of the Class A Shares, Class B Shares and Class C Shares of the
Fund (the "Plans"). The Plans permit the Fund to pay the Distributor from the
assets of the respective Classes a monthly fee for the Distributor's services
and expenses in distributing and promoting sales of shares. 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, holding special promotions for specified periods
of time, and paying distribution and maintenance fees to brokers, dealers and
others. In connection with the promotion of shares of the Classes, the
Distributor may, from time to time, pay to participate in dealer-sponsored
seminars and conferences, and reimburse dealers for expenses incurred in
connection with preapproved seminars, conferences, and advertising. The
Distributor may pay or allow additional promotional incentives to dealers as
part of preapproved sales contests and/or to dealers who provide extra training
and information concerning a Class and increase sales of the Class. In addition,
the Fund may make payments from the 12b-1 plan fees of its respective Class
directly to others, such as banks, who aid in the distribution of Class shares
or provide services in respect of a Class, pursuant to service agreements with
Mutual Funds, Inc.
The 12b-1 Plan expenses relating to each of the Class B Shares and Class C
Shares are also used to pay the Distributor for advancing the commission costs
to dealers with respect to the initial sale of such shares.
The aggregate fees paid by the Fund from the assets of its Classes to the
Distributor and others under the Plans may not exceed (i) 0.25% of the Class A
Shares' average daily net assets in any year, and (ii) 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 in any year. The Class A,
Class B and Class C Shares will not incur any distribution expenses beyond these
limits, which may not be increased without shareholder approval.
29
<PAGE>
While payments pursuant to the Plans may not exceed 0.25% annually with
respect to the Class A Shares, and 1% annually with respect to each of the
Class B Shares and the Class C Shares, the Plans do not limit fees to amounts
actually expended by the Distributor. It is therefore possible that the
Distributor may realize a profit in any particular year. However, the
Distributor currently expects that its distribution expenses will likely equal
or exceed payments to it under the Plans. The Distributor may, however incur
such additional expenses and make additional payments to dealers from its own
resources to promote the distribution of shares of the Classes. The monthly
fees paid to the Distributor under the Plans are subject to the review and
approval of Mutual Funds, Inc.'s unaffiliated directors, who may reduce the
fees or terminate the Plans at any time.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for the Fund
pursuant to an amended and restated agreement dated as of April 30, 1997. The
Transfer Agent also provides accounting services to the Fund pursuant to the
terms of a separate Fund Accounting Agreement. The directors of Mutual Funds,
Inc. annually review service fees paid to the Transfer Agent.
The Distributor and the Transfer Agent are also indirect, wholly owned
subsidiaries of DMH.
Expenses
The Fund is responsible for all of its own expenses other than those borne
by the Manager under the Investment Management Agreement and those borne by the
Distributor under the Distribution Agreement. In connection with the merger
transaction described above, the Manager has agreed for a period of two years
ending on April 30, 1999, to pay the operating expenses (excluding interest
expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of the Fund
which exceed 1% of the Fund's average daily net assets on an annual basis up to
certain limits as set forth in detail Part B. This agreement replaces a similar
provision in the Fund's investment advisory contracts with the Fund's
predecessor investment adviser.
30
<PAGE>
The Manager and the Distributor reserve the right to voluntarily waive
their fees in whole or part and to voluntarily absorb certain other of the
Fund's expenses. See Summary of Expenses for current fee waivers and
reimbursements. The ratios of expenses to average daily net assets (after
voluntary waivers and payments) for the Class A Shares and Class B Shares of the
Fund for the last fiscal year were as follows:
Period 8/1/96 Year ended
through 12/31/96 7/31/96
Class A Shares 0.87%* 0.85%
Class B Shares** 1.45%* N/A
*Annualized
**For the period December 18, 1996 (commencement of operations) through
December 31, 1996.
The expense ratios reflect the impact of each Class' 12b-1 Plan and the
voluntary waivers of fees in effect during the year.
Shares
Mutual Funds, Inc. is an open-end management investment company. The
Fund's portfolio of assets is diversified as defined by the 1940 Act. Commonly
known as a mutual fund, Mutual Funds, Inc. was organized as a Minnesota
corporation in April 1993. In addition to the Fund, Mutual Fund, Inc. presently
offers eight other series of shares, the Delaware-Voyageur Tax-Free Iowa Fund,
Delaware-Voyageur Tax-Free Wisconsin Fund, Delaware-Voyageur Tax-Free Idaho
Fund, Delaware-Voyageur Tax-Free Arizona Fund, Delaware-Voyageur Tax-Free
California Fund, Delaware-Voyageur Tax-Free New York Fund and Minnesota High
<PAGE>
Yield Municipal Bond Fund. Fund shares have a par value of $.01, equal voting
rights, except as noted below, and are equal in all other respects. Each fund
will vote separately on any matter which affects only that fund. Shares of each
fund have a priority over shares of any other Mutual Funds, Inc. in the assets
and income of that fund.
All of the shares have noncumulative voting rights which means that the
holders of more than 50% of Mutual Funds, Inc.'s shares voting for the election
of directors can elect 100% of the directors if they choose to do so. Under
Minnesota law, Mutual Funds, Inc. 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.
Shares of each Class represent proportionate interests in the assets of
the Fund and have the same voting and other rights and preferences as the other
classes of the Fund. The shareholders of Class A Shares, Class B Shares and
Class C Shares may vote only on matters affecting the 12b-1 Plan that relates
to the class of shares that they hold. However, Class B Shares of a Fund may
vote on any proposal to increase materially the fees to be paid by the Fund
under the 12b-1 Plan relating to Class A Shares.
Beginning June 9, 1997, the name of Voyageur National High Yield Municipal
Bond Fund changed to National High Yield Municipal Bond Fund.
31
<PAGE>
Other Investment
Policies and
Risk Considerations
Municipal Obligations
As used in this Prospectus, the term "Municipal Obligations" refers to
debt obligations issued by or on behalf of a state or territory or its
agencies, instrumentalities, municipalities and political subdivisions. The
term "Municipal Obligations" also includes Derivative Municipal Obligations as
defined below.
Municipal Obligations are primarily debt obligations issued to obtain funds
for various public purposes such as constructing public facilities and making
loans to public institutions. The two principal classifications of Municipal
Obligations are general obligation bonds and revenue bonds. General obligation
bonds are generally secured by the full faith and credit of an issuer possessing
general taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or revenue source. Revenue bonds are
payable only from the revenues derived from a particular source or facility,
such as a tax on particular property or revenues derived from, for example, a
municipal water or sewer utility or an airport. Municipal Obligations that
benefit private parties in a manner different than members of the public
generally (so-called private activity bonds or industrial development bonds) are
in most cases revenue bonds, payable solely from specific revenues of the
project to be financed. The credit quality of private activity bonds is usually
directly related to the creditworthiness of the user of the facilities (or the
creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Municipal Obligations, there is
a variety of types of municipal securities. Certain Municipal Obligations may
carry variable or floating rates of interest whereby the rate of interest is
not fixed but varies with changes in specified market rates or indexes, such as
a bank prime rate or a tax-exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Municipal Obligations are zero coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
<PAGE>
Municipal Obligations also include state or municipal leases and
participation interests therein. The Fund may invest in these types of
obligations without limit. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by the
Fund will be treated as illiquid unless they are determined to be liquid
pursuant to guidelines established by Mutual Fund Inc.'s Board of Directors.
Under these guidelines, the Manager will consider factors including, but not
limited to (a) whether the lease can be canceled, (b) what assurance there is
that the assets represented by the lease can be sold, (c) the municipality's
general credit strength (e.g., its debt, administrative, economic and financial
characteristics), (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an "event of non-appropriation"), and (e) the legal recourse in the event of
failure to appropriate. Additionally, the lack of an established trading market
for municipal lease obligations may make the determination of fair market value
more difficult. See Investment Restrictions and Policies--
Municipal Obligations in Part B.
The Fund may also acquire Derivative Municipal Obligations, which are
custodial receipts or trust certificates ("custodial receipts") underwritten by
securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain Municipal Obligations. The
underwriter of these certificates or receipts typically purchases and deposits
the securities in an irrevocable trust or custodial account with a custodian
bank, which then issues receipts or certificates that evidence ownership of the
periodic unmatured coupon payments and the final principal payment on the
obligations. Although under the terms of a custodial receipt or trust
certificate, the Fund may be authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased
a direct obligation of the issuer.
32
<PAGE>
In addition, in the event that the trust or custodial account in which the
underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to the Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to the Fund would lose their tax-exempt
character and become taxable, for federal and state purposes, in the hands of
the Fund and its shareholders. However, the Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable
on the receipts is tax-exempt. If the Fund invests in custodial receipts, it is
possible that a portion of the discount at which the Fund purchases the
receipts might have to be accrued as taxable income during the period that the
Fund holds the receipts.
The principal and interest payments on the Derivative Municipal Obligations
underlying custodial receipts or trust certificates may be allocated in a number
of ways. For example, payments may be allocated such that certain custodial
receipts or trust certificates may have variable or floating interest rates and
others may be stripped securities which pay only the principal or interest due
on the underlying Municipal Obligations. The Fund may also invest in custodial
receipts or trust certificates which are "inverse floating obligations" (also
sometimes referred to as "residual interest bonds"). These securities pay
interest rates that vary inversely to changes in the interest rates of specified
short term Municipal Obligations or an index of short-term Municipal
Obligations. Thus, as market interest rates increase, the interest rates on
inverse floating obligations decrease. Conversely, as market rates decline, the
interest rates on inverse floating obligations increase. Such securities have
the effect of providing a degree of investment leverage, since the interest
rates on such securities will generally change at a rate which is a multiple of
the change in the interest rates of the specified Municipal Obligations or
index. As a result, the market values of inverse floating obligations will
generally be more volatile than the market values of other Municipal Obligations
and investments in these types of obligations will increase the volatility of
the net asset value of shares of the Fund.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. A
security is considered illiquid if it cannot be sold in the ordinary course of
business within seven days at approximately the price at which it is valued.
Illiquid securities may offer a higher yield than securities which are more
readily marketable, but they may not always be marketable on advantageous
terms.
<PAGE>
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the
over-the-counter markets. The Fund may be restricted in its ability to sell
such securities at a time when the Manager deems it advisable to do so. In
addition, in order to meet redemption requests, the Fund may have to sell other
assets, rather than such illiquid securities, at a time which is not
advantageous.
Certain securities in which the Fund may invest, including municipal lease
obligations, certain restricted securities and commercial paper issued pursuant
to the private placement exemption of Section 4(2) of the Securities Act of
1933, historically have been considered illiquid by the staff of the Securities
and Exchange Commission. In accordance with more recent staff positions,
however, the Fund will treat such securities as liquid and not subject to the
above 15% limitation when they have been determined to be liquid by the Manager
subject to the oversight of and pursuant to procedures adopted by the Fund's
Board of Directors. See Investment Restrictions and Policies --Illiquid
Investments in Part B.
Forward Commitments
New issues of Municipal Obligations and other securities are often
purchased on a "when issued" or delayed delivery basis, with delivery and
payment for the securities normally taking place 15 to 45 days after the date
of the transaction. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the buyer enters into the
commitment. The Fund may enter into such "forward commitments" if it holds, and
maintains until the settlement date in a segregated account, cash or liquid
securities in an amount sufficient to meet the purchase price. There is no
percentage limitation on the Fund's total assets which may be invested in
forward commitments. Municipal Obligations purchased on a when-issued basis and
the securities held in the Fund's portfolio are subject to changes in value
(both generally changing in the same way, i.e., appreciating when interest
rates decline and depreciating when interest rates rise) based upon the
public's perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Municipal Obligations purchased on
a when-issued basis may expose the Fund to risk because they may experience
such fluctuations prior to their actual delivery. Purchasing Municipal
Obligations on a when-issued basis can involve the additional risk that the
yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. Any significant commitment
by the Fund to the purchase of securities on a when-issued basis may increase
the volatility of the Fund's net asset value. Although the Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, it may dispose of a commitment prior to settlement if the Fund's
Manager deems it appropriate to do so. The Fund may realize short-term profits
or losses upon the sale of forward commitments.
33
<PAGE>
Repurchase Agreements
The Fund may enter into repurchase agreements with respect to not more
than 10% of its total assets (taken at current value), except when investing
for defensive purposes during times of adverse market conditions. The Fund may
enter into repurchase agreements with respect to any securities which it may
acquire consistent with its investment policies and restrictions.
In order to invest its short-term cash reserves or when in a temporary
defensive posture, the Fund 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 Fund) 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. Should an issuer of a repurchase agreement
fail to repurchase the underlying security, the loss to the Fund, if any, would
be the difference between the repurchase price and the market value of the
security. The Fund will limit its investments in repurchase agreements to those
which the Manager under guidelines of the Board of Directors determines to
present minimal credit risks and which are of high quality. In addition, the
Fund must have collateral of at least 100% of the repurchase price, including
the portion representing the Fund's yield under such agreements, which is
monitored on a daily basis.
Reverse Repurchase Agreements
The Fund may engage in "reverse repurchase agreements" with banks and
securities dealers with respect to not more than 10% of its total assets.
Reverse repurchase agreements are ordinary repurchase agreements in which the
Fund is the seller of, rather than the investor in, securities and agrees to
repurchase them at an agreed upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transaction costs. Because
certain of the incidents of ownership of the security are retained by the Fund,
reverse repurchase agreements are considered a form of borrowing by the Fund
from the buyer, collateralized by the security. At the time the Fund enters into
a reverse repurchase agreement, cash or liquid securities having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be marked to market daily and maintained throughout the
period of the obligation. Reverse repurchase agreements may be used as a means
of borrowing for investment purposes subject to the 10% limitation set forth
above. This speculative technique is referred to as leveraging. Leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by income from or
appreciation of the securities purchased. Because the Fund does not currently
<PAGE>
intend to utilize reverse repurchase agreements in excess of 10% of total
assets, the Fund believes the risks of leveraging due to use of reverse
repurchase agreements to principal are reduced. The Manager believes that the
limited use of leverage may facilitate the Fund's ability to provide high
current income.
Options and Futures
The Fund may utilize put and call transactions and may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See Investment Restrictions and Policies--Options and Futures in Part B.
Options and futures may be used to attempt to protect against possible declines
in the market value of the Fund's portfolio resulting from downward trends in
the debt securities markets (generally due to a rise in interest rates), to
protect the Fund's unrealized gains in the value of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage
the effective maturity or duration of the Fund's portfolio or to establish a
position in the securities markets as a temporary substitute for purchasing
particular securities. The use of options and futures is a function of market
conditions. Other transactions may be used by the Fund in the future for
hedging purposes as they are developed to the extent deemed appropriate by the
Board.
Options on Securities
The Fund may write (i.e., sell) covered put and call options and purchase
put and call options on the securities in which it may invest and on indices of
securities in which it may invest, to the extent such put and call options are
available.
A put option gives the buyer of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price.
In purchasing a call option, the Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the
period by more than the amount of the premium. In purchasing a put option, the
Fund would be in a position to realize a gain if, during the option period, the
price of the security declined by an amount in excess of the premium paid. It
would realize a loss if the price of the security increased or remained the
same or did not decrease during that period by more than the amount of the
premium. If a put or call option purchased by the Fund were permitted to expire
without being sold or exercised, its premium would be lost by the Fund.
34
<PAGE>
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction as described in Appendix B to Part B. The Fund retains the premium
received from writing a put or call option whether or not the option is
exercised.
Over-the-counter options are purchased or written by the Fund in privately
negotiated transactions. Such options are illiquid, and it may not be possible
for the Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when the Manager believes
it would be advantageous to do so. Over-the-counter options are subject to the
Fund's 15% illiquid investment limitation. See Appendix B to Part B for a
further discussion of the general characteristics and risks of options.
Participation in the options market involves investment risks and
transaction costs to which the Fund would not be subject absent the use of this
strategy. If the Manager's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences
to the Fund may leave the Fund in a worse position than if such strategy was
not used. Risks inherent in the use of options include (a)dependence on the
Manager's ability to predict correctly movements in the direction of interest
rates and security prices; (b) imperfect correlation between the price of
options and movements in the prices of the securities being hedged; (c) the
fact that the skills needed to use these strategies are different from those
needed to select portfolio securities; (d) the possible absence of a liquid
secondary market for any particular instrument at any time; and (e) the
possible need to defer closing out certain hedged positions to avoid adverse
tax consequences. See See Investment Restrictions and Policies --Risks of
Transactions in Futures Contracts and Options in Part B and see Appendix B to
Part B for further discussion and for a discussion of closing transactions and
other risks.
<PAGE>
Futures Contracts and Options on Futures Contracts
The Fund may enter into contracts for the purchase or sale for future
delivery of fixed income securities or contracts based on financial indices
including any index of securities in which the Fund may invest ("futures
contracts") and may purchase and write put and call options to buy or sell
futures contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
The purchaser of a futures contract on an index agrees to take or make delivery
of an amount of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the contract
("current contract value") and the price at which the contract was originally
struck. Options on futures contracts to be written or purchased by the Fund
will be traded on exchanges or over-the-counter. The successful use of such
instruments draws upon the Manager's experience with respect to such
instruments and usually depends upon the Manager's ability to forecast interest
rate movements correctly. Should interest rates move in an unexpected manner,
the Fund may not achieve the anticipated benefits of futures contracts or
options on futures contracts or may realize losses and would thus be in a worse
position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the prices of the securities hedged or used
for cover will not be perfect.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements. To the extent required
to comply with applicable Securities and Exchange Commission releases and staff
positions, when purchasing a futures contract or writing a put option, the Fund
will maintain in a segregated account cash or liquid securities equal to the
value of such contracts, less any margin on deposit. In addition, the rules and
regulations of the Commodity Futures Trading Commission currently require that,
in order to avoid "commodity pool operator" status, the Fund must 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. There are no other numerical
limits on the Fund's use of futures contracts and options on futures contracts.
For a discussion of the tax treatment of futures contracts and options on
futures contracts, see Taxes in Part B. For a further discussion of the general
characteristics and risks of futures, see Appendix B to Part B.
35
<PAGE>
Concentration Policy
As a fundamental policy, the Fund may not invest 25% or more of its total
assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting
one bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk. For a discussion of these
segments of the municipal bond market, see Investment Restrictions and
Policies--Concentration Policy in Part B.
Mutual Funds Inc.'s Board may change any of the foregoing policies that
are not specifically designated fundamental.
Investment Restrictions
The Fund has adopted certain investment restrictions in addition to those
set forth above, which are set forth in their entirety in Part B. Certain of
these restrictions are fundamental and cannot be changed without shareholder
approval, including the restriction providing that the Fund may not borrow
money, except from banks for temporary or emergency purposes in an amount not
exceeding 20% of the value of its total assets (the Fund may also borrow money
in the form of reverse repurchase agreements up to 10% of total assets). See
Investment Restrictions and Policies--Investment Restrictions in Part B.
The Fund also has a number of non-fundamental investment restrictions
which may be changed by Mutual Funds Inc.'s Board without shareholder approval.
These include restrictions providing that the Fund may not (a) invest more than
5% of its total assets in securities of any single investment company, (b)
invest more than 10% of its total assets in securities of two or more
investment companies, (c) invest more than 15% of its net assets in illiquid
securities or (d) pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of net assets. If the Fund invests in securities of
other investment companies, the return on any such investments will be reduced
by the operating expenses, including investment advisory and administrative
fees, of such investment companies.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
36
<PAGE>
Appendix A--
Investment Illustrations
Illustrations of the Potential Impact on Investment Based on Purchase Option
$10,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
----------------------------------- --------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ ---------- ------------ --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
0 9,625 10,000 10,000 9,625 10,000 10,000
1 10,192 10,625 10,625 10,192 10,225 10,525+
2 10,905 11,289 11,289
3 11,669 11,995 11,995
4 12,485 12,744 12,744
5 13,359 13,541 13,541
6 14,294 14,387 14,387
7 15,295+ 15,286 15,286
8 16,366 16,242 16,242
9 17,511 17,379* 17,257
10 18,737 18,595* 18,335
<CAPTION>
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
-------------------------------- -------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ --------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
0 9,625 10,000 10,000 9,625 10,000 10,00
1 10,192 10,625 10,625 10,192 10,625 10,62
2 10,905 11,289 11,289 10,905 11,289 11,28
3 11,669 11,695 11,995 + 11,669 11,995 11,99
4 12,485 12,744 12,74
5 13,359 13,341 13,541
6
7
8
9
10
</TABLE>
<PAGE>
*This assumes that Class B Shares were converted to Class A Shares at the end
of the eighth year.
$250,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
---------------------------------- ---------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ ----------- ---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
0
243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,625 265,625 260,813 255,625 263,125 +
2 279,069 282,227 282,227
3 298,604 299,866 299,866
4 319,507 + 318,607 318,607
5 341,872 338,520 338,520
6 365,803 359,678 359,678
7 391,409 382,158 382,158
8 418,808 406,043 406,043
9 448,124 434,466* 431,420
10 479,493 464,878* 458,384
<CAPTION>
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
--------------------------------- --------------------------------
Year Class A Class B Class C Class A Class B Class C
- ------ --------- --------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
0
243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,625 265,625 260,813 265,625 265,625
2 279,069 282,227 282,227 279,069 282,227 282,227
3 298,604 292,366 300,866 + 298,604 299,866 299,866
4 319,507 + 318,607 318,607
5 341,872 333,520 338,520
6
7
8
9
10
</TABLE>
*This assumes that Class B Shares were converted to Class A Shares at the end
of the eighth year.
Assumes a hypothetical return for Class A of 7% per year, a hypothetical return
for Class B of 6.25% for years 1-8 and 7% for years 9-10, and a hypothetical
return for Class C of 6.25% per year. Hypothetical returns vary due to the
different expense structure for each Class and do not represent actual
performance.
Class A purchase subject to appropriate sales charge breakpoint (3.75% @
$10,000; 3.00% @ $100,000; 2.50% @ $250,000; 2.00% @ $500,000).
Class B purchase assessed appropriate CDSC upon redemption (4%-4%-3%-3%-2%-1%
in years 1-2-3-4-5-6).
Class C purchase assessed 1% CDSC upon redemption in year 1.
Figures marked "+" identify which Class offers the greater return potential
based on investment amount, the holding period and the expense structure of
each Class.
37
<PAGE>
Appendix B--
Classes Offered
<TABLE>
<CAPTION>
Consultant
A Class B Class C Class Class
<S> <C> <C> <C> <C>
Growth of Capital
Aggressive Growth Fund x x x --
Trend Fund x x x --
Enterprise Fund x x x --
DelCap Fund x x x --
Small Cap Value Fund x x x --
U.S. Growth Fund x x x --
Growth Stock Fund x x x --
Tax-Efficient Equity Fund x x x --
- ----------------------------------------------------------------------------------------------
Total Return x x x --
Blue Chip Fund x x x --
Quantum Fund x x x --
Devon Fund x x x --
Decatur Total Return Fund x x x --
Decatur Income Fund x x x --
Delaware Fund x x x --
- ----------------------------------------------------------------------------------------------
International Diversification x x x --
Emerging Markets Fund x x x --
New Pacific Fund x x x --
World Growth Fund x x x --
International Equity Fund x x x --
Global Assets Fund x x x --
Global Bond Fund x x x --
- ----------------------------------------------------------------------------------------------
Current Income
Delchester Fund x x x --
Strategic Income Fund x x x --
Corporate Income Fund x x x --
Federal Bond Fund x x x --
U.S. Government Fund x x x --
Delaware-Voyageur US Government
Securities Fund x x x --
Limited-Term Government Fund x x x --
</TABLE>
(Not Part of Prospectus)
38
<PAGE>
APPENDIX B--CLASSES OFFERED -- (Continued)
<TABLE>
<CAPTION>
Consultant
A Class B Class C Class Class
<S> <C> <C> <C> <C>
Tax-Free Income
National High Yield Municipal Bond Fund x x x --
Tax-Free USA Fund x x x --
Tax-Free Insured Fund x x x --
Tax-Free USA Intermediate Fund x x x --
Delaware-Voyageur Tax-Free Arizona Insured
Fund x x x --
Delaware-Voyageur Tax-Free Arizona Fund x x x --
Delaware-Voyageur Tax-Free California Insured
Fund x x x --
Delaware-Voyageur Tax-Free California Fund x x x --
Delaware-Voyageur Tax-Free Colorado Fund x x x --
Delaware-Voyageur Tax-Free Florida Insured
Fund x x x --
Delaware-Voyageur Tax-Free Florida Intermedi-
ate Fund x x x --
Delaware-Voyageur Tax-Free Florida Fund x x x --
Delaware-Voyageur Tax-Free Idaho Fund x x x --
Delaware-Voyageur Tax-Free Iowa Fund x x x --
Delaware-Voyageur Tax-Free Kansas Fund x x x --
Delaware-Voyageur Minnesota High Yield
Municipal Bond Fund x x x --
Delaware-Voyageur Minnesota Insured Fund x x x --
Delaware-Voyageur Tax-Free Minnesota Inter-
mediate Fund x x x --
Delaware-Voyageur Tax-Free Minnesota Fund x x x --
Delaware-Voyageur Tax-Free Missouri Insured
Fund x x x --
Delaware-Voyageur Tax-Free New Mexico Fund x x x --
Delaware-Voyageur Tax-Free New York Fund x x x --
Delaware-Voyageur Tax-Free North Dakota
Fund x x x --
Delaware-Voyageur Tax-Free Oregon Insured
Fund x x x --
Tax-Free Pennsylvania Fund x x x --
Delaware-Voyageur Tax-Free Utah Fund x x x --
Delaware-Voyageur Tax-Free Washington
Insured Fund x x x --
Delaware-Voyageur Tax-Free Wisconsin Fund x x x --
- ----------------------------------------------------------------------------------------------
Money Market Funds
Delaware Cash Reserve x x x x
U.S. Government Money Fund x -- -- x
Tax-Free Money Fund x -- -- x
</TABLE>
(Not Part of Prospectus)
39
<PAGE>
The Delaware Group includes funds
with a wide range of investment objectives.
Stock funds, income funds, national and
state-specific funds, tax-free funds, money market
funds, global and international funds and
closed-end equity funds give investors
the ability to create a portfolio that fits their
personal financial goals. For more information,
contact your financial adviser or call
Delaware Group at 800-523-4640.
Investment Manager
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
National Distributor
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
Shareholder Servicing
Dividend Disbursing,
Accounting Services
and Transfer Agent
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
Independent Auditors
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
Custodian
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55479
DELAWARE
GROUP
========
Philadelphia o London
LOGO Printed in the U.S.A. on recycled paper.
P-425[--]PP8/97
<PAGE>
PART B--STATEMENT OF ADDITIONAL INFORMATION
AUGUST 28, 1997
- --------------------------------------------------------------------------------
Voyageur Tax Free Funds, Inc.
Voyageur Intermediate Tax-Free Funds, Inc.
Voyageur Insured Funds, Inc.
Voyageur Investment Trust
Voyageur Investment Trust II
Voyageur Mutual Funds, Inc.
Voyageur Mutual Funds II, Inc.
- --------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
For Prospectus and Performance of Class A Shares, Class B Shares and Class C
Shares: Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and Class C
Shares: (SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Cover Page
- --------------------------------------------------------------------------------
Investment Policies and Restrictions
- --------------------------------------------------------------------------------
Performance Information
- --------------------------------------------------------------------------------
Trading Practices and Brokerage
- --------------------------------------------------------------------------------
Purchasing Shares
- --------------------------------------------------------------------------------
Investment Plans
- --------------------------------------------------------------------------------
Determining Offering Price and Net Asset Value
- --------------------------------------------------------------------------------
Redemption and Repurchase
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------------------
Taxes
- --------------------------------------------------------------------------------
Investment Management Agreements and Sub-Advisory Agreements
- --------------------------------------------------------------------------------
Officers and Directors
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
Appendix A--Special Factors Affecting the Funds
- --------------------------------------------------------------------------------
<PAGE>
This Statement of Additional Information ("Part B") describes shares of
each fund listed below (individually, a "Fund" and collectively, the "Funds"),
which is a series of an open-end management investment company, commonly
referred to as a mutual fund.
Delaware-Voyageur Tax-Free Arizona Intermediate
Delaware-Voyageur Tax-Free Arizona Insured Fund
Delaware-Voyageur Tax-Free Arizona Fund
Delaware-Voyageur Tax-Free California Intermediate Fund
Delaware-Voyageur Tax-Free California Insured Fund
Delaware-Voyageur Tax-Free California Fund
Delaware-Voyageur Tax-Free Colorado Intermediate Fund
Delaware-Voyageur Tax-Free Colorado Insured Fund
Delaware-Voyageur Tax-Free Colorado Fund
Delaware-Voyageur Tax-Free Florida Intermediate Fund
Delaware-Voyageur Tax-Free Florida Insured Fund
Delaware-Voyageur Tax-Free Florida Fund
Delaware-Voyageur Tax-Free Iowa Fund
Delaware-Voyageur Tax-Free Idaho Fund
Delaware-Voyageur Tax-Free Kansas Fund
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund
Delaware-Voyageur Minnesota Insured Fund
Delaware-Voyageur Tax-Free Minnesota Fund
Delaware-Voyageur Tax-Free Missouri Insured Fund
Delaware-Voyageur Tax-Free New Mexico Fund
Delaware-Voyageur Tax-Free New York Fund
Delaware-Voyageur Tax-Free North Dakota Fund
Delaware-Voyageur Tax-Free Oregon Insured Fund
Delaware-Voyageur Tax-Free Utah Fund
Delaware-Voyageur Tax-Free Washington Insured Fund
Delaware-Voyageur Tax-Free Wisconsin Fund
Each Fund offers three retail classes of shares: "Class A Shares," "Class B
Shares" and "Class C Shares" (individually, a "Class" and collectively, the
"Classes"). This Part B describes each Fund and each Class, except where noted.
Class B Shares and Class C Shares may be purchased at a price equal to the
next determined net asset value per share. Class A Shares may be purchased at
the public offering price, which is equal to the next determined net asset value
per share, plus a front-end sales charge. Class A Shares are subject to a
maximum front-end sales charge of 3.75% with respect to Tax-Free Funds and
Insured Funds and 2.75% with respect to Tax-Free Intermediate Funds. Class A
Shares are subject to annual 12b-1 Plan expenses which may not exceed 0.25%.
Class B Shares are subject to a contingent deferred sales charge ("CDSC") which
may be imposed on redemptions made within six years of purchase with respect to
Tax-Free Funds and Insured Funds and three years of purchase with respect to
Tax-Free Intermediate Funds. Class B Shares are subject to annual 12b-1 Plan
expenses of 1%, which are assessed for approximately eight years after purchase
against Class B Shares of Tax-Free Funds and Insured Funds and approximately
five years after purchase against Class B Shares of Tax-Free Intermediate Funds.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus. Class C Shares of each Fund are subject to a CDSC which may be
imposed on redemptions made within 12 months of purchase and annual 12b-1 Plan
expenses of 1%, which are assessed against the Class C Shares for the life of
the investment.
This Part B supplements the information contained in the current Prospectus
of the Funds dated August 28, 1997, as it may be amended from time to time. It
should be read in conjunction with the Funds' Prospectus. Part B is not itself a
prospectus but is, in its entirety, incorporated by reference into the
Prospectus. The Prospectus for the Funds may be obtained by writing or calling
your investment dealer or by contacting the Funds' national distributor,
Delaware Distributors, L.P. (the "Distributor"), 1818 Market Street,
Philadelphia, PA 19103.
2
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
Investment Restrictions
The Funds have adopted certain investment restrictions set forth below
which, together with the investment objectives of each Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the Investment Company Act of 1940 (the
"1940 Act"), this means the lesser of the vote of (1) 67% of the shares of a
Fund at a meeting where more than 50% of the outstanding shares of a Fund are
present in person or by proxy or (2) more than 50% of the outstanding shares of
a Fund. The following investment restrictions apply to Tax-Free Arizona Insured
Fund, Tax-Free California Insured Fund, Tax-Free Colorado Fund, Tax-Free
Florida Insured Fund, Tax-Free Kansas Fund, Minnesota Insured Fund, Tax-Free
Minnesota Intermediate Fund, Tax-Free Minnesota Fund, Tax-Free Missouri Insured
Fund, Tax-Free New Mexico Fund, Tax-Free North Dakota Fund, Tax-Free Oregon
Insured Fund, Tax-Free Utah Fund, and Tax-Free Washington Insured Fund. No such
Fund will:
(1) Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 20% (10% for Tax-Free Colorado Fund) of the value of
such Fund's total assets, including the amount borrowed. The Funds may not
borrow for leverage purposes, and securities will not be purchased while
borrowings are outstanding. Interest paid on any money borrowed will reduce such
Fund's net income.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of its total assets (taken at the lower of cost or current value)
and then only to secure borrowings permitted by restriction (1) above.
(3) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
(4) Make short sales of securities or maintain a short position for the
account of such Fund unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(5) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(6) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate.
(7) Purchase or sell commodities or commodity contracts (including futures
contracts).
(8) Make loans, except by purchase of debt obligations in which such Fund
may invest consistent with its investment policies, and through repurchase
agreements.
(9) Invest in securities of any issuer if, to the knowledge of such Fund,
officers and directors (or trustees) of such Fund or officers and directors of
such Fund's investment adviser who beneficially own more than 1/2 of 1% of the
securities of that issuer together own more than 5% of such securities.
(10) Invest 25% or more of its assets in the securities of issuers in any
single industry, except that the Funds may invest without limitation, in
circumstances in which other appropriate available investments may be in limited
supply, in housing, health care and utility obligations; provided that there
shall be no limitation on the purchase of Tax Exempt Obligations and, for
defensive purposes, obligations
3
<PAGE>
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
(Note: For purposes of this investment restriction, the Funds' investment
adviser (the "Manager") interprets "Tax Exempt Obligations" to exclude limited
obligation bonds payable only from revenues derived from facilities or projects
within a single industry.)
(11) Invest more than 15% of its net assets in illiquid investments.
The following fundamental investment restrictions apply to Tax-Free Iowa
Fund and Tax-Free Wisconsin Fund. These Funds will not:
(1) Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 20% of the value of such Fund's total assets, including
the amount borrowed. The Funds may not borrow for leverage purposes, and
securities will not be purchased while borrowings are outstanding. Interest paid
on any money borrowed will reduce such Fund's net income.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which such Fund
may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more of its assets in the securities of issuers in any
single industry, except that it may invest without limitation, in circumstances
in which other appropriate available investments may be in limited supply, in
housing, health care and/or utility obligations; provided that there shall be no
limitation on the purchase of Tax Exempt Obligations and, for defensive
purposes, obligations issued or guaranteed by U.S. government, its agencies or
instrumentalities. (Note: For purposes of this investment restriction, the
Manager interprets "Tax Exempt Obligations" to exclude limited obligations bonds
payable only from revenues derived from facilities or projects within a single
industry.)
(6) Issue any senior securities (as defined in the 1940 Act), except as set
forth in investment restriction number (1) above, and except to the extent that
purchasing or selling on a when-issued or forward commitment basis may be deemed
to constitute issuing a senior security.
(7) Purchase or sell commodities or commodity contracts (including futures
contracts).
(8) Make short sales of securities or maintain a short position for the
account of such Fund unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
The following restrictions apply to Tax-Free Arizona Intermediate Fund,
Tax-Free Arizona Fund, Tax-Free California Intermediate Fund, Tax-Free
California Fund, Tax-Free Colorado Intermediate Fund, Tax-Free Colorado Insured
Fund, Tax-Free Florida Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho
Fund and Tax-Free New York Fund. No such Fund will:
(1) Borrow money (provided that such Fund may enter into reverse repurchase
agreements), except from banks for temporary or emergency purposes in an amount
not exceeding 20% of the value of the Fund's total assets, including the amount
borrowed. The Funds may not borrow for leverage purposes, provided that such
Funds may enter into reverse repurchase agreements for such purposes, and
4
<PAGE>
securities will not be purchased while outstanding borrowings exceed 5% of the
value of such Fund's total assets.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, such Fund may
be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the Fund
may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more of its assets in the securities of issuers in any
single industry (except that it may invest without limitation, in circumstances
in which other appropriate available investments may be in limited supply, in
housing, health care, utility, transportation, education and/or industrial
obligations); provided that there shall be no limitation on the purchase of Tax
Exempt Obligations and, for defensive purposes, obligations issued or guaranteed
by the U. S. government, its agencies or instrumentalities. (Note: For purposes
of this investment restriction, the Manager interprets "Tax Exempt Obligations"
to exclude limited obligations bonds payable only from revenues derived from
facilities or projects within a single industry.)
(6) Issue any senior securities (as defined in the 1940 Act), except as set
forth in investment restriction number (1) above, and except to the extent that
using options, futures contracts and options on futures contracts, purchasing or
selling on a when-issued or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict the Fund
from purchasing or selling, on a basis consistent with any restrictions
contained in its then-current Prospectus, any financial contracts or instruments
which may be deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect, in each case,
to interest rates, currencies, stock indices, bond indices or interest rate
indices).
(8) With respect to Tax-Free Florida Intermediate Fund only, pledge,
hypothecate, mortgage or otherwise incumber its assets in excess of 10% of its
total assets (taken at the lower of cost or current value). For the purposes of
this restriction, collateral arrangements for margin deposits on futures
contracts with respect to the writing of options, with respect to reverse
repurchase agreements or with respect to similar investment techniques are not
deemed to be a pledge of assets.
The following non-fundamental investment restrictions may be changed by the
Board of each Fund at any time. None of the Funds will:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in securities of two
or more investment companies, except as part of a merger, consolidation or
acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) With respect to Tax-Free Arizona Intermediate Fund, Tax-Free Arizona
Fund, Tax-Free California Intermediate Fund, Tax-Free California Fund, Tax-Free
Colorado Intermediate Fund, Tax-Free Colorado Insured Fund, Tax-Free Florida
Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund and Tax-Free New
York Fund, such Funds will not make short sales of securities or maintain a
5
<PAGE>
short position for the account of such Fund, unless at all times when a short
position is open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
Tax Exempt Obligations
The term "Tax Exempt Obligations" refers to debt obligations issued by or
on behalf of a state or territory or its agencies, instrumentalities,
municipalities and political subdivisions, the interest payable on which is, in
the opinion of bond counsel, excludable from gross income for purposes of
federal income taxation (except, in certain instances, the alternative minimum
tax, depending upon the shareholder's tax status) and with respect to the Funds
other than the three national funds, personal income tax of the state specified
in the Fund's name, if any. Tax-Exempt Obligations are generally issued to
obtain funds for various public purposes, including the construction or
improvement of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Tax Exempt Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, Tax Exempt Obligations may be issued by or on behalf of
public bodies to obtain funds to provide for the construction, equipping, repair
or improvement of housing facilities, convention or trade show facilities,
airport, mass transit, industrial, port or parking facilities and certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Funds may invest, including Tax Exempt Obligations,
are subject to the provisions of bankruptcy, insolvency, reorganization and
other laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or a State's
legislature extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations within
constitutional limitations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations for the payment of interest on and principal of their Tax Exempt
Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Tax Exempt Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Tax Exempt Obligations for investment by the
Funds and the value of each Fund's portfolio. In such event, management of the
Funds may discontinue the issuance of shares to new investors and may reevaluate
each Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") for Tax Exempt
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Funds' Prospectus and this Statement of Additional Information. The ratings
of Moody's and S&P represent their opinions as to the quality of the Tax Exempt
Obligations which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings provide an initial criterion for selection of portfolio
investments, the Manager, will subject these securities to other evaluative
criteria prior to investing in such securities.
6
<PAGE>
Floating and Variable Rate Demand Notes. The Funds may purchase floating
and variable rate demand notes. Generally, such notes are secured by letters of
credit or other credit support arrangements provided by banks. Such notes
normally have a stated long-term maturity but permit the holder to tender the
note for purchase and payment of principal and accrued interest upon a specified
number of days' notice. The issuer of floating and variable rate demand notes
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus accrued interest
upon a specified number of days' notice to the noteholders. The interest rate on
a floating rate demand note is based on a specified interest index, such as a
bank's prime rate, and is adjusted automatically each time such index is
adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals, based upon current market conditions. The Manager monitors
the creditworthiness of issuers of floating and variable rate demand notes in
each Fund's portfolio.
Escrow Secured Bonds or Defeased Bonds. Escrow secured bonds or defeased
bonds are created when an issuer refunds in advance of maturity (or pre-refunds)
some of its outstanding bonds and it becomes necessary or desirable to set aside
funds for redemption or payment of the bonds at a future date or dates. In an
advance refunding, the issuer will use the proceeds of a new bond issue to
purchase high grade interest bearing debt securities which are then deposited in
an irrevocable escrow account held by an escrow agent to secure all future
payments of principal and interest of the advance refunded bond. Escrow secured
bonds will often receive a triple A rating from S&P and Moody's. The Tax-Free
Insured Funds will purchase escrow secured bonds without additional insurance
only where the escrow is invested in securities of the U.S. government or
agencies or instrumentalities of the U.S. government.
State or Municipal Lease Obligations. Municipal leases may take the form of
a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Funds will invest, the Manager
will evaluate the credit rating of the lessee and the terms of the lease.
Additionally, the Manager may require that certain municipal leases be secured
by a letter of credit or put arrangement with an independent financial
institution. State or municipal lease obligations frequently have the special
risks described below which are not associated with general obligation or
revenue bonds issued by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "nonappropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "nonappropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for nonappropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
Concentration Policy. As set forth in the Funds' Prospectus, although each
Fund may invest 25% or more of its total assets in limited obligation bonds, no
Fund will invest 25% or more of its total assets in limited obligation bonds
payable only from revenues derived from facilities or projects within a single
industry, except that the Funds may invest without limitation, in circumstances
in which other appropriate
7
<PAGE>
available investments may be in limited supply, in housing, health care and/or
utility obligations. Tax-Free Arizona Intermediate Fund, Tax-Free Arizona Fund,
Tax-Free California Intermediate Fund, Tax-Free California Fund, Tax-Free
Colorado Intermediate Fund, Tax-Free Colorado Insured Fund, Tax-Free Florida
Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund and Tax-Free New
York Fund also may, under such circumstances, invest without limit in
transportation, education and/or industrial obligations. Appropriate available
investments may be in limited supply, from time to time in the opinion of the
Manager, due to, among other things, each Fund's investment policy of investing
primarily in obligations of its state (and the state's municipalities, other
political subdivisions and public authorities) and of investing primarily in
investment grade (high grade, with respect to the Tax-Free Insured Funds)
securities. Additionally, the insurance policies of the Tax-Free Insured Funds
may affect the appropriate available investment supply from time to time in the
opinion of the Manager. Certain of the risks set forth below may be reduced or
eliminated to the extent a Fund invests in insured Tax Exempt Obligations.
Housing Obligations. Each Fund may invest, from time to time, 25% or more
of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. Each Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
Utility Obligations. Each Fund may invest, from time to time, 25% or more
of its total assets in obligations issued by public bodies, including state and
municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. Certain Funds may, from time to time, invest
25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance airports and highway,
bridge and toll road facilities. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for airport use,
occupancy of certain terminal space, service fees and leases. Airport operating
income may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The revenues of issuers which derive their payments from bridge, road or tunnel
toll revenues could be adversely affected by
8
<PAGE>
competition from toll-free vehicular bridges and roads and alternative modes of
transportation. Such revenues could also be adversely affected by a reduction in
the availability of fuel to motorists or significant increases in the costs
thereof.
Education Obligations. Certain Funds may, from time to time, invest 25% or
more of their total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. Certain Funds may, from time to time,
invest 25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal income
taxes and the personal income taxes of certain states for certain housing,
health care, utility, transportation, education and industrial revenue bonds
depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Funds to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
Taxable Obligations
As set forth in the Funds' Prospectus, the Funds may invest to a limited
extent in obligations and instruments, the interest on which is includable in
gross income for purposes of federal and state income taxation.
Government Obligations. The Funds may invest in securities issued or
guaranteed by the U. S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are
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supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and other obligations,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the instrumentality itself. Although the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law. The Funds will invest in such securities only when
the Manager is satisfied that the credit risk with respect to the issuer is
minimal.
Repurchase Agreements. The Funds may invest in repurchase agreements. The
Funds' custodian will hold the securities underlying any repurchase agreement or
such securities will be part of the Federal Reserve Book Entry System. The
market value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Funds' custodian (so the total collateral
is an amount at least equal to the repurchase price plus accrued interest).
Other Taxable Investments. The Funds also may invest in certificates of
deposit, bankers' acceptances and other time deposits. Certificates of deposit
are certificates representing the obligation of a bank to repay the funds
deposited (plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. With respect to Colorado Fund, investments in time deposits
generally are limited to London branches of domestic banks that have total
assets in excess of one billion dollars.
Options and Futures Transactions
To the extent set forth in the Prospectus, each Fund may buy and sell put
and call options on the securities in which they may invest, and certain Funds
may enter into futures contracts and options on futures contracts with respect
to fixed-income securities or based on financial indices including any index of
securities in which the Fund may invest. Futures and options will be used to
facilitate allocation of a Fund's investments among asset classes, to generate
income or to hedge against changes in interest rates or declines in securities
prices or increases in prices of securities proposed to be purchased. Different
uses of futures and options have different risk and return characteristics.
Generally, selling futures contracts, purchasing put options and writing (i.e.
selling) call options are strategies designed to protect against falling
securities prices and can limit potential gains if prices rise. Purchasing
futures contracts, purchasing call options and writing put options are
strategies whose returns tend to rise and fall together with securities prices
and can causes losses if prices fall. If securities prices remain unchanged over
time option writing strategies tend to be profitable, while option buying
strategies tend to decline in value.
Writing Options. The Funds may write (i.e. sell) covered put and call
options with respect to the securities in which they may invest. By writing a
call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
"Covered options" means that so long as a Fund is obligated as the writer
of a call option, it will own the underlying securities subject to the option
(or comparable securities satisfying the cover requirements of securities
exchanges). A Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains with its custodian cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
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Through the writing of call or put options, a Fund may obtain a greater
current return than would be realized on the underlying securities alone. A Fund
receives premiums from writing call or put options, which it retains whether or
not the options are exercised. By writing a call option, a Fund might lose the
potential for gain on the underlying security while the option is open, and by
writing a put option, a Fund might become obligated to purchase the underlying
security for more than its current market price upon exercise.
Purchasing Options. The Funds may purchase put options in order to protect
portfolio holdings in an underlying security against a decline in the market
value of such holdings. Such protection is provided during the life of the put
because a Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to a
Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit a Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put is sold.
A Fund may wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio.
Each of the Funds may also purchase call options. During the life of the
call option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
Securities Index Option Trading. The Funds may purchase and write put and
call options on securities indexes. Options on securities indexes are similar to
options on securities except that, rather than the right to take or make
delivery of a security at a specified price, an option on an index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the index upon which the option is based is greater than,
in the case of a call, or less than, in the case of a put, the exercise price of
the option. The writer of the option is obligated to make delivery of this
amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in a Fund's portfolio
correlate with price movements of the index selected. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular security, whether a Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of prices in the relevant underlying securities markets generally or, in
the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
a Fund of options on security indexes will be subject to the Manager's ability
to predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event the Manager is unsuccessful in predicting the movements
of an index, a Fund could be in a worse position than had no hedge been
attempted.
Because exercises of index options are settled in cash, a Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When a Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker
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as collateral for the option, cash, high-grade liquid debt securities or
"qualified securities" with a market value determined on a daily basis of not
less than 100% of the current market value of the option.
Options purchased and written by a Fund may be exchange traded or may be
options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by the Manager. OTC options are illiquid and it may not be possible for the Fund
to dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when the Manager believes it would be
advantageous to do so.
Futures Contracts and Options on Futures Contracts. Certain Funds may enter
into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate and securities index contracts and
put and call options on these futures contracts. These contracts will be entered
into on domestic and foreign exchanges and boards of trade, subject to
applicable regulations of the Commodity Futures Trading Commission. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes.
In connection with transactions in futures contracts and writing related
options, each Fund will be required to deposit as "initial margin" a specified
amount of cash or short-term, U.S. government securities. The initial margin
required for a futures contract is set by the exchange on which the contract is
traded. It is expected that the initial margin would be approximately 1-1/2% to
5% of a contract's face value. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the broker to reflect changes in the
value of the futures contract. No Fund will purchase or sell futures contracts
or related options if, as a result, the sum of the initial margin deposit on
that Fund's existing futures and related options positions and premiums paid for
options or futures contracts entered into for other than bona fide hedging
purposes would exceed 5% of the Fund's assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded, a Fund will incur brokerage fees when it
purchases or sells futures contracts.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several risks in
using securities index or interest rate futures contracts as hedging devices.
One risk arises because the prices of futures contracts may not correlate
perfectly with movements in the underlying index or financial instrument due to
certain market distortions. First, all participants in the futures market are
subject to initial margin and variation margin requirements. Rather than making
additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index or security and the futures market. Second, the margin requirements in the
futures market are lower than margin requirements in the securities market, and
as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures market
may also cause temporary price distortions. Because of possible price distortion
in the futures market and because of imperfect correlation between movements in
indexes of securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures
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contracts, the risk of imperfect correlation increases as the composition of a
Fund's portfolio diverges from the financial instruments included in the
applicable index.
Successful use of futures contracts by a Fund is subject to the ability of
the Manager to predict correctly movements in the direction of interest rates or
the relevant underlying securities market. If a Fund has hedged against the
possibility of an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its security which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
Liquidity of Futures Contracts. A Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risk of Options. The use of options on financial instruments and indexes
and on interest rate and index futures contracts also involves additional risk.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transactions costs). The writing
of a call option generates a premium, which may partially offset a decline in
the value of a Fund's portfolio assets. By writing a call option, the Fund
becomes obligated to sell an underlying instrument or a futures contract, which
may have a value higher than the exercise price. Conversely, the writing of a
put option generates a premium, but the Fund becomes obligated to purchase the
underlying instrument or futures contract, which may have a value lower than the
exercise price. Thus, the loss incurred by a Fund in writing options may exceed
the amount of the premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Manager
deems it desirable to do so. Although a Fund will
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enter into an option position only if the Manager believes that a liquid
secondary market exists for such option, there is no assurance that the Fund
will be able to effect closing transactions at any particular time or at an
acceptable price. The Funds' transactions involving options on futures contracts
will be conducted only on recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the Manager,
which could prove to be inaccurate. Even if the expectations of the Manager are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of a purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; a Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
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suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Certain Funds may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, such Funds will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
Certain Funds may purchase call options to hedge against an increase in
price of securities that the Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC options").
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. OTC options are illiquid and it
may not be possible for the Funds to dispose of options they have purchased or
terminate their obligations under an option they have written at a time when the
Manager believes it would be advantageous to do so. Accordingly, OTC options are
subject to each Fund's limitation that a maximum of 15% of its net assets be
invested in illiquid securities. In the event of the bankruptcy of the writer of
an OTC option, a Fund could experience a loss of all or part of the value of the
option. The Manager anticipates that options on Tax Exempt Obligations will
consist primarily of OTC options.
Illiquid Investments
Each Fund is permitted to invest up to 15% of its net assets in illiquid
investments. For certain Funds, this policy is fundamental. See Investment
Restrictions above. An investment is generally deemed to be "illiquid" if it
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment. "Restricted securities" are securities which were originally sold in
private placements and which have not been registered under the Securities Act
of 1933 (the "1933 Act"). Such securities generally have been considered
illiquid by the staff of the Securities and Exchange Commission (the "SEC"),
since such securities may be resold only subject to statutory restrictions and
delays or if registered under the 1933 Act. However, the Securities and Exchange
Commission has acknowledged that a market exists for certain restricted
securities (for example, securities qualifying for resale to certain "qualified
institutional buyers" pursuant to Rule 144A under the 1933 Act, certain forms of
interest-only and principal-only, mortgaged-backed U.S. government securities
and commercial paper issued pursuant to the private placement exemption of
Section 4(2) of the 1933 Act). As a fundamental policy, the Funds may invest
without limitation in these forms of restricted securities if such securities
are deemed by the Manager to be liquid in accordance with standards established
by the Funds' Board. Under these guidelines, the Manager must consider, among
other things, (a) the frequency of trades and quotes for the security, (b) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers, (c) dealer undertakings to make a market in the
security, and (d) the nature of the security and the nature of the marketplace
trades (for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer.)
At the present time, it is not possible to predict with accuracy how the
markets for certain restricted
15
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securities will develop. Investing in restricted securities could have the
effect of increasing the level of a Fund's illiquidity to the extent that
qualified purchasers of the securities become, for a time, uninterested in
purchasing these securities.
As more fully described in the Funds' Prospectus, the Funds are permitted
to invest in municipal leases. Traditionally, municipal leases have been viewed
by the Securities and Exchange Commission staff as illiquid investments.
However, subject to Board standards similar to the standards applicable to
restricted securities (as discussed above), the Manager may treat certain
municipal leases as liquid investments and not subject to the policy limiting
illiquid investments.
Diversification
Each Fund designated as such on the cover of the Prospectus operates as a
"diversified" management investment company, as defined in the Investment
Company Act of 1940 (the "1940 Act"), which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables),
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
such Fund and to not more than 10% of the outstanding voting securities of such
issuer. The other Funds are "non-diversified," as defined in the 1940 Act. See
the Prospectus regarding certain considerations relating to "non-diversified"
status.
For purposes of such diversification, the identification of the issuer of
Tax Exempt Obligations depends on the terms and conditions of the security. If a
State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond is
backed only by certain revenues to be received from the non-governmental user of
the project financed by the bond, then such non-governmental user is deemed to
be the sole issuer. If, however, in any of the above cases, a State, political
subdivision or some other entity guarantees a security and the value of all
securities issued or guaranteed by the guarantor and owned by one of the Funds
exceeds 10% of the value of such Fund's total assets, the guarantee is
considered a separate security and is treated as an issue of the guarantor.
Investments in municipal obligations refunded with escrowed U.S. government
securities will be treated as investments in U.S. government securities for
purposes of determining a Fund's compliance with the 1940 Act diversification
requirements.
In order to qualify as a regulated investment company, each Fund must
limit its investments so that, at the close of each quarter of the taxable year,
with respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Internal Revenue Code of 1986, as amended (the "Code") requires that not more
than 25% in value of each Fund's total assets may be invested in the securities
of a single issuer at the close of each quarter of the taxable year. Each Fund
intends to conduct its operations so that it will comply with diversification
requirements and qualify under the Code as a "regulated investment company."
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Insurance
The Manager anticipates that substantially all of the insured Tax-Exempt
Obligations in each Insured Fund's investment portfolio will be covered by
either Primary Insurance or Secondary Market Insurance. However, as a
non-fundamental policy, the Insured Funds must obtain Portfolio Insurance on all
Tax-Exempt Obligations requiring insurance that are not covered by either
Primary Insurance or Secondary Market Insurance. Both Primary Insurance and
Secondary Market Insurance are non-cancelable and continue in force so long as
the insured security is outstanding and the respective insurer remains in
business. Premiums for Portfolio Insurance, if any, would be paid from Fund
assets and would reduce the current yield on its investment portfolio by the
amount of such premiums.
Because Portfolio Insurance coverage terminates upon the sale of an insured
security from a Fund's portfolio, such insurance does not have an effect on the
resale value of the security. Therefore, unless a Fund elects to purchase
Secondary Market Insurance with respect to such securities or such securities
are already covered by Primary Insurance, it generally will retain any such
securities insured by Portfolio Insurance which are in default or in significant
risk of default, and will place a value on the insurance equal to the difference
between the market value of the defaulted security and the market value of
similar securities which are not in default.
The Insured Funds are authorized to obtain Portfolio Insurance from
insurers that have obtained a claims-paying ability rating of "AAA" from S&P or
"Aaa" (or a short-term rating of "MIG-1") from Moody's, including AMBAC
Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA"), Financial Guaranty Insurance Company ("FGIC") and Financial Security
Assurance, Inc. ("FSA").
A Moody's insurance claims-paying ability rating is an opinion of the
ability of an insurance company to repay punctually senior policyholder
obligations and claims. An insurer with an insurance claims-paying ability
rating of Aaa is adjudged by Moody's to be of the best quality. In the opinion
of Moody's, the policy obligations of an insurance company with an insurance
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position. An S&P insurance claims-paying ability rating is
an assessment of an operating insurance company's financial capacity to meet
obligations under an insurance policy in accordance with its terms. An insurer
with an insurance claims-paying ability rating of AAA has the highest rating
assigned by S&P. The capacity of an insurer so rated to honor insurance
contracts is adjudged by S&P to be extremely strong and highly likely to remain
so over a long period of time.
An insurance claims-paying ability rating by Moody's or S&P does not
constitute an opinion on any specific insurance contract in that such an opinion
can only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet non-policy
obligations (i.e., debt contracts).
The assignment of ratings by Moody's or S&P to debt issues that are fully
or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of insurance claims-paying ability
ratings. The likelihood of a timely flow of funds from the insurer to the
trustee for the bondholders is a likely element in the rating determination for
such debt issues.
Each of AMBAC, MBIA, FGIC, and FSA has a insurance claims-paying ability
rating of Aaa from Moody's and AAA from S&P.
AMBAC has received a letter ruling from the Internal Revenue Service which
holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Tax-Free Funds, under policy provisions
17
<PAGE>
substantially identical to those contained in its municipal bond insurance
policy, will excludable from federal gross income under Section 103(a) of the
Internal Revenue Code.
As of December 31, 1996, the total admitted assets of AMBAC were
approximately $2.6 billion with statutory capital of approximately $1.5 billion.
Statutory capital consists of the AMBAC's statutory contingency reserve and
policyholders' surplus.
As of December 31, 1996, the total admitted assets (unaudited) of MBIA were
approximately $4.5 billion with statutory capital of approximately $1.5 billion.
As of December 31, 1996, the total admitted assets (unaudited) of FGIC were
approximately $2.4 billion total capital and surplus (unaudited) approximately
$1.6 billion.
As of December 31, 1996, admitted assets of FSA were approximately $1.1
billion with statutory capital of approximately $676 million.
None of AMBAC, MBIA, FGIC and FSA or any associate thereof, has any
material business relationship, direct or indirect, with the Funds.
AMBAC, MBIA, FGIC and FSA are subject to regulation by the department of
insurance in each state in which they are qualified to do business. Such
regulation however, is not a guarantee that any of AMBAC, MBIA, FGIC and FSA
will be able to perform on its contractual insurance in the event a claim should
be made thereunder at some time in the future.
The information relating to AMBAC, MBIA, FGIC and FSA set forth above,
including the financial information, has been furnished by such corporations or
has been obtained from publicly available sources. Financial information with
respect to AMBAC, MBIA, FGIC and FSA appears in reports filed by AMBAC, MBIA,
FGIC and FSA with insurance regulatory authorities and is subject to audit and
review by such authorities. No representation is made herein as to the accuracy
or adequacy of such information with respect to AMBAC, MBIA, FGIC and FSA or as
to the absence of material adverse changes in such information subsequent to the
date thereof.
18
<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may state total return for its Classes in
advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life of fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
The average annual total rate of return for a Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1+T) = ERV
Where P = a hypothetical initial purchase order of $1,000 from
which, in the case of only Class A Shares, the
maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical $1,000 purchase
at the end of the period after the deduction of the
applicable CDSC, if any, with respect to Class B
Shares and Class C Shares.
In presenting performance information for Class A Shares, the Limited CDSC
applicable to only certain redemptions of those shares will not be deducted from
any computation of total return. See the Prospectus for the Classes for a
description of the Limited CDSC and the limited instances in which it applies.
All references to a CDSC in this Performance Information section will apply to
Class B Shares or Class C Shares.
Aggregate or cumulative total return is calculated in a similar manner,
except that the results are not annualized. Each calculation assumes the maximum
front-end sales charge, if any, is deducted from the initial $1,000 investment
at the time it is made and that all distributions are reinvested at net asset
value, and with respect to Class B Shares and Class C Shares, reflects the
deduction of the CDSC that would be applicable upon complete redemption of such
shares. In addition, each Fund may present total return information that does
not reflect the deduction of the maximum front-end sales charge or any
applicable CDSC.
The performance, as shown below, is the average annual total return
quotations of each Class of each Fund through December 31, 1996, computed as
described above. The average annual total return for Class A Shares at offer
reflects the maximum front-end sales charge of 3.75% with respect to Tax-Free
Funds and Insured Funds and 2.75% with respect to Tax-Free Intermediate Funds
paid on the purchase of shares. The average annual total return for Class A
Shares at net asset value (NAV) does not reflect the payment of any front-end
sales charge. The average annual return for Class B Shares and Class C Shares
including deferred sales charge reflects the deduction of the applicable CDSC
that would be paid if the shares were redeemed at December 31, 1996. The average
annual total return for Class B Shares and Class C Shares excluding deferred
sales charge assumes the shares were not redeemed at December 31, 1996 and
therefore does not reflect the deduction of a CDSC.
Securities prices fluctuated during the periods covered and past results
should not be considered as representative of future performance.
19
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Arizona Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 1.50% 5.47% 12/31/96 0.85% 4.83% 12/31/96 3.69% 4.68%
Period Period Period
3/2/95(1) 6/29/95(1) 5/13/95(1)
through through through
12/31/96 7.91% 10.18% 12/31/96 5.85% 8.41% 12/31/96 8.66% 8.66%
Tax-Free Arizona Insured Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 4.08%(3) 12/31/96 (0.66%)(3) 3.31%(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/10/95(1) 5/26/94(1)
ended through through
12/31/96 3.38%(3) 4.70%(3) 12/31/96 5.41%(3) 7.51%(3) 12/31/96 6.70%(3) 6.70%(3)
5 years
ended
12/31/96 6.46%(3) 7.27%(3)
Period
4/1/91(1)
through
12/31/96 7.34%(3) 8.05%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
20
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free California Fund(3)
Class B Class B
Class A Class A Shares Shares
Shares Shares (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year
ended ended
12/31/96 0.33% 4.19% 12/31/96 (0.16%) 3.76%
Period Period
3/3/95(1) 8/23/95(1)
through through
12/31/96 6.53% 8.77% 12/31/96 7.02% 9.88%
Tax-Free California Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.23%) 3.61% 12/31/96 (0.74%) 3.21% 12/31/96 1.47% 2.45%
Period Period
3 years 3/1/94(1) 4/12/95(1)
ended through through
12/31/96 2.85% 4.18% 12/31/96 3.44% 4.40% 12/31/96 5.93% 5.93%
Period
10/15/92(1)
through
12/31/96 5.94% 6.91%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
21
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Colorado Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 4.07%(3) 12/31/96 (0.72%)(3) 3.24%(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/22/95(1) 5/6/94(1)
ended through through
12/31/96 3.15%(3) 4.47%(3) 12/31/96 5.21%(3) 7.35%(3) 12/31/96 6.63%(3) 6.63%(3)
5 years
ended
12/31/96 6.62%(3) 7.43%(3)
Period
4/23/87(1)
through
12/31/96 7.74%(3) 8.17%(3)
Tax-Free Florida Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.18%) 3.73% 12/31/96 (0.43%) 3.50% 12/31/96 1.96% 2.94%
Period Period Period
3/2/95(1) 9/15/95(1) 4/22/95(1)
through through through
12/31/96 6.53% 8.78% 12/31/96 3.68% 6.72% 12/31/96 6.96% 6.96%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
22
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Insured Fund(3)
Class B Class B
Class A Class A Shares Shares
Shares Shares) (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year
ended ended
12/31/96 (1.00%) 2.89% 12/31/96 (1.53%) 2.39%
Period
3 years 3/11/94(1)
ended through
12/31/96 3.13% 4.45% 12/31/96 4.21% 5.20%
Period
1/1/92(1)
through
12/31/96 6.58% 7.40%
Tax-Free Florida Intermediate Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(4) CDSC) CDSC)(5) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 0.47% 3.33% 12/31/96 0.58% 2.56% 12/31/96 1.37% 2.36%
Period Period Period
5/1/94(1) 9/15/95(1) 3/23/95(1)
through through through
12/31/96 5.01% 6.10% 12/31/96 1.36% 2.87% 12/31/96 5.78% 5.78%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase;
and (ii) 1% if shares are redeemed during the third year following
purchase. The above figures have been calculated using this new
schedule.
(5) Beginning June 9, 1997, the CDSC applicable to Class C Shares will be
1.00% if shares are redeemed within 12 months of purchase. The above
figures have been calculated using this new schedule.
23
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Idaho Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.42% 4.34% 12/31/96 (0.23%) 3.73% 12/31/96 2.48% 3.47%
Period Period Period
1/4/95(1) 3/16/95(1) 1/11/95(1)
through through through
12/31/96 8.67% 10.77% 12/31/96 5.43% 7.55% 12/31/96 9.62% 9.62%
Tax-Free Iowa Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (1.27%) 2.55% 12/31/96 (2.17%) 1.74% 12/31/96 0.57% 1.54%
Period Period
3 years 3/24/95(1) 1/4/95(1)
ended through through
12/31/96 2.27% 3.58% 12/31/96 4.72% 6.88% 12/31/96 10.28% 10.28%
Period
9/1/93(1)
through
12/31/96 2.69% 3.87%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
24
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Kansas Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 3.41% 12/31/96 (1.26%) 2.67% 12/31/96 1.52% 2.51%
Period Period
3 years 4/8/95(1) 4/12/95(1)
ended through through
12/31/96 3.25% 4.57% 12/31/96 4.36% 6.58% 12/31/96 6.26% 6.26%
Period
11/30/92(1)
through
12/31/96 6.02% 7.02%
Tax-Free Minnesota Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.54%) 3.31% 12/31/96 (1.12%)(3) 2.82%(3) 12/31/96 1.65% 2.63%
Period Period
3 years 3/11/95(1) 5/4/94(1)
ended through through
12/31/96 2.91% 4.23% 12/31/96 4.90%(3) 7.01%(3) 12/31/96 6.04% 6.04%
5 years
ended
12/31/96 5.81% 6.62%
10 years
ended
12/31/96 6.72%(3) 7.13%(3)
Period
2/27/84(1)
through
12/31/96 8.70%(3) 9.03%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
25
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Minnesota Insured Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.17%) 3.74% 12/31/96 (0.94%)(3) 3.01%(3) 12/31/96 1.98% 2.96%
Period Period
3 years 3/7/95(1) 5/4/94(1)
ended through through
12/31/96 2.63%(3) 3.95%(3) 12/31/96 4.79%(3) 6.89%(3) 12/31/96 5.84%(3) 5.84%(3)
5 years
ended
12/31/96 5.96%(3) 6.77%(3)
Period
5/1/87(1)
through
12/31/96 7.13%(3) 7.55%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth
year following purchase. The above figures have been calculated using
this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
26
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Minnesota Intermediate Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.64% 3.44% 12/31/96 0.74%(4) 2.72%(4) 12/31/96 1.69% 2.67%
Period Period
3 years 8/15/95(1) 5/4/94(1)
ended through through
12/31/96 3.07%(4) 4.05%(4) 12/31/96 4.08%(4) 4.36%(4) 12/31/96 4.73%(4) 4.73%(4)
5 years
ended
12/31/96 4.74%(4) 5.32%(4)
10 years
ended
12/31/96 5.43%(4) 5.72%(4)
Period
10/27/85(1)
through
12/31/96 5.93%(4) 6.19%(4)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase;
and (ii) 1% if shares are redeemed during the third year following
purchase. The above figures have been calculated using this new
schedule.
(3) Beginning June 9, 1997, the CDSC applicable to Class C Shares will be
1.00% if shares are redeemed within 12 months of purchase. The above
figures have been calculated using this new schedule.
(4) Reflects voluntary waivers in effect during the period(s).
27
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Missouri Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 3.39% 12/31/96 (1.02%) 2.92% 12/31/96 1.48% 2.46%
Period Period
3 years 3/12/94(1) 11/11/95(1)
ended through through
12/31/96 2.80% 4.12% 12/31/96 4.10% 5.09% 12/31/96 4.14% 4.14%
Period
11/2/92(1)
through
12/31/96 5.62% 6.59%
Tax-Free New Mexico Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
Period
1 year 1 year 5/7/96(1)
ended ended through
12/31/96 0.25% 4.12% 12/31/96 (0.59%) 3.37% 12/31/96 5.30% 6.30%
Period
3 years 3/3/94(1)
ended through
12/31/96 3.74% 5.06% 12/31/96 3.92% 4.90%
Period
10/5/92(1)
through
12/31/96 6.37% 7.33%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
28
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free New York Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (1.40%) 2.45% 12/31/96 (2.46%) 1.42% 12/31/96 0.46% 1.43%
Period Period
3 years 11/14/94(1) 4/26/95(1)
ended through through
12/31/96 2.11% 3.43% 12/31/96 4.99% 6.31% 12/31/96 3.98% 3.98%
5 years
ended
12/31/96 5.35% 6.15%
Period
11/6/87(1)
through
12/31/96 7.12% 7.57%
Tax-Free North Dakota Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 3.87%(3) (0.04%)(3) 12/31/96 (0.58%)(3) 3.38%(3) 12/31/96 1.82% 2.80%
Period Period
3 years 5/10/94(1) 7/29/95(1)
ended through through
12/31/96 4.98%(3) 3.66%(3) 12/31/96 6.54%(3) 7.56%(3) 12/31/96 6.54%(3) 6.54%(3)
5 years
ended
12/31/96 7.13%(3) 6.32%(3)
Period
4/1/91(1)
through
12/31/96 7.80%(3) 7.09%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
29
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Oregon Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.72%) 3.13% 12/31/96 (1.33%) 2.60% 12/31/96 1.38% 2.36%
Period Period
3 years 3/12/94(1) 7/5/95(1)
ended through through
12/31/96 2.86% 4.19% 12/31/96 3.77% 4.76% 12/31/96 5.88% 5.88%
Period
8/1/93(1)
through
12/31/96 3.70% 4.87%
Tax-Free Utah Fund(3)
Class B Class B
Class A Class A Shares Shares
Shares Shares (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC)
1 year 1 year
ended ended
12/31/96 (0.54%) 3.34% 12/31/96 ( .47%) 2.45%
Period
3 years 5/27/95(1)
ended through
12/31/96 3.50% 4.82% 12/31/96 3.24% 5.67%
Period
10/5/92(1)
through
12/31/96 6.83% 7.79%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
30
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Washington Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.03% 3.96% 12/31/96 (0.65%) 3.31% 12/31/96 2.11% 3.10%
Period Period
3 years 10/24/95(1) 4/21/95(1)
ended through through
12/31/96 3.53% 4.85% 12/31/96 2.29% 5.63% 12/31/96 6.62% 6.62%
Period
8/1/93(1)
through
12/31/96 5.47% 6.66%
Tax-Free Wisconsin Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.40%) 3.47% 12/31/96 (1.11%) 2.83% 12/31/96 1.74% 2.72%
Period Period
3 years 4/22/95(1) 3/28/95(1)
ended through through
12/31/96 2.44% 3.75% 12/31/96 3.56% 5.85% 12/31/96 6.10% 6.10%
Period
9/1/93(1)
through
12/31/96 2.82% 4.01%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
As stated in the Funds' Prospectus, each Fund may also quote its
respective Classes' current yield in advertisements and investor communications.
The yield computation is determined by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period and annualizing the resulting figure,
according to the following formula:
31
<PAGE>
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The above formula will be used in calculating quotations of yield for
each Class, based on specified 30-day periods identified in advertising by the
Fund. Using this formula, the yields for the Funds for the 30-day period ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
30-Day Yield
---------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Tax-Free Arizona Insured Fund - Class A 4.44% 4.34%
Tax-Free Arizona Insured Fund - Class B 3.86% 3.77%
Tax-Free Arizona Insured Fund - Class C 3.86% N/A
Tax-Free Arizona Fund - Class A 5.28% 4.68%
Tax-Free Arizona Fund - Class B 4.73% 4.03%
Tax-Free Arizona Fund - Class C 4.72% 4.10%
Tax-Free California Insured Fund - Class A 5.05% 4.91%
Tax-Free California Insured Fund - Class B 4.83% 4.41%
Tax-Free California Insured Fund - Class C 4.50% 4.34%
Tax-Free California Fund - Class A 6.47% 5.72%
Tax-Free California Fund - Class B 6.17% 4.94%
Tax-Free California Fund - Class C 5.97% 4.95%
Tax-Free Colorado Fund - Class A 5.16% 5.06%
Tax-Free Colorado Fund - Class B 4.48% 4.43%
Tax-Free Colorado Fund - Class C 4.48% N/A
Tax-Free Florida Insured Fund - Class A 4.56% 4.38%
Tax-Free Florida Insured Fund - Class B 4.10% 3.73%
Tax-Free Florida Intermediate Fund - Class A 6.05% 5.58%
Tax-Free Florida Intermediate Fund - Class B 5.37% 4.95%
Tax-Free Florida Intermediate Fund - Class C 5.27% 4.92%
Tax-Free Florida Fund - Class A 5.01% 4.32%
Tax-Free Florida Fund - Class B 4.80% 3.80%
Tax-Free Florida Fund - Class C 4.45% 3.77%
Tax-Free Idaho Fund - Class A 5.33% 4.96%
Tax-Free Idaho Fund - Class B 5.07% 4.49%
Tax-Free Idaho Fund - Class C 4.79% 4.41%
Tax-Free Iowa Fund - Class A 4.53% 4.42%
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
30-Day Yield
---------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Tax-Free Iowa Fund - Class B 3.93% 3.78%
Tax-Free Iowa Fund - Class C 4.22% 4.17%
Tax-Free Kansas Fund - Class A 4.47% 4.18%
Tax-Free Kansas Fund - Class B 3.81% 3.50%
Tax-Free Kansas Fund - Class C 3.76% 3.57%
Tax-Free Minnesota Insured Fund - Class A 4.47% N/A
Tax-Free Minnesota Insured Fund - Class B 3.90% 3.81%
Tax-Free Minnesota Insured Fund - Class C 3.89% N/A
Tax-Free Minnesota Intermediate Fund - Class A 4.01% N/A
Tax-Free Minnesota Intermediate Fund - Class B 3.38% 3.33%
Tax-Free Minnesota Intermediate Fund - Class C 3.38% N/A
Tax-Free Minnesota Fund - Class A 4.80% N/A
Tax-Free Minnesota Fund - Class B 4.38% 4.24%
Tax-Free Minnesota Fund - Class C 4.23% N/A
Tax-Free Missouri Insured Fund - Class A 4.95% 4.71%
Tax-Free Missouri Insured Fund - Class B 4.46% 4.09%
Tax-Free Missouri Insured Fund - Class C 4.22% 4.09%
Tax-Free New Mexico Fund - Class A 4.93% 4.79%
Tax-Free New Mexico Fund - Class B 4.31% 4.15%
Tax-Free New Mexico Fund - Class C 4.62% 4.55%
Tax-Free New York Fund - Class A 4.80% 4.68%
Tax-Free New York Fund - Class B 4.24% 4.13%
Tax-Free New York Fund - Class C 4.24% 4.10%
Tax-Free North Dakota Fund - Class A 4.79% 4.64%
Tax-Free North Dakota Fund - Class B 4.49% 4.12%
Tax-Free North Dakota Fund - Class C 4.53% N/A
Tax-Free Oregon Insured Fund - Class A 4.65% 4.37%
Tax-Free Oregon Insured Fund - Class B 4.17% 3.72%
Tax-Free Oregon Insured Fund - Class C 3.94% 3.73%
Tax-Free Utah Fund - Class A 4.88% 4.44%
Tax-Free Utah Fund - Class B 4.20% 3.78%
Tax-Free Washington Insured Fund - Class A 5.13% 4.52%
Tax-Free Washington Insured Fund - Class B 4.49% 3.84%
Tax-Free Washington Insured Fund - Class C 4.39% 3.90%
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
30-Day Yield
---------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Tax-Free Wisconsin Fund - Class A 4.71% 4.63%
Tax-Free Wisconsin Fund - Class B 4.17% 4.02%
Tax-Free Wisconsin Fund - Class C 4.29% 4.23%
</TABLE>
Yield calculations assume the maximum front-end sales charge, if any, and
do not reflect the deduction of any contingent deferred sales charge. Actual
yield on Class A Shares may be affected by variations in front-end sales charges
on investments.
The Fund may also publish a tax-equivalent yield for a Class based on
federal and, if applicable, state tax rates, which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to the Class' yield.
For the 30-day period ended December 31, 1996, the tax-equivalent yields
(assuming a federal income tax rate of 31%) of each Class of each Fund were as
follows:
<TABLE>
<CAPTION>
ACTUAL
------
ARIZONA(1)
----------
31.74% 34.59% 39.58% 42.98%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund - Class A 6.50% 6.79% 7.35% 7.79%
Tax-Free Arizona Insured Fund - Class B 5.66% 5.90% 6.39% 6.77%
Tax-Free Arizona Insured Fund - Class C 5.66% 5.90% 6.39% 6.77%
Tax-Free Arizona Fund - Class A 7.74% 8.07% 8.74% 9.26%
Tax-Free Arizona Fund - Class B 6.93% 7.23% 7.83% 8.30%
Tax-Free Arizona Fund - Class C 6.92% 7.22% 7.81% 8.28%
CALIFORNIA(2)
-------------
34.70% 37.42% 41.95% 45.22%
------ ------ ------ ------
Tax-Free California Insured Fund - Class A 7.73% 8.07% 8.70% 9.22%
Tax-Free California Insured Fund - Class B 7.40% 7.72% 8.32% 8.82%
Tax-Free California Insured Fund - Class C 6.89% 7.19% 7.75% 8.21%
Tax-Free California Fund - Class A 9.91% 10.34% 11.15% 11.81%
Tax-Free California Fund - Class B 9.45% 9.86% 10.63% 11.26%
Tax-Free California Fund - Class C 9.14% 9.54% 10.28% 10.90%
COLORADO (3)
------------
31.60% 34.45% 39.20% 42.62%
------ ------ ------ ------
Tax-Free Colorado Fund - Class A 7.54% 7.87% 8.49% 8.99%
Tax-Free Colorado Fund - Class B 6.55% 6.83% 7.37% 7.81%
Tax-Free Colorado Fund - Class C 6.55% 6.83% 7.37% 7.81%
FLORIDA
-------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Florida Insured Fund - Class A 6.33% 6.61% 7.13% 7.55%
Tax-Free Florida Insured Fund - Class B 5.69% 5.94% 6.41% 6.79%
Tax-Free Florida Intermediate Fund - Class A 8.40% 8.77% 9.45% 10.02%
Tax-Free Florida Intermediate Fund - Class B 7.46% 7.78% 8.39% 8.89%
Tax-Free Florida Intermediate Fund - Class C 7.32% 7.64% 8.23% 8.73%
Tax-Free Florida Fund - Class A 6.96% 7.26% 7.83% 8.29%
Tax-Free Florida Fund - Class B 6.67% 6.96% 7.50% 7.95%
Tax-Free Florida Fund - Class C 6.18% 6.45% 6.95% 7.37%
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ACTUAL
------
IDAHO(4)
--------
33.90% 36.66% 41.25% 44.55%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Idaho Fund - Class A 8.06% 8.41% 9.07% 9.61%
Tax-Free Idaho Fund - Class B 7.67% 8.00% 8.63% 9.14%
Tax-Free Idaho Fund - Class C 7.25% 7.56% 8.15% 8.64%
IOWA (5)
--------
33.32% 35.90% 40.24% 43.39%
------ ------ ------ ------
Tax-Free Iowa Fund - Class A 6.79% 7.07% 7.58% 8.00%
Tax-Free Iowa Fund - Class B 5.89% 6.13% 6.58% 6.94%
Tax-Free Iowa Fund - Class C 6.33% 6.58% 7.06% 7.45%
KANSAS (6)
----------
33.58% 36.35% 40.96% 44.28%
------ ------ ------ ------
Tax-Free Kansas Fund - Class A 6.73% 7.02% 7.57% 8.02%
Tax-Free Kansas Fund - Class B 5.74% 5.99% 6.45% 6.84%
Tax-Free Kansas Fund - Class C 5.66% 5.91% 6.37% 6.75%
MINNESOTA (7)
-------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Minnesota Insured Fund - Class A 6.79% 7.08% 7.63% 8.09%
Minnesota Insured Fund - Class B 5.92% 6.18% 6.66% 7.06%
Minnesota Insured Fund - Class C 5.90% 6.16% 6.64% 7.04%
Tax-Free Minnesota Intermediate Fund - Class A 6.09% 6.35% 6.85% 7.26%
Tax-Free Minnesota Intermediate Fund - Class B 5.13% 5.35% 5.77% 6.12%
Tax-Free Minnesota Intermediate Fund - Class C 5.13% 5.35% 5.77% 6.12%
Tax-Free Minnesota Fund - Class A 7.29% 7.60% 8.20% 8.69%
Tax-Free Minnesota Fund - Class B 6.65% 6.94% 7.48% 7.93%
Tax-Free Minnesota Fund - Class C 6.42% 6.70% 7.22% 7.65%
MISSOURI(8)
-----------
31.16% 33.91% 38.51% 41.84%
------ ------ ------ ------
Tax-Free Missouri Insured Fund - Class A 7.19% 7.49% 8.05% 8.51%
Tax-Free Missouri Insured Fund - Class B 6.48% 6.75% 7.25% 7.67%
Tax-Free Missouri Insured Fund - Class C 6.13% 6.39% 6.86% 7.26%
NEW MEXICO(9)
-------------
33.69% 36.87% 41.44% 44.73%
------ ------ ------ ------
Tax-Free New Mexico Fund - Class A 7.48% 7.81% 8.42% 8.92%
Tax-Free New Mexico Fund - Class B 6.54% 6.83% 7.36% 7.80%
Tax-Free New Mexico Fund - Class C 7.01% 7.32% 7.89% 8.36%
NEW YORK(10)
------------
33.13% 35.92% 40.56% 43.90%
------ ------ ------ ------
Tax-Free New York Fund - Class A 7.18% 7.49% 8.08% 8.56%
Tax-Free New York Fund - Class B 6.34% 6.62% 7.13% 7.56%
Tax-Free New York Fund - Class C 6.34% 6.62% 7.13% 7.56%
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
ACTUAL
------
NORTH DAKOTA(11)
----------------
30.72% 33.87% 39.07% 42.77%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free North Dakota Fund - Class A 6.91% 7.24% 7.86% 8.37%
Tax-Free North Dakota Fund - Class B 6.48% 6.79% 7.37% 7.85%
Tax-Free North Dakota Fund - Class C 6.54% 6.85% 7.43% 7.92%
OREGON(12)
----------
34.48% 37.21% 41.76% 45.04%
------ ------ ------ ------
Tax-Free Oregon Insured Fund - Class A 7.10% 7.41% 7.98% 8.46%
Tax-Free Oregon Insured Fund - Class B 6.36% 6.64% 7.16% 7.59%
Tax-Free Oregon Insured Fund - Class C 6.01% 6.27% 6.77% 7.17%
UTAH(13)
--------
32.38% 35.13% 39.72% 43.04%
------ ------ ------ ------
Tax-Free Utah Fund - Class A 7.22% 7.52% 8.10% 8.57%
Tax-Free Utah Fund - Class B 6.21% 6.47% 6.97% 7.37%
WASHINGTON
----------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Washington Insured Fund - Class A 7.13% 7.43% 8.02% 8.49%
Tax-Free Washington Insured Fund - Class B 6.24% 6.51% 7.02% 7.43%
Tax-Free Washington Insured Fund - Class C 6.10% 6.36% 6.86% 7.27%
WISCONSIN(14)
-------------
32.99% 35.78% 40.44% 43.79%
------ ------ ------ ------
Tax-Free Wisconsin Fund - Class A 7.03% 7.33% 7.91% 8.38%
Tax-Free Wisconsin Fund - Class B 6.22% 6.49% 7.00% 7.42%
Tax-Free Wisconsin Fund - Class C 6.40% 6.68% 7.20% 7.63%
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
ARIZONA(1)
----------
31.74% 34.59% 39.58% 42.98%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund - Class A 6.36% 6.63% 7.18% 7.61%
Tax-Free Arizona Insured Fund - Class B 5.52% 5.76% 6.24% 6.61%
Tax-Free Arizona Insured Fund - Class C 5.66% 5.90% 6.39% 6.77%
Tax-Free Arizona Fund - Class A 6.86% 7.15% 7.75% 8.21%
Tax-Free Arizona Fund - Class B 5.90% 6.16% 6.67% 7.07%
Tax-Free Arizona Fund - Class C 6.01% 6.27% 6.79% 7.19%
CALIFORNIA(2)
-------------
34.70% 37.42% 41.95% 45.22%
------ ------ ------ ------
Tax-Free California Insured Fund - Class A 7.52% 7.85% 8.46% 8.96%
Tax-Free California Insured Fund - Class B 6.75% 7.05% 7.60% 8.05%
Tax-Free California Insured Fund - Class C 6.65% 6.93% 7.48% 7.92%
Tax-Free California Fund - Class A 8.76% 9.14% 9.85% 10.44%
Tax-Free California Fund - Class B 7.56% 7.89% 8.51% 9.02%
Tax-Free California Fund - Class C 7.58% 7.91% 8.53% 9.04%
COLORADO (3)
------------
31.60% 34.45% 39.20% 42.62%
------ ------ ------ ------
Tax-Free Colorado Fund - Class A 7.40% 7.72% 8.32% 8.82%
Tax-Free Colorado Fund - Class B 6.48% 6.76% 7.29% 7.72%
Tax-Free Colorado Fund - Class C 6.55% 6.83% 7.37% 7.81%
FLORIDA
-------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Florida Insured Fund - Class A 6.08% 6.35% 6.84% 7.25%
Tax-Free Florida Insured Fund - Class B 5.18% 5.41% 5.83% 6.18%
Tax-Free Florida Intermediate Fund - Class A 7.75% 8.09% 8.72% 9.24%
Tax-Free Florida Intermediate Fund - Class B 6.88% 7.17% 7.73% 8.20%
Tax-Free Florida Intermediate Fund - Class C 6.83% 7.13% 7.69% 8.15%
Tax-Free Florida Fund - Class A 6.00% 6.26% 6.75% 7.15%
Tax-Free Florida Fund - Class B 5.28% 5.51% 5.94% 6.29%
Tax-Free Florida Fund - Class C 5.24% 5.46% 5.89% 6.24%
IDAHO (4 )
----------
33.90% 36.66% 41.25% 44.55%
------ ------ ------ ------
Tax-Free Idaho Fund - Class A 7.50% 7.83% 8.44% 8.95%
Tax-Free Idaho Fund - Class B 6.79% 7.09% 7.64% 8.10%
Tax-Free Idaho Fund - Class C 6.67% 6.96% 7.51% 7.95%
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
IOWA(5)
-------
33.32% 35.90% 40.24% 43.39%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Iowa Fund - Class A 6.63% 6.90% 7.40% 7.81%
Tax-Free Iowa Fund - Class B 5.67% 5.90% 6.33% 6.68%
Tax-Free Iowa Fund - Class C 6.25% 6.51% 6.98% 7.37%
KANSAS (6)
----------
33.58% 36.35% 40.96% 44.28%
------ ------ ------ ------
Tax-Free Kansas Fund - Class A 6.29% 6.57% 7.08% 7.50%
Tax-Free Kansas Fund - Class B 5.27% 5.50% 5.93% 6.28%
Tax-Free Kansas Fund - Class C 5.37% 5.61% 6.05% 6.41%
MINNESOTA (7)
-------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Minnesota Insured Fund - Class A 6.79% 7.08% 7.63% 8.09%
Minnesota Insured Fund - Class B 5.78% 6.03% 6.51% 6.89%
Minnesota Insured Fund - Class C 5.90% 6.16% 6.64% 7.04%
Tax-Free Minnesota Intermediate Fund - Class A 6.09% 6.35% 6.85% 7.26%
Tax-Free Minnesota Intermediate Fund - Class B 5.05% 5.27% 5.69% 6.03%
Tax-Free Minnesota Intermediate Fund - Class C 5.13% 5.35% 5.77% 6.12%
Tax-Free Minnesota Fund - Class A 7.29% 7.60% 8.20% 8.69%
Tax-Free Minnesota Fund - Class B 6.44% 6.72% 7.24% 7.67%
Tax-Free Minnesota Fund - Class C 6.42% 6.70% 7.22% 7.65%
MISSOURI(8)
-----------
31.16% 33.91 38.51% 41.84%
------ ----- ------ ------
Tax-Free Missouri Insured Fund - Class A 6.84% 7.13% 7.66% 8.10%
Tax-Free Missouri Insured Fund - Class B 5.94% 6.19% 6.65% 7.03%
Tax-Free Missouri Insured Fund - Class C 5.94% 6.19% 6.65% 7.03%
NEW MEXICO(9)
-------------
33.69% 36.87% 41.44% 44.73%
------ ------ ------ ------
Tax-Free New Mexico Fund - Class A 7.27% 7.59% 8.18% 8.67%
Tax-Free New Mexico Fund - Class B 6.30% 6.57% 7.09% 7.51%
Tax-Free New Mexico Fund - Class C 6.91% 7.21% 7.77% 8.23%
NEW YORK(10)
------------
33.13% 35.92% 40.56% 43.90%
------ ------ ------ ------
Tax-Free New York Fund - Class A 7.00% 7.30% 7.87% 8.34%
Tax-Free New York Fund - Class B 6.18% 6.44% 6.95% 7.36%
Tax-Free New York Fund - Class C 6.13% 6.40% 6.90% 7.31%
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
NORTH DAKOTA(11)
----------------
30.72% 33.87% 39.07% 42.77%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free North Dakota Fund - Class A 6.70% 7.02% 7.62% 8.11%
Tax-Free North Dakota Fund - Class B 5.95% 6.23% 6.76% 7.20%
Tax-Free North Dakota Fund - Class C 6.54% 6.85% 7.43% 7.92%
OREGON(12)
----------
34.48% 37.21% 41.76% 45.04%
------ ------ ------ ------
Tax-Free Oregon Insured Fund - Class A 6.67% 6.96% 7.50% 7.95%
Tax-Free Oregon Insured Fund - Class B 5.68% 5.92% 6.39% 6.77%
Tax-Free Oregon Insured Fund - Class C 5.69% 5.94% 6.40% 6.79%
UTAH(13)
--------
32.38% 35.13% 39.72% 43.04%
------ ------ ------ ------
Tax-Free Utah Fund - Class A 6.57% 6.84% 7.37% 7.79%
Tax-Free Utah Fund - Class B 5.59% 5.83% 6.27% 6.64%
WASHINGTON
----------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Washington Insured Fund - Class A 6.28% 6.55% 7.06% 7.48%
Tax-Free Washington Insured Fund - Class B 5.33% 5.57% 6.00% 6.36%
Tax-Free Washington Insured Fund - Class C 5.42% 5.65% 6.09% 6.46%
WISCONSIN(14)
-------------
32.99% 35.78% 40.44% 43.79%
------ ------ ------ ------
Tax-Free Wisconsin Fund - Class A 6.91% 7.21% 7.77% 8.54%
Tax-Free Wisconsin Fund - Class B 6.00% 6.26% 6.75% 7.15%
Tax-Free Wisconsin Fund - Class C 6.31% 6.59% 7.10% 7.52%
</TABLE>
39
<PAGE>
(1) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 5.2% Arizona marginal rate and a 26.54%
federal marginal rate, (b) a 5.2% Arizona marginal rate and a 29.39%
federal marginal rate, (c) a 5.6% Arizona marginal rate and a 33.98%
federal marginal rate, and (d) a 5.6%Arizona marginal rate and a 37.38%
federal marginal rate.
(2) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9.3% California marginal rate and (a) a 25.4%
federal marginal rate, (b) a 28.12% federal marginal rate, (c) a 32.65%
federal marginal rate, and (d) a 35.92% federal marginal rate.
(3) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 5% Colorado rate and (a) a 26.6% federal
marginal rate, (b) a 29.45% federal marginal rate, (c) a 34.20% federal
marginal rate, and (d) 37.62% federal marginal rate.
(4) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.20% Idaho tax rate and (a) a 25.70% federal
marginal rate, (b) a 28.46% federal marginal rate, (c) a 33.05% federal
marginal rate, and (d) a 36.35% federal marginal rate.
(5) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.39% Iowa marginal rate and a 25.93%
federal marginal rate, (b) a 7.11% Iowa marginal rate and a 28.8%
federal marginal rate, (c) a 6.63% Iowa marginal rate and a 33.61%
federal marginal rate, and (d) a 6.28% Iowa marginal rate and a 37.11%
federal marginal rate.
(6) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.75 Kansas marginal rate and (a) a 25.83%
federal marginal rate, (b)a 28.60% federal marginal rate, (c) a 33.21%
federal marginal rate, and (d) a 36.53% federal marginal rate.
(7) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.5% Minnesota marginal rate and (a) a 25.62%
federal marginal rate, (b) a 28.37% federal marginal rate, (c) a 32.94%
federal marginal rate, and (d) a 36.23% federal marginal rate.
(8) The four combined rates listed above assume that the taxpayer is
subject to (a) a 4.39% Missouri marginal rate and a 26.77% federal
marginal rate, (b) a 4.22% Missouri marginal rate and a 29.69% federal
marginal rate, (c) a 3.92% Missouri marginal rate and a 34.59% federal
marginal rate, and (d) a 3.71% Missouri marginal rate and a 38.13%
federal marginal rate.
(9) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.9% New Mexico marginal rate and a 25.79%
federal marginal rate, (b) a 8.5% New Mexico marginal rate and a 28.37%
federal marginal rate, (c) a 8.5% New Mexico marginal rate and a 32.94%
federal marginal rate, and (d) a 8.5% New Mexico marginal rate and a
36.23% federal marginal rate.
(10) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.125% New York marginal rate and (a) a 26.00%
federal marginal rate, (b) a 28.79% federal marginal rate, (c) a 33.43%
federal marginal rate and (d) a 36.77% federal marginal rate.
(11) The four combined rates listed above assume that the taxpayer is
subject to (a) 26.94%, (b) 29.71%, (c) 34.27%% and (d) 37.52% federal
marginal rates and elects to determine his or her North Dakota income
tax liability as an amount equal to 14% of his or her adjusted federal
income tax liability.
(12) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9% Oregon tax rate and (a) a 25.48% federal
marginal rate, (b) a 28.21% federal marginal rate, (c) a 32.76% federal
marginal rate, and (d) a 36.04% federal marginal rate.
(13) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 6.08% Utah marginal rate and a 26.30%
federal marginal rate, (b) a 5.98% Utah marginal rate and a 29.15%
federal marginal rate, (c) a 5.81% Utah marginal rate and a 33.91%
federal marginal rate, and (d) a 5.69% Utah marginal rate and a 37.35%
federal marginal rate.
(14) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 6.93% Wisconsin marginal rate and (a) a 26.06%
federal marginal rate, (b) a 28.85% federal marginal rate, (c) a 33.51%
federal marginal rate, and (d) a 36.86% federal marginal rate.
These yields were computed by dividing that portion of a Class' yield
which is tax-exempt by one minus a stated income tax rate (in this case, a
federal income tax rate of 31%) and adding the product to that portion, if any,
of the yield that is not tax-exempt. In addition, a Fund may advertise a
tax-equivalent yield assuming other income tax rates, when applicable.
40
<PAGE>
Investors should note that the income earned and dividends paid by a
Fund will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of a Fund may change. Unlike money market funds,
each Fund invests in longer-term securities that fluctuate in value and do so in
a manner inversely correlated with changing interest rates. Each Fund's net
asset value will tend to rise when interest rates fall. Conversely, each Fund's
net asset values will tend to fall as interest rates rise. Normally,
fluctuations in interest rates have a greater effect on the prices of
longer-term bonds. The value of the securities held in a Fund will vary from day
to day and investors should consider the volatility of a Fund's net asset values
as well as the yield before making a decision to invest.
From time to time, a Fund may also quote for its Classes an actual
total return and/or yield performance in advertising and other types of
literature compared to indices or averages of alternative financial products
available to prospective investors. For example, the performance comparisons may
include the average return of various bank instruments, some of which may carry
certain return guarantees offered by leading banks and thrifts as monitored by
Bank Rate Monitor.
Comparative information on the Consumer Price Index may also be
included. The Consumer Price Index, as prepared by the U.S Bureau of Labor
Statistics, is the most commonly used measure of inflation. It indicates the
cost fluctuations of a representative group of consumer goods. It does not
represent a return from an investment.
A Fund may also promote its Classes' total return and/or yield
performance and use comparative performance information computed by and
available from certain industry and general market research and publications,
such as Lipper Analytical Services, Inc.
Statistical and performance information and various indices compiled
and maintained by organizations such as the following may also be used in
preparing exhibits comparing certain industry trends and competitive mutual fund
performance to comparable activities and performances of the Funds and in
illustrating general financial planning principles. From time to time, certain
mutual fund performance ranking information, calculated and provided by these
organizations, may also be used in the promotion of sales of the Funds. Any
indices used are not managed for any investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe
of independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety
of historical data including total return, capital appreciation and
income on the stock market as well as other investment asset classes,
and inflation. With their permission, this information will be used
primarily for comparative purposes and to illustrate general financial
planning principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed-income price and return information.
Compustat Industrial Databases, a service of Standard & Poor's, may
also be used in preparing performance and historical stock and bond
market exhibits. This firm maintains fundamental databases that provide
financial, statistical and market information covering more than 7,000
industrial and non-industrial companies.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market, corporate
and government-issued securities of various maturities. This
information, as well as unmanaged indices compiled and maintained by
these firms, will be used in preparing comparative illustrations. In
addition, the performance of multiple indices compiled and maintained
by these firms may be combined to create a blended performance
41
<PAGE>
result for comparative purposes. Generally, the indices selected will
be representative of the types of securities in which the Funds may
invest and the assumptions that were used in calculating the blended
performance will be described.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. Also, current rate information on municipal
debt obligations of various durations, as reported daily by The Bond Buyer, may
also be used. The Bond Buyer is published daily and is an industry-accepted
source for current municipal bond market information.
The total return performance for each Class will reflect the
appreciation or depreciation of principal, reinvestment of income and any
capital gains distributions paid during any indicated period, and, in the case
of Class A Shares, the impact of the maximum front-end sales charge, if any,
paid on the illustrated investment amount, annualized. Performance of Class A
Shares may also be shown without reflecting the impact of any front-end sales
charge. Performance of Class B Shares and Class C Shares will be calculated with
both the applicable CDSC included and excluded. The results will not reflect any
income taxes, if applicable, payable by shareholders on the reinvested
distributions included in the calculations. The net asset values of the Funds
fluctuate so shares, when redeemed, may be worth more or less than the original
investment, and past performance should not be considered a guarantee of future
results.
The following tables, for purposes of illustration only, reflect the
cumulative total return performance for each Class of each Fund through December
31, 1996.
42
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Arizona Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.21%) 12/31/96 (1.65%) 2.35% 12/31/96 1.44% 2.44%
6 months 6 months 6 months
ended ended ended
12/31/96 1.56%(4) 12/31/96 1.20% 5.20% 12/31/96 4.27% 5.27%
9 months 9 months 9 months
ended ended ended
12/31/96 3.24% 12/31/96 2.80% 6.80% 12/31/96 5.72% 6.72%
1 year 1 year 1 year
ended ended ended
12/31/96 1.50% 12/31/96 0.85% 4.83% 12/31/96 3.69% 4.68%
Period Period Period
3/2/95(1) 6/29/95(1) 5/13/95(1)
through through through
12/31/96 14.99% 12/31/96 8.96% 12.96% 12/31/96 14.56% 14.56%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
43
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Arizona Insured Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.41%)(3) 12/31/96 (1.70%)(3) 2.30%(3) 12/31/96 1.30% 2.30%
6 months 6 months 6 months
ended ended ended
12/31/96 1.05%(3)(4) 12/31/96 0.61%(3) 4.61%(3) 12/31/96 3.58% 4.58%
9 months 9 months 9 months
ended ended ended
12/31/96 1.63%(3) 12/31/96 0.89%(3) 4.89%(3) 12/31/96 3.92% 4.92%
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 12/31/96 (0.66%)(3) (3.31%)(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/10/95(1) 5/26/94(1)
ended through through
12/31/961 0.48%(3) 12/31/96 10.03%(3) 14.03%(3) 12/31/96 18.39%(3) 18.39%(3)
5 years
ended
12/31/96 36.76%(3)
Period
4/1/91(1)
through
12/31/96 50.27%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
44
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free California Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (0.92%) 12/31/96 (1.30%) 2.70% 12/31/96 1.66% 2.66%
6 months 6 months 6 months
ended ended ended
12/31/96 1.89%(4) 12/31/96 1.64% 5.64% 12/31/96 4.42% 5.42%
Period
9 months 9 months 4/9/96(3)
ended ended through
12/31/96 2.49% 12/31/96 2.13% 6.13% 12/31/96 6.58% 7.58%
1 year 1 year
ended ended
12/31/96 0.33% 12/31/96 (0.16%) 3.76%
Period Period
3/3/95(1) 8/23/95(1)
through through
12/31/96 12.30% 12/31/96 9.65% 13.65%
Tax-Free California Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
3 months 3 months 3 months
ended ended ended
12/31/96 (1.16%) 12/31/96 (1.44%) 2.56% 12/31/96 1.01% 2.01%
6 months 6 months 6 months
ended ended ended
12/31/96 1.42%(4) 12/31/96 1.18% 5.18% 12/31/96 3.62% 4.62%
9 months 9 months 9 months
ended ended ended
12/31/96 1.82% 12/31/96 1.47% 5.47% 12/31/96 3.81% 4.81%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.23%) 12/31/96 (0.74%) 3.21% 12/31/96 1.47% 2.45%
Period Period
3 years 3/1/94(1) 4/12/95(1)
ended through through
12/31/96 8.80% 12/31/96 10.05% 13.00% 12/31/96 10.43% 10.43%
Period
10/15/92(1)
through
12/31/96 27.52%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00% for Tax-Free California Fund and 0.00% for Tax-Free
California Insured Fund.
45
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Colorado Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.57%)(3) 12/31/96 (1.89%)(3) 2.11%(3) 12/31/96 1.11% 2.11%
6 months 6 months 6 months
ended ended ended
12/31/96 1.18%(3)(4) 12/31/96 0.70%(3) 4.70%(3) 12/31/96 3.59% 4.59%
9 months 9 months 9 months
ended ended ended
12/31/96 2.00%(3) 12/31/96 1.33%(3) 5.33%(3) 12/31/96 4.29% 5.29%
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 12/31/96 (0.72%)(3) 3.24%(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/22/95(1) 5/6/94(1)
ended through through
12/31/96 9.77%(3) 12/31/96 9.46%(3) 13.46%(3) 12/31/96 18.61%(3) 18.61%(3)
5 years
ended
12/31/96 37.75%(3)
Period
4/23/87(1)
through
12/31/96 106.06%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
46
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.27%) 12/31/96 (1.57%) 2.43% 12/31/96 1.35% 2.35%
6 months 6 months 6 months
ended ended ended
12/31/96 1.56%(4) 12/31/96 1.44% 5.44% 12/31/96 4.16% 5.16%
9 months 9 months 9 months
ended ended ended
12/31/96 2.24% 12/31/96 2.04% 6.04% 12/31/96 4.77% 5.77%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.18%) 12/31/96 (0.43%) 3.50% 12/31/96 1.98% 2.96%
Period Period Period
3/2/95(1) 9/15/95(1) 4/22/95(1)
through through through
12/31/96 12.32% 12/31/96 4.79% 8.79% 12/31/96 12.12% 12.12%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
47
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Insured Fund(3)
Class B Class B
Class A Shares Shares
Shares (including (excluding
(at offer) CDSC)(2) CDSC)
<S> <C> <C> <C> <C>
3 months 3 months
ended ended
12/31/96 (1.46%) 12/31/96 (1.78%) 2.22%
6 months 6 months
ended ended
12/31/96 1.27%(4) 12/31/96 1.07% 5.07%
9 months 9 months
ended ended
12/31/96 1.59% 12/31/96 1.25% 5.25%
1 year 1 year
ended ended
12/31/96 (1.00%) 12/31/96 (1.53%) 2.39%
Period
3 years 3/11/94(1)
ended through
12/31/96 9.67% 12/31/96 12.30% 15.30%
Period
1/1/92(1)
through
12/31/96 37.55%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the
sixth year following purchase. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
48
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Intermediate Fund(2)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(3) CDSC) CDSC)(4) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (0.97%) 12/31/96 (0.49%) 1.51% 12/31/96 0.49% 1.49%
6 months 6 months 6 months
ended ended ended
12/31/96 0.55%(5) 12/31/96 0.88% 2.88% 12/31/96 1.81% 2.81%
9 months 9 months 9 months
ended ended ended
12/31/96 1.10% 12/31/96 1.25% 3.25% 12/31/96 2.12% 3.12%
1 year 1 year 1 year
ended ended ended
12/31/96 0.47% 12/31/96 0.58% 2.56% 12/31/96 1.37% 2.36%
Period Period Period
5/1/94(1) 9/15/95(1) 3/23/95(1)
through through through
12/31/96 13.95% 12/31/96 1.76% 3.73% 12/31/96 10.50% 10.50%
</TABLE>
(1) Date of initial public offering.
(2) Reflects voluntary waivers in effect during the period(s).
(3) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase;
and (ii) 1% if shares are redeemed during the third year following
purchase. The above figures have been calculated using this new
schedule.
(4) Beginning June 9, 1997, the CDSC applicable to Class C Shares will
be 1.00% if shares are redeemed within 12 months of purchase.
The above figures have been calculated using this new schedule.
(5) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
49
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Idaho Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.20%) 12/31/96 (1.55%) 2.45% 12/31/96 1.39% 2.39%
6 months 6 months 6 months
ended ended ended
12/31/96 1.30%(4) 12/31/96 0.86% 4.86% 12/31/96 3.73% 4.73%
9 months 9 months 9 months
ended ended ended
12/31/96 2.17% 12/31/96 1.72% 5.72% 12/31/96 4.53% 5.53%
1 year 1 year 1 year
ended ended ended
12/31/96 0.42% 12/31/96 (0.23%) 3.73% 12/31/96 2.48% 3.47%
Period Period Period
1/4/95(1) 3/16/95(1) 1/11/95(1)
through through through
12/31/96 18.00% 12/31/96 9.97% 13.97% 12/31/96 19.85% 19.85%
</TABLE>
50
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Iowa Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.31%) 12/31/96 (1.75%) 2.25% 12/31/96 1.23% 2.23%
6 months 6 months 6 months
ended ended ended
12/31/96 2.04%(4) 12/31/96 1.52% 5.52% 12/31/96 4.45% 5.45%
9 months 9 months 9 months
ended ended ended
12/31/96 2.59% 12/31/96 1.90% 5.90% 12/31/96 4.77% 5.77%
1 year 1 year 1 year
ended ended ended
12/31/96 (1.27%) 12/31/96 (2.17%) 1.74% 12/31/96 0.57% 1.54%
Period Period
3 years 3/24/95(1) 1/4/95(1)
ended through through
12/31/96 6.97% 12/31/96 8.53% 12.53% 12/31/96 21.52% 21.52%
Period
9/1/93(1)
through
12/31/96 9.25%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00% for Tax-Free Idaho Fund and 0.00% for Tax-Free Iowa Fund.
51
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Kansas Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.68%) 12/31/96 (2.01%) 1.99% 12/31/96 0.98% 1.98%
6 months 6 months 6 months
ended ended ended
12/31/96 0.96%(4) 12/31/96 0.48% 4.48% 12/31/96 3.34% 4.34%
9 months 9 months 9 months
ended ended ended
12/31/96 1.83% 12/31/96 1.30% 5.30% 12/31/96 4.10% 5.10%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 12/31/96 (1.26%) 2.67% 12/31/96 1.52% 2.51%
Period Period
3 years 4/8/95(1) 4/12/95(1)
ended through through
12/31/96 10.08% 12/31/96 7.69% 11.69% 12/31/96 11.02% 11.02%
Period
11/30/92(1)
through
12/31/96 26.99%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
52
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Minnesota Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.54%) 12/31/96 (1.82%)(3) 2.18%(3) 12/31/96 1.15% 2.15%
6 months 6 months 6 months
ended ended ended
12/31/96 1.03%(4) 12/31/96 0.66%(3) 4.66%(3) 12/31/96 3.67% 4.67%
9 months 9 months 9 months
ended ended ended
12/31/96 1.51% 12/31/96 1.06%(3) 5.06%(3) 12/31/96 3.94% 4.94%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.54%) 12/31/96 (1.12%)(3) 2.82%(3) 12/31/96 1.65% 2.63%
Period Period
3 years 3/11/95(1) 5/4/94(1)
ended through through
12/31/96 8.98% 12/31/96 9.06%(3) 13.06%(3) 12/31/96 16.91% 16.91%
5 years
ended
12/31/96 32.60%
10 years
ended
12/31/96 91.65%(3)
Period
2/27/84(1)
through
12/31/96 192.11%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
53
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Minnesota Insured Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.40%) 12/31/96 (1.79%)(3) 2.21%(3) 12/31/96 1.30% 2.30%
6 months 6 months 6 months
ended ended ended
12/31/96 0.88%(4) 12/31/96 0.33%(3) 4.33%(3) 12/31/96 1.30% 2.30%
9 months 9 months 9 months
ended ended ended
12/31/96 1.35% 12/31/96 0.64%(3) 4.64%(3) 12/31/96 3.67% 4.67%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.17%) 12/31/96 (0.94%)(3) 3.01%(3) 12/31/96 1.98% 2.96%
Period Period
3 years 3/7/95(1) 5/4/94(1)
ended through through
12/31/96 8.11%(3) 2/31/96 8.90%(3) 12.90%(3) 12/31/96 16.33%(3) 16.33%(3)
5 years
ended
12/31/96 33.60%(3)
Period
5/1/87(1)
through
12/31/96 94.61%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
54
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Minnesota Intermediate Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(3) CDSC) CDSC)(4) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.00%) 12/31/96 (0.36%)(2) 1.64%(2) 12/31/96 0.64% 1.64%
6 months 6 months 6 months
ended ended ended
12/31/96 0.47%(5) 12/31/96 0.89%(2) 2.89%(2) 12/31/96 1.97% 2.97%
9 months 9 months 9 months
ended ended ended
12/31/96 0.73% 12/31/96 0.99%(2) 2.99%(2) 12/31/96 1.92% 2.92%
1 year 1 year 1 year
ended ended ended
12/31/96 0.64% 12/31/96 0.74%(2) 2.72%(2) 12/31/96 1.69% 2.67%
Period Period
3 years 8/15/95(1) 5/4/94(1)
ended through through
12/31/96 9.51%(2) 12/31/96 4.08%(2) 6.08%(2) 12/31/96 13.11%(2) 13.11%(2)
5 years
ended
12/31/96 26.03%(2)
10 years
ended
12/31/96 69.87%(2)
Period
10/27/85(1)
through
12/31/96 90.37%(2)
</TABLE>
(1) Date of initial public offering.
(2) Reflects voluntary waivers in effect during the period(s).
(3) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase; and
(ii) 1% if shares are redeemed during the third year following purchase.
The above figures have been calculated using this new schedule.
(4) Beginning June 9, 1997, the CDSC applicable to Class C Shares will be
1.00% if shares are redeemed within 12 months of purchase.
The above figures have been calculated using this new schedule.
(5) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
55
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Missouri Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.37%) 12/31/96 (1.67%) 2.33% 12/31/96 1.28% 2.28%
6 months 6 months 6 months
ended ended ended
12/31/96 1.41%(4) 12/31/96 1.01% 5.01% 12/31/96 3.78% 4.78%
9 months 9 months 9 months
ended ended ended
12/31/96 1.80% 12/31/96 1.46% 5.46% 12/31/96 4.13% 5.13%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 12/31/96 (1.02%) 2.92% 12/31/96 1.48% 2.46%
Period Period
3 years 3/12/94(1) 11/11/95(1)
ended through through
12/31/96 8.64% 12/31/96 11.96% 14.96% 12/31/96 4.73% 4.73%
Period
11/2/92(1)
through
12/31/96 25.55%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
56
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free New Mexico Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.62%) 12/31/96 (1.94%) 2.06% 12/31/96 1.04% 2.04%
6 months 6 months 6 months
ended ended ended
12/31/96 1.17%(4) 12/31/96 0.63% 4.63% 12/31/96 3.65% 4.65%
Period
9 months 9 months 5/7/96(1)
ended ended through
12/31/96 2.14% 12/31/96 1.56% 5.56% 12/31/96 5.30% 6.30%
1 year 1 year
ended ended
12/31/96 0.25% 12/31/96 (0.59%) 3.37%
Period
3 years 3/3/94(1)
ended through
12/31/96 11.65% 12/31/96 11.51% 14.51%
Period
10/5/92(1)
through
12/31/96 29.92%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
57
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free New York Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (2.61%) 12/31/96 (3.04%) 0.94% 12/31/96 (0.05%) 0.95%
6 months 6 months 6 months
ended ended ended
12/31/96 (0.97%)(4) 12/31/96 (1.59%) 2.41% 12/31/96 1.42% 2.42%
9 months 9 months 9 months
ended ended ended
12/31/96 (0.37%) 12/31/96 (1.23%) 2.74% 12/31/96 1.75% 2.75%
1 year 1 year 1 year
ended ended ended
12/31/96 (1.40%) 12/31/96 (2.46%) 1.42% 12/31/96 0.46% 1.43%
Period Period
3 years 11/14/94(1) 4/26/95(1)
ended through through
12/31/96 6.45% 12/31/96 10.93% 13.93% 12/31/96 6.79% 6.79%
5 years
ended
12/31/96 29.75%
Period
11/6/87(1)
through
12/31/96 87.64%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
58
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free North Dakota Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.61%)(3) 12/31/96 (1.88%)(3) 2.12%(3) 12/31/96 1.01% 2.01%
6 months 6 months 6 months
ended ended ended
12/31/96 0.79%(3)(4) 12/31/96 0.43%(3) 4.43%(3) 12/31/96 3.10% 4.10%
9 months 9 months 9 months
ended ended ended
12/31/96 1.46%(3) 12/31/96 1.08%(3) 5.08%(3) 12/31/96 3.74% 4.74%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.04%)(3) 12/31/96 (0.58%)(3) 3.38%(3) 12/31/96 1.82% 2.80%
Period Period
3 years 5/10/94(1) 7/29/95(1)
ended through through
12/31/96 11.37%(3) 12/31/961 8.27%(3) 21.27%(3) 12/31/96 9.46%(3) 9.46%(3)
5 years
ended
12/31/96 35.86%(3)
Period
4/1/91(1)
through
12/31/96 48.30%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
59
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Oregon Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.59%) 12/31/96 (1.90%) 2.10% 12/31/96 1.15% 2.15%
6 months 6 months 6 months
ended ended ended
12/31/96 1.45%(4) 12/31/96 1.06% 5.06% 12/31/96 3.94% 4.94%
9 months 9 months 9 months
ended ended ended
12/31/96 1.67% 12/31/96 1.24% 5.24% 12/31/96 4.12% 5.12%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.72%) 12/31/96 (1.33%) 2.60% 12/31/96 1.38% 2.36%
Period Period
3 years 3/12/94(1) 7/7/95(1)
ended through through
12/31/96 8.83% 12/31/96 10.94% 13.94% 12/31/96 8.87% 8.87%
Period
8/1/93(1)
through
12/31/96 13.23%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
60
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Utah Fund(3)
Class B Class B
Class A Shares Shares
Shares (including (excluding
(at offer) CDSC)(2) CDSC)
<S> <C> <C> <C> <C>
3 months 3 months
ended ended
12/31/96 (1.57%) 12/31/96 (2.01%) 1.99%
6 months 6 months
ended ended
12/31/96 0.71%(4) 12/31/96 0.09% 4.09%
9 months 9 months
ended ended
12/31/96 1.25% 12/31/96 0.54% 4.54%
1 year 1 year
ended ended
12/31/96 (0.54%) 12/31/96 (1.47%) 2.45%
Period
3 years 5/27/95(1)
ended through
12/31/96 10.88% 12/31/96 5.23% 9.23%
Period
10/5/92(1)
through
12/31/96 32.39%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
61
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Washington Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.50%) 12/31/96 (1.83%) 2.18% 12/31/96 1.25% 2.25%
6 months 6 months 6 months
ended ended ended
12/31/96 1.34%(4) 12/31/96 0.99% 4.99% 12/31/96 3.92% 4.92%
9 months 9 months 9 months
ended ended ended
12/31/96 2.18% 12/31/96 1.55% 5.55% 12/31/96 4.42% 5.42%
1 year 1 year 1 year
ended ended ended
12/31/96 0.03% 12/31/96 (0.65%) 3.31% 12/31/96 2.11% 3.10%
Period Period
3 years 10/24/95(1) 4/21/95(1)
ended through through
12/31/96 10.97% 12/31/96 2.73% 6.73% 12/31/96 11.51% 11.51%
Period
8/1/93(1)
through
12/31/96 19.99%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
62
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Wisconsin Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.26%) 12/31/96 (1.69%) 2.31% 12/31/96 1.28% 2.28%
6 months 6 months 6 months
ended ended ended
12/31/96 0.88%(4) 12/31/96 0.41% 4.41% 12/31/96 3.43% 4.43%
9 months 9 months 9 months
ended ended ended
12/31/96 1.37% 12/31/96 0.74% 4.74% 12/31/96 3.70% 4.70%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.40%) 12/31/96 (1.11%) 2.83% 12/31/96 1.74% 2.72%
Period Period
3 years 4/22/95(1) 3/28/95(1)
ended through through
12/31/96 7.50% 12/31/96 6.12% 10.12% 12/31/96 11.02% 11.02%
Period
9/1/93(1)
through
12/31/96 9.72%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 0.00%.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Funds and other mutual funds in the Delaware
Group, will provide general information about investment alternatives and
scenarios that will allow investors to assess their personal goals. This
information will include general material about investing as well as materials
reinforcing various industry-accepted principles of prudent and responsible
financial planning. One typical way of addressing these issues is to compare an
individual's goals and the length of time the individual has to attain these
goals to his or her risk threshold. In addition, the Distributor will provide
information that discusses the Manager's overriding investment philosophy and
how that philosophy impacts the Funds', and other Delaware Group funds',
investment disciplines employed in seeking their objectives. The Distributor may
also from time to time cite general or specific information about the
institutional clients of the Manager, including the number of such clients
serviced by the Manager.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick the
highs and the lows. By using a strategy known as dollar-cost averaging, you
schedule your investments ahead of time. If you invest a set amount on a regular
basis, that money will always buy more shares when the price is low and fewer
when the price is high. You can choose to invest at any regular interval--for
example, monthly or quarterly--as long as you stick to your regular schedule.
Dollar-cost averaging looks simple and it is,
63
<PAGE>
but there are important things to remember.
Dollar-cost averaging works best over longer time periods, and it doesn't
guarantee a profit or protect against losses in declining markets. If you need
to sell your investment when prices are low, you may not realize a profit no
matter what investment strategy you utilize. That's why dollar-cost averaging
can make sense for long-term goals. Since the potential success of a dollar-cost
averaging program depends on continuous investing, even through periods of
fluctuating prices, you should consider your dollar-cost averaging program a
long-term commitment and invest an amount you can afford and probably won't need
to withdraw. You also should consider your financial ability to continue to
purchase shares during periods of high fund share prices. Delaware Group offers
three services -- Automatic Investing Plan, Direct Deposit Purchase Plan and the
Wealth Builder Option -- that can help to keep your regular investment program
on track. See Investing by Electronic Fund Transfer Direct Deposit Purchase Plan
and Automatic Investing Plan under Investment Plans and Wealth Builder Option
under Investment Plans for a complete description of these services, including
restrictions or limitations.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $ 5.00 20
Month 4 $100 $10.00 10
--------------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of the Funds.
64
<PAGE>
The Power of Compounding
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding and the following chart illustrates just how powerful
it can be.
Compounded Returns
Results of various assumed fixed rates of return on a $10,000
investment compounded monthly tax-free for 10 years:
<TABLE>
<CAPTION>
4% Rate of Return 6% Rate of Return 8% Rate of Return
----------------- ----------------- -----------------
<S> <C> <C> <C>
1 Year $10,407 $10,617 $10,830
2 Years $10,831 $11,272 $11,729
3 Years $11,273 $11,967 $12,702
4 Years $11,732 $12,705 $13,757
5 Years $12,210 $13,488 $14,898
6 Years $12,707 $14,320 $16,135
7 Years $13,225 $15,203 $17,474
8 Years $13,764 $16,141 $18,924
9 Years $14,325 $17,137 $20,495
10 Years $14,908 $18,194 $22,196
</TABLE>
These figures are calculated assuming a fixed constant investment
return and assume no fluctuation in the value of principal. These figures, which
do not reflect payment of any sales charges, are not intended to be a projection
of investment results and do not reflect the actual performance results of any
of the Classes.
65
<PAGE>
TRADING PRACTICES AND BROKERAGE
Banks, brokers or dealers are selected to execute transactions on
behalf of a Fund for the purchase or sale of portfolio securities on the basis
of the Manager's judgment of their professional capability to provide the
service. The primary consideration is to have banks, brokers or dealers execute
transactions at best price and execution. Best price and execution refers to
many factors, including the price paid or received for a security, the
commission charged, the promptness and reliability of execution, the
confidentiality and placement accorded the order and other factors affecting the
overall benefit obtained by the account on the transaction. In nearly all
instances, trades are made on a net basis where a Fund either buys the
securities directly from the dealer or sells them to the dealer. In these
instances, there is no direct commission charged but there is a spread (the
difference between the buy and sell price) which is the equivalent of a
commission. When a commission is paid, the Fund pays reasonably competitive
brokerage commission rates based upon the professional knowledge of its trading
department as to rates paid and charged for similar transactions throughout the
securities industry. In some instances, a Fund pays a minimal share transaction
cost when the transaction presents no difficulty.
During the fiscal years ended December 31, 1994, 1995 and 1996, no
brokerage commissions were paid by the Funds.
The Manager may allocate out of all commission business generated by
all of the funds and accounts under its management, brokerage business to
brokers or dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software and hardware used in
security analyses; and providing portfolio performance evaluation and technical
market analyses. Such services are used by the Manager in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
During the fiscal year ended December 31, 1996, there were no portfolio
transactions of any Fund resulting in brokerage commissions directed to brokers
for brokerage and research services.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreement for each Fund, higher commissions are permitted to be paid
to broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the Funds believe that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the Manager which constitute in some part brokerage and research services used
by the Manager in connection with its investment decision-making process and
constitute in some part services used by the Manager in connection with
administrative or other functions not related to its investment decision-making
process. In such cases, the Manager will make a good faith allocation of
brokerage and research services and will pay out of its own resources for
services used by the Manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the Funds and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
The Manager may place a combined order for two or more accounts or
funds engaged in the purchase or sale of the same security if, in its judgment,
joint execution is in the best interest of each participant and will result in
best price and execution. Transactions involving commingled orders are allocated
in a manner deemed equitable to each account or fund. When a combined order is
executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is
66
<PAGE>
believed that the ability of the accounts to participate in volume transactions
will generally be beneficial to the accounts and funds. Although it is
recognized that, in some cases, the joint execution of orders could adversely
affect the price or volume of the security that a particular account or fund may
obtain, it is the opinion of the Manager and the Board of Directors that the
advantages of combined orders outweigh the possible disadvantages of separate
transactions.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"), and subject to seeking best price and
execution, the Funds may place orders with broker/dealers that have agreed to
defray certain expenses of the funds in the Delaware Group of funds such as
custodian fees, and may, at the request of the Distributor, give consideration
to sales of such funds' shares as a factor in the selection of brokers and
dealers to execute Fund portfolio transactions.
Portfolio Turnover
Each Fund anticipates that its portfolio turnover rate will generally
be less than 100%. However, a Fund will not attempt to achieve or be limited to
a predetermined rate of portfolio turnover for a Fund, such a turnover always
being incidental to transactions undertaken with a view to achieving each Fund's
investment objective in relation to anticipated movements in the general level
of interest rates. In investing for liberal current income, a Fund may hold
securities for any period of time, subject to complying with the Internal
Revenue Code and the 1940 Act, when changes in circumstances or conditions make
such a move desirable in light of the investment objective. To that extent, the
Fund may realize gains or losses. See Taxes. The turnover rate also may be
affected by cash requirements for redemptions and repurchases of Fund shares.
The portfolio turnover rate of each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by
the Fund during the particular fiscal year, exclusive of securities whose
maturities at the time of acquisition are one year or less.
The portfolio turnover rates for each Fund for the past two fiscal
years were as follows:
Fund 1995 1996
Tax-Free Arizona Insured Fund 42.96% 42.76%
Tax-Free Arizona Fund 38.05(1) 70.14
Tax-Free California Insured Fund 107.45 54.52
Tax-Free California Fund 39.51(1) 7.87
Tax-Free Colorado Fund 82.83 40.35
Tax-Free Florida Intermediate Fund 27.76 63.06
Tax-Free Florida Insured Fund 101.48 57.18
Tax-Free Florida Fund 63.52(1) 70.17
Tax-Free Idaho Fund 41.97(1) 34.68
Tax-Free Iowa Fund 21.67 14.56
Tax-Free Kansas Fund 19.71 56.77
Tax-Free Minnesota Intermediate Fund 40.28 28.18
Minnesota Insured Fund 53.72 14.04
Tax-Free Minnesota Fund 50.84 27.67
Tax-Free Missouri Insured Fund 31.69 28.26
Tax-Free New Mexico Fund 55.72 42.12
Tax-Free New York Fund 10.00(2) 5.00(3)
Tax-Free North Dakota Fund 45.34 57.50
Tax-Free Oregon Insured Fund 41.08 39.54
Tax-Free Utah Fund 35.28 39.58
Tax-Free Washington Insured Fund 50.54 33.30
Tax-Free Wisconsin Fund 38.54 12.10
- -----
(1) Annualized.
(2) For the year October 1, 1994 through September 30, 1995.
(3) For the period October 1, 1996 through December 31, 1996. For the period
October 1, 1995 through September 30, 1996, the portfolio turnover rate was
12.00%.
67
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
shares and has agreed to use its best efforts to sell shares of each Fund. See
the Prospectus for additional information on how to invest. Shares of each Fund
are offered on a continuous basis and may be purchased through authorized
investment dealers or directly by contacting a Fund or the Distributor.
The minimum initial investment generally is $1,000 for each Class of
each Fund. Subsequent purchases generally must be at least $100. The initial and
subsequent minimum investments for Class A Shares will be waived for purchases
by officers, directors and employees of any Delaware Group fund, the Manager or
any of the Manager's affiliates if the purchases are made pursuant to a payroll
deduction program. Shares purchased pursuant to the Uniform Gifts to Minors Act
or Uniform Transfers to Minors Act and shares purchased in connection with an
Automatic Investing Plan are subject to a minimum initial purchase of $250 and a
minimum subsequent purchase of $25. Accounts opened under the Delaware Group
Asset Planner service are subject to a minimum initial investment of $2,000 per
Asset Planner Strategy selected.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. A Fund will reject any purchase order of more than
$250,000 of Class B Shares and $1,000,000 or more for Class C Shares. An
investor may exceed these limitations by making cumulative purchases over a
period of time. An investor should keep in mind, however, that reduced front-end
sales charges apply to investments of $100,000 or more of Class A Shares, and
that Class A Shares are subject to lower annual 12b-1 Plan expenses than Class B
Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers have the responsibility of transmitting orders
promptly. The Fund reserves the right to reject any order for the purchase of
its shares if in the opinion of management such rejection is in such Fund's best
interest.
The NASD has adopted Rules of Fair Practice relating to investment
company sales charges. The Fund and the Distributor intend to operate in
compliance with these rules.
Class A Shares of Tax-Free Funds and Insured Funds are purchased at the
offering price which reflects a maximum front-end sales charge of 3.75%. Class A
Shares of Tax-Free Intermediate Funds are also purchased at the offering price
which reflects a maximum front-end sales charge of 2.75%. Lower sales charges
apply for larger purchases. See the tables below. Class A Shares are also
subject to annual 12b-1 Plan expenses. See Determining Offering Price and Net
Asset Value and Plans Under Rule 12b-1.
Class B Shares of Tax-Free Funds and Insured Funds are purchased at net
asset value and are subject to a CDSC of: (i) 4% if shares are redeemed within
two years of purchase; (ii) 3% if shares are redeemed during the third or fourth
year following purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. Shares of such Funds are also subject to annual 12b-1 Plan
expenses which are higher than those to which Class A Shares are subject and are
assessed against Class B Shares for approximately eight years after purchase.
Class B Shares of Tax-Free Intermediate Funds are purchased at net
asset value and are subject to a CDSC of: (i) 2% if shares are redeemed within
two years of purchase; and (ii) 1% if shares are redeemed during the third year
following purchase. Shares of such Funds are also subject to annual 12b-1 Plan
expenses which are higher than those to which Class A Shares are subject and are
assessed against the Class B Shares for approximately five years after purchase.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus.
Class C Shares of each Fund are purchased at net asset value and are
subject to a CDSC of 1% if shares are redeemed within 12 months following
purchase. Class C Shares are also subject to annual 12b-1 Plan expenses for the
life of the investment which are equal to those to which Class B Shares are
subject.
See Determining Offering Price and Net Asset Value and Plans Under Rule
12b-1 in this Part B.
68
<PAGE>
Certificates representing shares purchased are not ordinarily issued
unless, in the case of Class A Shares or Institutional Class shares, a
shareholder submits a specific request. Certificates are not issued in the case
of Class B Shares or Class C Shares. However, purchases not involving the
issuance of certificates are confirmed to the investor and credited to the
shareholder's account on the books maintained by Delaware Service Company, Inc.
(the "Transfer Agent"). The investor will have the same rights of ownership with
respect to such shares as if certificates had been issued. An investor that is
permitted to obtain a certificate may receive a certificate representing full
share denominations purchased by sending a letter signed by each owner of the
account to the Transfer Agent requesting the certificate. No charge is assessed
by the Funds for any certificate issued. A shareholder may be subject to fees
for replacement of a lost or stolen certificate under certain conditions,
including the cost of obtaining a bond covering the lost or stolen certificate.
Please contact the Funds for further information. Investors who hold
certificates representing any of their shares may only redeem those shares by
written request. The investor's certificate(s) must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class C
Shares permit investors to choose the method of purchasing shares that is most
suitable for their needs given the amount of their purchase, the length of time
they expect to hold their shares and other relevant circumstances. Investors
should determine whether, given their particular circumstances, it is more
advantageous to purchase Class A Shares and incur a front-end sales charge and
annual 12b-1 Plan expenses of up to a maximum of 0.25% of the average daily net
assets of Class A Shares, or to purchase either Class B Shares or Class C Shares
and have the entire initial purchase amount invested in a Fund with the
investment thereafter subject to a CDSC and annual 12b-1 expenses. Class B
Shares of Tax-Free Funds and Insured Funds are subject to a CDSC if the shares
are redeemed within six years of purchase. Class B Shares of Tax-Free
Intermediate Funds are subject to a CDSC if the shares are redeemed within three
years of purchase. Class C Shares of each Fund are subject to a CDSC if the
shares are redeemed within 12 months of purchase. Class B and Class C Shares are
each subject to annual 12b-1 Plan expenses of 1% (0.25% of which are service
fees to be paid to the Distributor, dealers and others, for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
the respective Class. Shares of USA B Class and Insured B Class will
automatically convert to Class A Shares of the respective Fund at the end of
approximately eight years after purchase and shares of Intermediate B Class will
automatically convert to the Class A Shares of this Fund at the end of
approximately five years after purchase and, thereafter, be subject to annual
12b-1 Plan expenses of up to a maximum of 0.25% of average daily net assets of
such shares. Unlike Class B Shares, Class C Shares do not convert to another
class.
Class A Shares
Purchases of $100,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges as shown in the accompanying table, and
may include a series of purchases over a 13-month period under a Letter of
Intention signed by the purchaser. See Special Purchase Features - Class A
Shares, below for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
69
<PAGE>
<TABLE>
<CAPTION>
Tax-Free Funds and Insured Funds+
- -------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Amount of Purchase Offering Offering
Price Amount Invested Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 0.00%** 3.25%
$100,000 but less than $250,000 3.00 0.00** 2.50
$250,000 but less than $500,000 2.50 0.00** 2.00
$500,000 but less than $1,000,000* 2.00 0.00** 1.75
- -------------------------------------------------------------------------------------------------------------------
Intermediate Funds++
- -------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Amount of Purchase Offering Offering
Price Amount Invested Price
- -------------------------------------------------------------------------------------------------------------------
Less than $100,000 2.75% 0.00%** 2.35%
$100,000 but less than $250,000 2.00 0.00** 1.75
$250,000 but less than $500,000 1.00 0.00** 0.75
$500,000 but less than $1,000,000* 1.00 0.00** 0.75
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* There is no front-end sales charge on purchases of Class A shares of $1
million or more but, under certain limited circumstances, a 1% limited
contingent deferred sales charge may apply upon redemption of such
shares.
** The front-end sales charge as a percentage of the amount invested is
based on the net asset value per share of the respective Class A shares
as of the end of the most recent fiscal year. Those amounts are as
follows:
<TABLE>
<CAPTION>
Offering Price Offering Price
3.75% 3.00% 2.50% 2.00% 2.75% 2.00% 1.00%
--------------------------------- ---------------------
Amount Invested Amount Invested
--------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona 3.93% 3.08% 2.52% 2.06% Tax-Free Arizona Intermediate 2.80% 2.00% 1.00%
Tax-Free Arizona Insured 3.89 3.07 2.53 2.08 Tax-Free California Intermediate 2.80 2.00 1.00
Tax-Free California 3.93 3.07 2.59 2.01 Tax-Free Colorado Intermediate 2.80 2.00 1.00
Tax-Free California Insured 3.90 3.05 2.57 2.00 Tax-Free Florida Intermediate 2.78 2.01 1.05
Tax-Free Colorado 3.90 3.06 2.60 2.04 Tax-Free Minnesota Intermediate 2.82 2.00 1.00
Tax-Free Colorado Insured 3.90 3.10 2.60 2.00
Tax-Free Florida 3.90 3.14 2.57 2.00
Tax-Free Florida Insured 3.92 3.08 2.52 2.05
Tax-Free Idaho 3.94 3.12 2.57 2.02
Tax-Free Iowa 3.85 3.12 2.60 2.08
Tax-Free Kansas 3.88 3.13 2.56 2.08
Tax-Free Minnesota 3.87 3.06 2.58 2.02
Minnesota Insured 3.87 3.02 2.55 2.08
Tax-Free Missouri Insured 3.86 3.09 2.60 2.03
Tax-Free New Mexico 3.89 3.06 2.59 2.04
Tax-Free New York Fund 3.93 3.09 2.53 2.06
Tax-Free North Dakota 3.86 3.13 2.57 2.02
Tax-Free Oregon Insured 3.85 3.14 2.53 2.03
Tax-Free Washington Insured 3.88 3.11 2.52 2.04
Tax-Free Wisconsin 3.94 3.11 2.59 2.07
Tax-Free Utah 3.87 3.14 2.58 2.03
</TABLE>
- --------------------------------------------------------------------------------
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
+ Tax-Free Funds and Insured Funds: Tax-Free Arizona, Tax-Free Arizona
Insured, Tax-Free California, Tax-Free California Insured, Tax-Free
Colorado, Colorado Insured Tax-Free Florida, Tax-Free Florida
70
<PAGE>
Insured, Free, Tax-Free Idaho, Tax-Free Iowa, Tax-Free Kansas, Tax-Free
Minnesota, Minnesota Insured, Tax-Free Missouri Insured, Tax-Free New
Mexico, Tax-Free New York Fund, Tax-Free North Dakota, Tax-Free Oregon
Insured, Tax-Free Washington Insured, Tax-Free Wisconsin and Tax-Free Utah.
++ Tax-Free Intermediate Funds: Tax-Free Arizona Intermediate, Tax-Free
California Intermediate, Tax-Free Colorado Intermediate, Tax-Free Florida
Intermediate and Tax-Free Minnesota Intermediate.
- --------------------------------------------------------------------------------
A Fund must be notified when a sale takes place which would qualify for the
reduced front-end sales charge on the basis of previous or current
purchases. The reduced front-end sales charge will be granted upon
confirmation of the shareholder's holdings by such Fund. Such reduced
front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which
the Distributor may reallow to dealers up to the full amount of the
front-end sales charge shown above. In addition, certain dealers who enter
into an agreement to provide extra training and information on Delaware
Group products and services and who increase sales of Delaware Group funds
may receive an additional commission of up to 0.15% of the offering price.
Dealers who receive 90% or more of the sales charge may be deemed to be
underwriters under the 1933 Act.
- --------------------------------------------------------------------------------
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission of up to 0.15% of
the offering price in connection with the sales of Class A Shares. Such dealers
must meet certain requirements in terms of organization and distribution
capabilities and their ability to increase sales. The Distributor should be
contacted for further information on these requirements as well as the basis and
circumstances upon which the additional commission will be paid. Participating
dealers may be deemed to have additional responsibilities under the securities
laws.
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedules:
Tax-Free Funds and Insured Funds
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
Tax-Free Intermediate Funds
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 0.50%
Next $1 million up to $3 million 0.50
Next $2 million up to $5 million 0.40
Amount over $5 million 0.20
71
<PAGE>
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Prospectus) applies may be aggregated with those of Class A
Shares of a Fund. Financial advisers also may be eligible for a dealer's
commission in connection with certain purchases made under a Letter of Intention
or pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B and Class C Shares are purchased without a front-end sales
charge. Class B Shares redeemed within prescribed periods after purchase may be
subject to a CDSC imposed at the rates and within the time periods set forth
below, and Class C Shares redeemed within 12 months of purchase may be subject
to a CDSC of 1%. CDSCs are charged as a percentage of the dollar amount subject
to the CDSC. The charge will be assessed on an amount equal to the lesser of the
net asset value at the time of purchase of shares being redeemed or the net
asset value of those shares at the time of redemption. No CDSC will be imposed
on increases in net asset value above the initial purchase price, nor will a
CDSC be assessed on redemption of shares acquired through the reinvestment of
dividends or capital gains distributions. See Waiver of Contingent Deferred
Sales Charge - Class B and Class C Shares under Redemption and Exchange in the
Prospectus for a list of the instances in which the CDSC is waived.
The following table sets forth the rates of the CDSC for the Class B
Shares of Tax-Free Funds and Insured Funds:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- ------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Funds and Insured
Funds will still be subject to the annual 12b-1 Plan expenses of up to 1% of
average daily net assets of those shares. See Automatic Conversion of Class B
Shares, above. Investors are reminded that the Class A Shares into which the
Class B Shares will convert are subject to ongoing annual 12b-1 Plan expenses
of up to a maximum of 0.25% of average daily net assets of such shares.
The following table sets forth the rates of the CDSC for the Class B
Shares of Tax-Free Intermediate Funds:
72
<PAGE>
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- ------------------------ ------------------
0-2 2%
3 1%
4 and thereafter None
During the fourth year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Intermediate Funds
will still be subject to the annual 12b-1 Plan expenses of up to 1% of average
daily net assets of those shares. See Automatic Conversion of Class B Shares
above. Investors are reminded that the Class A Shares into which the Class B
Shares will convert are subject to ongoing annual 12b-1 Plan expenses of up to a
maximum of 0.25% of average daily net assets representing such shares.
Plans Under Rule 12b-1
Pursuant to Rule 12b-1 under the 1940 Act, each of the Class A Shares,
Class B Shares and Class C Shares of the Funds have a separate distribution plan
under Rule 12b-1 (the "Plans"). Each Plan permits the relevant Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the Class to which the Plan applies.
The Plans permit a Fund, pursuant to its Distribution Agreement, to pay
out of the assets of the respective Class A Shares, Class B Shares and Class C
Shares monthly fees to the Distributor for its services and expenses in
distributing and promoting sales of the shares of such classes. These expenses
include, among other things, preparing and distributing advertisements, sales
literature and prospectuses and reports used for sales purposes, compensating
sales and marketing personnel, and paying distribution and maintenance fees to
securities brokers and dealers who enter into agreements with the Distributor.
The Plan expenses relating to the Class B and Class C Shares are also used to
pay the Distributor for advancing the commission costs to dealers with respect
to the initial sale of such shares.
In addition, each Fund may make payments out of the assets of the
respective Class A, Class B and Class C Shares directly to other unaffiliated
parties, such as banks, who either aid in the distribution of shares of, or
provide services to, such Classes.
The maximum aggregate fee payable by a Fund under its Plans, and each
Fund's Distribution Agreement, is on an annual basis, up to 0.25% of average
daily net assets of the Class A Shares, and up to 1% (0.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of each of the Class B Shares'
and Class C Shares' average daily net assets for the year. Each Fund's Board of
Directors or Trustees may reduce these amounts at any time. The Distributor has
agreed to waive these distribution fees to the extent such fee for any day
exceeds the net investment income realized by the Classes for such day.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
reimbursement from such Classes. Subject to seeking best price and execution, a
Fund may, from time to time, buy or sell portfolio securities from or to firms
which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreements, as amended, have been
approved by the Board of Directors or Trustees of the Funds, including a
majority of the directors who are not "interested persons" (as defined in the
1940 Act) and who have no direct or indirect financial interest in the Plans, by
vote cast in person at a meeting duly
73
<PAGE>
called for the purpose of voting on the Plans and such Agreements. Continuation
of the Plans and the Distribution Agreements, as amended, must be approved
annually by the Board of Directors or Trustees in the same manner as specified
above.
Each year, the directors or trustees must determine whether
continuation of the Plans is in the best interest of shareholders of,
respectively, Class A Shares, Class B Shares and Class C Shares of each Fund and
that there is a reasonable likelihood of the Plan relating to a Class providing
a benefit to that Class. The Plans and the Distribution Agreements, as amended,
may be terminated with respect to a Class at any time without penalty by a
majority of those directors or trustees who are not "interested persons" or by a
majority vote of the relevant Class' outstanding voting securities. Any
amendment materially increasing the percentage payable under the Plans must
likewise be approved by a majority vote of the relevant Class' outstanding
voting securities, as well as by a majority vote of those directors or trustees
who are not "interested persons." With respect to each Class A Shares' Plan, any
material increase in the maximum percentage payable thereunder must also be
approved by a majority of the outstanding voting securities of the respective
Class B Shares. Also, any other material amendment to the Plans must be approved
by a majority vote of the directors including a majority of the noninterested
directors of the Funds having no interest in the Plans. In addition, in order
for the Plans to remain effective, the selection and nomination of directors who
are not "interested persons" of the Funds must be effected by the directors who
themselves are not "interested persons" and who have no direct or indirect
financial interest in the Plans. Persons authorized to make payments under the
Plans must provide written reports at least quarterly to the Board of Directors
for their review.
For the fiscal years (or portions thereof, as indicated) ended December
31, 1996, 1995, and 1994, Rule 12b-1 fees and the amount waived, if any, for
each Fund are set forth below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund
Class A $551,781 $290,833 $608,790 $582,768 $648,615 $493,491
Class B 25,838 $2,956 7,062 1,807 N/A N/A
Class C 5,529 0 4,263 561 1,609 333
Tax-Free Arizona Fund
Class A 21,058 0 6,184 0 N/A N/A
Class B 26,502 2,854 3,765 975 N/A N/A
Class C 240 0 121 0 N/A N/A
Tax-Free California Insured Fund
12/31/95 - Class A 79,903 0 80,709 23,803 11,176 8,495
12/31/95 - Class B 63,807 22,641 44,275 17,904 2,774 1,260
12/31/95 - Class C 799 0 1,792 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 54,720 44,074
10/31/94 - Class B N/A N/A N/A N/A 4,534 1,869
10/31/94 - Class C N/A N/A N/A N/A N/A N/A
Tax-Free California Fund
Class A 2,820 0 2,145 0 N/A N/A
Class B 3,054 811 390 177 N/A N/A
Class C 418 0 N/A N/A N/A N/A
Tax-Free Colorado Fund
Class A 922,540 499,145 969,424 642,447 265,096 265,096
Class B 26,004 1,726 5,460 1,113 N/A N/A
Class C 14,080 0 7.874 0 2,161 14
Tax-Free Florida Intermediate Fund
Class A 5,390 4,315 1,536 1,389 602 602
Class B 6,567 1,102 120 30 N/A N/A
Class C 539 0 402 0 N/A N/A
Tax-Free Florida Insured Fund
12/31/95 - Class A 529,135 469,011 611,873 595,950 101,760 101,760
12/31/95 - Class B 30,245 14,311 22,840 13,701 2,101 1,265
10/31/94 - Class A N/A N/A N/A N/A 739,775 739,775
10/31/94 - Class B N/A N/A N/A N/A 4,452 1,761
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Florida Fund
Class A 12,611 0 5,427 0 N/A N/A
Class B 9,331 3,755 195 99 N/A N/A
Class C 98 0 48 0 N/A N/A
Tax-Free Idaho Fund
Class A 54,123 0 16,620 3,224 N/A N/A
Class B 37,996 9,559 6,034 1,549 N/A N/A
Class C 8,416 0 4,499 93 N/A N/A
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Iowa Fund
12/31/95 - Class A 103,980 55,582 95,497 86,503 28,296 28,296
12/31/95 - Class B 12,291 2,296 2,753 704 N/A N/A
12/31/95 - Class C 6,075 301 2,373 0 N/A N/A
8/31/94 - Class A N/A N/A N/A N/A 63,681 63,681
Tax-Free Kansas Fund
12/31/95 - Class A 25,773 13,777 23,138 19,960 2,775 2,775
12/31/95 - Class B 16,667 2,342 2,445 601 N/A N/A
12/31/95 - Class C 580 0 136 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 11,078 11,078
Tax-Free Minnesota Intermediate Fund
12/31/95 - Class A 172,919 0 185,286 0 171,101 0
12/31/95 - Class B 2,048 124 83 21 N/A N/A
12/31/95 - Class C 8,875 0 5,099 0 1,385 0
2/28/94 - Class A N/A N/A N/A N/A 31,163 0
2/28/94 - Class C N/A N/A N/A N/A N/A N/A
Minnesota Insured Fund
Class A 736,300 0 759,866 126,114 778,913 119,759
Class B 58,570 6,996 19,425 5,515 N/A N/A
Class C 32,890 0 25,345 453 6,399 0
Tax-Free Minnesota Fund
Class A 1,093,043 0 1,108,235 0 1,118,958 0
Class B 45,609 8,024 8,871 2,274 N/A N/A
Class C 27,693 0 17,906 0 4,020 0
Tax-Free Missouri Insured Fund
12/31/95 - Class A 123,099 75,641 113,879 103,135 15,539 15,539
12/31/95 - Class B 86,717 28,315 44,885 22,490 3,190 1,609
12/31/95 - Class C 1,388 0 28 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 85,866 85,866
10/31/94 - Class B N/A N/A N/A N/A 4,486 2,119
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free New Mexico Fund
12/31/95 - Class A 51,934 39,932 52,868 48,466 8,619 8,619
12/31/95 - Class B 6,452 1,358 5,003 1,508 446 134
12/31/95 - Class C 1,358 118 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 54,411 54,411
10/31/94 - Class B N/A N/A N/A N/A 1,441 310
Tax-Free New York Fund
Class A 3,240 0 176 0 90 0
Class B 861 0 3,057 0 1,544 0
Class C 133 0 518 0 260 0
Tax-Free North Dakota Fund
Class A 86,154 69,695 88,956 85,447 90,095 90,095
Class B 5,623 2,656 2,317 1,161 622 310
Class C 167 0 168 0 N/A N/A
Tax-Free Oregon Insured Fund
12/31/95 - Class A 52,403 21,733 46,075 39,592 5,914 5,914
12/31/95 - Class B 37,462 11,847 21,913 9,883 2,045 923
12/31/95 - Class C 2,501 0 708 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 23,890 23,890
10/31/94 - Class B N/A N/A N/A N/A 3,762 1,507
Tax-Free Utah Fund
12/31/95 - Class A 10,009 8,808 10,086 9,556 1,590 1,590
12/31/95 - Class B 3,821 749 1,209 305 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 10,190 10,190
Tax-Free Washington Insured Fund
12/31/95 - Class A 5,596 4,029 5,154 4,717 710 710
12/31/95 - Class B 2,775 472 29 8 N/A N/A
12/31/95 - Class C 188 0 123 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 3,782 3,782
Tax-Free Wisconsin Fund
12/31/95 - Class A 67,339 20,178 60,960 50,749 15,845 14,603
12/31/95 - Class B 9,369 1,519 3,151 803 N/A N/A
12/31/95 - Class C 3,603 153 308 0 N/A N/A
8/31/94 - Class A N/A N/A N/A N/A 23,230 23,230
</TABLE>
The staff of the Securities and Exchange Commission ("SEC") has
proposed amendments to Rule 12b-1 and other related regulations that could
impact Rule 12b-1 Distribution Plans. The Funds intend to amend the Plans, if
necessary, to comply with any new rules or regulations the SEC may adopt with
respect to Rule 12b-1.
77
<PAGE>
Other Payments to Dealers - Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits as set
by the Distributor, may receive from the Distributor an additional payment of up
to 0.25% of the dollar amount of such sales. The Distributor may also provide
additional promotional incentives or payments to dealers that sell shares of the
Delaware Group of funds. In some instances, these incentives or payments may be
offered only to certain dealers who maintain, have sold or may sell certain
amounts of shares. The Distributor may also pay a portion of the expense of
preapproved dealer advertisements promoting the sale of Delaware Group fund
shares.
Special Purchase Features - Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be reinvested without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
Current and former officers, directors or trustees and employees of
each Fund, any other fund in the Delaware Group, the Manager or any of the
Manager's current affiliates and those that may in the future be created, legal
counsel to the funds and registered representatives, and employees of
broker/dealers who have entered into Dealer's Agreements with the Distributor
may purchase Class A Shares and shares of any of the funds in the Delaware
Group, including any fund that may be created at net asset value. Family members
(regardless of age) of such persons at their direction, and any employee benefit
plan established by any of the foregoing funds, corporations, counsel or
broker/dealers may also purchase shares at net asset value. Class A Shares may
also be purchased at net asset value by current and former officers, directors
and employees (and members of their families) of the Dougherty Financial Group
LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value 12 months
of a change of the registered representative's employment, if the purchase is
funded by proceeds from an investment where a front-end sales charge, contingent
deferred sales charge or other sales charge has been assessed. Purchases of
Class A Shares may also be made at net asset value by bank employees who provide
services in connection with agreements between the bank and unaffiliated brokers
or dealers concerning sales of shares of the Delaware Group funds. Officers,
directors and key employees of institutional clients of the Manager or any of
its affiliates may purchase Class A Shares at net asset value. Moreover,
purchases may be effected at net asset value for the benefit of the clients of
brokers, dealers and registered investment advisers affiliated with a broker or
dealer, if such broker, dealer or investment adviser has entered into an
agreement with the Distributor providing specifically for the purchase of Class
A Shares in connection with special investment products, such as wrap accounts
or similar fee based programs. Such purchasers are required to sign a letter
stating that the purchase is for investment only and that the securities may not
be resold except to the issuer. Such purchasers may also be required to sign or
deliver such other documents as the Funds may reasonably require to establish
eligibility for purchase at net asset value.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
Each Fund must be notified in advance that the trade qualifies for
purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made by
any such purchaser previously enumerated within a 13-month period pursuant to a
written Letter of Intention provided by the Distributor and signed by the
purchaser, and not legally binding on the signer or the Funds, which provides
for the holding in escrow by the Transfer Agent, of 5% of the total amount of
Class A Shares intended to be purchased until such purchase is completed within
the 13-month period. A Letter of Intention may be dated to include shares
purchased up to 90 days prior to the date the Letter is signed. The 13-month
period begins on the date of the earliest purchase. If the intended investment
is not completed, except as noted below, the purchaser will be asked to pay an
amount equal to the difference between the front-end sales charge on Class A
Shares purchased at the reduced rate and the front-end sales charge otherwise
78
<PAGE>
applicable to the total shares purchased. If such payment is not made within 20
days following the expiration of the 13-month period, the Transfer Agent will
surrender an appropriate number of the escrowed shares for redemption in order
to realize the difference. Such purchasers may include the value (at offering
price at the level designated in their Letter of Intention) of all their shares
of the Funds and of any class of any of the other mutual funds in the Delaware
Group (except shares of any Delaware Group fund which do not carry a front-end
sales charge, CDSC or Limited CDSC, other than shares of Delaware Group Premium
Fund, Inc. beneficially owned in connection with the ownership of variable
insurance products, unless they were acquired through an exchange from a
Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC) previously purchased and still held as of the date of their Letter of
Intention toward the completion of such Letter.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of the Class A Shares, Class B Shares and/or
Class C Shares of the Funds, as well as any other class of any of the other
Delaware Group funds (except shares of any Delaware Group fund which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC).
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). Using the Tax-Free Funds as an example, if any such purchaser has
previously purchased and still holds shares of Class A Shares of those Funds
and/or shares of any other of the classes described in the previous sentence
with a value of $40,000 and subsequently purchases $60,000 at offering price of
additional shares of a Tax-Free Fund, the charge applicable to the $60,000
purchase would be 3.00%. For the purpose of this calculation, the shares
presently held shall be valued at the public offering price that would have been
in effect were the shares purchased simultaneously with the current purchase.
Investors should refer to the table of sales charges for Class A Shares to
determine the applicability of the Right of Accumulation to their particular
circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Fund who redeem such shares have one
year from the date of redemption to reinvest all or part of their redemption
proceeds in Class A Shares of that Fund or in Class A Shares of any of the other
funds in the Delaware Group, subject to applicable eligibility and minimum
purchase requirements, in states where shares of such other funds may be sold,
at net asset value without the payment of a front-end sales charge. This
privilege does not extend to Class A Shares where the redemption of the shares
triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Group offered without a
front-end sales charge, will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account, will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor
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<PAGE>
should obtain and read carefully the prospectus for the fund in which the
investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Funds' shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus) in connection with the features
described above.
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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
Classes in which an investor has an account (based on the net asset value of
that Fund in effect on the reinvestment date) and will be credited to the
shareholder's account on that date. Confirmations of each dividend payment from
net investment income will be mailed to shareholders quarterly. A confirmation
of each distribution from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase and
add full and fractional shares to their plan accounts at any time either through
their investment dealers or by sending a check or money order to the specific
Fund and Class in which shares are being purchased. Such purchases, which must
meet the minimum subsequent purchase requirements set forth in the Prospectus
and this Part B, are made for Class A Shares at the public offering price and
for Class B Shares and Class C Shares at the net asset value, at the end of the
day of receipt. A reinvestment plan may be terminated at any time. This plan
does not assure a profit nor protect against depreciation in a declining market.
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements, and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions
from a Fund in any of the other mutual funds in the Delaware Group, including
the Funds, in states where their shares may be sold. Such investments will be
made at net asset value per share at the close of business on the reinvestment
date without any front-end sales charge or service fee. Nor will such
investments be subject to a CDSC or Limited CDSC. The shareholder must notify
the Transfer Agent in writing and must have established an account in the fund
into which the dividends and/or distributions are to be invested. Any
reinvestment directed to a fund in which the investor does not then have an
account will be treated like all other initial purchases of a fund's shares.
Consequently, an investor should obtain and read carefully the prospectus for
the fund in which the investment is intended to be made before investing or
sending money. The prospectus contains more complete information about the fund,
including charges and expenses. See also Additional Methods of Adding to Your
Investment - Dividend Reinvestment Plan under How to Buy Shares in the
Prospectus.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Funds at
net asset value, provided an account has been established. Dividends from Class
A Shares may not be directed to Class B Shares or Class C Shares. Dividends from
Class B Shares may only be directed to other Class B Shares, and dividends from
Class C Shares may only be directed to other Class C Shares. See Appendix C -
Classes Offered in the Prospectus for the funds in the Delaware Group that are
eligible for investment by holders of Fund shares.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan--Investors may arrange for the Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan--Shareholders of Class A, Class B and Class C
Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date, although no check is required to initiate the transaction. (2)
If the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
81
<PAGE>
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to a Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
a Fund may liquidate sufficient shares from a shareholder's account to reimburse
the government or the private source. In the event there are insufficient shares
in the shareholder's account, the shareholder is expected to reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. A Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact the Funds for proper
instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in a Class
through regular liquidations of shares in their accounts in other mutual funds
in the Delaware Group. Shareholders of each Class may also elect to invest in
one or more of the other mutual funds in the Delaware Group through our Wealth
Builder Option. See Wealth Builder Option and Redemption and Exchange in the
Prospectus.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the Delaware
Group, subject to the conditions and limitations set forth in the Prospectus.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by written
notice to their Fund.
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<PAGE>
DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund or its agent. Orders for purchases of Class B
Shares and Class C Shares of each Fund are effected at the net asset value per
share next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund or its agent. Selling dealers have the
responsibility of transmitting orders promptly.
The offering price of Class A Shares consists of the net asset value
per share, plus any applicable front-end sales charges. Offering price and net
asset value are computed as of the close of regular trading on the New York
Stock Exchange (ordinarily, 4 p.m, Eastern time) on days when the Exchange is
open. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. When the
New York Stock Exchange is closed, the Fund will generally be closed, pricing
calculations will not be made and purchase and redemption orders will not be
processed.
The portfolio securities in which each Fund invests fluctuate
in value, and therefore, the net asset value per share of each Fund also
fluctuates. As of December 31, 1996, the net asset value per share of each Fund
which had commenced investment operations was calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Tax-Free Arizona Insured Fund
Class A Net Assets ($209,258,103) = Net Asset Value Per Share ($11.06)
------------------------------------ Shares Outstanding (18,923,862)
Class B Net Assets ($3,110,071) = Net Asset Value Per Share ($11.05)
------------------------------------ Shares Outstanding (281,457)
Class C Net Assets ($554,189) = Net Asset Value Per Share ($11.06)
------------------------------------ Shares Outstanding (50,124)
Tax-Free Arizona Fund
Class A Net Assets ($9,755,083) = Net Asset Value Per Share ($10.70)
------------------------------------ Shares Outstanding (911,692)
Class B Net Assets ($3,490,651) = Net Asset Value Per Share ($10.69)
------------------------------------ Shares Outstanding (326,539)
Class C Net Assets ($22,697) = Net Asset Value Per Share ($10.71)
------------------------------------ Shares Outstanding (2,120)
Tax-Free California Insured Fund
Class A Net Assets ($30,551,302) = Net Asset Value Per Share ($10.50)
------------------------------------ Shares Outstanding (2,909,650)
Class B Net Assets ($6,717,106) = Net Asset Value Per Share ($10.50)
------------------------------------ Shares Outstanding (639,694)
Class C Net Assets ($54,786) = Net Asset Value Per Share ($10.46)
-------------------------------------- Shares Outstanding (5,239)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Tax-Free California Fund
Class A Net Assets ($1,218,159) = Net Asset Value Per Share ($10.43)
------------------------------------ Shares Outstanding (116,808)
Class B Net Assets ($660,468) = Net Asset Value Per Share ($10.44)
------------------------------------ Shares Outstanding (63,260)
Class C Net Assets ($93,850) = Net Asset Value Per Share ($10.42)
------------------------------------ Shares Outstanding (9,003)
Tax-Free Colorado Fund
Class A Net Assets ($358,328,150) = Net Asset Value Per Share ($10.78)
------------------------------------ Shares Outstanding (33,238,520)
Class B Net Assets ($4,172,133) = Net Asset Value Per Share ($10.78)
------------------------------------ Shares Outstanding (387,138)
Class C Net Assets ($1,522,353) = Net Asset Value Per Share ($10.78)
------------------------------------ Shares Outstanding (141,218)
Tax-Free Florida Insured Fund
Class A Net Assets ($192,170,842) = Net Asset Value Per Share ($10.71)
------------------------------------ Shares Outstanding (17,937,779)
Class B Net Assets ($3,222,081) = Net Asset Value Per Share ($10.71)
------------------------------------ Shares Outstanding (300,908)
Tax-Free Florida Intermediate Fund
Class A Net Assets ($3,158,899) = Net Asset Value Per Share ($10.43)
------------------------------------ Shares Outstanding (302,985)
Class B Net Assets ($1,042,061) = Net Asset Value Per Share ($10.42)
------------------------------------ Shares Outstanding (99,966)
Class C Net Assets ($54,283) = Net Asset Value Per Share ($10.42)
------------------------------------ Shares Outstanding (5,209)
Tax-Free Florida Fund
Class A Net Assets ($5,761,111) = Net Asset Value Per Share ($10.52)
------------------------------------ Shares Outstanding (547,447)
Class B Net Assets ($1,634,750) = Net Asset Value Per Share ($10.53)
------------------------------------ Shares Outstanding (155,265)
Class C Net Assets ($15,563) = Net Asset Value Per Share ($10.52)
------------------------------------ Shares Outstanding (1,479)
Tax-Free Idaho Fund
Class A Net Assets ($27,683,985) = Net Asset Value Per Share ($10.91)
------------------------------------ Shares Outstanding (2,538,218)
Class B Net Assets ($4,945,246) = Net Asset Value Per Share ($10.89)
------------------------------------ Shares Outstanding (453,932)
Class C Net Assets ($821,981) = Net Asset Value Per Share ($10.90)
------------------------------------ Shares Outstanding (75,392)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Tax-Free Iowa Fund
Class A Net Assets ($40,037,169) = Net Asset Value Per Share ($9.62)
------------------------------------ Shares Outstanding (4,163,834)
Class B Net Assets ($1,645,131) = Net Asset Value Per Share ($9.61)
----------------------------------- Shares Outstanding (171,173)
Class C Net Assets ($670,289) = Net Asset Value Per Share ($9.61)
------------------------------------ Shares Outstanding (69,744)
Tax-Free Kansas Fund
Class A Net Assets ($10,176,166) = Net Asset Value Per Share ($10.56)
------------------------------------ Shares Outstanding (964,027)
Class B Net Assets ($2,401,734 ) = Net Asset Value Per Share ($10.57)
------------------------------------ Shares Outstanding (227,305)
Class C Net Assets ($90,350) = Net Asset Value Per Share ($10.55)
------------------------------------ Shares Outstanding (8,565)
Minnesota Insured Fund
Class A Net Assets ($304,876,891) = Net Asset Value Per Share ($10.60)
------------------------------------ Shares Outstanding (28,772,685)
Class B Net Assets ($6,817,309) = Net Asset Value Per Share ($10.58)
------------------------------------ Shares Outstanding (644,114)
Class C Net Assets ($3,126,091) = Net Asset Value Per Share ($10.60)
------------------------------------ Shares Outstanding (295,018)
Tax-Free Minnesota Intermediate Fund
Class A Net Assets ($66,024,295) = Net Asset Value Per Share ($10.99)
------------------------------------ Shares Outstanding (6,010,087)
Class B Net Assets ($408,320) = Net Asset Value Per Share ($10.99)
------------------------------------ Shares Outstanding (37,154)
Class C Net Assets ($1,137,276) = Net Asset Value Per Share ($10.99)
------------------------------------ Shares Outstanding (103,528)
Tax-Free Minnesota Fund
Class A Net Assets ($428,379,970) = Net Asset Value Per Share ($12.40)
------------------------------------ Shares Outstanding (34,538,091)
Class B Net Assets ($6,233,411) = Net Asset Value Per Share ($12.40)
------------------------------------ Shares Outstanding (502,673)
Class C Net Assets ($3,082,795) = Net Asset Value Per Share ($12.41)
------------------------------------ Shares Outstanding (248,473)
Tax-Free Missouri Insured Fund
Class A Net Assets ($49,301,215) = Net Asset Value Per Share ($10.37)
------------------------------------ Shares Outstanding (4,754,081)
Class B Net Assets ($10,432,486) = Net Asset Value Per Share ($10.37)
------------------------------------ Shares Outstanding (1,006,301)
Class C Net Assets ($151,771) = Net Asset Value Per Share ($10.37)
------------------------------------ Shares Outstanding (14,630)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Tax-Free New Mexico Fund
Class A Net Assets ($20,133,196) = Net Asset Value Per Share ($10.79)
------------------------------------ Shares Outstanding (1,865,440)
Class B Net Assets ($794,330) = Net Asset Value Per Share ($10.79)
------------------------------------ Shares Outstanding (73,584)
Class C Net Assets ($341,228) = Net Asset Value Per Share ($10.79)
------------------------------------ Shares Outstanding (31,619)
Tax-Free New York Fund
Class A Net Assets ($10,044,178) = Net Asset Value Per Share ($10.69)
------------------------------------ Shares Outstanding (940,019)
Class B Net Assets ($254,408) = Net Asset Value Per Share ($10.65)
------------------------------------ Shares Outstanding (23,887)
Class C Net Assets ($52,815) = Net Asset Value Per Share ($10.66)
------------------------------------ Shares Outstanding (4,955)
Tax-Free North Dakota Fund
Class A Net Assets ($33,713,299) = Net Asset Value Per Share ($10.88)
------------------------------------ Shares Outstanding (3,099,514)
Class B Net Assets ($700,333) = Net Asset Value Per Share ($10.88)
------------------------------------ Shares Outstanding (64,382)
Class C Net Assets ($40,492) = Net Asset Value Per Share ($10.87)
------------------------------------ Shares Outstanding (3,726)
Tax-Free Oregon Insured Fund
Class A Net Assets ($20,912,822) = Net Asset Value Per Share ($9.87)
------------------------------------ Shares Outstanding (2,118,095)
Class B Net Assets ($4,758,497) = Net Asset Value Per Share ($9.87)
------------------------------------ Shares Outstanding (481,913)
Class C Net Assets ($359,820) = Net Asset Value Per Share ($9.88)
------------------------------------ Shares Outstanding (36,429)
Tax-Free Utah Fund
Class A Net Assets ($3,860,621) = Net Asset Value Per Share ($10.84)
------------------------------------ Shares Outstanding (356,303)
Class B Net Assets ($397,386) = Net Asset Value Per Share ($10.83)
------------------------------------ Shares Outstanding (36,679)
Tax-Free Washington Insured Fund
Class A Net Assets ($2,382,304) = Net Asset Value Per Share ($10.30)
------------------------------------ Shares Outstanding (231,187)
Class B Net Assets ($515,653) = Net Asset Value Per Share ($10.31)
------------------------------------ Shares Outstanding (50,013)
Class C Net Assets ($19,459) = Net Asset Value Per Share ($10.30)
------------------------------------ Shares Outstanding (1,890)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Tax-Free Wisconsin Fund
Class A Net Assets ($28,292,440) = Net Asset Value Per Share ($9.64)
------------------------------------ Shares Outstanding (2,936,014)
Class B Net Assets ($1,339,330) = Net Asset Value Per Share ($9.63)
------------------------------------ Shares Outstanding (139,085)
Class C Net Assets ($554,860) = Net Asset Value Per Share ($9.66)
------------------------------------ Shares Outstanding (57,445)
</TABLE>
Each Fund's net asset value per share is computed by adding the value
of all securities and other assets in the portfolio of that Fund, deducting any
liabilities of the Fund and dividing by the number of Fund shares outstanding.
In determining a Fund's total net assets, portfolio securities are valued at
fair value, using methods determined in good faith by the Board of Directors.
This method utilizes the services of an independent pricing organization which
employs a combination of methods including, among others, the obtaining of
market valuations from dealers who make markets and deal in such securities, and
by comparing valuations with those of other comparable securities in a matrix of
such securities. A pricing service's activities and results are reviewed by the
officers of the Fund. In addition, money market instruments having a maturity of
less than 60 days are valued at amortized cost. Expenses and fees of each Fund
are accrued daily.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
the relevant Fund. The net asset values of all outstanding shares of each Class
of each Fund will be computed on a pro-rata basis for each outstanding share
based on the proportionate participation in such Fund represented by the value
of shares of that Class. All income earned and expenses incurred by a Fund will
be borne on a pro-rata basis by each outstanding share of a Class, based on each
Class' percentage in such Fund represented by the value of shares of such
Classes, except that the Class A, Class B and Class C Shares alone will bear the
12b-1 Plan expenses payable under their respective Plans. Due to the specific
distribution expenses and other costs that would be allocable to each Class, the
dividends paid to each Class of a Fund may vary. However, the net asset value
per share of each Class of a Fund is expected to be equivalent.
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<PAGE>
REDEMPTION AND REPURCHASE
Any shareholder may require his or her Fund to redeem shares by sending
a written request, signed by the record owner or owners exactly as the shares
are registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares only if a shareholder specifically requests them. Certificates are not
issued for Class B Shares or Class C Shares. If stock certificates have been
issued for shares being redeemed, they must accompany the written request. For
redemptions of $50,000 or less paid to the shareholder at the address of record,
the request must be signed by all owners of the shares or the investment dealer
or record, but a signature guarantee is not required. When the redemption is for
more than $50,000, or if payment is made to someone else or to another address,
signatures of all record owners and a signature guarantee are required. Each
signature guarantee must be supplied by an eligible guarantor institution. Each
Fund reserves the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness. The Funds may request further
documentation from corporations, retirement plans, executors, administrators,
trustees or guardians.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Funds, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the respective Fund or
its agent less any applicable CDSC or Limited CDSC. This is computed and
effective at the time the offering price and net asset value are determined. See
Determining Offering Price and Net Asset Value. The Fund and the Distributor end
their business days at 5 p.m., Eastern time. This offer is discretionary and may
be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to any applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus. Class B Shares of Tax-Free Funds and
Insured Funds are subject to a contingent deferred sales charge ("CDSC") of: (i)
4% if shares are redeemed within two years of purchase; (ii) 3% if shares are
redeemed during the third or fourth year following purchase; (iii) 2% if shares
are redeemed during the fifth year following purchase; and (iv) 1% if shares are
redeemed during the sixth year following purchase. Class B Shares of Tax-Free
Intermediate Funds are subject to a CDSC of: (i) 2% if shares are redeemed
within two years of purchase; and (ii) 1% if shares are redeemed during the
third year following purchase. See Automatic Conversion of Class B Shares under
Classes of Shares. Except for the applicable CDSC or Limited CDSC, and with
respect to the expedited payment by wire for which there is currently a $7.50
bank wiring cost, there is no fee charged for redemptions or repurchases, but
such fees could be charged at any time in the future.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
Each Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. A Fund will honor redemption requests as to shares for which a check
was tendered as payment, but a Fund will not mail or wire the proceeds until it
is reasonably satisfied that the check has cleared. This potential delay can be
avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for
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<PAGE>
insufficient funds or for any other reason, the Fund involved will automatically
redeem from the shareholder's account the Fund shares purchased by the check
plus any dividends earned thereon. Shareholders may be responsible for any
losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practical,
or it is not reasonably practical for a Fund fairly to value its assets, or in
the event that the Securities and Exchange Commission has provided for such
suspension for the protection of shareholders, a Fund may postpone payment or
suspend the right of redemption or repurchase. In such case, a shareholder may
withdraw the request for redemption or leave it standing as a request for
redemption at the net asset value next determined after the suspension has been
terminated.
Payment for shares redeemed or repurchased may be made in either cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sales by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, Tax-Free
Fund, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem Fund shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of such Fund during any 90-day
period for any one shareholder.
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
Small Accounts
Before a Fund involuntarily redeems shares from an account that, under
the circumstances listed in the relevant Prospectus, has remained below the
minimum amounts required by the Funds' Prospectus and sends the proceeds to the
shareholder, the shareholder will be notified in writing that the value of the
shares in the account is less than the minimum required and will be allowed 60
days from the date of notice to make an additional investment to meet the
required minimum. See The Conditions of Your Purchase under How to Buy Shares in
the Funds' Prospectus. Any redemption in an inactive account established with a
minimum investment may trigger mandatory redemption. No CDSC or Limited CDSC
will apply to the redemptions described in this paragraph.
* * *
Each Fund has made available certain redemption privileges, as
described below. The Funds reserve the right to suspend or terminate these
expedited payment procedures upon 60 days' written notice to shareholders.
Expedited Telephone Redemptions
Shareholders or their investment dealers of record wishing to redeem an
amount of Fund shares of $50,000 or less for which certificates have not been
issued may call the Shareholders Service Center at 800-523-1918 prior to the
time the offering price and net asset value are determined, as noted above, and
have the proceeds mailed to them at the record address. Checks payable to the
shareholder(s) of record will normally be mailed the next business day, but no
later than seven days, after the receipt of the redemption request. This option
is only available to individual, joint and individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the Fund before the request is received.
Payment will be made by wire or check to the bank account designated on
the authorization form as follows:
1. Payment by Wire: Request that Federal Funds be wired to the bank
account designated on the authorization form. Redemption proceeds will normally
be wired on the next business day following receipt of the redemption request.
There is a $7.50 wiring fee (subject to change) charged by CoreStates Bank, N.A.
which will
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<PAGE>
be deducted from the withdrawal proceeds each time the shareholder requests a
redemption. If the proceeds are wired to the shareholder's account at a bank
which is not a member of the Federal Reserve System, there could be a delay in
the crediting of the funds to the shareholder's bank account.
2. Payment by Check: Request a check be mailed to the bank account
designated on the authorization form. Redemption proceeds will normally be
mailed the next business day, but no later than seven days, after the date of
the telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the
relevant Fund and a signature guarantee may be required. Each signature
guarantee must be supplied by an eligible guarantor institution. The Funds
reserve the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness.
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect a
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Funds nor the Funds' Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, the Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders are generally tape recorded. A written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone.
Systematic Withdrawal Plan
Shareholders of Class A, Class B and Class C Shares who own or purchase
$5,000 or more of shares at the offering price or net asset value, as
applicable, for which certificates have not been issued may establish a
Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or quarterly
withdrawals of $75 or more, although the Funds do not recommend any specific
amount of withdrawal. Shares purchased with the initial investment and through
reinvestment of cash dividends and realized securities profits distributions
will be credited to the shareholder's account and sufficient full and fractional
shares will be redeemed at the net asset value calculated on the third business
day preceding the mailing date.
Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder, (unless such date falls on a holiday or a weekend) and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional Class A Shares of the paying Fund at net asset value. This plan is
not recommended for all investors and should be started only after careful
consideration of its operation and effect upon the investor's savings and
investment program. To the extent that withdrawal payments from the plan exceed
any dividends and/or realized securities profits distributions paid on shares
held under the plan, the withdrawal payments will represent a return of capital
and the share balance may in time be depleted, particularly in a declining
market.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated.
Withdrawals under this plan made concurrently with the purchase of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is a participant in one of our
retirement plans or is investing in Delaware Group funds which do not carry a
sales charge. Redemptions of Class A Shares pursuant to a Systematic
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<PAGE>
Withdrawal Plan may be subject to a Limited CDSC if the purchase was made at net
asset value and a dealer's commission has been paid on that purchase.
Redemptions of Class B Shares or Class C Shares pursuant to a Systematic
Withdrawal Plan may be subject to a CDSC, unless the annual amount selected to
be withdrawn is less than 12% of the account balance on the date that the
Systematic Withdrawal Plan was established. See Waiver of Contingent Deferred
Sales Charge - Class B and Class C Shares and Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares under Redemption and Exchange in the
Prospectus. Shareholders should consult their financial advisers to determine
whether a Systematic Withdrawal Plan would be suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must complete
an authorization form. If the recipient of Systematic Withdrawal Plan payments
is other than the registered shareholder, the shareholder's signature on this
authorization must be guaranteed. Each signature guarantee must be supplied by
an eligible guarantor institution. The Fund reserves the right to reject a
signature guarantee supplied by an eligible institution based on its
creditworthiness. This plan may be terminated by the shareholder or the Transfer
Agent at any time by giving written notice.
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<PAGE>
DISTRIBUTIONS
Each declares a dividend to shareholders of that Fund's net investment
income on a daily basis. Dividends are declared each day the Funds are open and
cash dividends are paid monthly. Payment by check of cash dividends will
ordinarily be mailed within three business days after the payable date. In
determining daily dividends, the amount of net investment income for each Fund
will be determined at the time the offering price and net asset value are
determined (see Determining Offering Price and Net Asset Value) and shall
include investment income accrued by the respective Fund, less the estimated
expenses of that Fund incurred since the last determination of net asset value.
Gross investment income consists principally of interest accrued and, where
applicable, net pro-rata amortization of premiums and discounts since the last
determination. The dividend declared, as noted above, will be deducted
immediately before the net asset value calculation is made. Net investment
income earned on days when the Fund is not open will be declared as a dividend
on the next business day.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if a Fund is given prior notice of Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Investors desiring to guarantee wire payments
must have an acceptable financial condition and credit history in the sole
discretion of the Fund. The Funds reserve the right to terminate this option at
any time. Purchases by check earn dividends upon conversion to Federal Funds,
normally one business day after receipt.
Each Class will share proportionately in the investment income and
expenses of its respective Fund, except that Class A Shares, Class B Shares and
Class C Shares alone will incur distribution fees under their respective 12b-1
Plans.
Dividends are automatically reinvested in additional shares of the
paying Fund at net asset value, unless an election to receive dividends in cash
has been made. Dividend payments of $1.00 or less will be automatically
reinvested, notwithstanding a shareholder's election to receive dividends in
cash. If such a shareholder's dividends increase to greater than $1.00, the
shareholder would have to file a new election in order to begin receiving
dividends in cash again. If a shareholder redeems an entire account, all
dividends accrued to the time of the withdrawal will be paid by separate check
at the end of that particular monthly dividend period, consistent with the
payment and mailing schedule described above.
Any distributions from net realized securities profits will be made
annually during the quarter following the close of the fiscal year. Such
distributions will be reinvested in shares, unless the shareholder elects to
receive them in cash. Shareholders will receive a quarterly statement showing a
Class' dividends paid and all the transactions made during the period.
Any check in payment of dividends or other distributions which cannot
be delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. A Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the United States Post Office or the Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Each Fund anticipates that most of its dividends paid to shareholders
will be exempt from federal income taxes.
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<PAGE>
TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), all
or a portion of the interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as each of the Funds, will not be deductible by a shareholder. Indebtedness may
be allocated to shares of a Fund even though not directly traceable to the
purchase of such shares.
Each Fund's present policy is to designate exempt-interest dividends at
each daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
Each Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, each Fund must declare dividends by the end of the calendar year
representing 98% of such Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long- and short-term capital gain) for the
12-month period ending on October 31 of such year. For purposes of the excise
tax, any income on which a Fund has paid corporate-level tax is considered to
have been distributed. Each Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
Under a special provision of the Revenue Reconciliation Act of 1993,
all or a portion of the gain that a Fund realizes on the sale of a Tax Exempt
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain tax-exempt obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Funds. The Funds will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in any Fund's portfolio lost its exempt status,
such Fund would make every effort to dispose of such investment on terms that
are not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which any Fund
may purchase options. To the extent a Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by entering
into a closing transaction or by exercise. In addition, with respect to many
types of options held at the end of a Fund's taxable year, unrealized gain or
loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from
93
<PAGE>
such options (including premiums on certain options that expire unexercised) is
treated as 60% long-term and 40% short-term capital gain or loss, regardless of
their holding period. The amount of any capital gain or loss actually realized
by a Fund in a subsequent sale or other disposition of such options will be
adjusted to reflect any capital gain or loss taken into account by the Fund in a
prior year as a result of the constructive sale under the "marked-to-market,
60/40 system."
Certain information about state taxation is contained in the
Prospectus. Additional information about California, Iowa and Wisconsin follows:
California State Taxation. Present California law taxes both long-term
and short-term capital gains at the rates applicable to ordinary income.
Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of California Fund will not be deductible for
California personal income tax purposes. California has an alternative minimum
tax similar to the federal alternative minimum tax described above. However, the
California alternative minimum tax does not include interest from private
activity bonds as an item of tax preference. Generally, corporate shareholders
of a California Fund subject to the California franchise tax will be required to
include any gain on an exchange or redemption of shares and all distributions of
exempt interest, capital gains and other taxable income, if any, as income
subject to such tax. The California Funds will not be subject to California
franchise or corporate income tax on interest income or net capital gain
distributed to the shareholders. Shares of the California Funds will be exempt
from local property taxes in California.
Iowa State Taxation. Iowa taxes long-term capital gains at the same
rates as ordinary income, while imposing limitations on the deductibility of
capital losses similar to those under federal law.
Iowa imposes an alternative minimum tax on individuals and corporations
to the extent that such tax exceeds the taxpayer's regular tax liability. Iowa
AMT is based on federal alternative minimum taxable income, with certain
adjustments. The Fund has received a ruling to the effect that dividends paid by
the Iowa Fund that are attributable to interest paid on obligations issued by
the State of Iowa, its political subdivisions, agencies and instrumentalities,
the interest on which is exempt under Iowa statute, and on obligations of U. S.
territories and possessions will not be subject to the AMT that Iowa imposes on
individuals and corporations.
Wisconsin State Taxation. Wisconsin taxes long-term capital gains at
the same rates as ordinary income, while imposing limitations on the
deductibility of capital losses similar to those under federal law.
Wisconsin imposes an alternative minimum tax on individuals, trusts and
estates to the extent that such tax exceeds a taxpayer's regular tax liability.
Wisconsin's AMT is based on federal alternative minimum taxable income, with
certain adjustments. The Fund has received a ruling to the effect that dividends
paid by the Wisconsin Fund that are attributable to interest paid on obligations
issued by the State of Wisconsin or its agencies, the interest on which is
exempt from Wisconsin personal income tax under Wisconsin statute, and on
obligations of U. S. territories and possessions will not be subject to the
Wisconsin AMT when received by shareholders subject to the Wisconsin personal
income tax.
94
<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS
Delaware Management Company, Inc.(the "Manager"), located at One
Commerce Square, Philadelphia, PA 19103, furnishes investment management
services to each Fund, subject to the supervision and direction of the its
Board of Directors or Trustees.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as each Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, the Funds' previous investment advisory agreements with
Voyageur were "assigned", as that term is defined by the Investment Company Act
of 1940, and the previous agreements therefore terminated upon the completion of
the acquisition. The Board of Directors or Trustees of those Funds unanimously
approved new advisory agreements at a meeting held in person on February 14,
1997, and called for a shareholders meeting to approve the new agreements. At a
meeting held on April 11, 1997, the shareholders of each Fund approved its
respective Investment Management Agreement with the Manager, an indirect
wholly-owned subsidiary of LNC, to become effective after the close of business
on April 30, 1997, the date the acquisition was completed.
Beginning May 1, 1997, the Manager, an indirect, wholly-owned
subsidiary of LNC, was retained as investment manager of Tax-Free Arizona
Intermediate Fund, Tax-Free California Intermediate Fund, Tax-Free Colorado
Insured Fund, Tax-Free Colorado Intermediate Fund, the Florida Funds, and
Tax-Free New York Fund. Voyageur was retained as investment manager for the
other Funds. On May 30, 1997, Voyageur was merged into the Manager and the
Manager became the investment manager for the other Funds.
The Investment Management Agreement into which each Fund's investment
manager has entered have an initial term of two years and may be renewed each
year only so long as such renewal and continuance are specifically approved at
least annually by the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund to which the Agreement relates, and
only if the terms and the renewal thereof have been approved by the vote of a
majority of the directors or trustees of the Funds who are not parties thereto
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. Each Agreement is terminable without
penalty on 60 days' notice by the directors or trustees of the Funds or by the
Manager. Each Agreement will terminate automatically in the event of its
assignment.
Each Fund pays its investment manager a monthly investment advisory and
management fee equivalent on an annual basis to 0.50% of its average daily net
assets except each Tax-Free Intermediate Fund pays 0.40% of its average daily
net assets.
The Manager makes and implements all investment decisions on behalf of
the Funds. The Manager pays the Funds' rent and the salaries of all directors or
trustees, officers and employees of the Funds who are affiliated with both the
Manager and the Funds. The Funds pay all of their other expenses. Set forth
below is certain information regarding the investment advisory and
administrative services fees and the amounts waived, if any, by each Fund to
Voyageur during the indicated fiscal periods.
95
<PAGE>
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
---------- -------------- -------------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund
1/1/96-12/31/96 $ 1,119,609 $ 307,939 $ None
1/1/95-12/31/95 $ 1,223,121 $ 299,757 $ 60,000
1/1/94-12/31/94 $ 1,298,673 $ 289,690 None
Tax-Free Arizona Fund
1/1/96-12/31/96 $ 55,464 $ 36,595 $ 90,000
1/1/95-12/31/95(4) $ 14,301 $ 15,541 $ 29,842
Tax-Free California Insured Fund
1/1/96-12/31/96 $ 192,101 $ 75,853 $ 75,000
1/1/95-12/31/95 $ 184,315 $ 67,135 $ 90,000
11/1/94-12/31/94(1) $ 23,717 $ 9,550 $ 33,267
11/1/93-10/31/94 $ 111,570 $ 52,328 $ 163,898
Tax-Free California Fund
1/1/96-12/31/96 $ 7,369 $ 21,559 $ 40,001
1/1/95-12/31/95(5) $ 4,468 $ 13,974 $ 18,442
Tax-Free Colorado Fund
1/1/96-12/31/96 $ 1,865,515 $ 426,237 $ None
1/1/95-12/31/95 $ 1,944,802 $ 441,178 None
1/1/94-12/31/94 $ 2,039,009 $ 409,511 None
Tax-Free Florida Intermediate Fund
1/1/96-12/31/96 $ 11,429 $ 21,512 $ 32,941
1/1/95-12/31/95 $ 2,665 $ 10,995 $ 13,660
1/1/94-12/31/94 (3) $ 956 $ 11,264 $ 12,220
Tax-Free Florida Insured Fund
1/1/96-12/31/96 $ 1,074,026 $ 314,165 $ 25,000
1/1/95-12/31/95 $ 1,235,118 $ 325,819 $ 480,000
11/1/94-12/31/93 (1) $ 204,833 $ 76,709 $ 250,000
11/1/93-10/31/94 $ 1,481,786 $ 350,992 $ 805,000
Tax-Free Florida Fund
1/1/96-12/31/96 $ 29,915 $ 30,812 $ 60,727
1/1/95-12/31/95(6) $ 10,974 $ 15,010 $ 25,984
Tax-Free Idaho Fund
1/1/96-12/31/96 $ 131,410 $ 62,657 $ 130,000
1/1/95-12/31/95(7) $ 38,282 $ 29,996 $ 68,278
Tax-Free Iowa Fund
1/1/96-12/31/96 $ 217,160 $ 93,979 $ 5,000
1/1/95-12/31/95 $ 193,451 $ 85,579 $ 45,000
9/1/94-12/31/94 (1) $ 56,650 $ 34,707 $ 91,357
9/1/93-8/31/94 $ 127,361 $ 70,832 $ 198,193
Tax-Free Kansas Fund
1/1/96-12/31/96 $ 60,154 $ 39,146 $ 30,000
1/1/95-12/31/95 $ 47,512 $ 14,005 $ 50,000
11/1/94-12/31/94 (1) $ 5,550 $ 5,993 $ 11,543
11/1/93-10/31/94 $ 22,132 $ 18,251 $ 40,383
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
---------- -------------- -------------
<S> <C> <C> <C>
Tax-Free Minnesota Intermediate Fund
1/1/96-12/31/96 $ 281,038 $ 110,484 None
1/1/95-12/31/95 $ 298,529 $ 114,999 None
3/1/94-12/31/94 (2) $ 272,884 $ 104,431 None
1/1/94-2/28/94 (2) $ 49,861 $ 16,471 None
Minnesota Insured Fund
1/1/96-12/31/96 $ 1,518,301 $ 355,578 None
1/1/95-12/31/95 $ 1,541,687 $ 329,546 $ 25,000
1/1/94-12/31/94 $ 1,561,406 $ 366,842 $ 925,000
Tax-Free Minnesota Fund
1/1/96-12/31/96 $ 2,222,690 $ 472,689 None
1/1/95-12/31/95 $ 2,229,862 $ 499,083 None
1/1/94-12/31/94 $ 2,241,071 $ 460,255 None
Tax-Free Missouri Insured Fund
1/1/96-12/31/96 $ 290,247 $ 125,437 $ 95,000
1/1/95-12/31/95 $ 250,578 $ 111,588 $ 170,000
11/1/94-12/31/94 (1) $ 32,651 $ 20,078 $ 50,000
11/1/93-10/31/94 $ 173,907 $ 79,615 $ 253,522
Tax-Free New Mexico Fund
1/1/96-12/31/96 $ 107,784 $ 51,384 None
1/1/95-12/31/95 $ 108,209 $ 46,835 None
11/1/94-12/31/94 (1) $ 17,494 $ 12,232 $ 29,726
11/1/93-10/31/94 $ 108,865 $ 47,287 $ 135,000
Tax-Free New York Fund
10/1/96-12/31/96 (10) $ 17,615 $ 5,447 $ 23,062
10/1/95-9/30/96 $ 93,048 $ N/A $ 24,580
10/1/94-9/30/95 $ 99,309 $ N/A $ 63,096
7/1/94-9/30/94 $ 26,011 $ N/A $ None
7/1/93-6/30/94 $ 111,126 $ N/A $ 14,541
Tax-Free North Dakota Fund
1/1/96-12/31/96 $ 175,239 $ 86,034 None
1/1/95-12/31/95 $ 179,121 $ 75,910 None
1/1/94-12/31/94 $ 180,617 $ 80,745 $ 157,087
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
---------- -------------- -------------
<S> <C> <C> <C>
Tax-Free Oregon Insured Fund
1/1/96-12/31/96 $ 124,769 $ 59,737 $ 65,000
1/1/95-12/31/95 $ 103,343 $ 42,931 $ 75,000
11/1/94-12/31/94 (1) $ 12,840 $ 6,649 $ 19,489
11/1/93-10/31/94 $ 49,537 $ 33,740 $ 83,277
Tax-Free Utah Fund
1/1/96-12/31/96 $ 21,935 $ 25,695 $ 30,000
1/1/95-12/31/95 $ 20,769 $ 18,829 $ 35,000
11/1/94-12/31/94 (1) $ 3,184 $ 1,757 $ 4,941
11/1/93-10/31/94 $ 20,384 $ 17,294 $ 37,678
Tax-Free Washington Insured Fund
1/1/96-12/31/96 $ 12,662 $ 21,966 $ 34,628
1/1/95-12/31/95 $ 10,374 $ 12,752 $ 23,126
11/1/94-12/31/94 (1) $ 1,422 $ 2,369 $ 3,791
11/1/93-10/31/94 $ 7,561 $ 13,824 $ 21,385
Tax-Free Wisconsin Fund
1/1/96-12/31/96 $ 141,262 $ 67,833 $ 10,000
1/1/95-12/31/95 $ 123,548 $ 49,595 None
9/1/94-12/31/94 (1) $ 31,634 $ 22,386 $ 54,020
9/1/94-8/31/94 $ 46,460 $ 31,486 $ 77,946
</TABLE>
(1) Effective December 31, 1994, the Fund changed its fiscal year end to
December 31.
(2) Effective February 28, 1994, Tax-Free Minnesota Intermediate Fund changed
its fiscal year end to February 28 and, effective December 31, 1994,
changed back to December 31.
(3) Period from May 1, 1994 (commencement of operations) to December 31, 1994.
(4) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(5) Period from March 3, 1995 (commencement of operations) to December 31,
1995.
(6) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(7) Period from January 4, 1995 (commencement of operations) to December 31,
1995.
(8) Period from September 7, 1995 (commencement of operations) to December 31,
1995.
(9) Period from September 8, 1995 (commencement of operations) to December 31,
1995.
(10) Effective December 31, 1996, Tax-Free New York Fund changed its fiscal year
from September 30 to December 31.
98
<PAGE>
Except for those expenses borne by the Manager under the Investment
Management Agreements and the Distributor under the Distribution Agreements, the
Funds are responsible for all of their own expenses. Among others, these include
the investment management fees; transfer and dividend disbursing agent fees and
costs; custodian expenses; federal and state securities registration fees; proxy
costs; and the costs of preparing prospectuses and reports sent to shareholders.
For the fiscal year ended December 31, 1996, the ratios of operating expenses to
average daily net assets for Class A Shares, Class B Shares and Class C Shares
of each Fund were as follows:
<TABLE>
<CAPTION>
Fund Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund 0.82% 1.59% 1.70%
Tax-Free Arizona Fund 0.46 1.11 1.21
Tax-Free California Insured Fund 0.27 0.50 0.78
Tax-Free California Fund 0.82 1.21 1.58
Tax-Free Colorado Fund 0.78 1.58 1.66
Tax-Free Florida Intermediate Fund 0.66 1.48 1.55
Tax-Free Florida Insured Fund 0.73 1.24 N/A
Tax-Free Florida Fund 0.33 0.76 1.15
Tax-Free Idaho Fund 0.60 1.11 1.33
Tax-Free Iowa Fund 0.92 1.61 1.75
Tax-Free Kansas Fund 0.83 1.61 1.77
Tax-Free Minnesota Intermediate Fund 0.89 1.56 1.30
Minnesota Insured Fund 0.92 1.56 1.68
Tax-Free Minnesota Fund 0.92 1.50 1.67
Tax-Free Missouri Insured Fund 0.71 1.29 1.62
Tax-Free New Mexico Fund 0.88 1.61 1.74
Tax-Free New York Fund 0.97 1.87 1.84
Tax-Free North Dakota Fund 0.88 1.36 1.75
Tax-Free Oregon Insured Fund 0.71 1.25 1.55
Tax-Free Utah Fund 0.68 1.44 N/A
Tax-Free Washington Insured Fund 0.44 1.21 1.37
Tax-Free Wisconsin Fund 0.98 1.66 1.75
</TABLE>
The ratios reflect the impact of each Class' 12b-1 Plan and the
voluntary waiver and payment of fees noted above. See Summary of Expenses in the
Prospectus for current fee waivers and reimbursements.
By California regulation, the Manager is required to waive certain fees
and reimburse the Fund for certain expenses to the extent that the Fund's annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, exceed 2 1/2% of its first $30 million of average daily
net assets, 2% of the next $70 million of average daily assets and 1 1/2% of any
additional average daily net assets. Such undertaking is computed separately for
each Fund. For the fiscal year ended December 31, 1996, no such reimbursement
was necessary or paid for any Fund.
Distribution and Service
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), located at 1818 Market Street,
Philadelphia, PA 19103, serves as the national distributor of each Fund's shares
under separate Distribution Agreements dated March , 1997. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by each Fund on behalf of its Class A Shares,
Class B Shares and Class C Shares under the 12b-1 Plans for each such Class.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
each Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to a Shareholders Services Agreement dated April 30, 1997. The Transfer
Agent also provides accounting services to the Funds pursuant to the terms of a
separate Fund Accounting Agreement. The Transfer Agent is also an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
99
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of the Funds are managed under the direction
of its Board of Directors.
Certain officers and directors of the Funds hold identical positions in
each of the other funds in the Delaware Group. As of July 31, 1997, the officers
and directors of each investment company, as a group, owned less than 1% of the
of the outstanding shares of each class of the Funds.
As of July 31, 1997, management believes the following accounts held 5%
or more of a Class of shares of a Fund:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund MLPF&S for the sole benefit of its 1,573,834 9.19%
Class A Shares customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd fl.
Jacksonville FL 32246-6484
Tax-Free Arizona Insured Fund Robert D Wickwire TTEE 41,059 11.40%
Class B Shares Robert D. Wickwire Rev
6050 N. Camino Esplendora
Tucson AZ 85718-4509
BA Investment Services, Inc. 23,217 6.44%
185 Berry St., 3rd Fl. #2640
San Francisco CA 94107-1729
Sally B. Schumacher TTEE 19,069 5.29%
Schumacher Trust
8101 N. Mummy Mountain Rd.
Paradise Valley AZ 85253-2241
Pru Sec FBO Mary Dehn Van Dessel TTEE 18,410 5.11%
Sun City West AZ 85375
Tax-Free Arizona Insured Fund Dean Witter for the benefit of the Arp Trust 1986 19,929 33.96%
Class C Shares Survivors Trust
Mary Arp & Carol Linda Dodge TTEES
Church St. Station - P.O. Box 250
New York NY 10277
BA Investment Services, Inc. 10,745 18.31%
185 Berry St., 3rd Fl. #2640
San Francisco CA 94107-1729
Jane Ellen Cooper TTEE 5,845 9.96%
John D & Jane Ellen Cooper TR
P.O. Box 401
Paulden AZ 86334-0401
Roy L Carson & Marian L Carson JT TEN 3,964 6.75%
2116 W. Comstock
Chandler AZ 85224-1712
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund Harriet J. Welch TTEE 3,712 6.32%
Class C Shares The Welch Family Trust
15612 E. Willis
Gilbert AZ 85296-1379
Tax-Free Arizona Fund Prudential Securities Inc. FBO Gaylord Rubin & 208,678 21.71%
Class A Shares Beverly Rubin
Phoenix AZ 85018
Dorothy H. Green TTEE 76,768 7.98%
5002 E. Mesquite Wood Court, Ste 700
Phoenix AZ 85044-1722
MLPF&S for the sole benefit of its customers 55,988 5.82%
Attn: Fund Administration
4800 Deer Lake Drive E., 3rd Fl.
Jacksonville FL 32246-6484
Tax-Free Arizona Fund Prudential Securities Inc. FBO Gaylord Rubin & 25,609 7.99%
Class B Shares Beverly Rubin
Phoenix AZ 85018
Rauscher Pierce REFSNES FBO Virginia Strickland TTEE 24,209 7.55%
Strickland Family Trust
7500 N. Calle Sin Envidia
Tucson AZ 85718-7300
Sally B. Schumacher TTEE 20,071 6.26%
Schumacher Trust
8101 N. Mummy Mountain Rd.
Paradise Valley AZ 85253-2241
PaineWebber FBO Gilberth Barnes & Clare Collord 17,876 5.58%
Barnes TTEE
210 West Palmaire Avenue
Phoenix AZ 85021-8750
Tax-Free Arizona Fund Margaret L Minder Ureban TTEE 22,415 75.53%
Class C Shares 6710 Mamaronick Drive
Tucson AZ 85718-2606
PaineWebber for the benefit of Carol J. Griffin and 4,600 15.50%
Dale Griffin JT/WROS
6738 N. Shadow Run Drive
Tucson AZ 85704-6930
Marion F Stewart 1,648 5.55%
2536 N. Tyndall
Tucson AZ 85719-2958
Tax-Free California Insured MLPF&S for the sole benefit of its customers 172,304 6.56%
Fund Class A Shares Attn: Fund Administration
4800 Deer Lake Drive E., 3rd Fl.
Jacksonville FL 32246-6484
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free California Insured Alex Brown & Sons Incorporated 4,326 48.33%
Fund Class C Shares P.O. Box 1346
Baltimore MD 21203-1346
C. Robert Tyler 2,689 30.04%
Elizabeth Tyler JT TEN
P.O. Box 1194
Grass Valley CA 95945-1194
Alex Brown & Sons Incorporated 1,056 11.79%
P.O. Box 1346
Baltimore MD 21203-1346
Elizabeth Tyler 879 9.82%
C. Robert Tyler JT TEN
P.O. Box 1194
Grass Valley CA 95945-1194
Tax-Free California Fund Dain Bosworth Inc. FBO William C. Johnson 28,662 14.23%
Class A Shares P.O. Box 7106
Rancho Santa Fe CA 92067-7106
Thelma Beam & Edith Ramsey TTEES 25,568 12.69%
250 Raylow Ave.
Manteca CA 95336-4832
The Five R's 23,466 11.65%
Edmund B. Richards
Brian J. Richards
5949 Hollister Ave.
Goleta CA 93117-3610
Edythe London TTEE 14,390 7.14%
2920 Neilson Way Apt. 306
Santa Monica CA 90405-5369
Tax-Free California Fund PaineWebber for the benefit of Paula L Dutra 20,736 6.05%
Class B Shares P.O. Box 1006
Woodbridge CA 95258-1006
Tax-Free California Fund Margie M. Bartel TTEE 4,086 36.04%
Class C Shares 555 E. Memory Lane Apt. D308
Santa Ana CA 92706-1707
Long Q. Nguyen 3,846 33.93%
Thoa K. Nguyen JT TEN
3229 Adelanto Lane
San Jose CA 95135-1059
PaineWebber for the benefit of John R. Pruett & 2,414 21.29%
Yvonne M. Pruett JTWROS
219 Forest Creek Lane
San Ramon CA 94583-1250
Carolyn Carter, Trustee 989 8.72%
P.O. Box 1535
Colfax CA 95713-1535
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Colorado Fund Everen Clearing Corp. 29,971 5.43%
Class B Shares William J. Keller
111 East Kilbourn Ave.
Milwaukee WI 53202-6609
Tax-Free Colorado Fund Dorothy E. Radant TTEE 8,639 6.11%
Class C Shares 1332 Cresent Dr.
Wausau WI 54401-2631
Dean Witter for the benefit of Bette J. Storms & 16,991 12.02%
William W. Storms JTTEN
3855 Hermitage Ave.
Colorado Springs CO 80906-7213
Tax-Free Florida Intermediate US Clearing Corp. 38,244 13.95%
Fund Class A Shares 26 Broadway
New York NY 10004-1798
MLPF&S for the sole benefit of its customers 25,558 9.33%
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Fl.
Jacksonville FL 32246-6484
Tax-Free Florida Intermediate Smith Barney Inc. 15,358 17.47%
Fund Class B Shares 388 Greenwich St.
New York NY 10013-2375
John A. Dragseth TTEE 5,512 6.27%
3623 SE Old St. Lucie Blvd.
Stuart FL 34996-5116
WCG Investment Partnership 5,473 6.23%
Attn: Howard Wolofsky
c/o Reflections
3400 NE 34th Street, Ste 1010
Ft. Lauderdale FL 33308-3751
Pauline B. Butler 5,464 6.22%
450 Avenue F SE
Winter Haven FL 33880-3751
PaineWebber for the benefit of Michael Nadir 5,446 6.20%
P.O. Box 1031
Elfers FL 34680-1031
James R. Dunn 4,873 5.54%
746 Riverside Dr.
Ormond Beach FL 32176-7814
Tax-Free Florida Intermediate Pru. Sec Inc. FBO Mrs. Jun L Mason 5,209 100.00%
Fund Class C Shares 1180 Reef Rd. Apt. A19
Vero Beach FL 32963-4306
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Florida Insured Fund MLPF&S for the sole benefit of its customers 1,987,147 12.86%
Class A Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Florida Insured Fund MLPF&S for the sole benefit of its customers 38,360 10.80%
Class B Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Florida Fund MLPF&S for the sole benefit of its customers 98,824 17.82%
Class A Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Florida Fund MLPF&S for the sole benefit of its customers 24,949 14.00%
Class B Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Anita R. Alexander & John E. Alexander 19,683 11.05%
259 Courtyard Blvd. Box 259-102
Sun City Center FL 33573-4700
NFSC FEBO Robert K. Sedgwick TTEE 14,031 7.87%
7711 Sundown Court
Bayonet Point FL 34667-3074
Edward Duffy & Edward L. Duffy Jr. 11,956 6.71%
Priscilla Brennan & Kevin Duffy
Mary Stuck JT TEN
7740 Parkway Blvd.
Hudson FL 34667-1268
PaineWebber for the benefit of Mrs. Ann E. Greene & 9,643 5.41%
Miss Terry A. Warren JRWROS
1745 SW 2nd Ave.
Boca Raton FL 33432-7230
PaineWebber for the benefit of Eugene A. Wildes & 9,570 5.37%
Rosalind B. Wildes Co-TTEES
11 Loggerhead Lane
Tequesta FL 33469-1550
Tax-Free Florida Fund Mary J. Manns 10,349 87.49%
C Shares 3629 Killarney Plaza CT
Tallahassee Fl 32308-7109
Prudential Securities Inc. FBO 1,479 12.50%
Anna Demato
2100 Springdale Blvd.
Apt. Y 215
Palm Springs FL 33461-6385
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Idaho Fund MLPF&S for the sole benefit of its customers 728,242 25.48%
Class A Shares Attn: Fund Administration
4800 Deer Lake Drive E, 3rd Fl.
Jacksonville FL 32246-6484
Audrey Ann Shayne 190,733 6.67%
4760 Rivervista Place
Boise ID 83703-1954
Tax-Free Idaho Fund MLPF&S for the sole benefit of its customers 252,770 44.12%
Class B Shares Attn: Fund Administration
4800 Deer Lake Drive E, 3rd Fl.
Jacksonville FL 32246-6484
Tax-Free Idaho Fund Joseph Daltoso 10,449 13.51%
Class C Shares 1225 Warm Spring Ave.
Boise ID 83712-7952
Archie Lurus & Georgia Lurus JT/WROS 9,979 12.84%
2391 N. 55th E
Idaho Falls ID 83401-5762
Herbert W. Runner 5,803 7.46%
Rosamond S. Runner JT TEN
828 Wade Circle
Boise ID 83705-5944
Dale E. Sisson- TRSTE 4,676 6.01%
Martha S. Sisson- TRSTE
1815 Westland Drive
Boise ID 83704-7258
Donaldson Lufkin Jenrette 4,242 5.45%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Tax-Free Iowa Fund Alex P. Despenas 64,345 26.23%
Class B Shares Ethel Despenas TEN COM
960 Briarstone
Mason City IA 50401-4642
Garry L. Waline 16,088 6.55%
Kathleen A. Waline JTTN
301 C Street Apt. 2
Toledo IA 52342-2411
Stanley A. Collins 12,490 5.09%
Clarice T. Collins TEN COM
P.O. Box 1705
Mason City IA 50402-1705
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Iowa Fund Donald R. Kurtz 10,568 13.17%
Class C Shares Mildred Kurtz JTTEN
1010 Plane Street
Burlington IA 52601-3172
Mary E Aringdale 5,412 6.74%
Robert F. Aringdale JT TEN
2924 Sunnyside Avenue
Burlington IA 52601-2367
David W. Oberbroeckling and 5,163 6.43%
Julia A. Oberbroeckling JT WROS
3702 Wisconsin Avenue
Davenport IA 52806-6723
Fern L Morrison 4,802 5.98%
Doyle D Morrison POA
TOD Doyle D Morrison Delores J Reed
421 Leffler
West Burlington IA 52655-1210
Marian W. Palmer 4,570 5.69%
TOD Sara Beth Palmer
904 Oak Street
Burlington IA 52601-4607
John A Reid 4,366 5.44%
Box 219
Greene IA 50636-0219
Theodore E Upton and 4,050 5.04%
Jane F. Upton JT WROS
1226 Dehner Street
Burlington IA 52601-2745
Tax-Free Kansas Fund Thomas B. Robinson 57,302 6.15%
Class A Shares 6401 Norwood Drive
Shawnee Mission KS 66208-1826
MLPF&S For the Sole Benefit 56,854 6.11%
Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Kansas Fund MLPF&S For the Sole Benefit 30,865 10.55%
Class B Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
William T Martin TTEE 23,323 7.9%
William T Martin TR
The Forum Apt 124
3501 W. 95th Street
OP KS 66206-2000
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Kansas Fund Gilbert D Sears 3,959 42.61%
Class C Shares TOD Megan R Fishpool
Lisa Papadopoulos
Tricia R Sears
213 E Parliament
Smith Center KS 66967-3110
Harold L Smith 2,514 27.06%
TOD Sheryl S Olson
David A Smith
Jayne A Radley & Marcia L Vaughn
446 Clinton
Haysville KS 67060-1132
Johann A Zacharias 1,734 18.66%
Marcia J Higginson JTTEN
3713 JP Drive
Hays KS 67601-1541
Randall L Hockett 500 5.39%
1721 North 73rd Terrace
#8
Kansas City KS 66112-2339
Tax-Free Minnesota MLPF&S For the Sole Benefit 608,510 11.37%
Intermediate Fund Of its Customers
Class A Shares Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Minnesota Patricia Anderson PER REP 12,728 18.70%
Intermediate Fund EST Anthony J Kelly
Class B Shares 2235 Rockwood Avenue
Apt# 910
St Paul MN 55116-3100
NFSC FEBO #BAH-547972 9,603 14.11%
Larry C Jordan
1633 Eustis
St Paul MN 55108-1219
Lucille E Edelen 6,397 9.40%
2712 Pillsbury Ave S Apt 204
Minneapolis MN 55408-1562
James Kuskey 5,687 8.35%
Mary Kuskey
1723 Clarence Street
Maplewood MN 55109-4512
Russell E Roos 4,808 7.06%
Helen Shirley Rood JT TEN
TOD Cheryl A & Scott A & Douglas R Roos 504 S
Freeman Luverne MN 56156-2007
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Minnesota David B Bishoff 4,624 6.79%
Intermediate Fund Sophie G Bishoff JTTN
Class B Shares 2221 Youngman Avenue
St Paul MN 55116-3055
Lois M Hoffman TTEE Lois M Hoffman 4,588 6.74%
Trust U/A 1/1/96
2265 Youngman Ave #203E
St Paul MN 55116-3054
George V Modersbach 3,729 5.48%
2235 Rockwood Ave Apt 711
St Paul MN 55116-3132
Tax-Free Minnesota Bradley E Bakken TTEE 16,786 15.00%
Intermediate Fund Bradley E Bakken Revocable Trust
Class C Shares UAD December 17 1993
10100 Windsor Lane
Minnetonka MN 55343
Nicholas Edloff 10,617 9.49%
Mary Edloff JT TEN
1315 Goodrich
St Paul MN 55105-2708
Donaldson Lufkin Jenrette 8,355 7.46%
Securities Corporation Inc
P.O. Box 2052
Jersey City NJ 07303-2052
Donaldson Lufkin Jenrette 6,996 6.25%
Securities Corporation Inc
P.O. Box 2052
Jersey City NJ 07303-2052
Robert P Fischer 6,462 5.77%
2390 Pagel Road
Mendota Heights MN 55120-1637
Minnesota Insured Fund The Drifter Fam Limited Prtnrshp 27,561 8.83%
Class C Shares Gopher Machine & Eng Co Gen Partner
c/o Firstar Ctr Attn George Benz
101 E 5th Street Suite 2104
Saint Paul MN 55101-1808
Lucille P Weimert 18,541 5.94%
238 North Plainview Ave
Mankato MN 56001-5549
Tax-Free Minnesota MLPF&S For The Sole Benefit 2,330,603 7.06%
Fund Class A Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Minnesota Erik J Russell 12,417 6.33%
Fund Class C Shares 2800 83rd Lane North
Minneapolis MN 55444-1537
Tax-Free Missouri Insured Corelink Financial Inc 276,169 5.98%
Fund Class A Shares 1855 Gateway Blvd Ste 750
Concord CA 94520-3290
MLPF&S For The Sole Benefit 276,151 5.98%
Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonvile FL 32246-6484
Tax-Free Missouri Insured Corelink Financial Inc 399,867 37.87%
Fund Class B Shares 1855 Gateway Blvd Ste 750
Concord CA 94520-3290
Tax-Free Missouri Insured Walter A Gawrych 9,838 47.45%
Fund Class C Shares Wendy D Gawrych JT TEN
12816 Pointe Drive
St Louis MO 63127-1742
George A Rhodes 5,000 24.11%
TOD Russell G Rhodes
1359 E Stoneridge Dr
Springfield MO 65803-3753
Bryan E Jaynes 3,002 14.48%
6434 Alamo Avenue
Apt #2W
St Louis MO 63105-3142
James M Brown 2,088 10.07%
4223-A Summit Knoll Dr
St Louis MO 63129-7532
Tax-Free New Mexico Fund MLPF&S For the Sole Benefit 331,254 18.92%
Class A Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Tax-Free New Mexico Fund Arnold A & Helen G Elsbernd TTEES 11,555 13.26%
Class B Shares Elsbernd Family Trust UAD 8-25-95
5525 Edwards Dr NE
Albuquerque MN 87111-1986
Nicholas & Jeanne Chintis TR 9,964 11.43%
FBO Chintis Family Trust
P.O. Box 2332
Silver City N 88062-2332
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax- Free New Mexico Fund Adele A Anderson TTEE For The 7,484 8.58%
Class B Shares Adele A Anderson Rev Living Trust
2916 Cutler Avenue NE
Albuquerque NM 87106-1715
Byrd T Mooney 7,256 8.32%
610 E 16th Street
Farmington NM 87401-6307
Donaldson Lufkin Jenrette 7,200 8.26%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Claude E Leyendecker 5,308 6.09%
P.O. Box 1846
Deming NM 88031-1846
PaineWebber For The Benefit of 5,284 6.06%
Lewis G Helm
Berry J Helm JTWROS
8213 Cherry Hills Dr NE
Albuquerque NM 87111-1010
Louie B Campanella TR 4,677 5.36%
Louie B Campanella Trust
102 Lytton Circle
Las Cruces NM 88001-7409
Tax-Free New Mexico Fund Donaldson Lufkin Jenrette 6,700 26.88%
Class C Shares Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
R Harold Wingo 3,486 13.99%
Ethel J Wingo JT Ten
TOD David N Wingo & Raymond M Wingo
725 Collier Avenue
Raton NM 87740-3307
Bob Harris 3,133 12.57%
Kathy R Harris
712 S 5th Street
Raton NM 87740-4129
Title Services Inc 2,874 11.53%
Attn Bob Harris
P.O. Box 696
Raton NM 87740-0696
Donaldson Lufkin Jenrette 2,818 11.30%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free New Mexico Fund Kathleen Porter Harris 1,982 7.95%
Class C Shares TOD Bob Harris
712 S 5th Street
Raton NM 87740-4129
Worth Wilkins 1,669 6.69%
Mollie Wilkins
P.O. Box 37
Raton NM 97740-0037
Tax-Free New York Fund Claudia Schellenberg 2,682 22.46%
Class B Shares 32-43 90th St Apt 202
Flushing NY 11369-2312
Donaldson Lufkin Jenrette 1,529 12.81%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Ralph L Warren 1,308 10.96%
Anne C Warren JT WROS
RR 3 Box 1760
Oneonta NY 13820-9402
Lewco Securities Corp 1,052 8.81%
34 Exchange Place 4th Floor
Jersey City NJ 07302-3901
Lewco Securities Corp 1,052 8.81%
34 Exchange Place 4th Floor
Jersey City NJ 07302-3901
Key Clearing Corp 1,000 8.37%
P.O. Box 93971
Cleveland OH 44101-5971
John Mitchell 934 7.82%
Madeleine Mitchell JT WROS
155 S Fordham RD
Hicksville NY 11801-6039
Arthur T Weinisch 837 7.01%
Deborah A Weinisch JT WROS
27 Beachview Pl
Ronkonkoma NY 11779-3011
Tax-Free New York Fund Donaldson Lufkin Jenrette 5,091 99.99%
Class C Shares Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Tax-Free North Dakota Wilkota and Company 203,626 7.25%
Fund Class A Shares 1st Natl Bank & TR Co of Williston
P.O. Box 1827
Williston ND 58802-1827
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free North Dakota MLPF&S For The Sole Benefit 9,725 12.22%
Fund Class B Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Edward D Jones & Co F/A/O 9,297 11.68%
Arthur N Lee
P.O. Box 2500
Maryland Heights MO 63043-8500
Susan K Krueger 4,802 6.03%
P.O. Box 716
West Fargo ND 58078-0716
Wesley W Weeding 4,683 5.88%
Geraldine M Weeding JTTEN
331 W 6th Street
West Fargo ND 58078-1533
Tax-Free North Dakota Jacob N Gust 2,360 66.57%
Fund Class C Shares Barbara A Olive JT TEN
4614 81st N
Fargo ND 58102-7501
Debbie S Kolegraf 1,064 30.00%
Kim M Kolegraf JT TEN
1673 Pocatello Drive
Bismarck ND 58504-6456
Tax-Free Oregon Insured Dorothy McCue 50,476 8.88%
Fund Class B Shares 2098 Law Lane
Eugene OR 97401-2347
Tax-Free Oregon Insured PaineWebber For The Benefit of 10,378 22.20%
Fund Class C Shares Daniel Oseran & Tracy Oseran JTTEN
4500 SW Humphrey
Portland OR 97221
PaineWebber 10,309 22.05%
FBO Herbert Bodner TR FBO The Bodner Fam Trust
1419 NW 14th Portland OR 97209-2816
Kenneth E Hansen and 7,566 16.18%
Melanie L Hansen JT WROS
1444 4th Street
Astoria OR 97103-5335
PaineWebber 5,186 11.09%
FBO Harold & Ruth Saltzman TR
6130 SW Thomas St
Portland OR97221-1223
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Oregon Insured Edward D Jones and Co F/A/O 3,638 7.78%
Fund Class C Shares Carol Roesch
P.O. Box 2500
Maryland Heights MO 63043-8500
Tax-Free Utah Fund MLPF&S For The Sole Benefit 24,437 8.32%
Class A Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonvile, FL 32246-6484
Smith Barney Inc. 19,292 6.57%
388 Greenwich Street
New York NY 10013-2375
Prudential Securities FBO Janet G 14,841 5.05%
Parberry TTEE Arden B Gundersen and
Valoise Gundersen Trust UA DTD
3276 English Way
Sandy UT 84093-2138
Tax-Free Utah Fund Prudential Securities FBO 23,454 49.46%
Class B Shares William T Logan & Sally M Logan JT TEN
1216 Aerie Drive
Park City UT 84068
Smith Barney Inc. 10,903 22.99%
388 Greenwich Street
New York NY 10013-2375
Prudential Securities Inc. FBO 9,278 19.56%
Mrs. Carol A Mensel TTEE
Revocable Inter Vivos Trust
1270 N Cottonwood Circle
Heber UT 84032-1127
Tax-Free Washington Smith Barney Inc. 13.619 5.91%
Insured Fund Class A 388 Greenwich Street
Shares New York NY 10013-2375
Tax-Free Washington PaineWebber For The Benefit Of 21,971 30.96%
Insured Fund Class B Hogin Family Trust
Shares Richard D & Mariann Hogin TTEES
7624 N Panorama Dr
Spokane WA 99208-8436
PaineWebber For The Benefit Of 7,536 10.62%
Arne L Filan
40 South Division
Walla Walla WA 99362-2408
PaineWebber For The Benefit Of 4,823 6.79%
Lemuel T Dazey & Romona G Dazey
TTEES For The
3021 W Wilcox Dr
Pasco WA 99301-3232
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Washington PaineWebber For The Benefit Of 4,808 6.77%
Insured Fund Class B Adrien L Casey & Virginia P Casey JTWROS
Shares 1934 Scarpelli Dr
Walla Walla WA 99362-4534
PaineWebber For The Benefit Of 3,975 5.60%
David H Olson & Evis Olson
Trustees For The David H & 1231 S 2nd Avenue
Walla Walla WA 99362-4120
Fred G Campbell 3,551 5.00%
P.O. Box 491
Davenport WA 99122-0491
Tax-Free Washington PaineWebber FBO 1,973 36.67%
Insured Fund Class C Delbert L Moore
Shares 1702 Moore Rd
Colfax WA 99111
Walter G Neiman 1,952 36.30%
2041 Cloverdale Rd
Kalama WA 98625-9737
PaineWebber FBO 1,453 27.01%
Leonard F Jansen
2027 E Upriver Dr Apt S-31
Spokane WA 99207-5186
Tax-Free Wisconsin Fund James Kadlec 13,383 8.16%
Class B Shares Kadlec Qualified Terminable
Interest Trust
3720 Elm Dr
La Crosse WI 54601-8325
Joyce M Weigel 11,615 7.08%
5387 Mariners Cove Dr Apt 309
Madison WI 53704-7604
Lydia M Aschenbrener 11,470 6.99%
3939 S 92nd Street
C-203
Greenfield WI 53228-2140
MLPF&S For The Sole Benefit 10,989 6.70%
Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Robert G Woller TTEE 10,933 6.67%
Robert G Woller Trust
P.O. Box 95
Pound WI 54161-0095
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Wisconsin Fund Edward J Saur 9,256 5.64%
Class B Shares Veronica Saur JT TEN
P.O. Box 66
Kellnersville WI 54215-0066
Tax-Free Wisconsin Fund Alan R & Harriet S Hyman TTEES 13,590 20.72%
Class C Shares Alan R & Harriet S Hyman Rev Liv Tr
1244 Dartmouth Road
Madison WI 53705-2214
Robert P Fahey 8,774 13.38%
5370 Irish Lane
Madison WI 53711-5518
Adeline B Straus TTEE 6,333 9.65%
Adeline B Strauss Tr UAD Jan 8 1997
2108 Edgewood Court
Kaukauna WI 54130-1806
Dean Witter For The Benefit Of 5,634 8.59%
Eugene Cudewicz
3856 E Somens Avenue
Cudahy WI 53110-1728
Beverly Kneebone 5,410 8.25%
1505 Stemp Terrace
Madison WI 53711-3658
</TABLE>
115
<PAGE>
DMH Corp., Delaware Voyageur Holdings, Inc., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd., Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National was completed. DMH and the
Manager are indirect, wholly owned subsidiaries, and subject to the ultimate
control, of Lincoln National. Lincoln National, with headquarters in Fort Wayne,
Indiana, is a diversified organization with operations in many aspects of the
financial services industry, including insurance and investment management.
As noted under Investment Management Agreements, after the close of
business on April 30, 1997, Voyageur became an indirect, wholly owned subsidiary
of Lincoln National as a result of Lincoln National's acquisition of DFG.
Certain officers and directors of the Funds hold identical positions in
each of the other funds in the Delaware Group. Directors and principal officers
of the Funds are noted below along with their ages and their business experience
for the past five years. Unless otherwise noted, the address of each officer and
director is One Commerce Square, Philadelphia, PA 19103.
*Wayne A. Stork (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of each of the seven investment companies, 26 other investment
companies in the Delaware Group, Delaware Management Holdings,
Inc., DMH Corp., Delaware International Holdings Ltd. and
Founders Holdings, Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group, Delaware Management Holdings, Inc. and Delaware Capital
Management, Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
*Director affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
116
<PAGE>
Paul E. Suckow (49)
Executive Vice President/Chief Investment Officer, Fixed Income of each
of the seven investment companies, each of the other 26
investment companies in the Delaware Group, Delaware
Management Company, Inc. and Delaware Management Holdings,
Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
Walter P. Babich (69)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (58)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
Ann R. Leven (56)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (76)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
117
<PAGE>
Thomas F. Madison (61)
Director and/or Trustee of each of the seven investment companies and
26 other investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
* Jeffrey J. Nick (44)
Director and/or Trustee of each of the seven investment companies and
26 other investment companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
Charles E. Peck (71)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer
of The Ryland Group, Inc., Columbia, MD.
*Director affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
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<PAGE>
David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of each of the seven investment companies, each of the
other 26 investment companies in the Delaware Group, Delaware
Management Holdings, Inc., Delaware Capital Management,
Inc., Founders CBO Corporation and Delaware Distributors L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc., Founders Holdings, Inc.
and Delaware International Holdings Ltd.
Chairman/ Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc. President/Chief Executive Officer/Chief Financial
Officer and Director of Delaware Service Company, Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer
of Equitable Capital Management Corporation, New York, from
December 1985 through August 1992, Executive Vice President
from December 1985 through March 1992, and Vice Chairman from
March 1992 through August 1992.
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of each of the
seven investment companies, each of the other 26 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc. and Delaware Distributors, L.P.
Executive Vice President, Secretary General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President, Secretary General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc. and Delaware Capital Management, Inc.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of each of the seven
investment companies, each of the other 26 investment
companies in the Delaware Group and Founders Holdings, Inc.
Senior Vice President/Corporate Controller/Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., and Delaware International Holdings,
Inc.
Chief Financial Officer/Treasurer of Delaware Investment &
Retirement Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/ Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief
Financial Officer for Prudential Residential Services, L.P.,
New York, NY from 1989 to 1992. Prior to that, Mr. Hastings
served as Controller and Treasurer for Fine Homes
International, L.P., Stamford, CT from 1987 to 1989.
119
<PAGE>
Michael P. Bishof (34)
Senior Vice President/Treasurer of each of the seven investment
companies, each of the other 26 investment companies in the Delaware
Group, Delaware Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/ Investment Accounting of Delaware Management
Company, Inc. and Delaware Service Company, Inc.
Senior Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995,
a Vice President for CS First Boston Investment Management,
New York, NY from 1993 to 1994 and an Assistant Vice President
for Equitable Capital Management Corporation, New York, NY
from 1987 to 1993.
Patrick P. Coyne (33)
Vice President/Senior Portfolio Manager of Tax-Free Fund, Inc., of
nine other investment companies in the Delaware Group and
Delaware Management Company, Inc.
From 1986 to 1990, Mr. Coyne was Vice President/Municipal Trading
with Kidder Peabody & Co., Inc. Mr. Coyne joined the Delaware
Group in 1990.
Mitchell L. Conery (38)
Vice President/Senior Portfolio Manager of Tax-Free Fund, Inc.,
each of the tax-exempt and the fixed-income funds in the
Delaware Group and Delaware Capital Management.
Before joining the Delaware Group in 1997, Mr. Conery was an
investment officer with Travelers Insurance from 1995 through
1996 and a research analyst with CS First Boston from 1992 to
1995.
Elizabeth H. Howell (35)
Vice President/Senior Portfolio Manager of Tax-Free Funds, Inc. and
Delaware Management Company, Inc.
Before joining Delaware Group in 1997, Ms. Howell was a senior
portfolio manager with Voyageur Fund Managers, Inc.
Andrew M. McCullagh, Jr.(48)
Vice President/Senior Portfolio Manager of Tax-Free Funds, Inc. and
Delaware Management Company, Inc.
Before joining Delaware Group in 1997, Mr. McCullagh was a senior
portfolio manager with Voyageur Asset Management LLC.
120
<PAGE>
The following is a compensation table listing for each director or
trustee entitled to receive compensation, the aggregate compensation expected to
be received from each investment company noted below during the actual fiscal
year, the total compensation received from all Delaware Group investment
companies for the fiscal year ended December 31, 1996, and an estimate of annual
benefits to be received upon retirement under the Delaware Group Retirement Plan
for Directors/Trustees as of December 31, 1996.
<TABLE>
<CAPTION>
Total
Compensation
from all 18
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Delaware
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual Group
Funds Funds ment Free Funds ment Funds Funds II Investment
Director/Trustee Inc.(1) Inc.(1) Trust(1) Inc.(1) Trust II(1) Inc.(1) Inc.(1) Companies
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Thacher Longstreth $1,252 $1,323 $1,063 $582 $483 $826 $1,080 $46,187
Ann R. Leven $1,354 $1,435 $1,140 $596 $484 $872 $1,159 $54,323
Walter P. Babich $1,334 $1,413 $1,125 $593 $484 $863 $1,143 $53,323
Anthony D. Knerr $1,334 $1,413 $1,125 $593 $484 $863 $1,143 $53,323
Charles E. Peck $1,252 $1,323 $1,063 $582 $483 $826 $1,080 $49,323
Thomas F. Madison(2) $1,252 $1,323 $1,063 $582 $483 $826 $1,080 N/A
</TABLE>
Pension or Retirement Benefits Accrued
as Part of each Investment Company's Expenses
<TABLE>
<CAPTION>
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual
Funds Funds ment Free Funds ment Funds Funds II
Director Inc. Inc. Trust Inc. Trust II Inc. Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Thacher Longstreth none none none none none none none
Ann R. Leven none none none none none none none
Walter P. Babich none none none none none none none
Anthony D. Knerr none none none none none none none
Charles E. Peck none none none none none none none
Thomas F. Madison none none none none none none none
</TABLE>
Estimated Annual Benefits Upon Retirement*
<PAGE>
<TABLE>
<CAPTION>
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual
Funds Funds ment Free Funds ment Funds Funds II
Director Inc. Inc. Trust Inc. Trust II Inc. Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Thacher Longstreth $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Ann R. Leven $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Walter P. Babich $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Anthony D. Knerr $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Charles E. Peck $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Thomas F. Madison $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
</TABLE>
(1) The current Board of Directors was elected by shareholders of Mutual
Funds III, Inc. on April 11, 1997 and began serving on May 1, 1997.
With the exception of Thomas F. Madison, none of the current directors
had served on the prior Board. Compensation figures are estimates of
payments for Mutual Funds III, Inc.'s current fiscal year.
(2) Thomas F. Madison also received $6,126 from Voyageur Tax Free Funds,
Inc., $7,080 from Voyageur Insured Funds, Inc., $4,817 form Voyageur
Investment Trust, $911 from Voyageur Intermediate Funds, Inc., $36 from
Voyageur Investment Trust II, $1,462 from Voyageur Mutual Funds, Inc.
and $4,682 from Voyageur Mutual Funds II, Inc. for his service on the
previous Boards of Directors/Trustees during the last fiscal year.
* Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his
or her retirement from the Board, has attained the age of 70 and served
on the Board for at least five continuous years, is entitled to receive
payments from each fund in the Delaware Group for a period equal to the
lesser of the number of years that such person served as a director or
the remainder of such person's life. The amount of such payments will
be equal, on an annual basis, to the amount of the annual retainer that
is paid to directors of each fund at the time of such person's
retirement. If an eligible director retired as of April 30, 1997, he or
she would be entitled to annual payments totaling $30,000, in the
aggregate, from all of the funds in the Delaware Group, based on the
number of funds in the Delaware Group as of that date.
121
<PAGE>
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of each Fund's
classes and for shareholders of classes of other funds in the Delaware Group are
set forth in the relevant prospectuses for such classes. The following
supplements that information. Each Fund may modify, terminate or suspend the
exchange privilege upon 60 days' notice to shareholders.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and carefully
read that fund's prospectus before buying shares in an exchange. The prospectus
contains more complete information about the fund, including charges and
expenses. A shareholder requesting an exchange will be sent a current prospectus
and an authorization form for any of the other mutual funds in the Delaware
Group. Exchange instructions must be signed by the record owner(s) exactly as
the shares are registered.
An exchange constitutes, for tax purposes, the sale of one fund and the
purchase of another. The sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes.
In addition, investment advisers and dealers may make exchanges between
funds in the Delaware Group on behalf of their clients by telephone or other
expedited means. This service may be discontinued or revised at any time by the
Transfer Agent. Such exchange requests may be rejected if it is determined that
a particular request or the total requests at any time could have an adverse
effect on any of the funds. Requests for expedited exchanges may be submitted
with a properly completed exchange authorization form, as described above.
Telephone Exchange Privilege
Shareholders owning shares for which certificates have not been issued
or their investment dealers of record may exchange shares by telephone for
shares in other mutual funds in the Delaware Group. This service is
automatically provided unless the relevant Fund receives written notice from the
shareholder to the contrary.
Shareholders or their investment dealers of record may contact the
Shareholder Service Center at 800-523-1918 to effect an exchange. The
shareholder's current Fund account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and each Fund reserve the right
to record exchange instructions received by telephone and to reject exchange
requests at any time.
As described in the Funds' Prospectus, neither the Funds nor their
Transfer Agent is responsible for any shareholder loss incurred in acting upon
written or telephone instructions for redemption or exchange of Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), each Fund will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
122
<PAGE>
Group funds from Timing Firms. A Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including accounts administered so as to
redeem or purchase shares based upon certain predetermined market indicators,
will be aggregated for purposes of the exchange limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Group funds: (1) Decatur
Income Fund, (2) Decatur Total Return Fund, (3) Delaware Fund, (4) Limited-Term
Government Fund, (5) Tax-Free USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware Group
funds are available for timed exchanges. Assets redeemed or exchanged out of
Timing Accounts in Delaware Group funds not listed above may not be reinvested
back into that Timing Account. Each Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
timing pattern (as described above).
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other
Delaware Group funds:
Delaware Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. Devon Fund
seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
Trend Fund seeks long-term growth by investing in common stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing in equity securities of
medium-to large-sized companies expected to grow over time that meet the Fund's
"Social Criteria"
123
<PAGE>
strategy.
Delchester Fund seeks as high a current income as possible by investing
principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Strategic Income Fund seeks to
provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities.
U.S. Government Fund seeks high current income by investing primarily
in long-term U.S. government debt obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
Limited-Term Government Fund seeks high, stable income by investing
primarily in a portfolio of short- and intermediate-term securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
instruments secured by such securities. U.S. Government Money Fund seeks maximum
current income with preservation of principal and maintenance of liquidity by
investing only in short-term securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or instrumentalities, and
repurchase agreements collateralized by such securities, while maintaining a
stable net asset value.
Delaware Cash Reserve seeks the highest level of income consistent with
the preservation of capital and liquidity through investments in short-term
money market instruments, while maintaining a stable net asset value.
Tax-Free USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to
124
<PAGE>
provide high current income consistent with preservation of capital. The fund
attempts to achieve this objective primarily by investing in a diversified
portfolio of investment grade fixed-income securities issued by U.S.
corporations.
Delaware Group Premium Fund, Inc. offers fifteen funds available
exclusively as funding vehicles for certain insurance company separate accounts.
Decatur Total Return Series seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. Delchester Series seeks as high a
current income as possible by investing in rated and unrated corporate bonds,
U.S. government securities and commercial paper. Capital Reserves Series seeks a
high stable level of current income while minimizing fluctuations in principal
by investing in a diversified portfolio of short- and intermediate-term
securities. Cash Reserve Series seeks the highest level of income consistent
with preservation of capital and liquidity through investments in short-term
money market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap common stocks whose market value
appears low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over time. Emerging Markets Series seeks to achieve long-term capital
appreciation by investing primarily in equity securities of issuers located or
operating in emerging countries. Convertible Securities Series seeks a high
level of total return on its assets through a combination of capital
appreciation and current income by investing primarily in convertible
securities. Quantum Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of medium to large-sized companies
expected to grow over time that meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Minnesota High Yield Municipal Bond Fund seeks to
provide a high level of current income exempt from federal income tax and the
Minnesota personal income tax primarily through investment in medium and lower
grade municipal obligations. National High Yield Municipal Fund seeks to provide
a high level of income exempt from federal income tax, primarily through
investment in medium and lower grade municipal obligations.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high
125
<PAGE>
total return on an after-tax basis. The Fund will attempt to achieve this
objective by seeking to provide a high long-term after-tax total return through
managing its portfolio in a manner that will defer the realization of accrued
capital gains and minimize dividend income.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
126
<PAGE>
GENERAL INFORMATION
The Manager is the investment manager of each Fund. The Manager also
provides investment management services to certain of the other funds in the
Delaware Group. The Manager, through a separate division, also manages private
investment accounts. While investment decisions for each Fund are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for each Fund.
Delaware International, or its affiliate Delaware also manages the
investment options for Delaware Medallion(sm) III Variable Annuity. Medallion is
issued by Allmerica Financial Life Insurance and Annuity Company (First
Allmerica Financial Life Insurance Company in New York and Hawaii). Delaware
Medallion offers fifteen different investment series ranging from domestic
equity funds, international equity and bond funds and domestic fixed income
funds. Each investment series available through Medallion utilizes an investment
strategy and discipline the same as or similar to one of the Delaware Group
mutual funds available outside the annuity. See Delaware Group Premium Fund,
Inc., above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, Delaware International Advisers Ltd. or their
affiliates, are permitted to engage in personal securities transactions subject
to the exceptions set forth in Rule 17j-1 and the following general restrictions
and procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions may only be closed-out at a profit after a 60-day holding
period has elapsed; and (5) the Compliance Officer must be informed periodically
of all securities transactions and duplicate copies of brokerage confirmations
and account statements must be supplied to the Compliance Officer.
The Distributor acts as national distributor for each Fund and for the
other mutual funds in the Delaware Group.
The following table sets forth the aggregate dollar amount of
underwriting commissions paid by each Fund for the fiscal periods indicated and
the amount of such commissions retained by the Underwriter.
<TABLE>
<CAPTION>
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
-------------------------------------- -----------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year ended year ended year ended year ended year ended year ended
12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund $339,087 $804,383 $2,007,707 $40,338 $103,168 $272,585
Tax-Free Arizona Fund 104,978 20,987 N/A 13,217 2,901 N/A
Tax-Free California Insured Fund
12/31/95 (1) 107,617 231,679 61,913 14,226 34,177 8,043
10/31/94 N/A N/A 434,743 N/A N/A 58,732
Tax-Free California Fund 11,751 19,639 N/A 1,641 2,554 N/A
Tax-Free Colorado Fund 525,069 721,452 2,513,880 68,666 117,743 346,636
Tax-Free Florida Intermediate Fund 6,853 3,866 0 1,233 741 0
Tax-Free Florida Insured Fund
12/31/95 (1) 174,064 357,154 39,051 20,261 48,112 5,589
10/31/94 N/A N/A 1,497,591 N/A N/A 207,722
Tax-Free Florida Fund 41,214 42,789 N/A 5,271 6,121 N/A
Tax-Free Idaho Fund 313,894 338,974 N/A 32,689 62,968 N/A
Tax-Free Iowa Fund
12/31/95 (1) 167,735 223,046 101,383 26,641 40,943 18,061
8/31/94 N/A N/A 1,352,653 N/A N/A 249,929
Tax-Free Kansas Fund
12/31/95 (1) 55,360 104,287 9,935 7,686 14,394 1,572
10/31/94 N/A N/A 175,196 N/A N/A 24,852
Tax-Free Minnesota Intermediate Fund
12/31/95 (1) 71,429 47,098 126,433 5,306 8,399 22,538
2/28/94 N/A N/A 67,700 N/A N/A 12,408
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
-------------------------------------- -----------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year ended year ended year ended year ended year ended year ended
12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Minnesota Fund 650,734 812,687 1,781,640 69,682 114,391 246,291
Minnesota Insured Fund 454,762 658,955 1,938,352 33,673 86,858 269,910
Tax-Free Missouri Insured Fund
12/31/95 (1) 211,558 316,387 37,792 29,607 53,274 5,375
10/31/94 N/A N/A 467,540 N/A N/A 65,646
Tax-Free New Mexico Fund
12/31/95 (1) 45,937 77,084 7,174 6,724 15,700 1,424
10/31/94 N/A N/A 302,834 N/A N/A 50,348
Tax-Free New York Fund 465 0
Tax-Free North Dakota Fund 38,688 65,566 188,974 5,425 10,960 27,132
Tax-Free Oregon Insured Fund
12/31/95 (1) 149,165 265,488 30,428 20,166 42,930 4,107
10/31/94 N/A N/A 398,064 N/A N/A 55,282
Tax-Free Utah Fund
12/31/95 (1) 4,575 10,693 1,003 800 1,782 201
10/31/94 N/A N/A 75,407 N/A N/A 12,223
Tax-Free Washington Insured Fund
12/31/95 (1) 17,167 26,941 3,265 2,196 3,915 380
10/31/94 N/A N/A 26,890 N/A N/A 3,895
Tax-Free Wisconsin Fund
12/31/95 (1) 107,671 139,886 101,720 11,170 25,338 18,121
8/31/94 N/A N/A 487,555 N/A N/A 71,314
</TABLE>
- -----------------------
(1) Effective 12/31/94, the Fund changed its fiscal year end to 12/31.
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The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for the Fund and for the other
mutual funds in the Delaware Group. The Transfer Agent is paid a fee by each
Fund for providing these services consisting of an annual per account charge of
$11.00 plus transaction charges for particular services according to a schedule.
Compensation is fixed each year and approved by the Board of Directors,
including a majority of the disinterested directors. The Transfer Agent also
provides accounting services to the Funds. Those services include performing all
functions related to calculating the Fund's net asset value and providing all
financial reporting services, regulatory compliance testing and other related
accounting services. For its services, the Transfer Agent is paid a fee based on
total assets of all funds in the Delaware Group for which it provides such
accounting services. Such fee is equal to 0.25% multiplied by the total amount
of assets in the complex for which the Transfer Agent furnishes accounting
services, where such aggregate complex assets are $10 billion or less, and 0.20%
of assets if such aggregate complex assets exceed $10 billion. The fees are
charged to each fund, including the Fund, on an aggregate pro-rata basis. The
asset-based fee payable to the Transfer Agent is subject to a minimum fee
calculated by determining the total number of investment portfolios and
associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of each Fund's securities and
cash. As custodian for a Fund, Norwest maintains a separate account or accounts
for the Fund; receives, holds and releases portfolio securities on account of
the Fund; receives and disburses money on behalf of the Fund; and collects and
receives income and other payments and distributions on account of the Fund's
portfolio securities.
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Capitalization
The Board of Directors has allocated the following number of shares to
each Fund and their respective classes:
<TABLE>
<CAPTION>
<S> <C>
Voyageur Insured Funds, Inc. 10 trillion
Delaware-Voyageur Tax-Free Arizona Insured Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free Colorado Insured Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Minnesota Insured Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Voyageur Intermediate Tax Free Funds, Inc. 10 trillion
Delaware-Voyageur Tax-Free Arizona Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free California Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free Colorado Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Voyageur Mutual Funds II, Inc. 10 trillion
Delaware-Voyageur Tax-Free Colorado Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Voyageur Tax Free Funds, Inc. 10 trillion
Delaware-Voyageur Tax-Free Minnesota Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free North Dakota Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
</TABLE>
Voyageur Investment Trust and Voyageur Investment Trust III each has a
present unlimited authorized number of shares of beneficial interest with no par
value allocated to each Class.
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While all shares have equal voting rights on matters affecting each
corporate entity, each Fund would vote separately on any matter, such as any
change in its own investment objective and policies or action to dissolve the
Fund and as prescribed by the 1940 Act. Shares of a Fund have a priority in the
assets of the Fund, and in gains on and income from the portfolio of the Fund.
Class A Shares, Class B Shares and Class C Shares of each Fund represent a
proportionate interest in the assets of a Fund and have the same voting and
other rights and preferences, except that, as a general matter, Class A Shares,
Class B Shares and Class C Shares may vote only on matters affecting the 12b-1
Plan that relates to the class of shares that they hold. However, Class B Shares
may vote on any proposal to increase materially the fees to be paid by a Fund
under the Plan relating to the respective Class A Shares. The shares of each
Class have no preemptive rights are fully transferable and, when issued, are
fully paid and nonassessable.
Beginning June 9, 1997, the names of the Funds have changed as follows:
<TABLE>
<CAPTION>
Previous Name New Name
<S> <C>
Voyageur Arizona Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Arizona Intermediate Fund
Voyageur Arizona Insured Tax Free Fund Delaware-Voyageur Tax-Free Arizona Insured Fund
Voyageur Arizona Tax Free Fund Delaware-Voyageur Tax-Free Arizona Fund
Voyageur California Limited Term Tax Free Fund Delaware-Voyageur Tax-Free California Intermediate Fund
Voyageur California Insured Tax Free Fund Delaware-Voyageur Tax-Free California Insured Fund
Voyageur California Tax Free Fund Delaware-Voyageur Tax-Free California Fund
Voyageur Colorado Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Colorado Intermediate Fund
Voyageur Colorado Insured Tax Free Fund Delaware-Voyageur Tax-Free Colorado Insured Fund
Voyageur Colorado Tax Free Fund Delaware-Voyageur Tax-Free Colorado Fund
Voyageur Florida Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Florida Intermediate Fund
Voyageur Florida Insured Tax Free Fund Delaware-Voyageur Tax-Free Florida Insured Fund
Voyageur Florida Tax Free Fund Delaware-Voyageur Tax-Free Florida Fund
Voyageur Idaho Tax Free Fund Delaware-Voyageur Tax-Free Idaho Fund
Voyageur Iowa Tax Free Fund Delaware-Voyageur Tax-Free Iowa Fund
Voyageur Kansas Tax Free Fund Delaware-Voyageur Tax-Free Kansas Fund
Voyageur Minnesota Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Minnesota Intermediate Fund
Voyageur Minnesota Insured Fund Delaware-Voyageur Minnesota Insured Fund
Voyageur Minnesota Tax Free Fund Delaware-Voyageur Tax-Free Minnesota Fund
Voyageur Missouri Insured Tax Free Fund Delaware-Voyageur Tax-Free Missouri Insured Fund
Voyageur New Mexico Tax Free Fund Delaware-Voyageur Tax-Free New Mexico Fund
Voyageur New York Tax Free Fund Delaware-Voyageur Tax-Free New York Fund
Voyageur North Dakota Tax Free Fund Delaware-Voyageur Tax-Free North Dakota Fund
Voyageur Oregon Insured Tax Free Fund Delaware-Voyageur Tax-Free Oregon Insured Fund
Voyageur Utah Tax Free Fund Delaware-Voyageur Tax-Free Utah Fund
Voyageur Washington Insured Tax Free Fund Delaware-Voyageur Tax-Free Washington Insured Fund
Voyageur Wisconsin Tax Free Fund Delaware-Voyageur Tax-Free Wisconsin Fund
</TABLE>
Noncumulative Voting
Each investment company's shares have noncumulative voting rights which
means that the holders of more than 50% of the shares an investment company
voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the Securities and Exchange
Commission.
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APPENDIX A
SPECIAL FACTORS AFFECTING THE FUNDS
The following information is a brief summary of particular state
factors effecting the Funds and does not purport to be a complete description of
such factors. The financial condition of a state, its public authorities and
local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of the
respective state Fund, or result in the default of existing obligations,
including obligations which may be held by a Fund. Further, each state faces
numerous forms of litigation seeking significant damages which, if awarded, may
adversely affect the financial situation of such state or issuers located in
such state. It should be noted that the creditworthiness of obligations issued
by local issues may be unrelated to the creditworthiness of a state, and there
is no obligation on the part of a state to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by a state.
Bond ratings received on a state's general obligation bonds, if any,
are discussed below. Moody's, S&P and/or Fitch Investors Service, Inc. provide
an assessment/rating of the creditworthiness of an obligor. The debt rating is
not a recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor. The
ratings are based on current information furnished by the issuer or obtained by
the rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by any such rating agencies, if in their respective
judgments, circumstances so warrant. The ratings are based, in varying degrees,
on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of, and provisions of, the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement(s) under the laws
of bankruptcy and other laws affecting creditors rights.
A revision or withdrawal of any such credit rating could have an effect
on the market price of the related debt obligations. An explanation of the
significance and status of such credit ratings may be obtained from the rating
agencies furnishing the same. In addition, a description of Moody's and S&P's
bond ratings is set forth in Appendix A hereto.
The information contained below is based primarily upon information
derived from state official statements, Certified Annual Financial Reports,
state and industry trade publications, newspaper articles, other public
documents relating to securities offerings of issuers of such states, and other
historically reliable sources. It has not been independently verified by the
Funds. The Funds make no representation or warranty regarding the completeness
or accuracy of such information. The market value of shares of any Fund may
fluctuate due to factors such as changes in interest rates, matters affecting a
particular state, or for other reasons.
Factors Affecting Arizona Funds
General Economic Conditions. Progressing from its traditional reliance
on a cyclical construction industry, Arizona's economic base is maturing and
diversifying.
One of the nation's leaders in employment growth, Arizona created close
to 335,000 jobs during 1990-95. After climbing by 6.2% in 1994, during which
the state's economy produced the second-highest number of jobs of any year in
Arizona history, job creation in Arizona is leveling off with employment growth
of 4.2% in 1995-96, although this compares favorably with the national figure of
2.3%. Arizona's wage and salary employment grew 5.4% in 1995 and is forecast to
increase by 4.3% in 1996, 3.7% in 1997 (adding more than
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153,000 new jobs since 1995) and 3.0% in 1998.
Arizona ranked third in the nation in personal income growth during
1990-95. Personal income growth is estimated at 8% in 1996, 6.7% in 1997, and
6.1% in 1998.
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. The numbers suggest a positive
outlook, although less so in 1996 and 1997 than in 1994 and 1995. By 1997
employment growth is expected by Arizona to be less than half of Arizona's 1994
growth rate.
Continued job growth is forecast by Arizona to be accompanied by strong
population growth. During the last ten years, Arizona's population grew at an
average rate of 3.5% to a total of 4.1 million people. Arizona's population grew
by an estimated 2.8% in 1994 and 3.5% in 1995. That rate is expected by Arizona
to drop back to 2.5% in 1996 and 2.6% between January of 1997 and January of
1998.
Budgetary Process. Annually, no later than five days after the regular
Legislative session convenes, the Governor must submit a budget to the
Legislature. Before July 1 the budget is enacted through the passage of a
General Appropriations Act, a Capital Outlay Bill and various Omnibus
Reconciliation Bills (ORBs). The reconciliation bills are used for statutory
adjustments that must be implemented to carry out the adopted budget. Upon
presentation, the Governor has five days to sign the bills into law, veto it in
its entirety, line-item veto individual items of appropriations, or allow the
bill to become law without his signature. The Legislature may, with a two-thirds
vote, override a veto or line-item veto.
The Budget Reform Act of 1993 initiated a one-and two-year budget
review process for State agencies beginning with the FY 1996/FY 1997. Agencies
selected for annual review and appropriation are designated as Major Budget
Units (MBUs). MBUs can be described as agencies with difficult issues requiring
frequent and critical reviews and, ultimately, more resources. The 16 MBUs
account for over 90% of the total General Fund expenditures. Agencies selected
for biennial review and appropriation are designated as Other Budget Units
(OBUs). In 1996, combined MBU and OBU in the General Fund totaled $4.38 billion,
and is estimated at $4.77 billion in 1997.
Revenues and Expenditures. The General Fund closed fiscal year 1996
with a $399.9 million ending balance, setting a new record for the state, and
the Executive plan for fiscal year 1997 anticipates a $254.9 million balance.
Overall, fiscal year 1996 revenues exceeded the spring 1996 forecast by about
$95.3 million. While there were many offsetting changes in the various revenue
sources, the most notable were in corporate and individual income taxes.
Revertments were anticipated to be about $75 million in spring 1996. The final
closing of the books revealed total revertments of $112 million - a $37 million
increase. However, some revertments will be administratively adjusted during
fiscal year 1997 to pay bills.
Fiscal Year 1997. In April 1996, when the fiscal year 1997 budget was
adopted, the consensus revenue estimate was $4.72 billion. The current Executive
forecast for fiscal year 1997 is $60 million higher, at $4.78 billion.
The major revenue source remaining essentially unchanged from the
spring 1996 forecast is transaction privilege taxes, still forecast to produce
$2.21 billion for fiscal year 1997. As of November 1996, fiscal year 1997 YTD
revenue collections were up 3.4% over the previous year and support the present
Executive General Fund forecast. All three major revenue categories - individual
income taxes, corporate income taxes and transaction privilege taxes - showed
gains on a year-over-year basis. The most significant impact on fiscal year 1997
revenues will be the $200 million property tax reduction enacted in 1996, which
has decreased revenues by some 3.2%. Overall, the Executive anticipates a 3.4%
or $163.2 billion increase in base revenues of the current FY 1997 estimate.
This compares to the 2.4%, or $112.5 million increase in base revenues between
fiscal year 1996 and fiscal year 1997.
Fiscal Year 1998. The Executive is recommending a base operating budget
of $4.94 billion for fiscal year 1998, an increase of approximately $168.7
million. The majority of recommended expenditures for fiscal year 1998 are in
the area of education. The K-12 budget (Department of Education) and the higher
education
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budgets (Community Colleges and University system) account for 57% (over $2.8
billion) of the General Fund operating budget. Additionally, the health and
welfare area accounts for over 23% (more than $1.1 billion), the protection and
safety area accounts for over 12% ($579 million), and other areas of government
account for less than 8% of the General Fund operating budget.
The Executive fiscal plan for fiscal year 1998 is based on revenue
estimates, yet still provides for Executive-initiated program changes of $59.6
million; a $100 million income tax reduction to continue the Governor's
phase-out of that revenue source; an $84.7 million capital program; and a $28.0
million employee compensation package. The Executive projects a fiscal year 1998
ending balance of $11.2 million.
Significant Litigation. In response to the court's ruling in the
Roosevelt v. Bishop case in 1994, the Executive recommended $30 million for the
first-year implementation of a capital assistance program for Arizona's schools.
The program is designed to help school districts that lack bonding capacity due
to low value or rapid growth. It requires an application that includes
documentation of need and is submitted to a capital equity board. Income is
provided for in a Capital Equity Fund which contains monies appropriated by the
Legislature and $30 million annually from the Common School Land Fund (Permanent
State School Fund). The Permanent State School Fund consists of revenues from
the proceeds of the sale of natural resources or property from lands that have
been granted by the United States to the State of Arizona for the support of
common schools. In future years, the Capital Equity Fund may contain monies
remitted by school districts for the repayment of loans. Funds are used to
assist school districts with capital needs. For fiscal year 1999, the Governor
recommends $40.5 million be appropriated from the Permanent State School Fund,
which includes the $30 million appropriated to the Capital Equity Fund.
Debt Administration and Limitation. The State is not permitted to issue
general obligation debt. The particular source of payment and security for each
of the Arizona Tax Exempt Obligations is detailed in the debt instruments
themselves and in related offering materials. There can be no assurances with
respect to whether the market value or marketability of any of the Arizona Tax
Exempt Obligations issued by an entity other than the State of Arizona will be
affected by financial or other conditions of the State or of any entity located
within the State. In addition, it should be noted that the State of Arizona, as
well as counties, municipalities, political subdivisions and other public
authorities of the State, are subject to limitations imposed by Arizona's
Constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the State legislature cannot appropriate revenues in
excess of 7% of the total personal income of the State in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
Although most of the Arizona Tax Exempt Obligations are revenue
obligations of local governments or authorities in the State, there can be no
assurance that the fiscal and economic conditions referred to above will not
affect the market value or marketability of the Arizona Tax Exempt Obligations
or the ability of the respective obligors to pay principal of and interest on
the Arizona Tax Exempt Obligations when due.
Factors Affecting California Funds
General Economic Conditions. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total State gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in a single year.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 non-farm jobs in 1996, and is expected to add another 330,000 jobs in
1997. The strongest growth has been in high technology and export-related
industries, including computer software, business services, electronics,
entertainment and tourism, all of which have offset the recession-related losses
which were heaviest in aerospace and defense-related industries (which accounted
for two-thirds of the job losses), and finance and insurance. Residential
housing construction, with new permits rising from 94,000 units in 1996 to
110,000 in 1997, is weaker than in previous recoveries, but has been growing
slowly since 1993.
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The State's July 1, 1994 population of 32.1 million represented over
12% of the total United States population. California's population is
concentrated in metropolitan areas. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48% of the State's population, with 15.6 million residents,
and the 10-county San Francisco Bay Area represented 21% with a population of
6.7 million. The June 1996 population projection forecasts 33.9 million
California residents in July 1998.
California enjoys a large and diverse labor force. For the year 1996,
the total civilian labor force was 15,496,000 with 14,372,000 individuals
employed and 1,124,000, or 7.3%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 5.4%.
Budgetary Process. The State's fiscal year begins on July 1 and ends on
June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Under the State Constitution, money may be drawn from the Treasury only through
an appropriation made by law. The primary source of the annual expenditure
authorizations is the Budget Act as approved by the Legislature and signed by
the Governor. The Budget Act must be approved by a two-thirds majority vote of
each House of the Legislature. The Governor may reduce or eliminate specific
line items in the Budget Act or any other appropriations bill without vetoing
the entire bill. Such individual line-item vetoes are subject to override by a
two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided by statute or the State
Constitution. Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
Revenues and Expenditures. The moneys of the State are segregated into
the General Fund and approximately 600 Special Funds. The General Fund consists
of revenues received by the State Treasury and not required by law to be
credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
January 31, 1996, the PMIA held approximately $17.31 billion of State moneys,
and $10.60 billion of moneys invested for 2,366 local governmental entities
through the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA
as of January 31, 1996 were $27,912,100,000. The Treasurer does not invest in
leveraged products or inverse floating rate securities. The investment policy
permits the use of reverse repurchase agreements subject to limits of no more
than 10% of PMIA. All reverse repurchase agreements are cash matched either to
the maturity of the reinvestment or an adequately positive cash flow date which
is approximate to the maturity date. The average life of the investment
portfolio of the PMIA as of January 31, 1996 was 233 days.
Special Fund for Economic Uncertainties. The Special Fund for Economic
Uncertainties ("SFEU") is funded with General Fund revenues and was established
to protect the State from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State
Controller as necessary to meet cash needs of the General Fund. The State
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for many years to meet
temporary imbalances of receipts and
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disbursements in the General Fund. As of June 30, 1995, the General Fund did not
have any outstanding loans from Special Funds (but did have $4 billion of
external loans represented by the 1994 Revenue Anticipation Warrant, Series C
and D which matured on April 25, 1996). As of June 30, 1996, the General Fund
Reserve for Economic Uncertainties was $234.6 million.
Proposition 13. The primary units of local government in California are
the counties. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 unincorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "Appropriations subject to limitation," with
respect to the State, are authorizations to spend "proceeds of taxes," which
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
Orange County, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
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Litigation Generally. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
Fiscal Year 1996-1997. On January 10, 1996, the Governor released his
proposed budget for the fiscal year 1996-97. The Governor requested total
General Fund appropriations of about $45.2 billion, based on projected revenues
and transfers of about $45.6 billion, which would leave a budget reserve in the
SFEU at June 30, 1997 of about $400 million. The Governor renewed a proposal,
which had been rejected by the Legislature in 1995, for a 15% phased cut in
individual and corporate tax rates over three years (the budget proposal assumes
this will be enacted, reducing revenues in 1996-97 by about $600 million). There
was also a proposal to restructure trial court funding in a way which would
result in a $300 million decrease in General Fund revenues. The Governor
requested legislation to make permanent a moratorium on cost of living increases
for welfare payments, and suspension of a renters tax credit, which otherwise
would go back into effect in the 1996-97 fiscal year. The Governor further
proposed additional cuts in certain health and welfare programs, and assumed
that cuts previously approved by the Legislature will receive federal approval.
Other proposals included an increase in funding for K-12 schools under
Proposition 98, for state higher education systems (with a second year of no
student fee increases), and for corrections. The Governor's Budget projected
external cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
Revised estimates were published in the Governor's Budget Summary for fiscal
year 1997-98. These estimates and projections are based upon various assumptions
which may be affected by numerous factors, including future economic conditions
in the State and the nation, and there can be no assurance that the estimates
will be achieved.
Preliminary General Fund revenues and transfers for fiscal year 1996-97
are $48.4 billion, a 4.56% increase from the prior year. Expenditures are
estimated at $48.4 billion, a 6.6% increase. The Governor's Budget Summary for
fiscal year 1997-98 projects a positive balance of $197 million in the budget
reserve, the SFEU, at June 30, 1997. Special Fund revenues are estimated at
$13.54 billion and appropriated Special Fund expenditures at $13.59 billion. As
of June 30, 1996, the General Fund balance was $685.4 million. The estimate for
June 30, 1997 is $648 million.
Overall, General Fund revenues and transfers represent about 78% of
total revenues. The remaining 22% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and bank
and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank and
corporation tax was reduced by 5%, and a number of targeted business tax
incentives were put into place.
1997-98 Fiscal Year. The Governor's proposed budget for fiscal year
1997-98 keeps General Fund spending below revenues. The budget provides for
General Fund revenues and transfers of $50.7 billion, a 4.65% increase from
1996-97, and expenditures of $50.3 billion, a 4% increase. The budget provides
for a General Fund Reserve for Economic Uncertainties of $553 million. The
balance in the General Fund at the end of fiscal year 1998 is forecast at $1,004
million. Special Fund revenues are estimated to be $14 billion and appropriated
Special Fund expenditures are projected at $14.3 billion.
K-12 education remains the state's top funding priority -- nearly
42 cents of every General Fund dollar is spent on K-12 education. Education,
public safety, and health and welfare expenditures constitute nearly 93% of all
state General Fund expenditures. General Fund expenditures for 1997-98 are
proposed in the following amounts and programs: $20.9 billion or 41.6% for K-12
education, $14.6 billion or 28.9% for health and welfare, $6.5 billion or 12.9%
for higher education, and $4.3 billion, or 8.5% for youth and correctional
programs. The remaining expenditures are in areas such as business,
transportation, housing, and environmental protection.
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The following are principal features of the Governor's 1997-98
budget proposal:
For fiscal year 1997-98, the Governor's budget proposes a further
10% reduction in the bank and corporation tax rate phased in over a two-year
period beginning with the 1998 tax year. This would implement the balance of the
Governor's proposal last year for a 15% bank and corporation tax reduction. In
addition, the Governor's Budget proposes that the State conform with recent
federal changes in the allowable number of Subchapter S shareholders. Combined,
these tax reduction proposals are estimated to reduce taxes by $93 million
during 1997-98, and $336 million during 1998-1999.
The Governor has proposed a $200 million bond to capitalize an
Infrastructure Bank to help finance infrastructure projects related to business
development. The budget also proposes $939,000 to create three new offices --
two in Asia and one in South America -- to provide California companies with
representation and assistance in these emerging markets.
Building on the 1996 class-size reduction initiative, the Budget
proposes $304 million to reduce class size in an additional grade, and funding
is provided to meet facilities-related costs of class size reduction in 1996-97.
An additional $57 million is proposed for improved reading instruction in grades
four through eight.
The Budget includes the second year of the Citizens' Option for
Public Safety Program, through which $100 million will be provided to local
governments to increase frontline law enforcement.
The Budget provides a $35 million Infant Health Protection
Initiative, designed to protect children from abuse or neglect from
substance-abusing parents. The budget also provides $15.3 million to increase
immunizations for low-income children.
Debt Administration and Limitation. The State Treasurer is
responsible for the sale of debt obligations of the State and its various
authorities and agencies. The State Constitution prohibits the creation of
indebtedness of the State unless a bond law is approved by a majority of the
electorate voting at a general election or a direct primary. General obligation
bond acts provide that debt service on general obligation bonds shall be
appropriated annually from the General Fund and all debt service on general
obligation bonds is paid from the General Fund. Under the State Constitution,
debt service on general obligation bonds is the second charge to the General
Fund after the application of moneys in the General Fund to the support of the
public school system and public institutions of higher education. Certain
general obligation bond programs receive revenues from sources other than the
sale of bonds or the investment of bond proceeds. The State had $17,913,271,000
aggregate principal amount of general obligation bonds outstanding, and
$8,383,864,000 authorized and unissued, as of December 31, 1996. Outstanding
lease revenue bonds totaled $5.845 billion as of June 30, 1996, and are
estimated to total $6.398 billion as of June 30, 1997.
From July 1, 1995 to December 15, 1995, the State issued
approximately $461 million in general obligation bonds and $44 million in
revenue bonds. Refunding bonds, which are used to refinance existing debt,
accounted for $81 million of the general obligation bonds and the entire $44
million of the revenue bonds. The Legislature placed two general obligation bond
measures totaling $5 billion on the March, 1996 statewide ballot. Additional
bond measures may be placed on the November 1996 ballot.
General Fund general obligation debt service expenditures for
fiscal year 1995-96 were $1.911 billion, and are estimated at $1.953 billion and
$1.979 billion for fiscal years 1996-97 and 1997-98, respectively.
The State's general obligation bonds have received ratings of "A1"
by Moody's Investors Service, "A" by Standard & Poor's Ratings Group and "A+" by
Fitch Investors Service, Inc.
Factors Affecting Colorado Funds
General Economic Conditions. Colorado entered the Union on August 1,
1876, and was called the "Centennial State" in honor of the 100th anniversary of
the Declaration of Independence. It is the eighth largest
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state in the nation, with an area of 104,247 square miles. The main feature of
the state's geography is the Continental Divide, extending northeast to
southwest and roughly bisecting Colorado into the Eastern and Western Slopes.
The major rivers of Colorado are the Arkansas, Platte, Rio Grande, and Colorado.
Colorado enjoys an average of nearly 300 days of sunshine per year.
Precipitation varies from 8 inches per year in lower elevations to 23 inches in
the mountains, with a yearly statewide average of 16.5 inches.
The U.S. Bureau of Census estimates Colorado's population in 1996
at 3.821 billion. This represents a 2.0% increase over the 1995 estimate of
3.747 billion. Colorado's population growth is predicted at 1.9% in 1997 and
1.8% in 1998, both years higher than the 1.2% estimated national rate for 1997
and 1998. A large part of Colorado's current growth is related to growth in the
West and to decentralization trends that emanate from California.
As the primary services center for the Rocky Mountain region, the
state suffered a sharp recession in the mid-to-late 1980s because of
retrenchment in the energy sector. Real estate values dropped sharply, with
evidence of overbuilding in commercial and residential sectors. Office vacancy
rates in the Denver area soared, and the state lost significant jobs in mining
and construction.
Colorado's economic vitality returned and was evident through the
1991-1992 national recession and more recent recovery. Wage and salary
employment growth topped 5.1% in 1994, but dropped to 4.7% in 1995 and an
estimated 2.5% in 1996. Personal income grew 8% in 1995 but dropped to an
estimated 6.3% in 1996. The state has added nearly 318,500 jobs during
1990-1995, mostly in service, trade, and government with an additional 45,200
estimated for 1996, a 2.5% increase from 1995, but lower than the 5.1% and 4.7%
increases in 1994 and 1995, respectively. Construction employment has been
strong, bolstered by the recently completed Denver International Airport
construction, but activity has shifted to other public infrastructure projects
and single-family homes. Estimates for 1996 show employment is now diversified
among service (29.7%), trade (24.5%), government (16.2%), and manufacturing
(10.5%). Housing starts have dramatically increased from 14,100 units permitted
in 1991 to an estimated 41,400 in 1996. Conversely, the state's mining sector
has recorded the loss of about 6,200 jobs since 1990. Transportation,
communications and public utilities, as well as retail trade has been strong,
growing 9% and 7.1%, respectively, in 1995. Income levels, while below their
early 1980s peak, are rising, with per capita personal income at 103% of the
national average.
The Colorado economy will continue to chalk up gains in 1997 but
not at the pace of the last three years. Absorbing the job cuts at Union Pacific
Railroad, USWEST, and Fitzsimmon's Army Medical Center will curtail growth. The
Colorado economy has now achieved more sustainable growth rates, but employment
will begin to tail off at the turn of the century. While construction job losses
at the airport largely have been absorbed into other public infrastructure
projects and residential housing, the construction sector is likely to lose jobs
as population growth slows. Projections of 2.4% employment growth and 6.4%
growth in personal income for 1997 are still strong by national standards, but
represent a slowdown from recent growth. The state unemployment rate should stay
below the national rate.
Significant Litigation. On June 19, 1995, the Colorado Supreme
Court affirmed the December 1993 Arapahoe County District Court decision in
favor of the Littleton School District. The Bolt v. Littleton School District
case was a class action lawsuit brought by three taxpayers residing in the
District. Plaintiffs argued that Littleton School District's 1993 property tax
millage rate increase violated Amendment 1. The Amendment states that all
Districts must obtain voter approval in advance of any new tax, tax rate
increase, or mill levy above that for the prior year, unless annual District
revenue is less than annual payments on G.O. bonds, pensions, and final court
judgments, with certain exceptions. The School District increased its 1993 mill
levy to pay debt service on its Series 1985 G.O. bonds. In affirming the Trial
Court's ruling in favor of the District, the Supreme Court reasoned that the
increase in the District's bond redemption mill levy for 1993 did not violate
the provisions of Amendment 1 because the District already received voter
approval for the tax rate increase when the Bonds originally were authorized by
voters at an election in 1984. The ruling has significance for the Colorado
municipal bond market because it upholds the right of Municipalities to increase
property tax millage rates to pay debt service on G.O. bonds issued before
Amendment 1.
The Littleton ruling follows another important ruling by the
Colorado Supreme Court in September,
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1995 in the case of Bickel v. City and County of Boulder and Boulder Valley
School District. In that case the court upheld the right of Municipalities to
request and obtain voter approval to issue G.O. bonds after passage of Amendment
1. Together, the Boulder and Littleton cases settle two of the most
controversial Amendment 1 issues and should lead to a more orderly primary and
secondary market for Colorado municipal bonds.
Budgetary Process. The financial operations of the legislative,
judicial, and executive branches of the state's government, with the exception
of custodial funds or federal moneys not requiring matching state funds, are
controlled by annual appropriation made by the General Assembly. The
Transportation Department's portion of the Highway Fund is appropriated to the
State Transportation Commission. Within the legislative appropriation, the
Commission may appropriate the specific projects and other operations of the
Department. In addition, the Commission may appropriate available fund balance
from their portion of the Highway Fund.
The legislative appropriation is constitutionally limited to the
unrestricted funds held at the beginning of the year plus revenues estimated to
be received during the year as determined by the modified accrual basis of
accounting. The Governor has line item veto authority over the Long
Appropriations Bill, but the General Assembly may override each individual line
item veto by a two-thirds majority vote in each house. For budgetary purposes,
cash funds are all funds received by the state that are neither general purpose
revenues, nor revenues received from the federal government. General and cash
fund appropriations, with the exception of capital construction, lapse at
year-end unless executive action is taken to roll-forward all or part of the
remaining unspent budget authority. Appropriations that meet the strict criteria
for roll-forward are reserved at year-end. Capital construction appropriations
are generally available for three years after appropriations.
Revenues and Expenditures. Audited GAAP financial statements for
the year-ended June 30, 1996 report an unreserved general fund balance of $368.5
million, or about 8.4% of general fund expenditures, and after setting aside
reserve monies, as required by statute, the ending fund balance was $211.8
million. This is in contrast to the unreserved general fund balance of just
$16.3 million in 1991 but lower than $488.5 million in 1995. In fiscal 1996,
challenged to deliver on a 1988 plan to increase the state's contribution toward
primary and secondary education, the state budget provided approximately $1.6
billion to K-12 education. Revenue growth was 6.8% in 1996, and 6.9% estimated
in 1997, with sales tax collections growing 8.1% in fiscal 1996 and an estimated
5.0% in 1997, while individual income taxes grew 10.1% in fiscal 1996 and are
projected to grow 9.1% in 1997.
For fiscal year 1996, general fund expenditures exceeded revenues
by $142.5 million due to actions taken during the 1996 legislative session.
There has been a change in managing the TABOR (Article X) Reserve: the state
controller transferred $196 million to the Controlled Maintenance Trust Fund
(CMTF) at the end of fiscal year 1996, with the balance in this fund satisfying
the state's Article X reserve requirement. Also, the legislature increased the
amount of the General Fund transfer to the Capital Construction Fund (up to $159
million from $120.3 million in fiscal year 1995).
For fiscal year 1997, appropriations are right at the 6%
expenditure limit of $4,151.9 million, or $235 million more than current-year
spending. Factoring in the first year of the Governor's revenue spending plan
for highways, the ending fund balance, after reserves, is estimated to increase
by $27.8 million to $396.3 million. After set-asides for required reserves, the
ending fund balance is projected to be $230.2 million, more than 5% of total
expenditures.
The Amendment 1 constitutional revenue and spending limit will not
affect the fiscal 1997 or 1998 budget, because projected revenues and
expenditures fall below limits. With slower population growth, the long-term
projections suggest a convergence of revenues with the amendment's limits.
General fund revenues for fiscal year 1997-98 are estimated to grow
by 4.5%, or $207.2 million, compared to the projected 6.9% growth rate for
1996-97. This lower growth rate is primarily due to the Governor's proposal to
eliminate intergovernmental transfers from the state's largest hospitals. After
reserve set-asides, the state is estimated to have an ending fund balance of
$159.7 million.
The State Controller may allow certain over expenditures of
the legal appropriation with the
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approval of the Governor. If the State Controller restricts the subsequent year
appropriation, the agency is required to seek a supplemental appropriation from
the General Assembly or reduce their subsequent year's expenditures. As provided
by statute, there is unlimited authority for Medicaid over expenditures. The
Department of Human Services is allowed $1 million in over expenditures not
related to Medicaid and unlimited over expenditures for self-insurance of its
workers' compensation plan. An additional $1 million over expenditure is allowed
for the Judicial Branch. State statute also allows over expenditures up to $1
million in total for the remainder of the executive branch.
Debt Administration and Limitation. The Constitution prohibits
Colorado from incurring G.O. debt, and most long-term financing takes the form
of lease purchase obligations. The state relies on general fund appropriations
for pay-as-you-go capital projects, with $159 million transferred to the capital
construction fund in 1996 and $116 million estimated in 1997. Since 1988, the
State's master lease purchase program primarily has been used to finance new
correctional facilities. Lottery revenues are intended for repayment on these
obligations, but deficiencies are appropriated from the general fund. In
November 1992, Colorado voters approved an amendment that redirects lottery
revenues to outdoor recreation. After 1998, alternate general fund resources
will need to be allocated for future lease payments, but the annual lease
payment obligation by then is only about $2.5 million. The State supports
affordable housing through the Colorado Housing Finance Authority, whose G.O.s
ultimately are secured by the State's moral obligation pledge.
The Funds Management Act (the "Act") was enacted to allow the State
to provide for temporary cash flow deficits caused by fluctuations in revenues
and expenditures. Under the Act the State Treasurer is authorized to sell Tax
and Revenue Anticipation Notes which are payable from the future anticipated
pledged revenues. The law directs the State Auditor to review information
relating to the Notes and report this information to the General Assembly. On
July 6, 1996, the State Treasurer issued General Fund Tax Revenue Anticipation
Notes (the "Notes") in the amount of $400 million. These Notes have a maturity
date of June 27, 1997 and are not subject to redemption prior to maturity. The
amount due at maturity is $418,000,000 consisting of the Note principal of
$400,000,000 and interest of $18,000,000. To ensure the payment of the Notes,
the Treasurer has agreed to deposit pledged revenues into the Account so that
the balance on June 15, 1997, will be no less than the amount to be repaid. The
Note agreement also provides remedies for holders of the Notes in the event of
default.
Since the State of Colorado does not have G.O. debt, it does
not have S&P, Moody's or Fitch ratings.
Factors Affecting Florida Funds
General Economic Conditions. Florida is the twenty-second (22nd)
largest state with an area of 54,136 square miles and a water area of 4,424
square miles. The State is 447 miles long (St. Marys River to Key West) and 361
miles wide (Atlantic Ocean to Perdido River) and has tidal shoreline of almost
2,300 miles. Florida has grown dramatically since 1980 and in 1994, ranked
fourth among the fifty states with an estimated population of 13.9 million. By
1996, Florida's population increased to 14.4 million, with projections of 15
million by 1999. The State's strong population growth is one fundamental reason
why its economy has typically performed better than the nation as a whole. Since
1984, the United States has had an average population increase of about 1.0%
annually, while Florida's average annual rate of increase is around 2.3%.
However, during 1992-96, Florida's annual net migration increase averaged 1.82%
and is predicted at 1.8% for 1997-98. Yet, Florida has been, and continues to
be, the fastest growing of the eleven (11) largest states.
While many of the Nation's senior citizens choose Florida as their
place of retirement, the State is also recognized as attracting a significant
number of working age people. Since 1985, the prime working age population
(18-44) has grown at an average annual rate of 2.2%. Florida's economic assets,
such as competitive wages and low per capita taxes, have attracted new
businesses and consequently have created many new job opportunities. The share
of Florida's total working age population (18-59) to total population is
approximately 54%.
Over the years, Florida's personal income has grown and has
generally outperformed both the U.S. as a whole and the southeast in particular.
The reasons for this are two fold. First, Florida's population has
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expanded. Second, the State's economy since the early seventies has diversified
in such a way as to provide a broader economic base. As a result, Florida's
personal income has tracked closely with the national average and, historically,
above that of the southeast. From 1985 through 1994, Florida's per capita income
rose an average of 5.2% per year, while the national per capita income increased
an average of 5.1%. Real personal income increased 4.5% in 1995-96 and is
estimated to increase 4.2% in 1996-1997 and increase 4.4% in 1997-1998, while
real income per capita peaked at 2.6% in 1995-96 and is projected to grow at
2.3% in 1996-1997 and 2.6% in 1997-1998.
In recent years, the State's service sector employment has
accounted for approximately 85% of total non-farm employment. While structurally
the southeast and the nation are endowed with a greater proportion of
manufacturing jobs, which tend to pay higher wages, service jobs, historically,
tend to be less sensitive to business cycle swings. Florida has a concentration
of manufacturing jobs in high-tech and high value-added sectors, such as
electrical and electronic equipment, as well as printing and publishing. The
State's manufacturing sector has kept pace with the U.S., at about 2.7% of total
U.S. manufacturing employment since the eighties.
Total non-farm employment is expected to increase 2.9% or 180,000
jobs in 1996-97 and remain stable at 2.9% or 183,500 new jobs in 1997-98. The
strongest areas in job growth in Florida in fiscal year 1997-98 are expected to
be in services and a combination of retail and wholesale trade. Services are
forecast to lead the economy, growing 4.3% (93,500 jobs) in fiscal year 1997-98,
and accounting for about 51% of total new jobs in that year. Services are the
single largest source of employment in Florida, making up about 35% of the total
in fiscal year 1997-98.
Wholesale and retail trade is projected to increase 2.9% in fiscal
year 1997-98 (47,100 new jobs), which parallels general economic growth. This
sector is the second largest, with about 25% of all jobs in the state, and is
anticipated to contribute about 26% of the new jobs created in fiscal year
1997-98. Construction will exhibit modest growth of 2.5% (7,800 new jobs)
reflecting stable construction activity supported by population growth.
Manufacturing, with slightly more than 7% of total jobs, will have the slowest
positive growth rate among the major sectors in fiscal year 1997-98, at less
than 1% (2,800 new jobs).
As the State's economic growth has slowed from its previous highs,
the unemployment rate has tracked above the national average. More recently,
Florida's unemployment rate has been below the national average. Florida's
unemployment rate was 5.5% in 1995 and as of November 1996, the rate was 4.8%,
giving an 11-month average of 5.3%. The national unemployment rate was 5.6% in
1995 and averaged 5.4% in 1996.
Tourism is one of Florida's most important industries.
Approximately 41 million people visited the State in 1995. In terms of business
activities and State tax revenues, tourists in Florida effectively represented
additional residents, spending their dollars predominantly at eating and
drinking establishments, hotels and motels, and amusements and recreation parks.
The State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its seasonality.
Besides a sub-tropical climate and clean beaches that attract people in the
winter months, the State has added, among other attractions, a variety of
amusement and educational theme parks. This diversification has helped to reduce
the seasonal and cyclical character of the industry and has effectively
stabilized tourist related employment as a result. By the end of fiscal year
1996, 41.4 million domestic and international tourists are expected to have
visited the State. In 1997-1998, tourist arrival should reach a high of 43.9
million, representing 3.2% growth from 1996-97. The current Florida Economic
Consensus Estimating Conference forecast shows that the Florida economy is
expected to decelerate along with the nation, but will continue to outperform
the U.S. as a whole as a result of relatively rapid population growth.
Budgetary Process. The budgetary process is an integrated,
continuous system of planning, evaluation and controls. Individual state
agencies prepare and submit appropriation requests to the Office of Planning and
Budgeting, Executive Office of the Governor, no later than September 1 of the
year next preceding Legislative consideration. After an evaluation of the
agencies' requests, the Office of Planning and Budgeting, Executive Office of
the Governor, makes recommendations to the Governor that are within previously
established policy guidelines of the Governor and revenue estimate. Florida
Statutes provides that
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financial operations of the State covering all receipts and expenditures be
maintained through the use of three funds - the General Revenue Fund, Trust
Funds, and Working Capital Fund. The General Revenue Fund receives the majority
of State tax revenues. Monies for all funds are expended pursuant to
appropriations acts. The Trust Funds consist of monies received by the State
which under law or trust agreement are segregated for a purpose authorized by
law. Revenues in the General Fund which are in excess of the amount needed to
meet appropriations may be transferred to the Working Capital Fund. The Florida
Constitution adds a fourth fund, the Budget Stabilization Fund. The Florida
Constitution and Statutes mandate that the State budget as a whole, and each
separate fund within the State budget be kept in balance from currently
available revenues each State Fiscal year (July 1-June 30). The Governor and
Comptroller are responsible for insuring that sufficient revenues are collected
to meet appropriations and that no deficit occurs in any State fund.
Revenues and Expenditures. Financial operations of the State of
Florida covering all receipts and expenditures are maintained through the above
described four fund types - General Revenue Fund, Trust Funds, Working Capital
Fund, and Budget Stabilization Fund. In fiscal year 1997-1998, an estimated 40%
of total direct revenues to these funds will be derived from State taxes and
fees. Federal funds and other special revenues account for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which are estimated to amount to 72%, 8%, 4%, and 3%,
respectively, of total General Revenue funds available.
State expenditures are categorized for budget and appropriation
purposes by type of fund and spending unit, which are further subdivided by line
item. For fiscal year 1997-1998, the Governor recommended appropriations from
the General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 52%, 26%, and 16%, respectively, of total General
Revenue funds available.
Estimated fiscal year 1996-97 General Revenue plus Working Capital
and Budget Stabilization funds available to the State total $16,601.7 million.
Of the total General Revenue plus Working Capital and Budget Stabilization funds
available to the State, $15,566.9 million of that is Estimated Revenues. With
effective General Revenues plus Working Capital Fund appropriations at $15,582.2
million, unencumbered reserves at the end of 1996-97 are estimated at $610.1
million. Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available total $17,384.9 million, a 4.7% increase
over 1996-97. The $16,301.5 million in Estimated Revenues represents an increase
of 4.7% over the previous year's Estimated Revenues.
The State Treasurer is responsible for investing the General
Revenue Fund and trust fund monies. Authorized investments include certificates
of deposits in Florida banks and savings and loan associations, direct
obligations of the United States Treasury, commercial paper and banker's
acceptances, medium-term corporate notes and co-mingled and mutual funds. Among
other functions, the Treasurer also serves as administrator of the Florida
Security for Public Deposit Program. This program encompasses all governmental
entities in the State. Participating banks and savings and loan associations
guarantee government deposits and pledge collateral at levels varying between
50% and 125%. Acceptable collateral includes obligations of the United States
Government and its agencies, obligations of the State of Florida and its
political subdivisions, and obligations of several states.
Debt Administration. By law, the State of Florida is not authorized
to issue obligations to fund governmental operations. State bonds, pledging the
full faith and credit of the State of Florida may be issued only to finance or
refinance the cost of State fixed capital outlay projects upon approval by a
vote of the electors. Article III, Section 11(d) of the Florida Constitution
provides that revenue bonds may be issued by the State of Florida or its
agencies without a vote of the electors only to finance or refinance the cost of
State fixed capital outlay projects which shall be payable solely from funds
derived directly from sources other than State tax revenues.
Florida maintains a bond rating from Moody's Investors Services
(Aa), Standard and Poor's Corporation (AA) and Fitch Investors Service, Inc.
(AA) on all of its general obligation bonds. As of June 30, 1996, the state's
net outstanding debt totaled $9.2 billion. Approximately 67% of Florida's debt
is full faith and credit bonds while the remaining 33% is comprised of revenue
bonds pledging a specific tax or revenue. Debt
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was issued to finance capital outlay for educational projects of local school
districts, community colleges and state universities, environmental protection
and highway construction.
Factors Affecting Idaho Fund
General Economic Conditions. State Government in Idaho originates
from the State Constitution adopted at the constitutional convention of August
6, 1889, and ratified by the people in November of the same year. Congress
approved the Constitution and admitted Idaho to the Union on July 3, 1890.
Idaho, located in the northwestern portion of the United States, is bordered by
Washington, Oregon, Nevada, Utah, Wyoming, Montana and Canada. Idaho's land area
consists of 83,557 square miles of varied terrain including prairies, rolling
hills and mountains with altitudes ranging from 736 feet to 12,662 feet.
With close of 1996, Idaho completed the tenth consecutive year of
economic expansion, maintaining one of the fastest annual growth rates of
employment and income among all states; employment is estimated to increase
nearly 4% and personal income increased 6.3% during 1996. However, the rapid
employment increases enjoyed by the state for the last ten years have already
begun to slow and are anticipated to continue slowing to the 2.7% range. The
unemployment rate dropped from 5.4% in 1995 to 5.0% in 1996, its lowest level
since 1978. Personal income is expected to drop to 5.3% in 1997, but then begin
to grow at rates of 5.7% and 6.1% during 1998 and 1999, respectively. Idaho's
population growth, which peaked at 3.0% in 1994, is expected to taper gradually
to 2.2% over the next few years, which will have a dampering effect on the
state's housing industry.
Exports. Exports of agricultural and manufactured goods played an
ever increasingly important role in Idaho's economic performance. With Japan,
the United Kingdom, Canada, Singapore, and Taiwan as the state's biggest
customers, Idaho's export value rose from $1.9 billion in 1993 to $2.3 billion
in 1994, a 21% increase; non-farm exports rose 20% in that period to $1.32
billion, creating an estimated 5,000 new jobs; exports climbed 187% from 1987 to
1993. Idaho ranked thirty-second among the states in the total value of goods
and services exported in 1994. Japan was Idaho's best customer importing $263
million worth of goods and services; the United Kingdom increased its imports
from Idaho 31% to $183 million and Canada came in third at $161 million for a
34% increase over 1993.
The jobs supported by Idaho's recent experiences in exports markets
are relatively evenly distributed between farm and manufacturing jobs. The
return to the state government from its investment in promoting Idaho products
abroad is elevated tax revenues. In 1996, the state tax revenues increased 5% to
$1.35 billion, a decrease from the 10% gain in 1995; taxable sales rose 10.5% in
1994 to $10.5 billion, the third year of double digit growth. State tax revenues
are expected to grow only 1.7% in fiscal year 1997 to $1.374 billion, but
increase to $1.449 billion or 5.5% in 1998. Approximately 35.5% of the revenues
for fiscal year 1998 are expected to come from sales tax.
Importance of Water. Although located in the arid West, Idaho has
large water resources which have dominated its history and development and may
prove equally important to its future. There are 26,000 miles of rivers and
streams and more than 2,000 natural lakes. Three of Idaho's rivers--Clearwater,
the Kootenai and the Salmon--are more than half as large as the Colorado. The
Snake Plain Aquifer is one of the largest fractured basalt aquifers in the
world. Equally important to quantity is the quality of Idaho's waters, which
remains outstanding. The drop in elevation of rivers like the Snake allow
valuable hydropower production, allowing the State some of the lowest
electricity rates in the nation.
Agriculture. Idaho has traditionally been an agriculture state.
Livestock, beef, dairy cattle, and sheep are important to the economy, while the
major crops of Idaho's farmers include potatoes, wheat, barley, sugar beets,
peas, lentils, seed crops and fruit. According to recent estimates, agricultural
related products make up 16% of Idaho's Gross State Product, making them key
elements in Idaho's economic performance. The improvement in water conditions
will help Idaho farmers on the supply side of the market; the third wheat crop
of over 100 million bushels is predicted for 1995. The combination of improved
demand and supply conditions pushed wheat prices to well above the $4.00 level
during 1994. In Idaho's most famous agricultural market, potatoes, 1994
production rose 6.4% to 134.3 million cwt and for Idaho's largest cash crop,
beef, production rose 7%. When all market factors are taken into consideration,
including an expected reduction of 2% in the
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nation's wheat production, the outlook for Idaho's agricultural industry
improves in 1995, with the state's beef production increasing at least 3% and
wheat production matching or exceeding previous records. The net result is
growth in farm proprietor income and agricultural employment. From December 1993
to December 1994 agricultural employment increased 18.1% to 25,240 driven by a
39.2% increase in hired workers. In recent years, the growth in agricultural
employment has slowed. From December 1995 to December 1996, total agricultural
employment increased only 0.3% to 26,930 and the number of hired workers
increased only 0.6%.
Service Producing Sector. By the most important economic measures,
the service producing sector is the heart of Idaho's economy; it accounts for
68% of Gross State Product and 78% of all nonagricultural jobs. For 1996, and
the next three years, employment growth in the service producing sector is
expected to slow from its 1995 rate of 4.2% to 3.6% in 1996 and around 2.9% the
next few years. Within the service producing sector, the weakest performer is
expected to be the federal government, which will have stable employment with
some decreases due to downsizing of services and employees. The retail trade and
services sector recorded the largest gains in 1996, at 3.8% and 6.2%,
respectively, with such increases continuing in the 3.2% and 4.5% range,
respectively. State and local governments, including public education, are
expected to expand at an average of 2% per year over the forecast period in
response to population pressures. This is lower than the 3-4% growth rates in
previous years. The remaining components of the service producing sector,
including the finance, insurance, transportation, communication and public
utility industries, are expected to continue to have mixed experiences with
employment; growth partly offset by right-sizing. The net result is that these
industries are expected to average around 2.0% per year employment growth
through 2000.
Goods Producing Sector. The goods producing sector, composed of
manufacturing, mining, and construction, had two of the star performers in the
state's ten years of economic expansion; electronics and construction. Both of
these industries have begun to slow and are expected to have substantially
slower growth rates in 1997; the goods producing sector will be a consistent
rather than spectacular performer. Metal mining employment has increased 25%
since 1994, with metal prices determining demand. Overall, this sector's
employment gains are expected to decline from the 4.7% level for 1996 to 0.2%
and 1.4% for 1997 and 1998, respectively. The causes of the dramatic shifts are
some restructuring in microelectronics, the economic hardships suffered in
resource based industries and a slowing in residential construction. Even with
offsetting job creation at some electronic firms in other goods producing
industries, this sector will have to wait until 2000 for employment to recover a
2% growth rate.
Budgetary Process. In the fall of each year, all agencies of the
State submit requests for appropriations to the Governor's Office, Division of
Financial Management, so a budget may be prepared for the upcoming legislative
session. The budget is generally prepared by agency, fund, program, and object.
The budget presentation includes information on the past year, current year
estimates, and requested appropriations for the next fiscal year.
The Governor's proposed budget is presented to the legislature for
review, change, and preparation of the annual appropriation acts for the various
agencies. The legislature enacts annual appropriations for the majority of funds
held in the state treasury. These budgets are adopted in accordance with State
statutes. Both houses of the legislature must pass the appropriation acts by a
simple majority vote. The appropriation acts become law upon the Governor's
signature, or 10 days after the end of the session if not signed by the
Governor.
For funds that are annually appropriated, the State's central
accounting and reporting system controls expenditures by appropriation
line-item. At no time can expenditures exceed appropriations, and financially
related legal compliance is assured. At fiscal year end, unexpended
appropriation balances may: (1) revert to unreserved fund equity balances and be
available for future appropriations; (2) be reappropriated as part of the
spending authority for the future year; or, (3) may be carried forward to
subsequent years as outstanding encumbrances with the approval of the Division
of Financial Management.
Revenues and Expenditures. Fiscal Year 1996. General Fund
revenue in fiscal year 1996 was $1,351.3 million. There was an additional $2.926
million due to carryover from the prior fiscal year. Fund transfers reduced
funds available by $2.652 million. Net General Funds available in fiscal year
1996 totaled
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$1,349.3 million. Total General Fund revenue growth was $64.2 million, or 5% in
fiscal year 1996. Strongest growth was in sales tax and income tax.
Expenditures in fiscal year 1996 consisted of $1,348.8 million in
original appropriations, plus $4.71 million in supplementals and
reappropriations, less $16.2 million in reversions and holdbacks. Net
expenditures in fiscal year 1996 were $1,337.6 million. An ending balance of
$11.7 million was carried over into fiscal year 1997.
In response to the major flood in northern Idaho in 1996, the
Governor issued Executive Order 96-04 that authorized transfers from the Budget
Reserve Fund and the Water Pollution Control Fund to meet the state and local
match requirement of federal grants. Subsequently, $1 million from each fund was
transferred. In addition, the Legislature authorized a $.04 per gallon increase
on the gasoline tax with the first $6 million to be used as match on
infrastructure reconstruction and repair. As of November 30, 1996, state revenue
for this fund was $3.88 million and the total expended was $3.48 million.
Fiscal Year 1997. Total funds available to the General Fund in
fiscal year 1997 are estimated to be $1,405.3 million. This consists of an
estimated $11.7 million carryover from fiscal year 1996, plus $4.99 million
transferred in from other funds and $1,374 million in base revenues, less $2.65
million in transfers to other funds. The Governor is recommending that the
Legislature give the State Board of Examiners the authority to transfer up to
$17.25 million from the Budget Reserve on June 30, 1997 in order to fund the
fiscal year 1997 holdback of funds for public schools. General Fund expenditures
and fund transfers authorized for fiscal year 1997 are $1,405.3 million. This
leaves no General Fund carryover in fiscal year 1998.
The revised fiscal year 1997 Executive revenue forecast of $1,374
million reflects 1.7% growth over fiscal year 1996. The revised base General
Fund revenue forecast for fiscal year 1997 consists primarily of sales and
income tax receipts. Product taxes account for a little over 1% of General Fund
revenues, and miscellaneous receipts account for approximately 5% of General
Fund revenues.
General Fund expenditures in fiscal year 1997 consist of $1,412.6
million in original appropriations, plus $2.25 million in reappropriations, less
$17.71 million in executive branch holdbacks, plus $8.13 million in net
supplementals. The executive holdback does not include the public schools, the
state treasurer, or the Catastrophic Health Care Program. The majority of
supplementals go toward privatization of medical services, additional inmate
housing costs, and juvenile offender private placement costs.
Fiscal Year 1998. The amount of total funds available to the
General Fund in fiscal year 1998 is estimated to be $1,449.6 million. This
consists entirely of General Fund revenue from individual income tax, sales tax,
corporate income tax, and miscellaneous revenue. General Fund expenditures
authorized for fiscal year 1998 are $1,448.8 million. This leaves an estimated
free-fund balance of $771,000 in the General Fund at the end of fiscal year
1998.
The original Executive revenue forecast of $1,449.6 million for
fiscal year 1998 reflects 5.5% growth over fiscal year 1997. General Fund
revenues consist primarily of sales tax generating 35.5% or $514.3 million of
total revenue and income tax representing 50.5% or $732.3 million. The net
growth rate for total General Fund revenue in fiscal year 1998 is 3.2%.
Expenditures in fiscal year 1998 consist of $1,382.7 million in
base spending plus $66.1 million in salary increases, inflation adjustments and
non-standard adjustments, replacement capital outlays, annualizations, and
enhancements. Above base increases in public school expenditures are the largest
item of increase, with $15.53 million provided as a lump sum. A state worker
salary increase of 2% accounts for $7.8 million of increase above the base.
Replacement capital outlay and related operating expenditures are $6.1 million
and enhancements are $41.8 million. Inflationary adjustments for transportation
and medical costs, annualizations and other nonstandard adjustments total $14.2
million.
Debt Administration and Limitation. The State has no
outstanding general obligation bond debt. By law, if the General Fund cash flow
shortages exist for more than 30 days, the State Treasurer must issue a tax
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anticipation note to correct the shortfall. The State Treasurer has issued
internal tax anticipation notes which are notes issued by the General Fund to
borrow monies from other available State funds or accounts. Internal tax
anticipation notes were not issued in fiscal years 1988 through 1994. In the
past ten fiscal years the State Treasurer has issued "External" tax anticipation
notes which were sold in the open market. All Notes issued by the State must
mature not later than the end of the then current fiscal year. Each Note when
duly issued and paid for will constitute a valid and binding obligation of the
State of Idaho. The faith and credit of the State of Idaho are solemnly pledged
for the payment of the Notes.
Series 1994 Notes. The State issued $200 million in Tax
Anticipation Notes ("TANs") on July 5, 1994, which mature on June 29, 1995. The
1994 Notes were issued in anticipation of the income and revenues and taxes to
be received by the General Fund during the fourth quarter of the 1995 fiscal
year. As required by law, all income and revenues from the taxes collected
during the fourth quarter of the 1995 fiscal year shall be deposited into the
Note Payment Account as received until the monies therein together with
investment earnings shall be sufficient to pay principal and interest on the
Notes at maturity. Sufficient monies to redeem the Series 1994 Notes with full
payment of interest at maturity have been deposited into the Note Payment
Account held by an escrow agent. These monies will be transferred to the paying
agent on June 29, 1995, for payment of the Series 1994 Notes.
Series 1995 Notes. The $200 million TANs are being issued to fund
the State's anticipated cash flow shortfalls during the fiscal year ending June
30, 1996. The 1996 fiscal year General Fund cash flow (before borrowing) is
estimated to have a negative balance at the end of the months of July through
March and May with the greatest ending month cash deficit estimated to be
$244,670,000 at the end of November. However, each month's mid-month cash
deficit is estimated to be greater than the end-of-the-month deficit balance.
This situation occurs because only approximately 20% of the month's revenues are
received during the same period. The majority of taxes are received during the
second half of the month because of statutorily established dates for tax
payments. A primary factor in the heavy percentage of first half expenditures
are the required dates for General Fund transfers to the public schools. The
greatest projected mid-month deficit for the 1996 fiscal year is $296,613,000
occurring on November 15, 1995. Moody's Investors Service and Standard and
Poor's corporation have assigned the 1995 Notes the rating of MIG-1 and SP-1+
respectively.
Factors Affecting Iowa Fund
General Economic Conditions. For Iowans, 1996 was a year of
continued but slow growth and economic consolidation following several years of
substantial growth. Iowa's seasonally adjusted unemployment rate increased from
3.8% in December 1996, to 3.6% in January 1997, according to a report released
by the Iowa Department of Employment Services (DES). The statewide jobless rate
was also reported at 3.6% in January 1996. The State's Department of Employment
Services measures the number of individuals in non-farm payroll jobs from state
unemployment tax records. In January 1997, 17,300 more Iowans were working at
payroll jobs than one year earlier. Of this increase, 14,800 was in services,
3,400 was in transportation, 2,400 in durable goods, and 900 in construction.
The retail trade sector, after years of expansion, decreased 1,500 from January
1996 to January 1997, indicating signs of leveling-off. Manufacturing as a whole
decreased 300 over the year. According to the Iowa Economic Forecasting Council,
payroll employment is expected to grow by 10,290, or .7% in 1997, and by another
11,520 or 0.8% in 1998.
During the late-1980's and early 1990's Iowa became a major
exporting state. Despite its inland location, Iowa has been a major supplier to
the world's markets for industrial machinery, instruments and measurement
devices, electronics, specialized transportation equipment, chemicals and
pharmaceuticals, processed food products, farm commodities and livestock. During
the years 1991-1993, the value of Iowa's factory exports increased a compounded
rate of 9% per year. In 1994, factory exports increased 17% to $3.4 billion
while farm exports fell to $2.4 billion. The drop in farm exports in 1994 was
tied to the flood in 1993 and the diminished size of the crop that went into
storage. Even though the circumstances were unique, the facts were clear:
factory exports surpassed farm exports for the first time in Iowa's history. In
1995, the export of factory goods accounted for $4.1 billion, or 51% of the $8.1
billion total exports from Iowa. For the first half of 1996, the value of
factory exports grew by 17% over the value exported during the same period in
1995. At this rate of growth, 1996 factory exports could grow to $4.7 billion
for the year.
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One of the issues addressed by the Governor and the General
Assembly during Fiscal Year 1995, was the increasing amount of property taxes
levied to support expenditures for mental health. Legislation was passed which
provides significant property tax relief through a process of managed care and
through increased State assistance which will ultimately finance 50% of the
mental health expenditures funded by property taxes. This legislation
established a new Mental Health/Developmental Disabilities Fund at the county
level and provided State appropriations for mental health property tax relief in
the amount of $61 million, $78 million and $95 million for fiscal years 1996,
1997, and 1998 respectively. The amount of property taxes that may be levied in
this fund is limited and the property taxes must be reduced dollar for dollar
for each dollar of mental health property tax relief the counties receive. In
addition to the $17 million increase already enacted, in January of 1997, the
Governor recommended the appropriation for fiscal year 1998 be increased $6.2
million, 2.89% of net expenditures, and an additional $6.5 million for fiscal
year 1999, to adjust for inflation.
The second item of property tax relief was the elimination of
property taxes on industrial machinery, equipment and computers acquired after
January 1, 1994, and a phase-out of the property taxes on existing industrial
machinery, equipment and computers. For fiscal years 1997 through 2006, county
auditors may file claims with the State for partial replacement of lost taxes.
For fiscal year 1998-99, the Governor proposed an across-the-board
reduction of personal income tax rates by 10%. This would allow Iowans to keep
an additional $200 million a year. The Governor proposed that, when passed in
the spring of 1997, tax rates be reduced to 5% retroactive to January 1, 1997,
with the remaining 5% effective January 1, 1998. The Governor also recommended a
15% income tax reduction for the Family Opportunity Plan unveiled in 1994.
Budgetary Process. The current statewide accounting system was
implemented in 1983 and has been periodically upgraded and modified. As part of
that implementation, and on an ongoing basis, emphasis has been placed on the
adequacy of internal and budgetary controls. Internal controls are in place to
provide reasonable, but not absolute, assurance that assets are safeguarded
against unauthorized use or disposition, and that financial records from all
appropriate sources are reliable for preparing financial statements and
maintaining accountability. All claims presented for payment must be certified
by the appropriate department that the expenditure is for a purpose intended by
law and a sufficient unexpended appropriation balance is available. The
automated statewide accounting system also performs various edits to assure
appropriation authorizations are not exceeded. For programs supported totally or
in part with federal or other funds, expenditures can not exceed the sum of
appropriations and additional dedicated revenue that is received. If dedicated
revenue is not received as expected, expenditures must be reduced in a like
manner.
Revenues and Expenditures. Most State operations are accounted for
through the following Governmental fund types: General, Special Revenue, and
Capital Projects. Total General Fund receipts for fiscal year 1996 were $4,404.5
million, a 6.03% increase from the prior year. Of this amount, $4,038.9 million
came from special taxes, with 49.5% from personal income tax and 30% from sales
tax. The Cash Reserve increased 5% from the previous fiscal year to $201.6
million. Total net refunds of taxes paid for fiscal year 1996 were $382.1
million.
Total General Fund appropriations for fiscal year 1996 were
$3,855.4 million. Approximately 41.4% or $1.6 billion was for education, and
18.9% or $727.7 million was for human services.
Total General Fund receipts for fiscal year 1997 are estimated at
$4,627 million, a 5% increase. Of this amount, $4,261.8 is predicted to come
from special taxes, with 49.5% from personal income tax and 29.9% from sales
tax. The cash reserve for fiscal year 1997 is estimated to increase 5% to $215
million. Total net refunds of taxes paid for fiscal year 1997 are estimated at
$387.9 million.
Total General Fund appropriations for fiscal year 1997 are
estimated at $4,134.7 million, a 7.2% increase from fiscal year 1996.
Approximately 43% is dedicated to education and 18.1% to human services. Ongoing
spending is about 8% less than total available revenue, leaving a $346 million
unspent general fund balance in fiscal year 1997, the largest in the nation.
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Debt Administration and Limitation. The Constitution of the State
of Iowa prohibits the State from exceeding a maximum of $250 thousand in general
obligation debt without voter approval. However, State law authorizes the
issuance of Tax and Revenue Anticipation Notes (TRANS), provided that the total
issuance does not exceed anticipated revenue receipts for the fiscal year and
that the total issuance matures during the fiscal year. For the first time in
the last ten years, it was not necessary this year for the State to issue TRANS.
Revenue bonds issued by various authorities of the State totaled
$1,255.9 million outstanding at fiscal year-end 1995. This amount consisted of
$7.8 million of internal service revenue bonds, $559.9 million of component unit
- - proprietary funds revenue bonds (housing and higher education), $519.1 million
in revenue bonds issued by the three State universities (for facilities), and
$106.5 million and $62.5 million in various bonds issued by the Iowa Finance
Authority for the Underground Storage Tank Program and the Department of
Corrections, respectively.
Certificates of Participation (COPS), issued by the State and
outstanding at fiscal year-end, amounted to $135.2 million. COPS represents an
ownership interest of the certificate holder in a lease purchase agreement.
Other financing arrangements payable, excluding COPS, totaled $3.8 million at
June 30, 1995. State agencies, including the universities, have also entered
into capital leases and installment purchase agreements for various purposes.
Total long-term capital leases and installment purchases outstanding on June 30,
1995, was $38.2 million.
Since the State of Iowa does not have G.O. debt, it does not
have S&P, Moody's or Fitch ratings.
Factors Affecting Kansas Fund
General Economic Conditions. Kansas is the 14th largest state in
terms of size with an area in excess of 82,000 square miles. It is rectangular
in shape and is 411 miles long from east to west and 208 miles wide. The
geographic center of the 48 contiguous states lies within its borders. Kansas
became the 34th state in 1861 and Topeka was chosen to be the capitol later that
year. The population of the State of Kansas has grown from 2,477,588 in 1990 to
2,554,047 in 1994. This represents a percentage increase of 3.1%. In comparison,
the growth in population of the United States was 4.7%.
In 1996, jobs across Kansas were up 2.3%, for a net increase of
27,100 new jobs. There was a 3.8% growth rate from October 1995 to October 1996.
National job growth for the same period was 2.1%. Total non-farm employment as
of October 1996 was 1,233,200. This was 19,000 higher than the previous year.
Trade led growth with the addition of 8,700 new jobs. Manufacturing employment
rose by 4,600 over the year, primarily from increased production of aircraft and
parts. More business in special trade contracting and heavy construction added
3,600 construction jobs during the year. Services employment rose by 2,300, with
substantial increases in social, management, and business services.
Transportation-utilities added 2,100 jobs, primarily from growth in
communications firms. Gains in banking and insurance provided most of the 1,500
new jobs in the finance division. Mining edged up only 100 over the year.
Government had the only decrease, down 3,900 from October 1995.
During 1995 and 1996, the Kansas unemployment rate decreased from
4.4% to an estimated 3.9%, respectively. This compares favorably with a national
unemployment rate in 1995 and 1996 of 5.6% and an estimated 5.4%, respectively.
Budgetary Process. The Governor is statutorily mandated to present
spending recommendations to the Legislature. "The Governor's Budget Report"
reflects expenditures for both the current and upcoming fiscal years and
identifies the sources of financing for those expenditures. The Legislature uses
"The Governor's Budget Report" as a guide as it appropriates the money necessary
for state agencies to operate. Only the Legislature can authorize expenditures
by the State of Kansas. The Governor recommends spending levels, while the
Legislature chooses whether to accept or modify those recommendations. The
Governor may veto legislative appropriations, although the Legislature may
override any veto by two-thirds majority vote.
The state "fiscal year" runs from July 1 to the following June 30
and is numbered for the calendar year in which it ends. The "current fiscal
year" is the one which ends the coming June. The "actual fiscal year"
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is the year which concluded the previous June. The "budget year" refers to the
next fiscal year, which begins the July following the Legislature's adjournment.
In "The FY 1997 Governor's Budget Report," the actual fiscal year is fiscal year
1995, the current fiscal year is fiscal year 1996, and the budget year is fiscal
year 1997. By law, "The Governor's Budget Report" must reflect actual year
spending, the Governor's revised spending recommendations for the current fiscal
year, state agency spending requests for the budget year, and the Governor's
spending recommendations for the budget year. The budget recommendations cannot
include the expenditure of anticipated income attributable to proposed
legislation.
Revenues and Expenditures. The State General Fund is the largest of
the "uncommitted" revenue sources available to the state. It is also the fund to
which most general tax receipts are credited. The Legislature may spend State
General Fund dollars for any purpose. All revenues coming into the state
treasury not specifically authorized by statute or the constitution to be placed
in a separate fund are deposited in the State General Fund.
Fiscal Year 1996. The Governor's fiscal year 1996 budget
recommendations total $7.9 billion from all funding sources and approximately
$3.47 billion from the State General Fund. The budget includes a total of
44,697.9 state employees, a reduction of 118.7 from the amount approved by the
1995 Legislature. These recommendations reflect significant changes to the
budget approved by the 1995 Legislature. In September 1995, the Governor
announced the need for a 1.5% across-the-board reduction to the budgets of most
agencies funded through the State General Fund. This action was necessary
because of a shortfall of approximately $25 million in estimated fiscal year
1995 receipts and resulting downward revisions to the consensus revenue estimate
made for fiscal year 1996. In addition to the 1.5% reduction, significant
savings were available in agency budgets because of a reduction in the funding
requirements for group health insurance rates for state employees and in the
funding necessary for the state share of local option school budgets. In total,
these adjustments allow the Governor to recommend a budget which maintains the
targeted 7.5% ending balance for fiscal year 1996 while providing only necessary
supplemental appropriations to maintain commitments to higher education and
public schools. In addition, the Governor directed all agencies under his
supervision to reduce their workforce by 2% in fiscal year 1996 through
attrition and retirements. The salary savings attributable to those reductions
will be identified at the end of the fiscal year.
Fiscal Year 1997. The fiscal year 1997 budget recommendations
include all funding source expenditures of $7.8 billion, a reduction of almost
$100 million from fiscal year 1996. The largest single source of fiscal year
1997 receipts is the State General Fund, with 46.6% of the total receipts.
Individual income taxes account for the largest source of State General Fund
revenue, totaling $1.410 billion (39.9%) in fiscal year 1997. The next largest
category, sales and use taxes, is projected to generate $1.392 billion (39.5%)
for the State General Fund during fiscal year 1997. State General Fund
expenditure recommendations for fiscal year 1997 are $3.52 billion, an increase
of 1.4%. The Governor recommends that $1,923.7 million, or 54.6% of State
General Fund expenditures be used for aid to local units of government.
Federal grants represent 21.9% of total receipts from all funding
sources, with 42 state agencies receiving $1.7 billion in fiscal year 1997. Of
the $1.7 billion, 50.4% will go to the Department of Social and Rehabilitation
Services. This is followed by the Department of Transportation, 15.4%, the
Department of Education, 12%, the Regents institutions, 5.8%, and the Department
of Health and Environment, 4.3%. The remaining 12.1% is distributed to 29 other
agencies. Agency service charges include revenues received for services provided
by state agencies. This includes charges for inspections, examinations, and
audits; fees collected for tuition and fees at the Regents institutions; and
admissions to the Kansas State Fair. This revenue category represents 6.6% of
total receipts for fiscal year 1997.
Dedicated sales tax receipts represent revenues from four taxes
that are collected for a specific purpose and are deposited in special revenue
funds, rather than the State General Fund. Taxes on motor fuels and vehicle
registrations as well as a dedicated sales tax of one-quarter of a cent are
credited to the State Highway Fund. A statewide property tax of 1.5 mills is
assessed for construction and maintenance of state buildings at Regents
institutions and state hospitals. This revenue category represents 5.1% of total
receipts for fiscal year 1997.
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Other special revenue receipts include license fees, interest
earnings on special revenue funds, non-federal grants, the sale of state
property, and numerous other miscellaneous revenue sources. This revenue
category represents 8.9% of total receipts for fiscal year 1997. Non revenue
receipts are collections and reimbursements not considered revenue. Examples
include collections by the Department of Human Resources for the payment of
unemployment benefits and collections by KPERS for payment of retirement
benefits. Collections made by SRS from absent parents for child support are also
included in this category. This category represents 8.5% of total receipts for
fiscal year 1997. Lottery ticket sales account for the remaining 2.4% of total
receipts for fiscal year 1997 from all funding sources.
It was clear from the beginning of the fiscal year 1997 budget
process that the revenues available to state government could not support
continuation of existing levels of service for all agencies. A variety of
factors contributed to the austerity of the fiscal year 1997 budget. First and
most important, for the past two fiscal years, the State General Fund ending
balance was significantly above the 7.5% ending balance target, allowing
expenditures to exceed receipts in both fiscal years 1995 and 1996. In simple
terms, fiscal year 1997 cannot exceed receipts while complying with the ending
balance requirements. The expenditures in fiscal year exceeded receipts by
$106.6 million. In effect, the first claim on projected increases in State
General Fund receipts for fiscal year 1997 will be to correct this imbalance.
Second, a variety of factors required significant additional funding for the
school finance formula including enrollment growth, the second year of increased
aid requirements to offset motor vehicle tax reductions passed by the 1995
Legislature, the remainder of the Real Estate Settlement Procedures Act (RESPA)
adjustment, and growth in capital improvement aid. In addition, growth in inmate
populations required additional staff and funding for correctional institutions.
Further, caseload and cost increases in various populations served by SRS
seriously affected the fiscal year 1997 budget.
Debt Administration and Limitation. The State of Kansas finances a
portion of its capital expenditures with various debt instruments. Of capital
expenditures that are debt-financed, revenue bonds and loans from the Pooled
Money Investment Board finance most capital improvements for buildings, and
certificates of participation and "third-party" financing pay for most capital
equipment. The Kansas Constitution makes provision for the issuance of general
obligation bonds subject to certain restrictions; however, no bonds have been
issued under this provision for may years. No other provision of the
Constitution or state statute limits the amount of debt that can be issued. As
of June 30, 1995, the state had authorized but unissued debt of $27,230,000.
Although, the state has no General Obligation debt rating, it seeks
an underlying rating on specific issues of at least "AA-" from Standard & Poor's
and "A1" from Moodys. The ratings for the most recently issued fixed rate bonds
issued by the Kansas Department of Transportation were "Aa" and "AA" from Moody
and Standard & Poor's respectively. The Kansas Development Finance Authority is
currently working with the rating agencies to obtain a rating indicator for the
State of Kansas.
The Kansas Department of Transportation issues debt to finance
highway projects. The Comprehensive Highway Program began during fiscal year
1989. The 20-year bonds will be retired with motor fuel taxes, motor vehicle
registration fees, retail sales and compensating use taxes, and accrued
interest. During fiscal years 1994 and 1995, the state sold bonds totaling
approximately $151 million and $167.1 million. respectively. Again, the largest
use of the bond proceeds was $125 million and $140 million for the Comprehensive
Highway Program for these two years, respectively.
Other State of Kansas debt is issued by the Kansas Development
Finance Authority (KDFA), an independent instrumentality of the state which was
created in 1987 for this purpose. The Governor's budget recommendations for
Regents institutions are a significant departure from the traditional way
revenues from the Educational Building Fund (EBF) have been used for
construction projects at the state's universities. Based on concerns for the
aging buildings on the state's campuses, the Governor recommends that KDFA issue
bonds in fiscal year 1997 in the amount of $156.5 million to address a wide
variety of rehabilitation and repair projects at the universities. With interest
earnings, the total project costs would be an estimated $163.6 million. Debt
service over the 15-year period will total $228.4 million, with each year's debt
service payment over the next 15 years totaling $15 million. No project paid
with bond proceeds will have a life-expectancy of less than 20 years, so as to
"keep ahead" of the bonded indebtedness. Because the current cost of borrowing
money is less than the
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projected cost of inflation for construction, it is more cost-effective to
perform the repairs now and leverage the EBF, rather than incurring higher
annual repair costs in the future. Rehabilitation and repair projects at the
campuses include compliance with the Americans with Disability Act Accessibility
Guidelines and life safety codes, energy conservation projects, and improvements
to classrooms, in addition to the typical repairs made to aging buildings.
Bonds totaling $4.4 million were issued by KDFA in November 1990 to
begin Energy Conservation Improvements Program authorized by the 1990
Legislature. The bonds are retired by utility cost savings from the energy
conservation improvements undertaken. Projects financed with the bond proceeds
consist of improvements at many of the state universities, the Department of
Administration, the Department of Social and Rehabilitation Services, the
Highway Patrol, and the Department of Corrections. An amount of $5,000 was
appropriated from the State General Fund to the Department of Administration,
the paying agent, for fiscal year 1992 to begin retirement of the debt service.
The second series of bonds, issued in June 1992, totaled $3.6 million. On
October 1, 1993, a third series of bonds totaling $4,370,000 under the Energy
Conservation Improvements Program was issued. In August 1995, the fourth series
of bond, totaling $2,734,000 was issued. For fiscal year 1997, the debt service
totals $1,785,007 from the State General Fund, $1,340,000 for principal and
$445,007 for interest. To date, $15.1 million in bonds has been issued by the
Kansas Development Finance Authority for these projects. A fifth bond issue
estimated to total $4.8 million is scheduled for early 1996.
Factors Affecting Minnesota Funds
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1996. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. In 1995, Minnesota's per capita personal income exceeded the
national average by 3%. The State's annual unemployment rate has been less than
the national unemployment rate every year since 1985. In 1995 and 1996, the
Minnesota unemployment rate was 3.7% and 3.6%, respectively, compared to rates
of 5.6% and 5.4%, respectively, for the nation.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve, imposing
a sales tax on purchases by local governmental units, and making other budgetary
adjustment. The Minnesota Department of Finance November 1996 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1997 with a $502.4 million budgetary balance, which consists of a $350
million cash flow account balance, plus a $261 million budget reserve. Total
General Fund expenditures and transfers for the biennium are projected to be
$18.8 billion. State expenditures for education finance (K-12), post-secondary
education, and human services in the biennium ending June 30, 1997 are not
anticipated to be sufficient to maintain program levels of the previous
biennium. The State is party to a variety of civil actions that could adversely
affect the State's General Fund. In addition, substantial portions of State and
local revenues are derived from federal expenditures, and reductions in federal
aid to the State and its political subdivisions and other federal spending cuts
may have substantial adverse effects on the economic and fiscal condition of the
State and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than those
reflected in State budget forecasts and planning estimates may create additional
budgetary pressures.
National economic growth for the remainder of the decade is
predicted to generate a corresponding growth in state revenues without
increasing tax rates. Minnesota's revenues are expected to grow by $1.4 billion,
7.4% in the 1998-99 biennium, and 8.1% in the following biennium. Since the
state forecast is based on
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a strong 2.4% annual growth rate, a return to a more moderate growth rate,
similar to the 2.0% rate of growth in 1995, would materially reduce forecast
revenues.
The state's budget reserve for the 1998-99 biennium is doubled to
$522 million (an increase from $261 million in fiscal year 1997) or 5% of fiscal
year 1999 spending to protect against economic uncertainty.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Tax Exempt Obligations that are held by a Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in
federal and State income tax laws, including rate reductions, could adversely
affect the value and marketability of Minnesota Municipal Tax Exempt Obligations
that are held by a Fund. See "Distributions to Shareholders and Taxes; Minnesota
State Taxation" in the Prospectus.
The state issued $439.6 million of new general obligation bonds,
and $170.6 million of general obligation bonds were redeemed during 1996,
leaving an outstanding balance of $2.2 billion. General obligation bonds
authorized but unissued as of June 30, 1996 were $1.101 billion.
The most recent ratings applicable to General Obligation bonds
issued by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+" by S&P
and "AAA" by Fitch Investors Service.
Factors Affecting Missouri Fund
General Economic Conditions. Missouri was organized as a territory
in 1812 and was admitted to the Union as the 24th state on August 10, 1821. The
State ranks 19th in size with a total area of approximately 69,697 square miles.
Missouri is a central mid-western state located near the geographic center of
the United States. Bordered by Iowa on the north, Arkansas on the south,
Illinois, Kentucky and Tennessee across the Mississippi River on the east, and
Nebraska, Kansas and Oklahoma on the west, Missouri is one of only two states
which shares it boundaries with as many as eight states.
As a major manufacturing, financial, and agricultural state,
Missouri's economic health is tied closely to that of the nation. The economic
outlook is for continued improvement in fiscal year 1997. Missouri's personal
income, which directly impacts individual income tax and sales tax, rose at a
5.4% rate during fiscal year 1996. The Missouri economy has produced exceptional
job growth over the past three years. Missouri's employment stood at 2,768,620
as of November 1996, an increase of 13% or 300,000 since January of 1993. At the
end of November 1996, the state unemployment rate was 4.0% which compares
favorably to the national unemployment rate of 5.0%. The preliminary 1996
average unemployment rate for Minnesota is 4.1% and for the U.S., 5.4%.
Budgetary Process. Annually, all State agencies submit budget
requests for the following appropriation year to the Division of Budget and
Planning of the Office of Administration. The Division Budget and Planning
prepares the Executive Budget and an estimate of general revenues. The Executive
Budget contains the budget amount which is recommended and submitted to the
General Assembly by the Governor within thirty days after the General Assembly
convenes in each regular session.
The General Assembly appropriates money after consideration of both
the Executive Budget and the revenue estimate. The legislative appropriations
are subject to the Governor's approval or veto, except for the funding of public
debt and public education which the Governor is prohibited by the Constitution
of Missouri from vetoing. The Governor may control the rate at which an
appropriation is expended by allotment or other means and may limit the
expenditures for any State agencies below their appropriations, whenever actual
revenues are less than the revenue estimated upon which the appropriations were
based. The Governor has line-item veto power, except for appropriations for
public debt and public education.
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Revenues and Expenditures. Balancing Missouri's budget in fiscal
year 1996 was achieved through sound financial management. The growing economy
produced general revenues that were better than projected. The Governor and
General Assembly adopted a conservative State budget meeting mandated
expenditure increases and providing limited funding for new and expanded
program. In future years, Missouri will focus on controlling the growth of
mandatory programs though welfare reform, managed care, and cost-effective
alternatives. Major funding priorities include education, corrections, economic
development, mental health, children's services, and repairs and upgrades to
existing state facilities.
The State of Missouri completed fiscal year 1996 in excellent
financial condition due to strong revenue collections and efficient management
of State programs. Net general revenue collections increased over fiscal year
1995 due to a strong national and state economy. Expenditures were lower than
anticipated in fiscal year 1996 as prudent state agency managers did not use all
available spending authority. General revenue collections in fiscal year 1996
were $5,442 million, 7.5% above fiscal year 1995 collections. General Revenue
expenditures in fiscal year 1996 for the operating budget were $5,287.5 million.
The fiscal year 1997 budget is conservatively based upon general revenue
collections of $5,753.2 million.
Final calculations made pursuant to Article X of the Missouri
Constitution show that total state revenues for Fiscal Year 1996 exceeded the
total state revenue limit by $229.1 million. Therefore, in accordance with
Article X, the entire amount of excess revenues will be refunded to Missouri
income taxpayers in calendar year 1998. Litigation has delayed the refund of
$147.2 million triggered in Fiscal Year 1995. The Office of Administration
projects that total state revenues will exceed the total state revenue limit by
approximately $155 million in Fiscal Year 1997.
The State ended fiscal year 1996 with an ending balance (surplus)
of $335.4 million for the General Revenue Fund. The unreserved fund balance of
the General Fund improved due to revenue collection which were slightly better
than projections. The ending General Fund balance for fiscal year 1997 is
projected at $132.8 million.
Federal court-ordered payments for the St. Louis and Kansas City
desegregation plans were $289.6 million in fiscal year 1996 which is about 4.9%
of the State's general revenue budget. The estimate for fiscal year 1997 is
$257.9 million. Desegregation expenditures, court orders, and other developments
are continually monitored to provide the best possible anticipation and forecast
of future costs.
Debt Administration and Limitation. Pursuant to the Missouri State
Constitution, the General Assembly may issue general obligation bonds solely for
the purpose of (1) refunding outstanding bonds; or, (2) upon the recommendation
of the Governor, for a temporary liability by reason of unforeseen emergency or
of deficiency in revenue in an amount not to exceed $1 million for any one year
and to be paid in not more than five years or as otherwise specifically
provided. When the liability exceeds $1 million, the General Assembly, or the
people by initiative, may submit the proposition to incur indebtedness to the
voters of the State, and the bonds may be issued if approved by a majority of
those voting. Before any bonds so authorized are issued, the General Assembly
shall make adequate provisions for the payment of the principal and interest and
shall provide for an annual tax on all taxable property in an amount sufficient
for that purpose.
The State has had a clear debt payment record since 1869 when it
arranged for payment of railroad bond interest which had been in default from
1861 to 1867. Missouri did no other significant borrowing until 1922, after
which the debt climbed to $124,700,000 in 1936. Thereafter, the State's debt
declined through 1956. In 1956, the voters approved a constitutional amendment
authorizing $75 million principal amount of bonds for the purpose of repairing
existing buildings or constructing new buildings at the State's correctional
institutions, the State training schools, State hospitals and State schools and
other eleemosynary institutions and institutions of higher education. Missouri
voters have, subsequently, approved constitutional amendments providing for the
issuance of general obligation bonds used for a number of purposes.
The amount of general obligation debt that can be issued by the
State is limited to the amount approved by popular vote plus the amount of $1
million. The State's debt limits at June 30, 1995, was $1,476,000,000 of which
$396,505 was unissued. The general obligation debt position of the State at June
30,
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1995 was: general obligation bonded debt (net of amount available in
governmental funds), $896,935,000; and, Debt per capita, $169.30. During fiscal
year 1995, $33,690,000 of the bonds were retired and $105 billion new bonds were
issued. At year end, the total general obligation debt outstanding was
$933,745,000. The interest rate range was .05-9.25%.
As of January 1, 1997, $198,620,000 principal remains outstanding
of the $200,000,000 issued fourth state building bonds (approved in August
1994); and $137,315,000 principal remains outstanding of the $439,494,240 issued
water pollution control bonds (both amounts excluding refunding issuances). With
the final $75 million issuance on December 1, 1987, all $600 million in third
state building bonds authorized by Missouri voters in 1982 were issued.
In fiscal year 1996 Missouri invested a total of $339.6 million in
its capital assets with appropriations for maintenance and construction projects
throughout the State. Appropriations for fiscal year 1997 are estimated at
$257.5 million. Capital improvements of $521.7 million are recommended for
fiscal years 1998-99 biennial budget. Of this amount, $60.5 million is for vital
maintenance and repairs to state-owned facilities to initiate the voter-approved
maintenance funding mechanism, including $15.3 million to be transferred to the
facilities maintenance reserve fund. Also included is $461.2 million for
planning, major renovation, new construction, land acquisition, and other
improvements. Amounts are designated to prison construction, projects at
elementary and secondary education institutions, and facilities for veterans.
The State's general obligation bond issues received triple "A"
ratings from Moody's Investors Service, Inc., Standard & Poor's Rating Group,
and Fitch Investors Service, Inc.
Factors Affecting New Mexico Fund
General Economic Conditions. The State of New Mexico, admitted as
the forty-seventh state on January 6, 1912, is the fifth largest state,
containing approximately 121,593 square miles. The State's climate is
characterized by sunshine and warm bright skies in both winter and summer. New
Mexico has a semiarid subtropical climate with light precipitation. At the time
of the official 1990 United States Census, the State's population was 1,515,069.
In 1995, the population had increased to 1,685,401, or 11.2% since 1990.
Major industries in the State are energy resources, tourism,
services, construction, trade, agriculture-agribusiness, government,
manufacturing, and mining. In 1994, the value of energy resources production
(crude petroleum, natural gas, uranium, and coal) was approximately $5.05
billion. From 1994-95, the value of construction contracts increased $3.12
billion. Major federally funded scientific research facilities at Los Alamos,
Albuquerque and White Sands are also a notable part of the State's economy.
The State has a thriving tourist industry. In 1994, there were
approximately 2.29 million visits to national parks and about 4.9 million visits
to State parks, in the State. According to a 1991 estimate by the U.S. Travel
Data Center, the State's tourist industry generated about $2.3 billion in
revenue and more than 38,370 jobs. However, 1995 was a slower year for tourism
and travel in New Mexico. Total gross receipts for hotels and other lodging
places dropped 1.4%, compared with a 5.6% gain in 1994. Air travel was also down
0.4%. In addition, visits to New Mexico's national parks and monuments, affected
partly by federal government shutdowns in the fall and winter, dropped 1.7%. One
of the State's most famous attractions is Carlsbad Cavern, which was made a
national monument in 1923 and designated a national park in 1930.
Agriculture is a major part of the State's economy, producing
$1.521 billion in 1995. As a high, relatively dry region with extensive
grasslands, the State is ideal for raising cattle, sheep, and other livestock.
Because of irrigation and a variety of climatic conditions, the State's farmers
are able to produce a diverse assortment of quality products. The State's
farmers are major producers of alfalfa hay, wheat, chile peppers, cotton, fruits
and pecans. Agricultural businesses include chile canneries, wineries, alfalfa
pellets, chemical and fertilizer plants, farm machinery, feed lots, and
commercial slaughter plants.
Budgetary Process. The State's government consists of the
three branches characteristic of the American political system: executive,
legislative and judicial. The executive branch is headed by the Governor who is
elected for a four-year term and may succeed him(her)self in office once.
Following a reorganization
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plan implemented in 1978 to reduce and consolidate some 390 agencies, boards and
commissions, the primary functions of the executive branch are now carried out
by sixteen cabinet departments, each headed by a cabinet secretary appointed by
the Governor.
The Board, in addition to other powers and duties provided by law,
has general supervisory authority over the fiscal affairs of the State and over
the safekeeping and depositing of all money and securities belonging to, or in
the custody of, the State. The Board has seven members consisting of the
Governor, the Lieutenant Governor, the Treasurer and four members appointed by
the Governor with the advice and consent of the Senate; no more than two such
appointed members may be from the same political party.
The Department of Finance and Administration, created in 1957 as
part of governmental reorganization measures of that year, is the principal
financial organization of State government and performs through its divisions
the duties and functions relating to State and local government financing and
general administration. On July 1, 1983, the Department of Finance and
Administration was reorganized into the DFA, which retained the prior name and
handles the State's financial functions, and the General Services Department,
which now handles the administrative functions. The executive and administrative
head of the DFA is the Secretary, who is appointed by the Governor with the
advice and consent of the Senate, and who also serves as Executive Officer of
the Board. In 1983, a Board of Finance Division was created in the DFA, to staff
and coordinate the functions of the Board.
The Legislature convenes in regular session annually on the third
Tuesday in January. Regular sessions are constitutionally limited in length to
sixty calendar days in odd-numbered years and thirty calendar days in
even-numbered years. In addition, special sessions of the Legislature may be
convened by the Governor under certain limited circumstances.
All State agencies are required to submit their budget requests to
the Budget Division of the DFA by September 1 of each year. Budget hearings are
scheduled for the purpose of examining the merits of budget requests through the
fall and are usually completed by the middle of December. Statutes require the
Budget Division to present comprehensive budget recommendations to the Governor
annually by January 2.
By statute, the Governor is required to submit a budget for the
upcoming fiscal year to the Legislature by the 25th legislative day. The State
budget is contained in a General Appropriation Bill which is first referred to
the House Appropriations and Finance Committee for consideration. The General
Appropriation Act may also contain proposals for supplemental and deficiency
appropriations for the current fiscal year. The Senate and the Senate Finance
Committee consider the General Appropriation Act after its approval by the House
of Representatives. Upon Senate passage, the Governor may sign the General
Appropriation Act, veto it, veto line items or veto parts of it. After the
Governor has signed the General Appropriation Act, the Budget Division of the
DFA approves the agency budgets and monitors the expenditure of the funds
beginning on July 1, the fist day of the fiscal year.
Revenues and Expenditures. The State derives the bulk of its
recurring General Fund revenues from five major sources: general and selective
sales taxes, income taxes, the emergency school tax on oil and gas production,
rents and royalties from State and federal land, and interest earnings from its
two Permanent Funds. Effective July 1, 1981, the Legislature abolished all
property taxes for State operating purposes.
Declines in oil and gas prices and in gas production have
contributed to a major restructuring of the State's tax base by the 1986, 1987,
1988, 1990, and 1993 Legislatures. Sales and income taxes were increased to
offset declines in severance tax and royalty revenue. However, economic growth
in 1993 and 1994 was substantially greater than expected and large surpluses
became available. The 1994 Legislature rolled back approximately one-half of the
1993 increases.
Fiscal Year 1995-1996. For the Fiscal Year ending June 30, 1996,
recurring revenue totaled $2.809 billion, an increase of 6.3% over the previous
fiscal year. Total General Fund Revenue was $2.757 billion, up 4.9% from fiscal
year 1995. The fiscal year 1996 revenue was below a December 1995 estimate by
approximately $2 million, or 0.1%. In general, weakness in broad-based taxes was
offset by strength in revenue
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related to the production of natural gas and crude oil. Strength relative to the
estimate was also evident for interest earnings, miscellaneous receipts and
reversions.
Preliminary results for fiscal year 1996 show recurring
appropriations at $2.77 billion, up 5.7% from the previous fiscal year.
Nonrecurring appropriations for fiscal year 1996 were $22 million, down 76% from
fiscal year 1995. The net transfer necessary from the operating reserve is $19.4
million and is within the $30 million transfer authority authorized by the 1996
legislature.
The 1996 legislature also established the risk reserve fund within
the general fund. General fund balances including the risk reserve fund are
projected to total $144 million. Without the risk reserve, balances would be
$28.1 million. The fiscal year 1996 balance in the operating reserve is $21.6
million, or only 0.8% of fiscal year 1996 total revenue.
Disaster allotments from the appropriation contingency fund totaled
over $5.4 million, primarily due to the drought and the severe wildfires
experienced during 1996 and the ending balance in the appropriation contingency
fund is $500,000 due to a reversion.
Fiscal Year 1996-1997. For fiscal year 1997, the Governor proposed
a budget which took into consideration spending requirements in Medicaid (an
18.2% increase, or $30.9 million) and in the criminal justice system (a 5.7%
increase, or $6.9 million), and placed a high priority on public school funding
(a 2.0% increase, or $26.2 million).
Estimated results for fiscal year 1997 show general fund total
receipts of $2.995 billion and recurring appropriations of $2.862 billion with
expenditures totaling $2.96 billion. The estimated fiscal year 1997 total ending
balance is $175 million, an increase of 23% over the preliminary 1996 results of
$144 million.
Debt Administration. The principal sources of funding for capital
projects by the State are surplus general fund balances, general obligation
bonds, and Severance Tax Bonds. Total funding of such capital projects for the
period 1983 to 1985 ranged from $170 million to $210 million per year. For the
period 1986 to 1990, capital appropriations were approximately $100 million per
year (except in 1987 when fund dropped to $57 million). The 1994 Legislature
authorized the largest capital program in the State's history, $383 million.
These authorizations fund a broad range of State and local capital needs for
various public school and higher education acquisitions as well as correction
facilities, museum and cultural facilities, health facilities, State building
repairs, water rights, wastewater and water systems, State parks, local roads,
and senior citizens facilities projects.
General Obligation Bonds. General obligation bonds of the State are
issued and the proceeds thereof appropriated to various purposes pursuant to an
act of the Legislature of the State. The State Constitution requires that any
law which authorizes general obligation debt of the State shall provide for an
annual tax levy sufficient to pay the interest and to provide a sinking fund to
pay the principal of the debts. General obligation bonds are general obligations
of the State for the payment of which the full faith and credit of the State are
pledged. The general obligation bonds are payable from "ad valorem" taxes levied
without limit as to rate or amount on all property in the State subject to
taxation for State purposes. For the fiscal year ended June 30, 1996, the total
amount outstanding on General Obligation Bonds was $193,660,867. Of this amount,
$31,325,867 is in interest.
The State of New Mexico General Obligation Capital Projects
Improvements Bonds Series 1995 in the principal amount of $66,265,000 are
authorized by the 1994 Capital Projects General Obligation Bond Act (the "Act")
passed by the State Legislature in 1994, have been approved by the voters in a
statewide election in November 1994 and will be issued pursuant to a resolution
of the State Board of Finance adopted on March 7, 1995. The proceeds of the
general obligation bonds will be used to pay the expenses incurred in the
preparation and sale of the general obligation bonds and to provide for certain
capital expenditures described in the Act. Proceeds will be distributed for the
following amounts and purposes: $3,674,732, certain senior citizen facility
improvements, equipment and vehicles; $59,851,200, certain State public
educational capital improvements and acquisitions; and, $2,500,000 for public
library acquisitions.
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Severance Tax Bonds. Severance Tax Bonds are not general
obligations of the State and the State is prohibited by law from using the
proceeds of property taxes as a source of payment of revenue bonds, including
Severance Tax Bonds. The State Treasurer keeps separate accounts for all money
collected as Severance Taxes, and is directed by State statute to pay Severance
Tax Bonds from monies on deposit in the Bonding Fund. Most of the 1994
authorizations were issued in a $16.8 million sale in 1994 to the New Mexico
State Treasurer and $92.1 million in a bond sale in August, 1994. For the fiscal
year ended June 30, 1996, the total amount outstanding on Severance Tax Bonds
was $454,065,280. Of this amount, $80,896,280 is in interest.
The Severance Tax Bonds, Series 1995A funds 55 projects for
schools, local governments, universities, and State agencies, including $1
million for University of New Mexico medical equipment; $525,000 for Department
of Health laboratories; $400,000 for an overpass in Albuquerque; $800,000 for a
local water system; and, $250,000 for a wastewater treatment plant in Anthony,
New Mexico. Following the issuance of the Severance Tax Bonds, Series 1995A,
Severance Tax Bonds in the principal amount of $8.1 million remain authorized
but unissued (including pre-1994 legislative authorizations). Total amount of
principal and interest due on Series 1995-B and Series 1996-A as of June 30,
1996 is $73,744,836 and $48,171,364, respectively.
Severance taxes have been collected by the State since the adoption
of the Severance Tax Act in 1937. Since 1959, certain severance tax receipts and
certain other monies determined by the Legislature have been deposited into the
Bonding Fund and used, in part, to retire bond issues which have funded a
variety of capital improvements in the State. The principle minerals extracted
from the State which contribute the largest portion of Severance Tax revenues
are natural gas, oil and coal. Severance Tax Collections on these three mineral
resources produced 98% of total fiscal year 1993-1994 Severance Tax Bonding Fund
tax collections. Severance Taxes from natural gas and oil together represent
approximately 80% of total fiscal year 1993-1994 Bonding Fund tax receipt.
Severance tax collections totaled $143 million in fiscal year 1996.
Moody's and S&P have assigned the bond ratings of "Aa1" and "AA+,"
respectively to General Obligation Bonds and "Aa" and "AA," respectively, to the
Severance Tax Bonds, Series 1995A.
Factors Affecting New York Fund
The following information is a brief summary of New York State and
New York City factors affecting the Fund and does not purport to be a complete
description of such factors. As described above, except during temporary
defensive periods, the Fund will invest at least 80% of the value of its net
assets in Tax-Exempt Obligations, the interest on which is exempt from federal
income, New York State and New York City personal income tax (except for New
York State and New York City franchise tax on corporations and financial
institutions, which is measured by income). Therefore, the financial condition
of New York State, its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of the Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. Further, New
York State and New York City face numerous forms of litigation seeking
significant damages which, if awarded, could adversely affect the financial
situation of New York State or New York City or issuers located in New York
State. It should be noted that the creditworthiness of obligations issued by
local issuers (including New York City) may be unrelated to the creditworthiness
of New York State, and that there is no obligation on the part of New York State
to make payment on such local obligations in the event of default in the absence
of a specific guarantee or pledge provided by New York State.
Bond ratings received on New York State's and New York City's
general obligation bonds are discussed below. Moody's Investors Service, Inc.
("Moody's") and/or Standard & Poor's Ratings Services ("S&P") provide an
assessment/rating of the creditworthiness of an obligor. The debt rating is not
a recommendation to purchase, sell, or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular investor. The ratings
are based on current information furnished by the issuer or obtained by the
rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time
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or that they will not be revised or withdrawn entirely by any such rating
agencies, if in their respective judgments, circumstances so warrant. The
ratings are based, in varying degrees, on the following considerations:
(1) Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
(2) Nature of, and provisions of, the obligation.
(3) Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other arrangement(s)
under the laws of bankruptcy and other laws affecting creditors rights.
A revision or withdrawal of any such credit rating could have an
effect on the market price of the related debt obligations. An explanation of
the significance and status of such credit ratings may be obtained from the
rating agencies furnishing the same. In addition, a description of Moody's and
S&P's bond ratings is set forth in Appendix A hereto.
The following information provides only a brief summary of the
complex factors affecting the financial situation in New York State and New York
City, is derived from sources that are generally available to investors and is
believed to be accurate. It is based on information drawn from the Annual
Information Statement of the State of New York dated June 23, 1995 and updates
thereto issued on July 28, 1995 and October 26, 1995, and from other
official statements and prospectuses issued by, and other information reported
by, the State of New York (the "State"), by its various public bodies (the
"Agencies"), and other entities located within the State, including the City of
New York (the "City"), in connection with the issuance of their respective
securities.
THE FUND MAKES NO REPRESENTATION OR WARRANTY REGARDING THE
COMPLETENESS OR ACCURACY OF SUCH INFORMATION. THE MARKET VALUE OF SHARES OF THE
FUND MAY FLUCTUATE DUE TO FACTORS SUCH AS CHANGES IN INTEREST RATES, MATTERS
AFFECTING NEW YORK STATE OR NEW YORK CITY, OR FOR OTHER REASONS.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. Travel and tourism constitute an important part of
New York's economy. Relative to the nation, the State has a smaller share of
manufacturing and construction and a larger share of service-related industries.
The State is likely to be less affected than the nation as a whole during an
economic recession that is concentrated in manufacturing and construction, but
likely to be more affected during a recession that is concentrated more in the
service-producing sector.
The State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.
During the calendar years 1984 through 1991, the State's rate of
economic expansion was somewhat slower than that of the nation. In the 1990-91
recession, the economy of the State, and that of the rest of the Northeast, was
more heavily damaged than that of the nation as a whole and has been slower to
recover. The total employment growth rate in the State has been below the
national average since 1984. The unemployment rate in the State dipped below the
national rate in the second half of 1981 and remained lower until 1991; since
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then, it has been higher.
The State has had the second highest combined state and local tax
burden in the United States which has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
However, the State's 1995-96 budget reflected significant actions to reduce the
burden of State taxation, including adoption of a 3-year, 20 percent reduction
in the State's personal income tax. During 1996-97, New York led the nation in
tax cuts, at 54.1%, bringing the total value of tax reductions in effect for the
1997 year to over $6 billion. When measured as a percentage of personal income,
state-imposed taxes in New York should be below the national median in 1997. The
budget for fiscal year 1997-98 reflects an additional $170 million in tax
reductions.
The State Financial Plan is based on a projection by State's
Division of the Budget ("DOB") of national and State economic activity. The
national economy began the current expansion in 1991 and has added over 7
million jobs since early 1992. However, the recession lasted longer in the State
and the State's economic recovery has lagged behind the nation's. In the last
few years, New York has shown signs of economic resurgence. Since 1994, New York
has jumped from 15th to 6th in terms of total private sector employment growth
compared to other states, gaining 140,000 private sector jobs since December
1994, despite banking layoffs and closure of a major automotive plant. Overall
employment growth was close to 0.7%, almost 60,000 jobs, for 1996. National
employment growth in 1996 was 2.0%. The New York economy in 1997 is expected to
grow at about the same rate as in 1996. Personal income is expected to increase
5.2% in 1996 and 4.5% in 1997.
1996-97 Fiscal Year. The State's current fiscal year commenced on
April 1, 1996, and ends on March 31, 1997 (the "1996-97 fiscal year"). Prior to
adoption of the budget, the Legislature enacted appropriations for disbursements
considered to be necessary for State operations and other purposes, including
all necessary appropriations for debt service. The State Financial Plan for the
1996-97 fiscal year is based on the State's budget as enacted by the legislature
and signed into law by the Governor.
The 1996-97 General Fund Financial Plan continues to be balanced,
with a projected surplus of $1.3 billion. This will be the second consecutive
material budget surplus generated by the Governor's administration. Of this
amount, $250 million is being used to accelerate the last portion of the
Governor's personal income tax cut through changes to the 1997 withholding
tables. This raises taxpayers' current take-home pay rather than issuing larger
refunds in 1998. Of the remainder, $943 million is being used to help close the
projected 1997-98 budget gap, and $65 million is being deposited into the Tax
Stabilization Reserve Fund (the State's "rainy day" fund) as provided by the
Constitution. This is the maximum amount that can be deposited, and increases
the size of that fund to $332 million by the end of 1997-98, the highest balance
ever achieved.
The surplus results primarily from growth in projected receipts. As
compared to the enacted budget, revenues increased by more than $1 billion,
while disbursements fell by $228 million. These changes from original Financial
Plan projections reflect actual results through December 1996 as well as
modified economic and caseload projections for the balance of the fiscal year.
The General Fund is projected to be balanced on a cash basis for
the 1996-97 fiscal year. Total receipts and transfers from other funds are
projected to be $32.966 billion, a decrease of $207 million from total receipts
in the prior fiscal year. Total General Fund disbursements and transfers to
other funds are projected to be $32.895 billion, a decrease of $149 million from
the total amount disbursed in the prior fiscal year.
The General Fund closing balance is expected to be $358 million at
the end of 1996-97. Of this amount, $317 million will be on deposit in the Tax
Stabilization Reserve Fund (TSRF), while another $41 million will remain on
deposit in the Contingency Reserve Fund (CRF). The TSRF has an opening balance
of $287 million, supplemented by a required payment of $15 million and an
extraordinary deposit of $65 million from surplus 1996-97 monies. The $9 million
on deposit in the Revenue Accumulation Fund will be drawn down as planned. The
previously planned deposit of $85 million to the CRF, projected earlier to be
received from contractual efforts to maximize Federal revenue, is not expected
to materialize this year.
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In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural gaps for the State. These gaps resulted from a significant disparity
between recurring revenues and the costs of maintaining or increasing the level
of support for State programs. As noted, the 1996-97 enacted budget combines
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
The 1995-96 State Financial Plan reflected actions that will
directly affect the State's 1996-97 fiscal year baseline receipts and
disbursements. The three-year plan to reduce State personal income taxes will
decrease State tax receipts by an estimated $1.7 billion in State fiscal year
1996-97, in addition to the amount of reduction in State fiscal year 1995-96.
Further significant reductions in the personal income tax are scheduled for the
1997-98 State fiscal year. Other tax reductions enacted in 1994 and 1995 are
estimated to cause an additional reduction in receipts of over $500 million in
1996-97, as compared to the level of receipts in 1995-96. Similarly, many
actions taken to reduce disbursements in the State's 1995-96 fiscal year are
expected to provide greater reductions in State fiscal year 1996-97.
The 1997-98 budget gap is smaller than the previous two fiscal year
projections. The baseline budget forecast produced an estimated $2.3 billion
budget imbalance, before reflecting any actions taken by the Governor to produce
a balanced 1997-98 Financial Plan. Projections of baseline revenue growth showed
a decline of almost $2 billion, reflecting the loss of non-recurring receipts
used in 1996-97 and implementation of previously enacted tax reduction programs.
The 1996-97 surplus of $943 million reduced the 1997-98 budget gap
to $1.3 billion. Proposals included in the Executive Budget for 1997-98 close
this remaining gap, reducing State spending for the third straight year, and
permitting three new tax reduction proposals: the $1.7 billion, multi-year
property tax reduction portion of STAR (School Tax Relief initiative); a
three-year phased reduction in the estate and gift tax; and a $50 million
reserve for additional targeted job-creating tax reductions. The budget also
makes a significant investment in school aid -- a proposed increase of $302
million on a school year basis as the first step toward implementing the $1.7
billion school aid portion of STAR.
The 1997-98 Financial Plan includes approximately $66 million in
non-recurring resources, or only 0.2% of the General Fund budget -- the lowest
level in more than a decade. As compared to 1996-97, non-recurring resources are
a much smaller component of the budget: down over $1 billion from last year's
adopted budget. The loss of these resources in future years is more than offset
by recommendations which provide higher annualized savings in 1998-99 and
beyond.
Assuming these gap-closing actions, the Financial Plan projects
receipts of $32.9 billion and spending of $32.8 billion in fiscal year 1997-98,
with a required deposit of $15 million to the TSRF and an increase of $24
million in the CRF. The closing fund balance in the General Fund is projected to
be $332 million, the largest amount ever on deposit.
To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
To correct recurring budgetary imbalances, the State would need to take
significant actions to align recurring receipts and disbursement in future
fiscal years. There can be no assurance, however that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring receipts
and disbursements in future fiscal years.
The economic and financial condition of the State may be affected
by various financial, social, economic and political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the state. For example, a significant
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risk to the 1997-98 State Financial Plan arises from tax legislation pending in
Congress. Changes to Federal tax treatment of capital gains are likely to flow
through automatically to the State personal income tax. Such changes, depending
upon their precise character and timing, and upon taxpayer response, could
produce either revenue gains or losses during the balance of the State's fiscal
year. Uncertainties with respect to both the economy and potential decisions at
the Federal level add further pressure on future budget balance in New York
State. Specific budget proposals being discussed at the Federal level but not
included in the State's current economic forecast would (if enacted) have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states. Because of the uncertainty and
unpredictability of these potential changes, their impact is not included in the
assumptions underlying the State's projections.
The 1996-97 and 1997-98 State Financial Plans are based upon
forecasts by the DOB of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. Many uncertainties exist in forecasts
of both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, Federal fiscal
and monetary policies, the level of interest rates, and the condition of the
world economy, which could have an adverse effect on the State. There can be no
assurances that the State economy will not experience results in the current
fiscal year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. Projections of total State disbursements
are based on assumptions relating to economic and demographic factors, levels of
disbursements for various services provided by local governments (where the cost
is partially reimbursed by the State), and the results of various administrative
and statutory mechanisms in controlling disbursements for State operations.
Factors that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the Federal government, and changes in the demand for and use of State
services. There can be no assurance that the State's projections for tax and
other receipts for the 1996-97 fiscal year and 1997-98 fiscal year are not
overstated and will not be revised downward, or that disbursements will not be
in excess of the amounts projected. Such variances could adversely affect the
State's cash flow during the 1996-97 fiscal year or subsequent fiscal years, as
well as the State's ability to achieve a balanced budget on a cash basis for
such fiscal year or subsequent fiscal years.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Projections and estimates of receipts from taxes have
been subject to variance in recent fiscal years. The personal income tax, the
sales tax, and the corporation franchise tax have been particularly subject to
overestimation as a result of several factors, most recently the significant
slowdown in the national and regional economies and uncertainties in taxpayer
behavior as a result of actual and proposed changes in Federal tax laws. As a
result of the foregoing uncertainties and other factors, actual results could
differ materially and adversely from the projections discussed herein, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address cash flow needs and State Financial Plan shortfall,
and DOB believes it could take similar action should variances from its
projections occur in the current and/or subsequent fiscal years. Those variances
could, however, affect the State's ability to achieve a balanced budget on a
cash basis for the current and/or subsequent fiscal years.
There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years. There can be
no assurance, however, that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future years, nor can there be any assurance that budgetary
difficulties will not lead to further adverse consequences for the State and its
obligations.
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As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members of the State
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial condition, as reflected in the 1996-97 State Financial Plan, that may
vary materially and adversely from the information provided herein.
Indebtedness. As of March 31, 1995, the total amount of long-term
State general obligation debt authorized but unissued stood at $1.789 billion.
As of the same date, the State had approximately $5.181 billion in general
obligation debt, including $149.3 million in bond anticipation notes
outstanding.
As of March 31, 1995, $17.980 billion of bonds, issued in
connection with lease-purchase and contractual-obligation financings of State
capital programs, were outstanding. The total amount of outstanding
State-supported debt as of March 31, 1995 was $27.913 billion. As of March 31,
1995, total State-related debt (which includes the State-supported debt, moral
obligation and certain other financings and State-guaranteed debt) was $36.1
billion.
The State anticipates that its capital programs will be financed,
in part, through borrowings by the State and public authorities in the 1995-96
fiscal year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The State's commercial paper
program is expected to have an average of $287 million outstanding during
1997-98. The Legislature has also authorized the issuance of up to $33 million
in certificates of participation during the State's 1995-96 fiscal year for
equipment purchases and $14 million for capital purposes. The projection of the
State regarding its borrowings for the 1995-96 fiscal year may change if
circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, and has been authorized to issue its bonds to provide net proceeds of
up to $529 million during the State's 1995-96 fiscal year to redeem notes sold
in June 1995. The LGAC program was completed in 1995-96 with the issuance of the
last installment of authorized bond sales.
Ratings. As of September 1995, Moody's rating of the State's
general obligation bonds stood at A, and S&P's rating stood at A-. Moody's
lowered its rating to A on June 6, 1990, its rating having been A1 since May 27,
1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's previous
ratings were A from March 1990 to January 1992, AA- from August 1987 to March
1990 and A+ from November 1982 to August 1987.
The City and the Municipal Assistance Corporation ("MAC")
The City accounts for approximately 41% of the State's population
and personal income, and the City's financial health affects the State in
numerous ways.
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt, defaulted on
certain of its short-term notes. Shortly after the UDC default, the City entered
a period of financial crisis. Both the State Legislature and the United States
Congress enacted legislation in response to this crisis. During 1975, the State
Legislature (i) created MAC to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the State Financial
Control Board (the "Control Board") to review and approve the City's budgets and
four-year financial plans (the financial plans also apply to certain
City-related public agencies).
The national economic downturn which began in July 1990 adversely
affected the City economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and the City's economy
declined in those two years. Beginning in 1992, the improvement in the national
economy helped stabilize conditions in the City. Employment losses moderated and
the City's economy improved,
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boosted by strong wage gains. However, after noticeable improvements in the
City's economy during calendar year 1994, the City's current four-year financial
plan assumes that economic growth will slow in calendar year 1996, with local
employment increasing modestly. During the 1995 fiscal year, the City
experienced substantial shortfalls in payments of non-property tax revenues from
those forecasted.
For each of the 1981 through 1993 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its recent fiscal years in order to maintain balanced operating
results. There can be no assurance that the City will continue to maintain a
balanced budget, or that it can maintain a balanced budget without additional
tax or other revenue increases or reductions in City services, which could
adversely affect the City economic base.
Pursuant to State law the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The current
financial plan extends through the 1999 fiscal year. The City is required to
submit its financial plans to review bodies, including the Control Board. If the
City were to experience certain adverse financial circumstances, including the
occurrence or the substantial likelihood of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City
to balance its budget and to meet its cash requirements. The State's 1996-97
Financial Plan projects a balanced General Fund. If the State experiences
revenue shortfalls or spending increases during its 1996-97 fiscal year or
subsequent years, such developments could result in reductions in projected
State aid to the City. In addition, there can be no assurance that State budgets
in future fiscal years will be adopted by the April 1 statutory deadline and
that there will not be adverse effects on the City's cash flow and additional
City expenditures as a result of such delays.
The Mayor is responsible for preparing the City's four-year
financial plan, including the City's current financial plan for the 1996 through
1999 fiscal years. The City projections set forth in its financial plan are
based on various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in such financial plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability to complete revenue generating transactions,
provision of State and Federal aid and mandate relief, State legislative
approval of future State budgets, levels of education expenditures as may be
required by State law, adoption of future City budgets by the New York City
Council, approval by the Governor or the State Legislature and the cooperation
of MAC with respect to various other actions proposed in such financial plan,
and the impact on City revenues of proposals for Federal and State welfare
reform.
Implementation of its financial plan is also dependent upon the
City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1996 through 1999
contemplates the issuance of $9.7 billion of general obligation bonds primarily
to reconstruct and rehabilitate the City's infrastructure and physical assets
and to make capital investments. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
terms and success of projected public sales of City general obligation bonds and
notes will be subject to prevailing market conditions, and no assurance can be
given that such sales will be completed. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned capital and operating expenditures. Future developments concerning the
City and public discussion of such developments, the City's future financial
needs and other issues may affect the market for outstanding City general
obligation bonds or notes.
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The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than those
forecast in the financial plan. In addition, the Control Board staff and others
have questioned whether the City has the capacity to generate sufficient
revenues in the future to provide the level of services included in the
financial plan. It is reasonable to expect that such reports and statements will
continue to be issued and to engender public comment.
1995 Fiscal Year. On July 21, 1995, the City submitted to the
Control Board a fourth quarter modification to the financial plan for the 1995
fiscal year. The City projects a balanced budget in accordance with GAAP for the
1995 fiscal year after taking into account a transfer of $75 million.
1996-99 Financial Plan. On July 11, 1995, the City submitted to the
Control Board the 1996-99 Financial Plan, which relates to the City, the Board
of Education and the City University of New York. The 1996-99 Financial Plan is
based on the City's expense and capital budgets for the City's 1996 fiscal year,
which were adopted on June 14, 1995, and sets forth proposed actions by the City
for the 1996 fiscal year to close substantial projected budget gaps resulting
from lower than projected tax receipts and other revenues and greater than
projected expenditures. In addition to substantial proposed agency expenditure
reductions and productivity, efficiency and labor initiatives negotiated with
the City's labor unions, the 1996-99 Financial Plan reflects a strategy to
substantially reduce spending for entitlements for the 1996 and subsequent
fiscal years.
The 1996-99 Financial Plan also sets forth projections for the 1997
through 1999 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $888 million, $1.5 billion and $1.4 billion for the
1997, 1998 and 1999 fiscal years, respectively, after successful implementation
of the $3.1 billion gap-closing program for the 1996 fiscal year. The proposed
gap-closing actions, a substantial number of which are not specified in detail,
include various actions which may be subject to State or Federal approval.
On July 24, 1995, the City Comptroller issued a report on the
1996-99 Financial Plan. The report concluded that the 1996-99 Financial Plan
includes total risks of $749 million to $1.034 billion for the 1996 fiscal year.
With respect to the 1997-99 fiscal years, the report noted that the gap-closing
program in the 1996-99 Financial Plan does not include information about how the
City will implement the various gap-closing programs, and that the entitlement
cost containment and revenue initiatives will require approval of the State
legislature. The report estimated that the 1996-99 Financial Plan includes total
risks of $2.0 billion to $2.5 billion in the 1997 fiscal year, $2.8 billion to
$3.3 billion in the 1998 fiscal year, and $2.9 billion to $3.4 billion in the
1999 fiscal year.
In early December 1994, the City Comptroller issued a report which
noted that the City is currently seeking to develop and implement plans which
will satisfy the Federal Environmental Protection Agency that the water supplied
by the City watershed areas does not need to be filtered. The City Comptroller
noted that, if the City is ordered to build filtration plants, they could cost
as much as $4.75 billion to construct, with annual debt service and operating
costs of more than $500 million, leading to a water rate increase of 45%.
On December 16, 1994, the City Comptroller issued a report noting
that the capacity of the City to issue general obligation debt could be greatly
reduced in future years due to the decline in value of taxable real property.
The report concluded that the debt incurring power of the City would likely be
curtailed substantially in the 1997 and 1998 fiscal years.
On July 21, 1995, the staff of the Control Board issued a report on
the 1996-99 Financial Plan which identified risks of $873 million, $2.1 billion,
$2.8 billion and $2.8 billion for the 1996 through 1999 fiscal years,
respectively.
On June 14, 1995, the staff of the Office of the State Deputy
Comptroller for the City of New York ("OSDC") issued a report on the financial
plan with respect to the 1995 fiscal year. The report noted that, during the
1995 fiscal year, the City faced adverse financial developments totaling over $2
billion resulting from the inability to initiate approximately 35% of the City's
gap-closing program, as well as newly-identified spending needs and revenue
shortfalls. The report noted that the City relied heavily on one-time actions to
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offset adverse developments, using $2 billion in one-time resources in the 1995
fiscal year, or nearly double the 1994 amount.
On July 24, 1995, the staff of the OSDC issued a report on the
1996-99 Financial Plan. The report concluded that there remains a budget gap for
the 1996 fiscal year of $392 million, largely because the City and its unions
have yet to reach an agreement on how to achieve $160 million in unspecified
labor savings and the remaining $100 million in recurring health insurance
savings from last year's agreement. The report further noted that growth in City
revenues is being constrained by the weak economy in the City, which is likely
to be compounded by the slowing national economy, and that there is a likelihood
of a national recession during the course of the 1996-99 Financial Plan.
Moreover, the report noted that State and Federal budgets are undergoing
tumultuous changes, and that the potential for far-reaching reductions in
intergovernmental assistance is clearly on the horizon, with greater uncertainty
about the impact on City finances and services.
Litigation. The City is a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, actions commenced and
claims asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
of the proceedings and claims are not currently predictable, adverse
determinations in certain such proceedings and claims might have a material
adverse effect upon the City's ability to carry out its financial plan. As of
June 30, 1994, the City estimated its potential future liability in
respect of outstanding claims to be approximately $2.6 billion. The 1996-99
Financial Plan includes provisions for judgments and claims of $279 million,
$236 million, $251 million and $264 million for the 1996 through 1999 fiscal
years, respectively.
Ratings. As of March 1996, the State had regained S&P's rating of
A- on the City's general obligation bonds. On July 10, 1995, S&P revised
downward its rating on City general obligation bonds from A- to BBB+ and removed
City bonds from CreditWatch. S&P stated that "structural budgetary balance
remains elusive because of persistent softness in the City's economy,
highlighted by weak job growth and a growing dependence on the historically
volatile financial services sector." Other factors identified by S&P in lowering
its rating on City bonds included a trend of using one-time measures, including
debt refinancings, to close projected budget gaps, dependence on unratified
labor savings to help balance financial plans, optimistic projections of
additional Federal and State aid or mandate relief, a history of cash flow
difficulties caused by State budget delays and continued high debt levels. Fitch
Investors Service, Inc. continues to rate the City general obligations bonds A-.
Moody's rating for City general obligation bonds is Baa1.
On February 11, 1991, Moody's had lowered its rating from A.
Previously, Moody's had raised its rating to A in May 1988, to Baa1 in December
1986, to Baa in November 1983 and to Ba1 in November 1981. S&P had raised its
rating to A- in November 1987, to BBB+ in July 1985 and to BBB in March 1981.
Indebtedness. As of June 30, 1995, the City and MAC had,
respectively, $23.258 billion and $4.033 billion of outstanding net long-term
indebtedness.
The State Agencies: Certain Agencies of the State, including the
State Housing Finance Agency ("HFA") and the UDC, have faced substantial
financial difficulties which could adversely affect the ability of such Agencies
to make payments of interest on, and principal amounts of, their respective
bonds. The difficulties have in certain instances caused the State (under
so-called "moral obligation" provisions, which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is expected
that the problems faced by these Agencies will continue and will require
increasing amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations (including HFA and UDC)
could result in a default by one or more of the Agencies. Such default, if it
were to occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the defaulting
Agencies. In addition, any default in payment on any general obligation of any
Agency whose bonds contain a moral obligation provision could constitute a
failure of certain conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
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State Litigation: The State is a defendant in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to, claims
asserted against the State arising from alleged torts, alleged breaches of
contracts, condemnation proceedings and other alleged violations of State and
Federal laws. Included in the State's outstanding litigation are a number of
cases challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of contract and tort claims
wherein significant monetary damages are sought. Actions commenced by several
Indian nations claim that significant amounts of land were unconstitutionally
taken from the Indians in violation of various treaties and agreements during
the eighteenth and nineteenth centuries. The claimants seek recovery of
approximately six million acres of land as well as compensatory and punitive
damages.
Adverse developments in the foregoing proceedings or new
proceedings could adversely affect the financial condition of the State in the
1996-97 fiscal year or thereafter.
Other Municipalities: Certain localities in addition to New York
City could have financial problems leading to requests for additional State
assistance and the need to reduce their spending or increase their revenues. The
potential impact on the State of such actions by localities is not included in
projections of State revenues and expenditures in the State's 1995-96 fiscal
year
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the Fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1993, the total indebtedness of all
localities in the State other than New York City was approximately $17.7
billion. State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during the period that
such deficit financing is outstanding. Fifteen localities had outstanding
indebtedness for deficit financing at the close of their fiscal year ending in
1993.
From time to time, Federal expenditure reductions could reduce, or
in some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, New York City or any of the Agencies were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the Fund, could be adversely
affected. Localities also face anticipated and potential problems resulting from
certain pending litigation, judicial decisions, and long-range economic trends.
Long-range potential problems of declining urban population, increasing
expenditures, and other economic trends could adversely affect localities and
require increasing State assistance in the future.
Factors Affecting North Dakota Fund
General Economic Conditions. North Dakota lies in the central
portion of the Northern Plains with a land area of 70,665 square miles.
Elevation in the northeast corner of the State is 750 feet above sea level and
in the southwest corner of the State is 3,506 feet. The North Dakota economy
continues to grow at a slow and steady pace. The production-based economy, which
provides the basis for this stable, slow growth, while sensitive to change, is
not as susceptible to recessionary impacts as the rest of the nation. Due to
strong economic conditions experienced in North Dakota, taxable sales and
purchases are expected to increase by 3.81% in 1997 and 5.7% annually over the
next biennium, resulting in increased sales tax collections of $43 million
during 1997-99.
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Agriculture is an important segment of the state's economy. As a
major producer of durum wheat, North Dakota is expected to benefit from high
wheat prices while cattle prices are expected to remain low. NAFTA and GATT are
expected to increase agricultural exports. In recent years, the state's farmers
have formed cooperatives that combine production and processing to create
manufacturing jobs and new markets for their goods. An example of North Dakota's
commitment to agriculture-related economic development is its recent success in
attracting the Pro-Gold corn processing plant which is under construction near
Wahpeton, North Dakota. The plant is expected to process 72,000 bushels of corn
per day, expanding to 320,000 bushels per day, raising corn prices in the area
by approximately one dollar per bushel.
The energy industry in North Dakota is projected to be robust
during the next biennium as a result of increased oil activity in the western
part of the state. Oil production in this state is currently averaging
approximately 92,000 barrels per day, up 14.1% from last years production level
of 80,600 barrels per day. Oil production is expected to increase to a level of
over 100,000 barrels of oil per day during the next biennium while prices are
expected to be in the $19 per barrel range.
The labor force and employment situation for the state appears
healthy. Employment in the state has grown by 7,500 wage and salary jobs
reflecting an increase of 2.5% compared to one year earlier. About half of the
increase has been in the service industries with smaller gains in trade and
finance. Construction employment has also been a significant contributor to
overall growth, mainly attributed to the continuing construction of the ProGold
corn processing plant in Wahpeton. Manufacturing employment has shown little
growth in 1995 and 1996 and the current forecast projects manufacturing payroll
growth of 0.5% in 1997. Unemployment is significantly below national levels.
North Dakota's unemployment rate in 1995 and 1996 (preliminary) was 3.3% and
3.1%, respectively. This is significantly lower than the national unemployment
rates of 5.6% and 5.4% for 1995 and 1996, respectively.
The 1995 Legislative Assembly funded the design, development and
implementation of a Welfare Reform Computer System. The demonstration, known as
the Training, Education, Employment, and Management (TEEM) Project, is
progressing with numerous waivers received from the federal government in
September, 1995. The TEEM demonstration provides for a uniform treatment of
income and assets, a uniform budget methodology, standard certification periods
and reporting requirements, and employment and training with adequate child care
as a means of helping participants to become self-sufficient, and incorporates
child support enforcement issues. Ten counties will be included in the TEEM
demonstration.
The 54th Legislative Assembly contained substantial workers
compensation reform. Legislators passed a number of bills which dealt directly
with the North Dakota Workers Compensation Bureau. Among the list of issues
addressed in the legislation were: fraud prevention; designated providers; first
report of injury; retirement; claims closure; rehabilitation; permanent partial
injury; worker adviser/ombudsman program; and, litigation/attorney fees.
Additionally, the North Dakota Workers Compensation Bureau is implementing a
number of other changes to improve customer service. The Fund is also expanding
its employer-based programs to get more employers actively involved in risk
management. These programs focus on intense communication between the injured
worker, medical providers and the employer.
Budgetary Process. The State operates through a biennial
appropriation which represents departmental appropriations recommended by the
Governor and presented to the General Assembly at the beginning of each
legislative session. The General Assembly enacts the budgets of the various
State departments through passage of specific appropriation bills. The Governor
has line item veto powers over all legislation subject to legislative override.
Session laws that were passed by the Legislature in 1993 authorize directors of
various state agencies to transfer appropriation authority among the various
divisions of their specific agency, subject to the Budget Section of the North
Dakota Legislative Council's approval. Unexpended appropriations lapse at the
end of each biennium, except certain capital expenditures covered under the
North Dakota Code and except for all unexpended general funds appropriation
authority which must be deposited in special revenue funds of the institutions
in the University System according to law. During the 1993-1995 biennium there
were supplemental appropriations of $105,573,249. The general fund appropriation
authority was increased by approximately $6.5 million. Of this amount $3.7
million was carryover from the 1991-1993 biennium, $2.0 million was approved by
the 54th Legislative Assembly for Risk Management and $.8 million
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was for deficiencies also approved by the 54th Legislative Assembly.
The beginning balance for the 1995-97 biennium was $31.1 million,
$4.2 million more than had been projected for an ending balance when the 1995
Legislative Assembly adjourned. No one-time transfers were utilized in the
1995-97 budget, although $31.9 million of the transfers from the Bank of North
Dakota were moved from the 1993-95 biennium to the 1995-97 biennium. Although
the 1995 Legislative Forecast estimated transfers from the Bank of North Dakota
of $59.9 million, the November 1996 revenue forecast assumes $50.3 million will
be transferred. The June 30, 1997 ending balance is anticipated to be $63
million.
North Dakota implemented a new accounting standard, GASB Statement
No 22 "Accounting for Taxpayer Assessed Tax Revenues in Governmental Funds."
This created a one time acceleration of revenue recognition for the State's
major tax types. The change resulted in a restatement of the general fund's 1994
balance, increasing it from $64.3 million to $94.4 million. In fiscal year 1995
an additional $75.6 million was recognized for taxes receivable in the general
fund. The increase in taxes receivable resulted in an additional $36 million
being recognized as revenue and $39.6 million as deferred revenue in fiscal year
1995 in the general fund. The general fund also had an $11 million increase in
accrued tax refunds payable which decreased revenues in the general fund for
fiscal year 1995.
Revenues and Expenditures. General governmental activities are
accounted for in four governmental fund types: general (GAAP) basis; special
revenue; capital projects; and, debt service funds. The November 1996 general
fund revenue forecast for the 1995-97 biennium is $1.37 billion, an increase of
approximately $40 million from the original estimate and 10% more than the
previous biennium. Oil tax revenue collections accounted for nearly $9 million
of the excess during the first fiscal year due to the increased oil activity in
the state. Of the total revenues, taxes accounted for over $1 billion. The
largest increase in taxes on a budgetary basis comes from sales and use taxes
with an estimated increase of $50.79 million for the biennium, resulting in
$523.1 million. The second largest source of general fund revenue, the
individual income tax, is estimated to increase $31.6 million to a total of
$311.4 million. On the other hand, corporate income taxes are expected to
slightly decrease approximately $388,000 to $94.37 million.
General fund appropriations are expected to total $1.35 billion for
the 1995-97 biennium, an increase of 7.6% from the previous biennium. The three
leading expenditures are: education, $769.1 million, health and human services,
$327.9 million; and, general government and grants, $99.9 million.
Projected general fund revenues for the 1997-99 biennium, based on
the executive recommendation, are $1.44 billion. This is a $68 million or nearly
5% increase over the revised revenue estimate for the 1995-97 biennium. The
projected ending balance at June 30, 1999 is approximately $10 million.
Claims/Judgments Payable are primarily Workers Compensation Claims
Incurred But Not Yet Reported (IBNR) by the claimants as well as claims related
to various litigation matters. Claims and judgments for governmental funds are
reflected entirely in the general long-term debt account group and not in
individual funds as the liability is not expected to be liquidated with
expendable available financial resources.
Debt Administration. The Constitution of North Dakota provides that
the State may issue or guarantee the payment of bonds provided that all bonds in
excess of $2 million are: secured by first mortgage upon property and no further
indebtedness may be incurred by the State unless evidenced by a bond issue;
authorized by law, for a certain purpose; provisioned to pay the interest
semiannually, and pay the principal within 30 years. The law authorizing the
bond issue must specifically appropriate the provisions to the payment of the
principal and interest of the bond. The State is currently in compliance with
the constitutional debt limitation. At June 30, 1995, the state had a number of
debt issues outstanding. These issued include:
General Obligation Bonds. General obligation bonds have been
authorized and issued to provide funds to the Bank of North Dakota. General
obligation bonds issued according to the constitution and enabling statutes are
backed by the full faith, credit and taxing power of the State of North Dakota.
Debt service requirements are provided by repayment of the real estate loans and
transfers from the Bank of North Dakota. The State's net general obligation debt
per capita is $36. General obligation bonds currently outstanding are the
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1984 and 1986 Real Estate Series. At June 30, 1995, the balance was $39,046,000.
Revenue Bonds. Current State statutes empower certain State
agencies to issue bonds as part of their activities. This debt is not backed by
the full faith and credit of the State of North Dakota. The principal and
interest on such bonds shall be payable only from the applicable agencies'
program income. On June 30, 1995, total Revenue Bonds outstanding totaled
$825,439. The Bonds and balance were as follows: State Fair, $3,421,000; Student
Loan Trust, $199,320,000; Building Authority, $65,613,000; Housing Finance,
$425,149,000; University System, $65,571,000; and Municipal Bond Bank,
$66,365,000.
Long-Term Notes. The Bank of North Dakota has long-term notes in
the amount of $53.5 million. The Fuji Bank, Ltd. Notes ($50 million) were issued
in December, 1986 and are due December, 1996. The rate of interest in 7.875%
with an effective interest rate of 7.94%. The bank has two advances from the
Federal Home Loan Bank in the amounts of $2.5 million and $1 million. The rates
of interest are 7.99% and 8.34%, respectively.
North Dakota continues to receive bond ratings from both Moody's
Investors Service (Aa) and Standard and Poor's Corporation (AA-) on general
obligation bond issues.
Factors Affecting Oregon Fund
General Economic Conditions. Similar to the nation as a whole,
economic growth in Oregon is likely to be restricted to its long-term trend rate
by near capacity labor markets and rising costs. Oregon's jobless rate is
unlikely to fall below its current 5.0% for any sustained period. The labor
force is expected to increase sufficiently to keep Oregon's employment growth
well above the national average but not enough to match the job growth rates of
the 1994 to 1996 period. Overall, manufacturing employment is forecast to
increase 0.3% in 1997 after averaging 3.0% growth for the 1994-1996 period.
Construction employment, which increased 11.4% from 1995 to 1996, is expected to
show less growth in 1997, yet at high levels. The state's service-producing
sectors are expected to continue growing but they too are likely to be
constrained by labor availability. The state's tight labor markets and expanding
high technology industries should continue to push Oregon's wages and per capita
income up toward the national average.
The rest of the state will benefit from a generally healthy
agriculture section (with the exception of the cattle industry), a stabilizing
timber harvest and increasing cost advantages relative to the Willamette Valley
and Portland metropolitan area. The statewide timber harvest is expected to be
4.2 billion board feet in 1997, matching the estimate for 1996. In the
agricultural industry, cash commodities include farm forest products, cattle and
calves, nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye
grass seed.
Non-farm employment is expected to grow 2.9% in 1997, a significant
decrease from the preliminary 4.1% pace recorded in 1996, yet more than double
the 1997 projected national rate of job growth. Job growth is expected to slow
further to 2.3% in 1998 as the high technology manufacturing sector winds down
and a shortage of available labor limits net job creation.
Budgetary Process. The Oregon budget is approved on a biennial
basis by separate appropriation measures. a biennium begins July 1 and ends June
30 of odd-numbered years. Measures are passed for the approaching biennium
during each regular Legislative session, held beginning in January of
odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session
for approximately six months of each biennium, provision is made for interim
funding through the Legislative Emergency Board. The Emergency Board is
authorized to make allocations of General Fund monies to State agencies from the
State Emergency Fund. The Emergency Board may also authorize increases in
expenditure limitations from Other or Federal Funds (dedicated or continuously
appropriated funds), and may take other actions to meet emergency needs when the
Legislative Assembly is not in session. The most significant feature of the
budgeting process in Oregon is the constitutional requirement that the budget be
in balance at the end of each biennium. Because of this provision, Oregon may
not budget a deficit and is required to alleviate any revenue shortfalls within
each biennium.
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Revenue and Expenditures. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. In its 1995 Regular
Session, the Oregon Legislative Assembly approved General Fund appropriations
totaling $7,372.6 million for the 1995-1997 biennium. This was a 15.2% increase
compared to estimated 1993-1995 expenditures.
General Fund revenue totaled $6,536.1 million for the 1993-1995
biennium. Revenue exceeded the May estimate by $16.7 million in the 1993 Close
of Session (COS) estimate by $330.6 million or 5.3%. Expenditures were $6,410.1
million for the biennium.
The December forecast for the 1995-97 General Fund revenue is
$7,399.3 million, a 13.2% increase from the 1993-95 biennium. The 1995-97
estimate is also an increase of $106.3 million from the September 1996 estimate
and $437.8 million or 6.3% from the 1995 Close of Legislative Session (COS)
forecast. The beginning balance is estimated to be $496.3 million, leaving total
General Fund resources available for the 1995-97 biennium of $7,895.6 million.
The General Fund resources estimate is $450.9 million higher than the COS
estimate.
General Fund revenue is projected to be $8,145.7 million for the
1997-99 biennium. The beginning balance is estimated to be $536.3 million for a
total General Fund resource estimate of $8,682 million. The December 1997-99
General Fund revenue estimate is $115.1 million higher than the September
forecast despite the anticipation of a larger 2% surplus kicker refund. The
overall General Fund resource projection is $243.8 million more than the
September forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims filed against the State. Of those claims, 544 also have
been filed as court actions, and are pending against the State. These cases are
pending in State courts and are subject to the liability limitations stated in
the Tort Claims Act of $500,000 per occurrence, $200,000 per individual for
physical injuries, and $50,000 per occurrence for property damage. The
likelihood of an unfavorable outcome in these cases ranges from probable to
remote, but it is certain that these cases do not involve real exposure of $25
million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the
property tax cut and cap. It will reduce revenues to schools, cities and
counties by as much as $1 billion and put pressure on the General Fund to make
up some or all of the difference.
Debt Administration and Limitation. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
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A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general
obligation bonds for financing community colleges, highway construction, and
pollution control facilities. Higher education institutions and activities and
community colleges are financed through an appropriation from the General Fund.
Facilities acquired under the pollution control program are required to
conservatively appear to be at least 70% self-supporting and self-liquidating
from revenues, gifts, federal government grants, user charges, assessments, and
other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. For the year ending June 30, 1996, the total
balance of general obligation bonds was $3.7 billion. The debt service
requirements for general obligation bonds, including interest of approximately
$2.75 billion, as of September 1, 1996, was $6.4 billion.
In addition to general obligation and direct revenue bonds, the
State of Oregon issues industrial development revenue bonds ("IDBs"), Oregon
Mass Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing request from local mass transit districts
and my authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing
agreements through the issuance of certificates of participation. Certificates
of participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education. Further,
certificates of participation were used in the acquisition of telecommunication
system by the Department of Administrative Services and the Adult & Family
Services Division. For the year ending June 30, 1996, the certificates of
participation debt totaled $443.4 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in
1991, to assist with the assembling and financing of lands for health care,
housing, educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
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recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally
taxable bonds in those situations where securing a federal tax exemption is
unlikely or undesirable; regulate "current" as well as "advance" refunding
bonds; enter into financing agreements, including lease purchase agreements,
installment sales agreements and loan agreements to finance real or personal
property and approve certificates of participation with respect to the financing
agreements. Amounts payable by the State under a financing agreement are limited
to funds appropriated or otherwise made available by the Legislative Assembly
for such payment. The principal amount of such financing agreements are treated
as bonds subject to maximum annual bonding levels established by the Legislative
Assembly under Oregon statute.
Each of Fitch Investors Service, Moody's Investors Service and
Standard & Poor's Ratings Group has assigned their municipal bond ratings of
"AA," "Aa," and "AA" respectively.
Factors Affecting Puerto Rico
General Economic Conditions. Puerto Rico, the fourth largest of the
Caribbean islands, is located approximately 1,600 miles southeast of New City
and 1,000 miles east-southeast of Miami, Florida. It is approximately 100 miles
long and 35 miles wide. According to estimates of the Planning Board, the
population of Puerto Rico increased to 3,653,000 during fiscal 1994.
Puerto Rico came under United States sovereignty by the Treaty of
Paris, signed on December 10, 1898, terminating the Spanish-American War. Puerto
Ricans have been citizens of the United States since 1917. Puerto Rico's
constitutional status is that of a territory of the United States and the
ultimate source of power over Puerto Rico, pursuant to the Territories Clause of
the Federal Constitution, is the United States Congress. The Commonwealth
exercises virtually the same control over its internal affairs as do the fifty
states; however, it differs from the states in its relationship with the federal
government. The people of Puerto Rico are citizens of the United States but do
not vote in national elections. They are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives and limited voting
powers. Most federal taxes, except those such as social security taxes, are not
levied in Puerto Rico. No federal income tax is collected from Commonwealth
residents on ordinary income earned from sources in Puerto Rico, except for
certain federal employees who are subject to taxes on their salaries and for
income earned from sources outside Puerto Rico.
The Commonwealth has established policies and programs directed at
the development of manufacturing and the expansion and modernization of the
island's infrastructure. The investment of mainland United States, foreign and
local funds in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. Infrastructure
expansion and modernization have bee to a large extent financed by bonds and
notes issued by the Commonwealth, its public corporations and municipalities.
Economic progress has been aided by significant increases in the levels of
education and occupational skills of the island's population.
The economy of Puerto Rico is closely integrated with that of the
mainland United States. During fiscal 1994 approximately 87% of Puerto Rico's
exports went to the United States mainland, which was also the source of
approximately 67% of Puerto Rico's imports. In fiscal 1994, Puerto Rico
experienced a $4.3 billion positive adjusted merchandise trade balance. Gross
product in fiscal 1991 was $22.8 billion and gross product in fiscal 1995 was
$28.4 billion. This represents an increase in gross product of 24.4% from fiscal
1991 to 1995.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1991 through fiscal 1995. Almost
every sector of the economy was affected and record levels of employment were
achieved. Average employment in creased from 977,000 in fiscal 1991 to 1,051,300
in fiscal 1995. Average unemployment decreased from 15.2% in fiscal 1991 to
13.8% in fiscal 1995.
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Puerto Rico has a diversified economy. During the fiscal years
1990-1994, the manufacturing and service sectors generated the largest portion
of gross domestic product. Three sectors of the economy provide the most
employment: Manufacturing, services, and government.
Gross product in fiscal 1991 was $22.8 billion and gross product in
fiscal 1995 was $28.4 billion. This represents an increase in gross product of
24.4% from fiscal 1991 to 1995. Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently each fiscal year. In fiscal
1994, aggregate personal income was $25.7 billion and personal income per capita
was $7,047. Personal income includes transfer payments to individuals in Puerto
Rico under various social program. Transfer payments to individual in fiscal
1994 were $5.7 billion, of which $3.9 billion, or 68.9% represent entitlements
to individuals who had previously performed services or made contributions under
programs such as Social Security, Veterans' Benefits, and Medicare.
Budgetary Process. The fiscal year of the Commonwealth begins on
July 1. The Governor is constitutionally required to submit to the Legislature
an annual balanced budget of capital improvements and operating expenses of the
Commonwealth for the ensuing fiscal year. Section 7 of Article VI of the
Constitution provides that, "The appropriations made for any fiscal year shall
not exceed the total revenues, including available surplus, estimated for said
fiscal year unless the imposition of taxes sufficient to cover said
appropriations as provided by law."
Revenues and Expenditures. In the fiscal 1995 budget revenues and
other resources of all budgetary funds total $8,381,444,000, excluding balances
from the previous fiscal year and general obligation bonds authorized. Current
expenses and capital improvements, other than those financed by bonds, of all
budgetary funds total $8,673,845,000, an increase of $1,160,550,000 from fiscal
1994. The general obligation bond authorization for the fiscal 1995 budget is
$325,000,000.
In the fiscal 1996 budget proposal revenues and other resources of
all budgetary funds total $8,269,848,000 excluding balances from the previous
fiscal year and general obligation bonds authorized. Current expenses and
capital improvements other than those financed by bonds, of all budgetary funds
total $8,546,543,000, a decrease of $127,303,000 from fiscal 1995. The general
obligation bond authorization for the fiscal 1996 budget is $355,000,000.
Tax Incentives. Much of the development of the manufacturing sector
in Puerto Rico can be attributed to various federal and Commonwealth tax
incentive, particularly Section 936 of the Internal Revenue Code, as amended
(the "Code") and the Commonwealth's Industrial Incentives Program.
Section 936. Under Section 936 of the Code, United States
corporations that meet certain requirements and elect its application ("Section
936 Corporations") are entitled to credit against their United States corporate
income tax the portion of such tax attributable to (i) income derived from the
active conduct of a trade or business within Puerto Rico ("active business
income") or from the sale of exchange of substantially all assets used in the
active conduct of such trade or business; and, (ii) qualified possession source
investment income ("passive income"). To qualify under Section 936 in any given
taxable year a corporation must derive (i) for the three-year period immediately
preceding the end of such taxable year 80% or more of its gross income from
sources within Puerto Rico; and, (ii) for taxable years beginning after December
31, 1986, 75% or more of its gross income from the active conduct of a trade or
business in Puerto Rico. A Section 936 Corporation may elect to compute its
active business income eligible for the Section 936 credit under one of three
formulas.
On November 17, 1995 the United States Congress adopted, as part of
its larger federal income tax legislative package, a ten-year phase out of the
current 936 credit for companies that are existing credit claimants and the
elimination of the credit for companies establishing new operation in Puerto
Rico and for existing companies that add a substantial new lime of business. The
credit based on the economic limitation will continue as under current law
without change until tax years beginning in 2002, during which years the
possession business income will be subject to a cap based on the corporation's
possession income for an average adjusted base period. The credit based on the
percentage limitation will continue as under current law
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until tax years beginning in 1998. In that year and thereafter, the credit based
on the percentage limitation will be 40%, but the possession business income
will be subject to a cap based on the corporation's possession income for an
average adjusted base period. The 936 credit is eliminated for taxable years
beginning in 2006. However, the credit granted to passive income (QPSII) is
eliminated for taxable years beginning after December 31, 1995.
The President vetoed the legislation submitted by the United States
Congress on December 7, 1995. The Administration has proposed a modification to
the 936 credit that would phase out the credit based upon the percentage
limitation over a five year period beginning in 1997, retain the credit based
upon the economic limitation under current law, allow a five year carry forward
of excess credit based upon the economic limitation and retain the credit
granted to passive income (QPSII) under current law.
It is not possible at this time to determine the final legislative
changes that may be made to Section 936, or the effect on the long-term outlook
on the economy of Puerto Rico. The government of Puerto Rico does not believe
there will be short-term or medium-term material adverse effects on Puerto
Rico's economy as a result of the changes to Section 936 currently proposed by
Congress or the Administration. The Government of Puerto Rico further believes
that even if the Congressional proposal became law, sufficient time exists to
put additional incentive programs in place to safeguard Puerto Rico's
competitive position.
Industrial Incentives Program. Since 1948 Puerto Rico has had
various industrial incentives laws designed to stimulate industrial investment
in the island. On January 24, 1987, the Governor of Puerto Rico signed into law
the most recent industrial incentives law, known as the Puerto Rico Tax
Incentive Act (the "1987 Act"). The tax exemption benefits provided by the 1987
Act are generally more favorable than those provided by its predecessor, the
Industrial Incentives Act of 1978 (the "1978 Act"). The activities eligible for
exemption under the 1987 Act include manufacturing, certain designated services
for markets outside Puerto Rico, the production of energy from local renewable
sources for consumption in Puerto Rico, and laboratories for scientific and
industrial research.
The 1987 Act provides a fixed 90% exemption from income and
property taxes and a 60% exemption from municipal license taxes during a 10, 15,
20 or 25 year period, depending on the zone where the operations are located.
The 1987 Act also provides a special deduction equal to 15% of the production
payroll for companies whose net income from operations is less than $20,000 per
production job. This special benefit is designed to attract and maintain labor
intensive operations in Puerto Rico. The passive income from certain qualified
investment in Puerto Rico and the instruments evidencing such investments are
fully exempt from income tax. In addition, companies making such investments for
fixed periods of not less than five years are eligible to reduce the tollgate
tax imposed on dividend and liquidating distributions from a maximum rate of 10%
to 5%, depending on the amount and term of the investment.
The bottom limit of 5% was approved in a recent amendment (December
1993) of the 1987 Act (the "1993 amendments"). The 1993 amendments also impose a
new 5% estimated tax on annual industrial development income, subject to
reduction in the event certain long-term qualified investments with such income
are made. The Department of Treasury is collecting an additional amount annually
as a result of the implementation of the bottom limit. As a result of the 1993
amendments, the Department of the Treasury has increased its ability to predict
tax revenues from corporations with greater accuracy. The 1993 amendments also
contain an option to pay a flat 14% tax on annual industrial development income,
which would allow eligible companies to repatriate profits free of tollgate
taxes. Under this option, if a company invests 25% or 50% of its profits in
qualified industrial development investments, the 14% rate drops to 11% or 9%,
respectively. The 1987 Act applies to newly established operations as well as to
existing operations that elect to convert their tax exemption grants to the
provision of the 1987 Act.
Since 1983 hotel operations have been covered by a special
incentives law, the Tourism Incentives Act of 1983, which provides exemptions
from income, property and municipal license taxes for a period of 10 years. In
1993, legislation was enacted providing for an additional set of tax incentives
for new hotel development projects. In addition to providing for exemptions from
income, property and municipal license taxes for a period of up to 10 years, it
provides certain tax credits for qualifying investments in such projects.
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Caribbean Basin Initiative. In August, 1983, the President of the
United States signed into law the Caribbean Basin Economic Recovery Act. The Tax
Reform Act of 1986 amended Section 936 to allow Puerto Rico financial
institutions to invest funds representing earnings accumulated under Section
936, in active business assets or development projects in a qualified Caribbean
Basin country. As of December 1994, 167 projects under the Puerto Rico Caribbean
Development Program have been promoted in fourteen Caribbean Basin countries,
representing 36,115 jobs and over $1,989 million in loan commitments, of which
$1,217 million of Section 936 funds have been disbursed.
Debt Administration and Limitation. Public sector debt comprises
bonds and notes of the Commonwealth and its municipalities and public
corporations. Direct debt of the Commonwealth is supported by Commonwealth
taxes. Debt of municipalities, other than bond anticipation notes, is supported
by real and personal property taxes and municipal license taxes. Debt of public
corporations, other than bond anticipation notes is generally supported by the
revenues of such corporations from charges for services or products. However,
certain debt of public corporations is supported, in whole or in part, directly
or indirectly, by Commonwealth appropriations or taxes.
Commonwealth Guaranteed Debt. Annual debt service on outstanding
Commonwealth guaranteed bonds issued by Urban Renewal and Housing Corporation
and assumed in fiscal year 1992 by Housing Bank and Finance Agency is
$13,254,048 in the fiscal year ending September 30, 1996, which constitutes the
maximum annual debt service on such bonds. The final maturity of such bonds is
October 1, 2001. As of September 30, 1995, $74,755,000 of Commonwealth
guaranteed bonds of Housing Bank and Finance Agency were outstanding. Annual
debt service on Commonwealth guaranteed bonds of Public Buildings Authority is
$114,777,000 in fiscal year ending June 30, 1996 with the final maturity on July
1, 2025. As of September 30, 1995, $1,335,611,000 of Commonwealth guaranteed
bonds of Public Buildings Authority were outstanding. No payments under the
Commonwealth guaranty have been required to date for bonds of Housing Bank and
Finance Agency or Public Buildings Authority.
As of September 30, 1995, $267,000,000 of Commonwealth guaranteed
obligations of Government Development Bank were outstanding. No payments under
the Commonwealth guaranty have been required for any obligations of Government
Development Bank to date.
Public Sector Debt. In Puerto Rico, many governmental or
quasi-governmental functions are performed by public corporations. These are
governmental entities of the Commonwealth created by the Legislature but with
varying degrees of independence from the central government. Most public
corporations obtain revenues from charges for services or products, but many are
subsidized to some extent by the central governments. Capital improvements of
most of the larger public corporations are financed by revenue bonds under trust
notes of certain of the public corporations as of September 30, 1995. Debt of
certain other public corporations is payable primarily from the Federal
Government or is payable from sources other than Commonwealth appropriations or
taxes or revenues of public corporations derived from services or products.
Historically, the Commonwealth has maintained a fiscal policy which
provides for a prudent relationship between the growth of public sector debt and
the growth of the economic base required to service that the debt. The
Commonwealth has also sought opportunities to realize debt service savings by
refunding outstanding debt with obligations bearing lower interest rates. Over
fiscal years 1991 to 1995, public sector debt increased by 24.7% while gross
product rose 24.4%. This slightly greater increase in the rate of public sector
debt relative to the rate of increase in gross product over the subject period
was principally the result of refinancing to achieve debt service savings. Short
term debt outstanding relative to total debt was 7.7% as of September 30, 1995.
Government Development Bank. The principal functions of Government
Development Bank are to act as financial advisor to, and fiscal agent for, the
Commonwealth, its municipalities and public corporations in connection with the
issuance of bonds and notes, to make loans and advances to public corporations
and municipalities, and to make loans to private enterprises to aid in the
economic development of Puerto Rico.
As of September 30, 1995, $1,540,948,000 of bonds and notes of
Government Development Bank
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were outstanding. Government Development Bank has loaned $1,901,578,894 to
Commonwealth public corporations and municipalities. Act No. 12, approved May 9,
1975, as amended, provides that the payment of principal of and interest on
specified notes and other obligations of Government Development Bank, not
exceeding $550,000,000, may be guaranteed by the Commonwealth, of which
$267,000,000 were outstanding as of September 30, 1995. Government Development
Bank has the following principal subsidiaries: Higher Education Assistance
Corporation, Housing Finance Corporation, Tourism Development Fund, Development
Fund, Capital Fund, and Public Finance Corporation.
Factors Affecting Utah Fund
General Economic Conditions. On January 4, 1896, the State became
the forty-fifth state of the United States of America. Ranking eleventh among
the states in total area, the State contains approximately 82,168 square miles.
It ranges in elevation from a low of 2,500 feet above sea level in the south, to
a high of 13,500 feet above sea level in the north. The State is located in an
arid region (precipitation ranks as the forty-ninth lowest in the nation, ahead
of Nevada) and in the center of the Rocky Mountain region with excellent access
to major national and international markets. Home to deserts, plateaus, the
Great Basin and the Rocky Mountains, the State is known for its scenic beauty
and the diversity of its outdoor recreation areas. Approximately 20% of the
State is national park and forest land, 42% is Bureau of Land Management land
and 7% is State park land. Transportation infrastructure in the form of
interstate highways, railroad lines, and an international airport is in place to
provide efficient transportation for business and tourism.
The population forecast for 1996 is 2,002,359 indicating continued
growth. The 1995 estimate for Utah's population was approximately 1,959,025, a
2.2% increase. The U.S. Census Bureau estimates Utah was the third fastest
growing state in the country. Net in-migrations were approximately 13,882 people
in 1996. This is the sixth consecutive year Utah experienced strong net
in-migrations. The State's population continues to be concentrated in the
metropolitan area along the Wasatch mountains, with Salt Lake City as the hub.
Growth in the rural areas has picked up in the last few years and between 1995
and 1996, almost every county in Utah experienced population increases. The
State continues to face the challenge of bringing more economic development to
the rural areas of the State.
Utah's economy continues to experience sustained growth rates
greater than that of the national economy. Employment growth, an important
economic indicator, continues to look strong. Utah consistently ranked near the
top of the nation in job growth. In 1996, Utah's job growth rate was 5.3%, or an
additional 48,000 net new jobs, ranking second among all states. Utah's job
growth rate has now equaled or exceeded 3.0% for nine consecutive years and
exceeded 5% in four straight years. Projected job growth for 1997 is about 4.2%.
The strength of the State's economy over the past several years has
occurred at the same time that it has become more diversified. That is, the
distribution of the State's employment has become less specialized across
industries while the level of total employment has increased. The result of this
restructuring in the midst of economic growth is that sectors in which the
State's employment has been disproportionately concentrated in the past (such as
the federal government and extractive industries) have lost in employment share,
while sectors other than these (notably those affected by the expansion of
tourism, computer software, financial services, and biomedical technologies)
have increased in shares. The service industries continue to generate the
largest number of jobs in the State. During 1996, services created 17,100 new
jobs for a growth rate of over 7%. The major contributors to rapid expansion
were the high-tech computer services, business services, engineering/management
services, and personal/amusement services.
In light of Utah's economic growth and positive financial position,
the State continues to face many significant issues. The State must deal with
the increased demand for services associated with this growth. Education,
economic development, transportation, corrections, health, and human service
needs continue to be the major demands on state resources.
Budgetary Process. The Governor is required to submit a balanced
budget to the Legislature for each fiscal year. The budget is required to
describe, among other things, (i) a complete plan of proposed expenditures and
estimated revenues for the ensuing year, (ii) the revenues and expenditures for
the next
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preceding fiscal year, and (iii) current assets, liabilities and reserves, any
surplus or deficit and the debts and funds of the State. The budget is required
to include an itemized estimate of appropriations for payment and discharge of
the principal and interest of the indebtedness of the State, among other things.
Deficits or anticipated deficits must be included in the budget.
The State Constitution requires that budgeted expenditures should
not exceed estimated revenues and other sources of funding, including beginning
fund balances. The Legislature authorizes expenditures in annual state
"Appropriations Acts." The Acts also identify the sources of funding for
budgeted expenditures. In the event actual revenues are insufficient to cover
budgeted expenditures, the Governor must order budget reductions. Adjustments to
the budget may be made throughout the year for changes in department revenues or
fund revenues so that departments and funds will not end the fiscal year in a
deficit positions.
The State also has an appropriation limitation statute which limits
the growth in state appropriations. The law provides three basic limitations.
First, as population, personal income, and inflation increase, appropriations
are allowed to increase only at the same relative rate. Second, it limits
outstanding state general obligation debt to 20% of the appropriations limit.
Third, it freezes the state-mandated property tax rate, which funds a portion of
public education at the local level. These statutory limitations can be exceeded
only if a fiscal emergency is declared and approved by more than two-thirds of
both houses of the Legislature, or if approved by a vote of the people. However,
the spending limit statute may be amended by a majority in both houses of the
Legislature.
The State was $7.4 million below the appropriation limitation for
the fiscal year ended June 30, 1996. The State is currently below the fiscal
year 1997 appropriation limitation by $15 million. Also, the State is currently
$326 million below the debt limit established in the Constitution.
Revenues and Expenditures. The General Fund is the principal fund
from which appropriations are made for State operations. It is specifically
maintained to account for all financial resources and transactions not accounted
for in another fund. The General Fund receives all State sales taxes, which
comprise the largest source of this Fund's revenues. Other principal sources of
revenues include Federal contracts, grants and mineral lease payments, State
department collections and miscellaneous licenses, fees and taxes.
Each fund of the State maintains an equity position which is either
restricted by state law, restricted by contract, or is unreserved and available
for future appropriation. The equity position of the State's General Fund
Uniform School Fund, and Transportation Fund are:
The state ended fiscal year 1996 with a surplus in both the General
and Uniform School Funds totaling $9.1 million. In addition, fiscal year 1997
revenue is expected to exceed original estimates by $13.8 million with the total
General and Uniform School Fund at $2.8 billion. Other changes to available
dollars amount to $1.9 million. Altogether, there are $24.8 million available.
This allows the governor to recommend supplemental funding in fiscal year 1997
for needs that arose after the legislature met in 1996. The Governor is
recommending $6.7 million in General and Uniform School Fund supplementals.
The General Fund ending balance for fiscal year 1996 was $351,000,
which is 97.7% less than the previous fiscal year. Approximately $126.2 million
in the Uniform School Fund was reserved from fiscal year 1996 for fiscal year
1997, leaving a $0 ending balance in this fund at June 30, 1996. The balance in
the Rainy Day Fund was $71.5 million.
Actual revenue collections for the General Fund in fiscal year 1996
were $1.34 billion. Of this amount, 86.8% or $1.162 billion came from the sales
and use tax. Sales and use tax revenue increased 10.2% from the previous fiscal
year. Retail sales were estimated to have increased 11.8% in 1996, but are
projected to slow to 6.3% in 1997.
Actual revenue collections in the Uniform School Fund was $1.33
billion. Of this amount, approximately $1.14 billion or 85.8% was generated from
the individual income tax, an increase of 11% from fiscal year 1995. Revenue in
the Transportation Fund for fiscal year 1996 totaled $261 million, with 64% or
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$163 million represented by the motor fuel tax which showed a 4.8% increase.
Expenditures in the General and Uniform School Funds for fiscal
year 1996 totaled $2.595 billion. Prior to the lapsing of $14.1 million into
these Funds, the total appropriations were $2.609 billion. The majority of the
spending is toward public education, which consisted of 48% or $1.25 billion of
total expenditures. Higher education received $425 million or 16.2%. Corrections
appropriations amounted to 5.9% or $155 million, and human services were 5.5% or
$142 million of total appropriations.
Debt service appropriations from General and Uniform School Funds
totaled $77 million in fiscal year 1996 and are expected to increase to $81.5
million for fiscal year 1997. Appropriations for the Capital Budget in these
Funds were $72.4 million in fiscal year 1996 but are estimated to increase to
$209.1 million in fiscal year 1997. Total capital budget for all funds for
fiscal year 1996 was $388.3 million and total debt service was $94.4 million.
Debt Administration and Limitation. Utah's Constitution limits the
State to a total general obligation debt not to exceed, in the aggregate any one
time, an amount equal to 1.5% of the value of the taxable property of the State,
as shown by the last assessment for state purposes. The estimated fiscal year
1998 appropriation limit of $3.25 billion equates to an outstanding general
obligation debt limit of $650 million. Revenue bonds and certificates of
participation issued by the State are legally excluded from the debt
limitations.
During fiscal year 1995, the State issued $95 million in general
obligation bonds and $31 million in lease revenue bonds for construction and
renovation of various capital facilities. Shortly after fiscal year end, the
State issued general obligation bonds totaling $45 million for buildings
construction and purchases. The State also issued $93 million in lease revenue
bonds on August 15, 1995, to be used to purchase and construct state buildings.
The State is authorized to issue an additional $15 million in general obligation
bonds for construction and renovation of various capital facilities. The bonds
are not likely to be issued before July 1996.
The State issued $8.4 million in water revenue refunding notes on
October 4, 1995. The note proceeds and original bond reserve funds were used to
defease the 1989 Revolving Loan Recapitalization Program Revenue Bond of $7.7
million. The notes also provided an additional $2 million in capital for
revolving water loan programs.
As of June 30, 1995, the State's total general obligation debt
outstanding was $431 million, leaving available to the Sate $725 million of
additional general obligation borrowing capacity. As of October 31, 1995, the
outstanding debt was $413 million, with a remaining constitutional limit of $743
million. A statutory debt limit is established in the Utah Code Annotated. It
sets the maximum general obligation bonding authority at 20% of the
appropriation limitation. The estimated fiscal year 1998 appropriation limit of
$3.25 billion equates to an outstanding general obligation debt limit of $650
million. This amount, less approximately $297 million in outstanding debt and
$27 million in authorized but unissued debt, leaves a general obligation
borrowing capacity of $326 million in fiscal year 1998.
In fiscal year 1996, $44.33 million general obligation bonds were
authorized and another $31 million are authorized for fiscal year 1997.
Lease-purchase/revenue bond projects authorized for fiscal year 1997 are at
$50.6 million.
Funding for debt service on the State's general obligation bonds is
usually appropriated from the General Fund and transferred to the various bond
sinking funds within the Debt Service Fund. All State general obligation bond
and certain revenue bond principal and interest payments are made from
individual sinking funds within the Debt Service Fund. Investment earnings on
moneys held in the sinking funds (except as may be required by the proceedings
authorizing the issuance of particular series of bonds), transfers from the
General Fund or Special Revenue Funds and certain pledged revenues are the only
sources of funding for this fund.
The outstanding general obligation bonds of the State were rated
"Aaa by Moody's, "AAA" by Standard & Poor's, and "AAA" by Fitch as of July 1,
1995.
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Factors Affecting Washington Fund
General Economic Conditions. The state of Washington was created by
an enabling act of Congress in 1889. The state is located on the Pacific Coast
in the northwestern corner of the continental United States. Washington
comprises 68,139 square miles. On the west side of the state, high mountains
rise above coastal waters. The mild moist climate in western Washington makes
this region excellent for dairy farming and the production of flower bulbs. The
forests of the Olympic Peninsula are among the rainiest places in the world.
Washington's location makes it a gateway for land, sea, and air travel to Alaska
and the Pacific Rim countries. Its coastline has hundreds of bays and inlets
that make excellent harbors. East of the Cascade Mountain Range, farmers raise
livestock and wheat on large ranches. Washington leads the nation in apple
production and the state produces large amounts of lumber, pulp, paper, and
other wood products.
The State's population reached an estimated 5,516,800 in 1996, with
an annual growth rate of approximately 2% despite slower economic growth since
1990. In fiscal year 1995, Washington's population growth remained relatively
strong, with an estimated net migration of 57,400 people between April 1, 1994
and April 1, 1995. This was only slightly higher than the 55,700 increase
recorded in the previous fiscal year, but still substantially above the 30-year
historical average of approximately 40,000 net migrants per year. Net migration
between 1996 and 1997 is forecast at 55,800.
The City of Seattle, located in northwestern Washington, is the
largest city in the Pacific Northwest and serves as the King County seat. King
County and the adjacent counties to the north, Snohomish and Island Counties,
comprise the Seattle Primary Metropolitan Statistical Area ("PMSA"), which is
the fourth largest metropolitan center on the Pacific Coast and biggest single
component of the State's economy. The population in Seattle declined gradually
to 488,200 in 1986 and since that time has increased to 531,400 in 1994. The
percent of State residents living east of the Cascades, which had remained
stable at 25% throughout the 1970's, declined to nearly 20% by 1990. Since 1990
the pace of growth picked up in several eastern cities, including Spokane, as
growth began to slow in the Puget Sound area.
The economic base of the State includes manufacturing and service
industries as well as agricultural and timber production. As the State's largest
employer, the Boeing Company, is preeminent in aircraft manufacture and is
headquartered in Seattle. Boeing exerts a significant impact on overall State
production, employment and labor earnings. After six years of downsizing, Boeing
increased its work force by 3,800 employees in the last two quarters of fiscal
year 1996, with plans to hire 10,000 more by the end of calendar year 1996. This
marked a dramatic turn-around for the state's aerospace industry, which lost a
total of 25,000 jobs between the first quarter of 1993 and the second quarter of
1996. While the primary activity of Boeing is the manufacture of commercial
aircraft, Boeing has played leading roles in aerospace and military missile
programs for the United States and has undertaken a broad program of
diversification activities including Boeing Information and Support Services. In
1995, Boeing had $19.515 billion in sales and net earnings of $329 million, and
a backlog of orders totaling $72.3 billion. While Boeing has dominated
manufacturing employment, other manufacturers have experienced growth, thus
reducing Boeing's percentage of total manufacturing jobs in the State. The most
significant growth in manufacturing jobs, exclusive of aerospace, has occurred
in high technology-based companies.
The highest employment growth in the State between 1981 and the
present occurred in the services sector, although rate of growth has shown small
but consistent decline since 1990 from 7% to 3.5% forecast for 1994. As the
business, legal, and financial center of the State, Seattle ranks ninth in the
country in the number of downtown hotel rooms. The Washington State Convention
and Trade Center, occupying 370,000 square feet at an investment of $152 million
opened in June 1988. The convention facility has the capacity for events
involving as many as 11,000 people. The State's natural attractions include the
Olympic and Cascade Mountain Ranges, Mt. Rainier, Mt. St. Helens National
Volcanic Monument, Puget Sound and the ocean beaches. Tourists also enjoy the
State's wineries. Seven of the ten largest wine producers in the Pacific
Northwest are located in the State.
Natural forests cover more than 40% of the State's land area.
Forest products rank second behind aerospace in value of total production.
Approximately 2.6% of non-farm employment is in the forest products industry,
with The Weyerhaeuser Company being the largest employer. Productivity in the
State's forest
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products industry increased steadily from 1980 to 1990; however, since 1991
recessionary influences have resulted in a production decline. Yet, in 1994, the
industry employed more than 58,000 people and produced approximately $11.0
billion worth of products. A continued decline in overall production during the
next few years is expected due to federally imposed limitations on the harvest
of old-growth timber and the inability to maintain the recent record levels of
production increases. Although continued decline in unemployment may be
anticipated in certain regions, the impact is not expected to significantly
affect the State's overall economic performance.
Agriculture, combined with food processing, is the State's most
important industry. The State's major products, wheat, milk, apples and cattle,
comprise 55% of total production. Washington's food processing industries
employed approximately 40,000 workers at more than 750 plants in 1994,
generating products worth nearly $8 billion annually. Growth in agricultural
production, including potatoes and hay, was an integral factor in the State's
economic growth in the late 1980's and early 1990's.
On a combined basis, employment in the government sector represents
approximately 19% of all wage and salary employment in the State. Seattle is the
regional headquarters of a number of federal government agencies, and the State
receives an above-average share of defense expenditures. Major federal
installations include Navy bases at Bremerton, Whidbey Island and Bangor;
Everett is the site of a new Naval home port; an Air Force base (McChord) and an
Army base (Fort Lewis) are located in the Tacoma area. As part of the
President's plan to reduce the federal deficit, the Secretary of Defense has
proposed spending cuts that would include the Puget Sound Naval Shipyard and the
Bangor Trident Submarine Base in Kitsap County. None of the military
installations in the State are included among those bases proposed for closure
in 1995. Recent declines of naval and civilian personnel in Kitsap County have
been offset by increases in army personnel in Pierce County. During 1994, Army
unit reassignments to Fort Lewis from Europe and parts of the United States
increased troop strength by more than 5,000. At present no major additions or
reductions to troop strength at Fort Lewis have been made. The long term outlook
is for relative stability.
Budgetary Process. The Governor is required to submit a budget to
the state Legislature no later than December 20 of the year preceding
odd-numbered year sessions of the Legislature. The budget is a proposal for
expenditures in the ensuing biennial period based upon anticipated revenues from
the sources and rates existing by law at the time of submission of the budget.
The appropriated budget and any necessary supplemental budgets are legally
required to be adopted through the passage of biennial appropriation bills by
the Legislature and approved by the Governor. Biennial operating appropriations
are generally made at the fund/account and agency level, however, in a few
cases, biennial appropriations are made at the fund/account and agency/program
level. Biennial capital appropriations are generally made at the fund/account,
agency, and project level.
Biennial legislative appropriations are strict legal limits on
expenditures/expenses, and over expenditures are prohibited. All appropriated
and non-appropriated/allotted funds are further controlled by the executive
branch through the allotment process. This process allocates the
expenditure/expense plan into monthly allotments by program, source of funds,
and object of expenditures. According to statutes, except under limited
circumstances, the original biennial allotments are approved by the Governor and
may be revised only at the beginning of the second year of the biennium and must
be initiated by the Governor.
Proprietary funds earn revenues and incur expenses not covered by
the allotment process. Budget estimates are generally made outside the allotment
process according to prepared business plans. These proprietary fund business
plan estimates are adjusted only at the beginning of each fiscal year.
Additional fiscal control is exercised through various means. OFM
is authorized to make expenditure/expenses allotments based on availability of
unanticipated receipts, mainly federal government grant increases made during a
fiscal year. State law does not preclude the over expenditure of allotments
although, the statute requires that the Legislature be provided an explanation
of major variances.
Revenues and Expenditures. The General Fund accounts for all
general government financial resources and expenditures not required to be
accounted for in other funds. For the 1993-1995 biennium,
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revenues in the General Fund increased 11.5%. Based on the November 1996
forecast by the ERFC, General Fund-State revenues for the 1995-1997 Biennium are
forecast to be about $18.3 billion, an increase of 6.2% over the previous
biennium in nominal terms. In real terms and on a constant rate and base, the
revenue growth will be about 5.1%. Tax changes enacted during the 1995
legislative session reduced revenues for the 1995-1997 Biennium by $228
million; additional changes during the 1996 legislative session and the special
session further reduced revenues for the 1995-1997 Biennium by $175 million.
Without these legislative reductions, the revenue growth for the 1995-1997
Biennium would have been 10%.
Governmental activities are accounted for in four governmental fund
types: the general, special revenue, debt service, and capital projects funds.
Revenues for all governmental funds are estimated to total $37.97 billion for
the 1995-97 biennium. This represents an increase of 5.9% over revenue for the
previous biennium. Taxes, the largest source of governmental revenue, are
expected to produce 55% of revenues. This percentage is a slight increase from
the previous biennium and is attributable to growth in the state's population
and personal income during the current biennium which increased retail sales and
use tax collections by $434 million or 5.3%. Also, during the current biennium,
the federal government grants-in-aid is expected to increase by $397 million or
5%. However, Washington is expected to lose $618.9 million in federal funding in
the 1997-99 biennium due to federal cost cutting measures signed into law in
August 1996. Of this amount, $474 million are in programs outside of the current
state budget. Yet, many of these reductions are expected to have a significant
impact on the state budget.
Claims and judgments payable is materially comprised of three
activities: workers' compensation, risk management, and state employees'
insurance. The Workers' Compensation Fund, an enterprise fund, establishes a
liability for both reported and incurred but not reported insured events, which
includes estimates of both future payments of losses and related claim
adjustment expenses. At June 30, 1995, $23.4 billion of unpaid claims and claim
adjustment expenses are presented at their net present value of $10.4 billions.
The $10.4 billion claims and claim adjustment liabilities as of June 30, 1995,
includes $4.7 billion for supplemental pension cost of living adjustments (COLA)
that by statute are not to be fully funded. The remaining $5.7 billion in claims
liabilities is fully funded by $6.7 billion in assets, including $6.2 billion of
long-term investments, held for payment of the claims.
The Risk Management Fund, an internal service fund, reports claims
and judgment liabilities when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. The state and its component
public authorities are defendants in a significant number of lawsuits pertaining
to property and casualty matters. As of June 30, 1995, outstanding and
actuarially determined claims against the state and its public authorities were
$113.8 million for which the state has recorded a liability. At June 30, 1995,
the Risk Management Fund held $69.3 million in cash equivalents designated for
payment of these claims. Of this amount, $52.6 million has been accumulated
under the state's Self Insurance Liability Program initiated in 1990. This Self
Insurance Liability Program is intended to provide funds for the payment of all
claims resulting from accidents after June 30, 1990. The state is restricted by
law from accumulating funds in the Self Insurance Liability Program in excess of
50% of total outstanding and actuarially determined claims. Current projections
indicate that the state will reach this limit by June 30, 1996.
The State Employees' Insurance Fund, an internal service fund,
establishes a liability when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. Liabilities include an
actuarially determined amount for claims that have been incurred but not
reported. Because actual claims liabilities depend on various complex factors,
the process used in computing claims liabilities does not necessarily result in
an exact amount. At June 30, 1995, the state held $31.1 million in investments
designated for payment of state employees' insurance claims.
Debt Administration. The State Constitution and enabling statutes
authorize the incurrence of state general obligation debt, to which the state's
full faith, credit, and taxing power are pledged, either by the Legislature or
by a body designated by statute (presently the State Finance Committee). Bonds
payable at June 30, 1995 consisted of bonds issued by the state of Washington
and accounted for in the General Long-Term Obligations Account Group, and
certain state agency bonds accounted for in proprietary funds. During Fiscal
Year 1995, the state of Washington maintained its "AA" rating from Fitch
Investors Service and Standard &
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Poor's Corporation, and its "Aa" rating from Moody's Investors Service.
General Obligation Bonds. General obligation bonds have been
authorized and issued primarily to provide funds for acquisition and
construction of capital facilities for public and common schools, higher
education, public and mental health, corrections, conservation, and maintenance
and construction of highways, roads, and bridges. The state also issued bonds
for assistance to municipalities for construction of water and sewage treatment
facilities and corrections facilities. Additionally, bonds are authorized and
issued to provide for the advance refunding of general obligation bonds
outstanding.
Zero Interest Rate General Obligation Bonds. Zero interest rate
general obligation bonds have been authorized and issued primarily to provide
funds for acquisition and construction of public administrative buildings and
facilities, and capital facilities for public and common schools and higher
education. Total debt service (principal and interest) requirements for zero
interest rate general obligation bonds to maturity as of June 30, 1995 was
approximately $492 million. As of June 30, 1995, zero interest rate general
obligation bonds outstanding totaled $208 million while bonds authorized but
unissued equaled zero.
Limited Obligation Bond. Limited obligation bonds have been
authorized and issued to provide funds for public school plant facilities;
state, county, and city arterials; and state capital buildings and facilities.
These bonds are payable primarily from dedicated revenue of the state's motor
vehicle fuel excise tax and other miscellaneous dedicated revenue generated from
assets such as harbors and tidelands, park, and land grants. Total debt service
(principal and interest) requirements for limited obligation bonds to maturity
at June 30, 1995 was approximately $8.1 million. As of November 30, 1996,
limited obligation bonds outstanding totaled $4.2 million while bonds authorized
but unissued equaled zero.
Revenue Bonds. Current state statutes empower certain state
agencies to issue bonds that are not supported, or are not intended to be
supported, by the full faith and credit of the state. These bonds pledge income
derived from acquired or constructed assets for retirement of the debt and
payment of the related interest. Revenue bonds issued by individual agencies are
supported by fees, rentals, and tolls assessed to users. Primary issuing
agencies are the State's Public Universities and various Community Colleges.
Total debt service (principal and interest) for revenue bonds to maturity at
June 30, 1995 was approximately $310 million. As of June 30, 1995, revenue bonds
outstanding totaled $162 million while bonds authorized but unissued equaled
zero.
Certificates of Participation. The office of the State Treasurer
continued its administration of the state certificates of participation program
("COPs")which has been in existence since Fiscal Year 1990. This program enables
state agencies to finance the acquisition of real and personal property at tax
exempt interest rates realizing substantial savings over vendor financing. The
state's publicly-offered equipment certificates of participation have been rated
"A" by both rating agencies which rely on the centralized oversight of the State
Treasurer and the Office of Financial Management as a strong credit element in
the rating. In the real estate component of the financing program, certain
projects have been rated "A1" by Moody's Investors Service as a reflection of
their essentialness to state government operations. As of June 30, 1995, there
were outstanding $193 million in certificates of participation. Underlying this
amount were agency certificates originating from 73 agencies amounting to $178.5
million with the balance on deposit with the trustee either for use in the
program (unissued proceeds) or to satisfy reserve requirements. These programs
are currently funded using a combination of publicly offered securities and bank
financial services master installment agreements.
Factors Affecting Wisconsin Fund
General Economic Conditions. Wisconsin provides a full range of
services which include education, health and social services, transportation,
law, justice, public safety, recreation and resource development, public
improvements and general administrative services. The State's economy remains
strong. Unemployment fell to 3.5% for all of 1996, the lowest rate since 1969.
This is well below the national rate of 5.4% and is estimated to be the fifth
lowest unemployment rate in the country. Manufacturing jobs in 1996 reached
599,900, eclipsing the old mark of 591,000 set in 1979. The strongest growth
occurred in the service sector, increasing by 14,900 jobs to a total 645,600.
Total non-farm employment increased to 2,586,200, setting a new record. However,
in 1996, Wisconsin's jobs increased 1.2% which is much lower than the 2.6%
growth
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in 1995 and the 2.0% growth nationally. Looking ahead, strong gains in
employment will be more difficult. Employment growth is expected to remain at
1.2% in 1997 and rise slightly to 1.6% in 1998. Manufacturing employment growth
is expected to dip into negative territory briefly in 1997, but then resume
growth near 1% for 1998 and 1999. That will again place manufacturing employment
growth in Wisconsin nearly 1% above the national average. The strongest gains in
employment will be trade and services.
Wisconsin's personal income growth will be affected by the slowdown
in employment growth. Personal income increased 6.1% in 1995. However, the
slowdown in job growth will restrain income gains to increases below the rest of
the country for 1996, 4.9%. In 1997 and 1998, income gains should match the pace
of national income growth, about 4.8%.
In 1995, the State continued its efforts to expand existing State
business and attract new businesses to Wisconsin. In 1995, $11.4 million was
awarded in grants and loans from the Wisconsin Development Fund for major
economic development projects, customized labor training and technology
development. In addition, the State operates a variety of programs that target
minority business development, development zones and community-based economic
development. For the 1997-99 biennium, the Governor recommended $4 million be
provided to the Wisconsin Development Reserve Fund to support guarantees for
private bank loans of up to $500,000 for land redevelopment. The State expended
$8.2 million in 1995 to market Wisconsin as a tourism destination. In Calendar
Year 1994, the tourism industry created directly and indirectly 147,149 jobs and
$5.6 billion in expenditures. For the 1997-99 biennium, the Governor recommended
maintaining tourism promotion funding at $7.7 million annually.
Wisconsin's Clean Water Fund program provides financial assistance
to municipalities for the planning, design and construction of pollution
abatement facilities - primarily for wastewater treatment. Funding is provided
from the federal state revolving fund grant authorized through the Water Quality
Act, and through four State programs backed by State revenue and general
obligation bonds. In fiscal year 1995, the Clean Water Fund reached agreements
with municipalities amounting to $116.7 million, bringing the total amount of
loans and grants awarded by the program to $761.7 million since its inception in
1991. For fiscal years 1997-99, the Governor recommended $20 million be
authorized in the Clean Water Fund for subsidized loans to municipalities along
with $43,800 to support loan-processing activities.
Welfare reform initiatives moved forward in Wisconsin in fiscal
year 1995 with the implementation of the Parental and Family Responsibility
program and the Two-Tier Demonstration project, each in four counties on July 1,
1994. In addition, the Work Not Welfare initiative, one of the first programs in
the nation to test time-limited benefits, began in January 1995 in two counties.
On April 25, 1996, "Wisconsin Works" was enacted into law as an effort to make
people more self-sufficient by making beneficial changes for child care, AFDC
families, and increasing grant amounts for subsidized employment. As a result of
ongoing welfare reform efforts and a strong economy the AFDC caseload dropped
from approximately 68,000 in October 1995 to approximately 48,000 in October
1996, a reduction of almost 30% and the lowest level since the early 1980's.
In fiscal year 1995, the legislature and Governor acted to fulfill
their commitment to increase the State's share of school costs to 66.7% in
fiscal year 1997. To facilitate reaching this goal, $171 million was added to
the $103 million fiscal year 1995 school aid increase originally approved in the
1993-95 biennial budget, bringing the total fiscal year 1995 State school aid
increase to $274 million. This $274 million increase is the largest dollar
increase in school aid in the State's history and resulted in a statewide 1994
school property tax increase of only 0.3%, the smallest levy increase since
1973. Full implementation of the two-thirds State funding commitment in Fiscal
Year 1997 will result in the largest reduction in the school property tax levy
in the State's history. The Governor recommended increases in direct school aids
of $204.3 million in fiscal year 1998 and $94.2 million in fiscal year 1999.
Budgetary Process. The State Constitution requires the Legislature
to enact a balanced budget. The State's fiscal year runs from July 1 through
June 30 of the following year. State law establishes procedures for the budget's
enactment. The Secretary of Administration, under the direction of the Governor,
compiles all budget information and prepares an executive budget consisting of
the planned operating expenditures and revenues of all State agencies. The
Department of Revenue furnishes forecasts of tax revenues to the
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Department of Administration. The budget is submitted to the Legislature on or
about February 15 of each odd-numbered year. Upon concurrence by both houses of
the Legislature in the appropriations and revenue measures embodied in the
budget bill, the entire bill is submitted to the Governor. The Governor is
empowered to sign the bill into law or to veto all or part of the bill. If the
Governor vetoes any portions, those items may be reconsidered in accordance with
the rules of each house and, if approved by two-thirds of the members of each
house, will become law notwithstanding the Governor's veto. In the event that a
budget is not in effect at the start of a fiscal year, the prior year's budget
serves as the budget until such time a new one is enacted.
State law prohibits the enactment of legislation which would cause
the estimated General Fund balance to be less than 1% of the general purpose
revenue appropriations for that fiscal year. For the 1995-1996 fiscal year and
1996-1997 fiscal year, the statutorily required reserves are $83 million and $92
million respectively. The effect of the State law provision is to divide the
year-ending General Fund balance into two components: the statutorily required
reserve and the amount above such reserve.
The Statutes provide that if, following the enactment of the
budget, the Secretary of Administration determines that budgeted expenditures
will exceed revenues by more than one-half of one percent of general purpose
revenues, no action can be taken regarding approval of expenditure estimates.
Further, the Secretary of Administration must notify the Governor, the
Legislature and its Joint Committee on Finance, and the Governor must submit a
bill correcting the imbalance. If the Legislature is not in session, the
Governor must call a special session to take up the matter.
The Secretary of Administration also has statutory power to order
reductions in the appropriations of state agencies (which represent less than
one-third of the General Fund budget). The Secretary of Administration may also
temporarily reallocate free balances of certain funds to other funds which have
insufficient balances and, further, may prorate or defer certain payments in the
event current or projected balances are insufficient to meet current
obligations. In such an event, the Department of Administration may also request
the issuance of operating notes by the Building Commission.
The 1995-1997 State budget provides for a reorganization of State
government that occurs between July 29, 1995 and July 1, 1996. This
reorganization is intended to improve accountability, consolidate similar
functions, provide a better framework to administer policy changes and improve
government efficiency and effectiveness. The reorganization creates two
departments. The Department of Tourism initiates operations on January 1, 1996,
and will perform various duties previously conducted within parts of the
Department of Development and Department of Natural Resources. The Department of
Financial Institutions commences operations on July 1, 1996 and will perform
duties currently conducted within the Offices of the Commissioners of Banking,
Savings and Loan, Securities, and Credit Unions.
This reorganization renames the Department of Public Instruction
the Department of Education and transfers revised duties of the State
Superintendent of Public Instruction to the new Office of the State
Superintendent of Public Instruction. These actions were to go into effect on
January 1, 1996; however, the State Supreme Court issued a temporary injunction
on December 27, 1995 that delays the renaming of the Department of Public
Instruction and transfer of revised duties of the State Superintendent of Public
Instruction. Effective July 1, 1996, this reorganization also renames other
State Departments and includes other components for reorganization in eight
other functions groupings as well.
Revenues and Expenditures. The State has an extremely diverse
revenue-raising structure. Approximately forty-four percent of the total revenue
is derived from the various taxes levied by the State. The remainder comes from
the federal government and from various kinds of fees, licenses, permits and
service charges paid by users of specific services, privileges or facilities.
State expenditures are categorized under eight functional
categories and three distinct types of expenditures within each. The eight
functional categories are: Commerce, Education, Environmental Resources, Human
Relations and Resources, General Executive, Judicial, Legislative, and General
Appropriations.
As of June 30, 1995, the State ended the fiscal year on a statutory
and unaudited basis with an
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unreserved, undesignated balance of $401 million. On an all-funds basis, the
total amount available was $23.319 billion consisting of (i) a beginning balance
of $235 million, (ii) tax revenues of $8.577 billion and (iii) nontax revenues
of $14.507 billion. Total disbursements and reserves were $22.918 billion,
resulting in the balance stated previously. On a general-fund basis the total
amount available was $13.495 billion consisting of (i) the same beginning
balance, (ii) tax revenues of $7.816 billion and (iii) nontax revenues of $5.444
billion. Total disbursements and reserves were approximately $13.94 billion,
resulting in the same balance as described on an all-fund basis.
For fiscal year ending June 30, 1996, the budget on an all-funds
basis projects a balance of $442 million. Total available revenues are estimated
to be $20.686 billion consisting of (i) a beginning balance of $337 million,
(ii) tax revenues of $8.218 billion and (iii) nontax revenues of $12.131
billion. Total disbursements and reserves are estimated to be $20.327 billion,
consisting of net disbursements of $20.187 billion and reserves of $140 million.
This results in an estimated balance of $359 million which, when combined with
statutorily required balance of $83 million, results in a balance at June 30,
1996 of $442 million.
For fiscal year 1997, total tax revenue is estimated at $8,688.5
million and total revenue in the general fund is estimated at $9,407.5 million.
After expenditures of $9,264.8 million, the general fund is expected to have an
ending balance of $142.7 million.
Since 1984 the State has issued operating notes each year in
anticipation of cash-flow imbalances, primarily experienced in November and
December. These operating notes eliminated the need to prorate or defer large
local assistance payments or to reallocate balances in other State funds. The
1997-99 budget assumes issuing operating notes of approximately $500 million in
fiscal year 1998 and $750 million in fiscal year 1999. As a percent of total
appropriations, the size of the operating notes will be within the range of
notes issued in past years. Operating notes are not general obligations of the
State and are not on a parity with State general obligations.
The Dane County Circuit Court has specified the remedies resulting
form its 1991 decision regarding the source of payment for certain additional
pension amounts. One part of the remedy required a lump-sum payment from the
General Fund to the Employee Trust Fund to be made by August 1994. The payment
is estimated to be $95.3 million. In addition, the State is expected to incur
other costs of about $0.5 million to implement the remedy and an amount yet to
be determined to pay plaintiffs' attorneys fees. The monetary remedy has been
stayed by the Dane Count Circuit Court pending entry of a final, nonappealable
judgment. All parties have filed appeals or cross-appeals. It is possible that
the amount of the remedy may be increased or decreased, perhaps substantially,
or eliminated. The 1995-1996 and 1996-1997 budgets do not specifically provide
for this payment.
Debt Administration and Limitation. At the inception of statehood,
constitutional limitations severely restricted the issuance of direct State
debt. Prior to 1969, independent nonstock, nonprofit corporations were
established to issue debt on behalf of the State. In April 1969, the voters of
the State, by referendum, adopted an amendment to the Constitution that
authorized the State to borrow money directly and simultaneously terminated the
use of the corporations for financing State construction. Legislation that
established specific implementation powers was subsequently passed in December
1969, whereupon the State first issued general obligation bonds. To date, the
Legislature has authorized the issuance of general obligations for 59 distinct
purposes and has limited the amount of general obligations which may be issued
for each purpose. The purposes for which State general obligations may be issued
are set forth in the Wisconsin Constitution, which provides the basis for the
State's general obligation borrowing program. It permits three types of
borrowing: (1) to acquire, construct, develop, extend, enlarge or improve land,
waters, property, highways, railways, buildings, equipment or facilities for
public purposes; (2) make funds available for veterans housing loans; and, (3)
fund or refund any outstanding State general obligations. There is no
constitutional requirement that the issuance of general obligations receive the
direct approval of the electorate.
The Wisconsin Constitution and State Statutes limits the amount of
debt the State can contract in total and in any calendar year. In total, debt
cannot exceed five percent of the value of all taxable property in the State.
The amount of debt contracted in any calendar year is limited to the lesser of
three-quarters of one
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percent of aggregate value of taxable property or 5 percent of aggregate value
of taxable property less net indebtedness at January 1. Currently, the annual
limit is $1,511,535,818 and the cumulative debt limits is $10,076,905,450 (of
which the amount available is 46,832,826,001). The lesser amount is
$1,511,535,818. A refunding bond issue is not taken into account for purposes of
the annual debt limit, and a refunded bond issue is not taken into account for
purposes of the cumulative debt limits. Interest scheduled to accrue on any
obligation that is not payable during the current fiscal year is treated as debt
and taken into account for purposes of the debt limitations.
The $158,080,000 State of Wisconsin General Obligation Bonds of
1996, Series A, are the State's first publicly offered general obligation bond
issue in 1996. Currently authorized but unissued general obligation bonding
authority for general purpose revenue supported programs amounts to $980.4
million. This authorized/unissued bond authority breaks down to $514.0 million
for building programs and $466.4 million for environmental programs. The State
anticipates several competitive sales of general obligations for governmental
purposes. The State anticipates the competitive sale of at least one general
obligation issue for the veterans housing loan program and several private sales
of general obligations for the Clean Water Fund program. The amounts will be
based on cash needs and market conditions. The state's most recent long-term
20-year general obligation bond issue sold at a true interest cost rate of
5.56%. The State is currently considering a general obligation refunding issue
which the State would undertake to achieve debt service savings. The size of
this transaction is estimated to be $75-$125 million.
Although all general obligation bonds and notes issued by the State
are supported by its full faith, credit and taxing power, a substantial amount
of the indebtedness of the State is issued with the expectation that debt
service payments will not impose a direct burden on the State's taxpayers and
its general revenue sources. Similarly, a portion of the indebtedness issued by
nonstock, nonprofit corporations on behalf of the State prior to 1970 and backed
by lease-rental obligations of various State agencies was issued with the
expectation that the rental obligations of the State would not be discharged
from General Fund revenues. At June 30, 1995, State of Wisconsin bonds had a
rating of Aa from Moody's Investors Services and a rating of AA from Standard
and Poor's Corporation.
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FINANCIAL STATEMENTS
KPMG Peat Marwick LLP served as the independent auditors for each
Fund through December 31, 1996 and, in its capacity as such, audited the annual
financial statements of the Fund. Beginning May 1, 1997, Ernst & Young LLP began
serving in such capacity. The Fund's Statements of Net Assets, Statements of
Operations, Statements of Changes in Net Assets, and Notes to Financial
Statements, as well as the report of KPMG Peat Marwick LLP, independent
auditors, for the fiscal year ended December 31, 1996 are included in their
Annual Reports to shareholders. The financial statements, the notes relating
thereto and the report of KPMG Peat Marwick LLP, listed above are incorporated
by reference from the Annual Report into this Part B.
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- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
AUGUST 28, 1997
- --------------------------------------------------------------------------------
VOYAGEUR MUTUAL FUNDS, INC.
- --------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
For Prospectus and Performance of Class A Shares, Class B Shares and Class C
Shares:
Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and Class C
Shares:
(SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Cover Page
- --------------------------------------------------------------------------------
Investment Restrictions and Policies
- --------------------------------------------------------------------------------
Accounting and Tax Issues
- --------------------------------------------------------------------------------
Performance Information
- --------------------------------------------------------------------------------
Trading Practices and Brokerage
- --------------------------------------------------------------------------------
Purchasing Shares
- --------------------------------------------------------------------------------
Investment Plans
- --------------------------------------------------------------------------------
Determining Offering Price
and Net Asset Value
- --------------------------------------------------------------------------------
Redemption and Repurchase
- --------------------------------------------------------------------------------
Distributions and Taxes
- --------------------------------------------------------------------------------
Investment Management Agreement
- --------------------------------------------------------------------------------
Officers and Directors
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
Appendix A -- Ratings
- --------------------------------------------------------------------------------
Appendix B -- General Characteristics and Risks of Options and Futures
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
-1-
<PAGE>
Voyageur Mutual Funds, Inc. ("Mutual Funds, Inc.") is a
professionally-managed mutual fund of the series type. This Statement of
Additional Information ("Part B" of the registration statement) describes
Delaware-Voyageur Minnesota High Yield Municipal Bond Fund series (the "Fund")
of Mutual Funds, Inc. The Fund offers Class A Shares, Class B Shares and Class C
Shares (individually, a "Class" and collectively the "Classes").
Class B Shares and Class C Shares of the Fund may be purchased at a
price equal to the next determined net asset value per share. Class A Shares may
be purchased at the public offering price, which is equal to the next determined
net asset value per share, plus a front-end sales charge. Class A Shares are
subject to a maximum front-end sales charge of 3.75% and annual 12b-1 Plan
expenses of up to 0.25%. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within six years
of purchase and annual 12b-1 Plan expenses of up to 1% which are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the Fund's
Prospectus. Class C Shares are subject to a CDSC which may be imposed on
redemptions made within 12 months of purchase and annual 12b-1 Plan expenses of
up to 1% which are assessed against Class C Shares for the life of the
investment. All references to "shares" in this Part B refer to all Classes of
shares of the Fund, except where noted.
This Part B supplements the information contained in the current
Prospectus for the Fund dated August 28, 1997 as it may be amended from time to
time. It should be read in conjunction with the Prospectus. Part B is not itself
a prospectus but is, in its entirety, incorporated by reference into the
Prospectus. A prospectus may be obtained by writing or calling your investment
dealer or by contacting the Fund's national distributor, Delaware Distributors,
L.P. (the "Distributor"), 1818 Market Street, Philadelphia, PA 19103.
-2-
<PAGE>
INVESTMENT RESTRICTIONS AND POLICIES
Investment Restrictions
The Fund has adopted certain investment restrictions set forth below
which, together with the investment objectives of the Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the 1940 Act, this means the lesser of
the vote of (1) 67% of the shares of the Fund at a meeting where more than 50%
of the outstanding shares of the Fund are present in person or by proxy or (2)
more than 50% of the outstanding shares of the Fund. The following investment
restrictions apply to the Fund. The Fund will not:
(1) Borrow money (provided that the Fund may enter into reverse
repurchase agreements with respect to not more than 10% of its total assets),
except from banks for temporary or emergency purposes in an amount not exceeding
20% of the value of the Fund's total assets, including the amount borrowed. The
Fund may not borrow for leverage purposes, provided that the Fund may enter into
reverse repurchase agreements for such purposes, and securities will not be
purchased while outstanding borrowings exceed 5% of the value of the Fund's
total assets.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, the Fund may
be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities
which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more if its total assets in the securities of any
industry, although, for purposes of this limitation, tax-exempt securities and
U.S. Government obligations are not considered to be part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (1) above, and except to the extent
that using options, futures contracts and options on futures contracts,
purchasing or selling on a when-issued or forward commitment basis or using
similar investment strategies may be deemed to constitute issuing a senior
security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict the Fund
from purchasing or selling, on a basis consistent with any restrictions
contained in its then-current Prospectus, any financial contracts or instruments
which may be deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect, in each case,
to interest rates, currencies, stock indices, bond indices or interest rate
indices).
The following non-fundamental investment restrictions may be changed by
the Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in securities of two
or more investment companies, except as part of a merger, consolidation or
acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
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(3) The Fund will not write puts if, as a result, more than 50% of the
Fund's assets would be required to be segregated to cover such puts.
(4) The Fund will not make short sales of securities or maintain a
short position for the account of the Fund, unless at all times when a short
position is open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
Diversification
Although the Fund is characterized as a non-diversified fund under the
1940 Act, the Fund intends to conduct its operations so that it will qualify
under the Internal Revenue Code of 1986 as a "regulated investment company." In
order to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Code requires that not more than 25% in value of the Fund's total assets may be
invested in the securities of a single issuer at the close of each quarter of
the taxable year.
For purposes of such diversification, the identification of the issuer
of Municipal Obligations depends on the terms and conditions of the security. If
a State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by the Fund
exceeds 10% of the value of the Fund's total assets, the guarantee is considered
a separate security and is treated as an issue of the guarantor. Investments in
municipal obligations refunded with escrowed U. S. Government securities will be
treated as investments in U. S. Government securities for purposes of
determining the Fund's compliance with the 1940 Act diversification
requirements.
Municipal Obligations
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
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housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, Fitch and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings provide an
initial criterion for selection of portfolio investments, Voyageur Fund
Managers, Inc. ("Voyageur"), the Fund's investment manager, will subject these
securities to other evaluative criteria prior to investing in such securities.
Floating and Variable Rate Demand Notes
Variable rate master demand notes, in which the Fund may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between the Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, the Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the period of time remaining
until the principal amount can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Fund will be determined by the
Fund's Manager under guidelines established by the Fund's Board of Directors to
be of comparable quality at the time of purchase to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, the Manager will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies)
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and will continuously monitor their financial condition. Although there may be
no active secondary market with respect to a particular variable or floating
rate note purchased by the Fund, the Fund may re-sell the note at any time to a
third party. The absence of such an active secondary market, however, could make
it difficult for the Fund to dispose of the variable or floating rate note
involved in the event the issuer of the note defaulted on its payment
obligations, and the Fund could, for this or other reasons, suffer a loss to the
extent of the default. Variable or floating rate notes may be secured by bank
letters of credit.
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Fund's total assets only if such notes are
subject to a demand feature that will permit the Fund to demand payment of the
Principal within seven days after demand by the Fund. If not rated, such
instruments must be found by the Fund's Manager and/or sub-adviser under
guidelines established by the Fund's Board of Directors, to be of comparable
quality to instruments that are rated high quality. A rating may be relied upon
only if it is provided by a nationally recognized statistical rating
organization that is not affiliated with the issuer or guarantor of the
instruments.
Escrow Secured Bonds or Defeased Bonds
Escrow secured bonds or defeased bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) some of its outstanding bonds
and it becomes necessary or desirable to set aside funds for redemption or
payment of the bonds at a future date or dates. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade interest
bearing debt securities which are then deposited in an irrevocable escrow
account held by an escrow agent to secure all future payments of principal and
interest of the advance refunded bond. Escrow secured bonds will often receive a
triple A rating from S&P, Moody's and Fitch.
State or Municipal Lease Obligations
Municipal leases may take the form of a lease with an option to
purchase, an installment purchase contract, a conditional sales contract or a
participation certificate in any of the foregoing. In determining leases in
which the Fund will invest, the Manager will evaluate the credit rating of the
lessee and the terms of the lease. Additionally, the Manager may require that
certain municipal leases be secured by a letter of credit or put arrangement
with an independent financial institution. State or municipal lease obligations
frequently have the special risks described below which are not associated with
general obligation or revenue bonds issued by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "nonappropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "nonappropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for nonappropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
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Concentration Policy
As a fundamental policy, the Fund may not invest 25% or more of its
total assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. Government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting one
bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk.
Housing Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
Utility Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. The Fund may, from time to time, invest 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other factors,
and several airlines are experiencing severe financial difficulties. The
revenues of issuers which derive their payments from bridge, road or tunnel toll
revenues could be adversely affected by competition from toll-free vehicular
bridges and roads and alternative modes of transportation. Such
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revenues could also be adversely affected by a reduction in the availability of
fuel to motorists or significant increases in the costs thereof.
Education Obligations. The Fund may, from time to time, invest 25% or
more of its total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. The Fund may, from time to time, invest
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal
income taxes and the personal income taxes of Minnesota for certain housing,
health care, utility, transportation, education and industrial revenue bonds
depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Fund to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
Taxable Obligations
As set forth in the Fund's Prospectus, the Fund may invest to a limited
extent in obligations and instruments, the interest on which is includable in
gross income for purposes of federal and Minnesota state income taxation.
Government Obligations
The Fund may invest in securities issued or guaranteed by the U. S.
Government or its agencies or instrumentalities. These securities include a
variety of Treasury securities, which differ in their interest rates, maturities
and times of issuance. Treasury Bills generally have maturities of one year or
less; Treasury Notes generally have maturities of one to ten years; and Treasury
Bonds generally have maturities of greater than ten years. Some obligations
issued or guaranteed by U. S. Government agencies and instrumentalities, such as
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U. S. Treasury; other obligations,
such as those of the Federal Home Loan Banks, are secured by the right of the
issuer to borrow from the Treasury; other obligations, such as those issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U. S. Government to purchase certain obligations of the agency
or
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instrumentality; and other obligations, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the instrumentality
itself. Although the U. S. Government provides financial support to such U. S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund will
invest in such securities only when the Manager is satisfied that the credit
risk with respect to the issuer is minimal.
Repurchase Agreements
A repurchase agreement is a short-term investment by which the
purchaser acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the purchaser's holding period. Should an issuer of a
repurchase agreement fail to repurchase the underlying security, the loss to the
Fund, if any, would be the difference between the repurchase price and the
market value of the security. The Fund will limit its investments in repurchase
agreements to those which the Manager, under the guidelines of the Board of
Directors, determines to present minimal credit risks and which are of high
quality. In addition, the Fund must have collateral of at least 100% of the
repurchase price, including the portion representing the Fund's yield under such
agreements which is monitored on a daily basis.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Fund may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described below.
Other Taxable Investments
The Fund also may invest in certificates of deposit, bankers'
acceptances and other time deposits. Certificates of deposit are certificates
representing the obligation of a bank to repay the funds deposited (plus
interest thereon) at a time certain after the deposit. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Options
The Fund may purchase call options, write call options on a covered
basis, write secured put options and purchase put options on a covered basis
only, and will not engage in option writing strategies for speculative purposes.
The Fund may invest in options that are either Exchange listed or
traded over-the-counter. Certain over-the-counter options may be illiquid. Thus,
it may not be possible to close option positions and this may have an adverse
impact on the Fund's ability to effectively hedge its securities. The Fund will
not, however, invest more than 15% of its assets in illiquid securities.
A. Covered Call Writing--The Fund may write covered call options from
time to time on such portion of its portfolio, without limit, as Delaware
Management Company, Inc. (the "Manager") determines is appropriate in seeking to
obtain the Fund's investment objective. A call option gives the purchaser of
such option the right to buy, and the writer, in this case the Fund, has the
obligation to sell the underlying security at the exercise price during the
option period. The advantage to the Fund of writing covered calls is that the
Fund receives a premium which is additional income. However, if the security
rises in value, the Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which
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the writer effects a closing purchase transaction. A closing purchase
transaction cannot be effected with respect to an option once the option writer
has received an exercise notice for such option.
With respect to options on actual portfolio securities owned by the
Fund, the Fund may enter into closing purchase transactions. A closing purchase
transaction is one in which the Fund, when obligated as a writer of an option,
terminates its obligation by purchasing an option of the same series as the
option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Fund may realize a net
gain or loss from a closing purchase transaction depending upon whether the net
amount of the original premium received on the call option is more or less than
the cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be partially or entirety offset by the premium
received from a sale of a different call option on the same underlying security.
Such a loss may also be wholly or partially offset by unrealized appreciation in
the market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means
that the Fund will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Fund would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Fund will normally have expiration dates between one and
nine months from the date written. The exercise price of a call option may be
below, equal to or above the current market value of the underlying security at
the time the option is written.
B. Purchasing Call Options--The Fund may purchase call options to the
extent that premiums paid by the Fund do not aggregate more than 2% of the
Fund's total assets. The advantage of purchasing call options is that the Fund
may alter portfolio characteristics, and modify portfolio maturities without
incurring the cost associated with portfolio transactions.
The Fund may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same Fund as the option previously purchased. The Fund
will realize a profit from a closing sale transaction if the price received on
the transaction is more than the premium paid to purchase the original call
option; the Fund will realize a loss from a closing sale transaction if the
price received on the transaction is less than the premium paid to purchase the
original call option.
Although the Fund will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular
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option, or at any particular time, and for some options no secondary market on a
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the results that the Fund would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Fund may expire without any value
to the Fund.
C. Purchasing Put Options--The Fund may invest up to 2% of its total
assets in the purchase of put options. The Fund will, at all times during which
it holds a put option, own the security covered by such option.
The Fund intends to purchase put options in order to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option ("protective puts"). The ability to
purchase put options will allow the Fund to protect an unrealized gain in an
appreciated security in its portfolio without actually selling the security. If
the security does not drop in value, the Fund will lose the value of the premium
paid. The Fund may sell a put option which it has previously purchased prior to
the sale of the securities underlying such option. Such sales will result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the put option which
is sold.
The Fund may sell a put option purchased on individual portfolio
securities. Additionally, the Fund may enter into closing sale transactions. A
closing sale transaction is one in which the Fund, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
D. Writing Put Options--The Fund may also write put options on a
secured basis which means that the Fund will maintain in a segregated account
with its custodian, cash or U.S. government securities in an amount not less
than the exercise price of the option at all times during the option period. The
amount of cash or U.S. government securities held in the segregated account will
be adjusted on a daily basis to reflect changes in the market value of the
securities covered by the put option written by the Fund. Secured put options
will generally be written in circumstances where the Manager wishes to purchase
the underlying security for the Fund's portfolio at a price lower than the
current market price of the security. In such event, the Fund would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay.
Following the writing of a put option, the Fund may wish to terminate
the obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
Futures
Futures contracts are agreements for the purchase or sale for future
delivery of securities. While futures contracts provide for the delivery of
securities, deliveries usually do not occur. Contracts are generally terminated
by entering into an offsetting transaction. When the Fund enters into a futures
transaction, it must deliver to the futures commission merchant selected by the
Fund an amount referred to as "initial margin." This amount is maintained by the
futures commission merchant in an account at the Fund's custodian bank.
Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the
Fund from, such account in accordance with controls set for such account,
depending upon changes in the price of the underlying securities subject to the
futures contract.
In addition, when the Fund engages in futures transactions, to the
extent required by the Securities and Exchange Commission, it will maintain with
its custodian, assets in a segregated account to cover its obligations with
respect to such contracts, which assets will consist of cash, cash equivalents
or high quality debt securities from its
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portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the margin payments
made by the Fund with respect to such futures contracts.
The Fund may enter into such futures contracts to protect against the
adverse effects of fluctuations in interest rates without actually buying or
selling such securities. Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to hedge in anticipation of
subsequent purchases of government securities at higher prices.
With respect to options on futures contracts, when the Fund is not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The writing of a call
option on a futures contract constitutes a partial hedge against declining
prices of the securities which are deliverable upon exercise of the futures
contract. If the futures price at the expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities which
are deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
increase in the price of government securities which the Fund intends to
purchase.
If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between the value of its
portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction, the
Fund may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize a loss. For example, if the Fund is hedged
against the possibility of an increase in interest rates which would adversely
affect the price of government securities held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its government securities which it has because it will have
offsetting losses in its futures position. In addition, in such situations, if
the Fund had insufficient cash, it may be required to sell government securities
from its portfolio to meet daily variation margin requirements. Such sales of
government securities may, but will not necessarily, be at increased prices
which reflect the rising market. The Fund may be required to sell securities at
a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, the Fund may
seek to close out an option position by writing or buying an offsetting position
covering the same securities or contracts and have the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market
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<PAGE>
may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in indexes of securities
and movements in the prices of futures contracts, even a correct forecast of
general market trends may not result in a successful hedging transaction over a
very short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the
ability of Voyageur to predict correctly movements in the direction of interest
rates or the relevant underlying securities market. If the Fund has hedged
against the possibility of an increase in interest rates adversely affecting the
value of fixed-income securities held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its security which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risk of Options. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a
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decline in the value of the Fund's portfolio assets. By writing a call option,
the Fund becomes obligated to sell an underlying instrument or a futures
contract, which may have a value higher than the exercise price. Conversely, the
writing of a put option generates a premium, but the Fund becomes obligated to
purchase the underlying instrument or futures contract, which may have a value
lower than the exercise price. Thus, the loss incurred by the Fund in writing
options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when
Voyageur deems it desirable to do so. Although the Fund will enter into an
option position only if Voyageur believes that a liquid secondary market exists
for such option, there is no assurance that the Fund will be able to effect
closing transactions at any particular time or at an acceptable price. The
Fund's transactions involving options on futures contracts will be conducted
only on recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by Voyageur, which
could prove to be inaccurate. Even if the expectations of Voyageur are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
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<PAGE>
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Fund will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
price of securities that the Fund anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Fund to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when Voyageur believes it would be advantageous to do so. Accordingly, OTC
options are subject to the Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
writer of an OTC option, the Fund could experience a loss of all or part of the
value of the option. Voyageur anticipates that options on Municipal Obligations
will consist primarily of OTC options.
Illiquid Investments
The Fund may invest no more than 15% of the value of its net assets in
illiquid securities.
The Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the Securities Act of 1933. Rule 144A permits many privately
placed and legally restricted securities to be freely traded among certain
institutional buyers such as the Fund.
While maintaining oversight, the Board of Directors has delegated to
the Manager the day-to-day function of determining whether or not individual
Rule 144A Securities are liquid for purposes of a Fund's 15% limitation on
investments in illiquid assets. The Board has instructed the Manager to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
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marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security that was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Manager will determine what action to take to ensure that
the Fund continues to adhere to such limitation.
Special Factors Affecting the Fund
The following information is a brief summary of Minnesota factors
affecting the Fund and does not purport to be a complete description of such
factors. The financial condition of Minnesota, its public authorities and local
governments could affect the market values and marketability of, and therefore
the net asset value per share and the interest income of the Fund, or result in
the default of existing obligations, including obligations which may be held by
the Fund. Further, Minnesota faces numerous forms of litigation seeking
significant damages which, if awarded, could adversely affect the financial
situation of Minnesota or issuers located in therein. It should be noted that
the creditworthiness of obligations issued by local issuers may be unrelated to
the creditworthiness of Minnesota, and that there is no obligation on the part
of Minnesota to make payment on such local obligations in the event of default
in the absence of a specific guarantee or pledge provided by Minnesota. The
following information is based primarily upon information derived from public
documents relating to securities offerings of issuers of such states and other
historically reliable sources, but has not been independently verified by the
Fund. The Fund makes no representation or warranty regarding the completeness or
accuracy of such information. The market value of the shares of the Fund may
fluctuate due to factors such as changes in interest rates, matters affecting
Minnesota or for other reasons.
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1994. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. During 1993, 1994 and 1995, the State's monthly unemployment rate
generally was less than the national unemployment rate.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve, imposing
a sales tax on purchases by local governmental units, and making other budgetary
adjustment. The Minnesota Department of Finance February 1996 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1997 with a $15 million surplus, plus a $350 million cash flow account
balance, plus a $220 million budget reserve. Total General Fund expenditures and
transfers for the biennium are projected to be $18.8 billion. State expenditures
for education finance (K-12), post-secondary education, and human services in
the biennium ending June 30, 1997 are not anticipated to be sufficient to
maintain program levels of the previous biennium. The State is party to a
variety of civil actions that could adversely affect the State's General Fund.
In addition, substantial portions of State and local revenues are derived from
federal expenditures, and reductions in federal aid to the State and its
political subdivisions and other federal spending cuts may have substantial
adverse
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effects on the economic and fiscal condition of the State and its local
governmental units. The February 1996 Forecast states that pending federal
legislation could reduce federal aid to Minnesota's state and local governments
by a total of $3.2 billion over seven years. Risks are inherent in making
revenue and expenditure forecasts. Economic or fiscal conditions less favorable
than those reflected in State budget forecasts and planning estimates may create
additional budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Municipal Obligations that are held by the Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in federal
and State income tax laws, including rate reductions, could adversely affect the
value and marketability of Minnesota Municipal Obligations that are held by the
Fund. See Dividends and Distributions and Taxes--Minnesota State Taxation in the
Prospectus.
As of May 1996, ratings applicable to General Obligation bonds issued
by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+" by S&P and
"AAA" by Fitch Investors Service.
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ACCOUNTING AND TAX ISSUES
When the Fund writes a call option, an amount equal to the premium
received by it is included in the section of the Fund's assets and liabilities
as an asset and as an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which the Fund has written expires on its stipulated expiration date, the Fund
reports a realized gain. If the Fund enters into a closing purchase transaction
with respect to an option which the Fund has written, the Fund realizes a gain
(or loss if the cost of the closing transaction exceeds the premium received
when the option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
Any such gain or loss is a short-term capital gain or loss for federal income
tax purposes. If a call option which the Fund has written is exercised, the Fund
realizes a capital gain or loss (long-term or short-term, depending on the
holding period of the underlying security) from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received.
Other Tax Requirements -- The Fund has qualified and intend to continue
to qualify as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The Fund must meet several
requirements to maintain its status as a regulated investment company. Among
these requirements are that at least 90% of its investment company taxable
income be derived from dividends, interest, payment with respect to securities
loans and gains from the sale or disposition of securities; that at the close of
each quarter of its taxable year at least 50% of the value of its assets
consists of cash and cash items, government securities, securities of other
regulated investment companies and, subject to certain diversification
requirements, other securities; and that less than 30% of its gross income be
derived from sales of securities held for less than three months. This 30% rule
is rescinded for tax years beginning August 5, 1997.
The requirement that not more than 30% of the Fund's gross income be
derived from gains from the sale or other disposition of securities held for
less than three months may restrict the Fund in its ability to write covered
call options on securities which it has held less than three months, to write
options which expire in less than three months, to sell securities which have
been held less than three months and to effect closing purchase transactions
with respect to options which have been written less than three months prior to
such transactions. Consequently, in order to avoid realizing a gain within the
three-month period, the Fund may be required to defer the closing out of a
contract beyond the time when it might otherwise be advantageous to do so.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the following year, subject to the same limitation.
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PERFORMANCE INFORMATION
From time to time, the Fund may state each of its Classes' total return
in advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be deducted
from any computation of total return. See the Prospectus for a description of
the Limited CDSC and the limited instances in which it applies. All references
to a CDSC in this Performance Information section will apply to Class B Shares
or Class C Shares of the Fund.
Total return performance for each Class will be computed by adding all
reinvested income and realized securities profits distributions plus the change
in net asset value during a specific period and dividing by the offering price
at the beginning of the period. It will not reflect any income taxes payable by
shareholders on the reinvested distributions included in the calculation.
Because securities prices fluctuate, past performance should not be considered
as a representation of the results which may be realized from an investment in
the Fund in the future.
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of $1,000
from which, in the case of only Class A Shares, the
maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical $1,000 purchase
at the end of the period after the deduction of the
applicable CDSC, if any, with respect to Class B
Shares and Class C Shares.
As stated in the Prospectus, the Fund may also quote the current yield
for each Class in advertisements and investor communications. The yield
computation is determined by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period and annualizing the resulting figure, according to the following formula:
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a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on
the last day of the period.
The above formula will be used in calculating quotations of yield of
each Class, based on specified 30-day periods identified in advertising by the
Fund. The yields as of December 31, 1996 using this formula were 5.17%, 4.59%
and 4.64% for Class A Shares, Class B Shares and Class C Shares, respectively.
Yield assumes the maximum front-end sales charge, if any, and does not reflect
the deduction of any CDSC or Limited CDSC and also reflects voluntary waivers in
effect during the period. Actual yield may be affected by variations in
front-end sales charges on investments. Past performance, such as is reflected
in quoted yields, should not be considered as a representation of the results
which may be realized from an investment in any class of the Fund in the future.
The Fund may also publish a tax-equivalent yield for a Class based on
federal and, if applicable, state tax rates, which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to the Class' yield.
The taxable equivalent yield is based on current Federal marginal income tax
rates combined with Minnesota marginal income tax rates. Each combined marginal
rate assumes a single taxpayer and that state income taxes paid are fully
deductible for purposes of computing federal taxable income. The combined
marginal rates do not reflect federal rules concerning the phase-out of personal
exemptions and limitations on the allowance of itemized deductions for certain
high-income taxpayers.
The taxable equivalent yields for each Class of the Fund for the 30-day
period ended December 31, 1996 were:
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Class A 9.12% 9.52% 10.26% 10.87%
Class B 8.33% 8.70% 9.38% 9.93%
Class C 8.36% 8.73% 9.41% 9.97%
These yields were computed by dividing that portion of a Class' yield
which is tax-exempt by one minus the stated income tax rate and adding the
product to that portion, if any, of the yield that is not tax-exempt. These
yields also reflect the expense limitations in effect during the period.
Investors should note that the income earned and dividends paid by the
Fund will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of the fund may change. Unlike money market
funds, the Fund invests in longer-term securities that fluctuate in value and do
so in a manner inversely correlated with changing interest rates. The Fund's net
asset value will tend to rise when interest rates fall. Conversely, the Fund's
net asset value will tend to fall as interest rates rise. Normally, fluctuations
in interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held in the Fund will vary from day to day and investors
should consider the volatility of the Fund's net asset value as well as its
yield before making a decision to invest.
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<PAGE>
From time to time, the Fund may also quote actual total return
performance of its Classes in advertising and other types of literature compared
to indices or averages of alternative financial products available to
prospective investors. For example, the performance comparisons may include the
average return of various bank instruments, some of which may carry certain
return guarantees offered by leading banks and thrifts as monitored by Bank Rate
Monitor, and those of generally-accepted corporate bond and government security
price indices of various durations prepared by Lehman Brothers and Salomon
Brothers, Inc. These indices are not managed for any investment goal.
Statistical and performance information and various indices compiled and
maintained by organizations such as the following may also be used in preparing
exhibits comparing certain industry trends and competitive mutual fund
performance to comparable activity and performance of the Fund and in
illustrating general financial planning principles. From time to time, certain
mutual fund performance ranking information, calculated and provided by these
organizations, may also be used in the promotion of sales of the Fund. Any
indices used are not managed for any investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe of
independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety
of historical data including total return, capital appreciation and
income on the stock market as well as other investment asset classes,
and inflation. With their permission, this information will be used
primarily for comparative purposes and to illustrate general financial
planning principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed-income price and return information.
Compustat Industrial Databases, a service of Standard & Poor's, may also
be used in preparing performance and historical stock and bond market
exhibits. This firm maintains fundamental databases that provide
financial, statistical and market information covering more than 7,000
industrial and non-industrial companies.
Russell Indexes is an investment analysis service that provides both
current and historical stock performance information, focusing on the
business fundamentals of those firms issuing the security.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as
well as unmanaged indices compiled and maintained by these firms, will
be used in preparing comparative illustrations. In addition, the
performance of multiple indices compiled and maintained by these firms
may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the
types of securities in which the Fund may invest and the assumptions
that were used in calculating the blended performance will be described.
Comparative information on the Consumer Price Index may also be
included. The Consumer Price Index, as prepared by the U.S. Bureau of Labor
Statistics, is the most commonly used measure of inflation. It indicates the
cost fluctuations of a representative group of consumer goods. It does not
represent a return from an investment.
The following table is an example, for purposes of illustration only, of
cumulative total return performance for Class A Shares, Class B Shares and Class
C Shares through December 31, 1996. For these purposes, the calculations
-21-
<PAGE>
assume the reinvestment of any realized securities profits distributions and
income dividends paid during the indicated periods. In addition, these
calculations, as shown below, reflect maximum sales charges, if any, paid on the
purchase or redemption of shares, as applicable, but not any income taxes
payable by shareholders on the reinvested distributions included in the
calculations. The performance of Class A Shares may also be shown without
reflecting the impact of any front-end sales charge. The performance of Class B
Shares and Class C Shares is calculated both with the applicable CDSC included
and excluded.
The net asset value of a Class fluctuates so shares, when redeemed, may
be worth more or less than the original investment, and a Class' results should
not be considered as representative of future performance.
-22-
<PAGE>
Cumulative Total Return
Minnesota High Yield Municipal Bond Fund(1)
<TABLE>
<CAPTION>
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.20%) 12/31/96 (1.55%) 2.45% 12/31/96 1.35% 2.35%
6 months 6 months 6 months
ended ended ended
12/31/96 (0.10%)(3) 12/31/96 (0.61%) 3.39% 12/31/96 2.29% 3.39%
Period Period Period
6/4/96(4) 6/12/96(1) 6/7/96(1)
through through through
12/31/96 1.44% 12/31/96 3.29% 7.29% 12/31/96 4.02% 5.02%
</TABLE>
(1) Reflects voluntary waivers in effect during the period(s).
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase;
(ii) 3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) For the six months ended December 31, 1996, cumulative total return for
Class A Shares at net asset value was 0.00%.
(4) Date of initial public offering.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Fund and other mutual funds in the Delaware
Group, will provide general information about investment alternatives and
scenarios that will allow investors to assess their personal goals. This
information will include general material about investing as well as materials
reinforcing various industry-accepted principles of prudent and responsible
personal financial planning. One typical way of addressing these issues is to
compare an individual's goals and the length of time the individual has to
attain these goals to his or her risk threshold. In addition, the Distributor
will provide information that discusses the Manager's overriding investment
philosophy and how that philosophy impacts the Fund's, and other Delaware Group
funds', investment disciplines employed in seeking their objectives. The
Distributor may also from time to time cite general or specific information
about the institutional clients of the Manager, including the number of such
clients serviced by the Manager.
-23-
<PAGE>
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding and the following chart illustrates just how powerful
it can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000
investment compounded monthly for 10 years:
7% Rate 9% Rate 11% Rate
of Return of Return of Return
--------- --------- ---------
1 year $10,723 $10,938 $11,157
2 years $11,498 $11,964 $12,448
3 years $12,330 $13,086 $13,889
4 years $13,221 $14,314 $15,496
5 years $14,177 $15,657 $17,289
6 years $15,201 $17,126 $19,289
7 years $16,300 $18,732 $21,522
8 years $17,479 $20,489 $24,012
9 years $18,743 $22,411 $26,791
10 years $20,098 $24,514 $29,891
These figures are calculated assuming a fixed constant investment
return and assume no fluctuation in the value of principal. These figures, which
do not reflect payment of applicable taxes or any sales charges, are not
intended to be a projection of investment results and do not reflect the actual
performance results of any of the classes.
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<PAGE>
TRADING PRACTICES AND BROKERAGE
Portfolio transactions are executed by the Manager on behalf of the
Fund in accordance with the standards described below.
Brokers, dealers and banks are selected to execute transactions for
the purchase or sale of portfolio securities on the basis of the Manager's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers, dealers or banks execute transactions at best
price and execution. Best price and execution refers to many factors, including
the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. Trades are generally made on a net basis where
securities are either bought or sold directly from or to a broker, dealer or
bank. In these instances, there is no direct commission charged, but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission. When a commission is paid, the Fund pays reasonably competitive
brokerage commission rates based upon the professional knowledge of its trading
department as to rates paid and charged for similar transactions throughout the
securities industry. In some instances, the Fund pays a minimal share
transaction cost when the transaction presents no difficulty.
The Manager may allocate out of all commission business generated by
all of the funds and accounts under its management, brokerage business to
brokers or dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software and hardware used in
security analyses; and providing portfolio performance evaluation and technical
market analyses. Such services are used by the Manager in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 and the Fund's
Investment Management Agreement, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, Mutual Funds, Inc. believes that
the commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the Manager which constitute in some part brokerage and research services used
by the Manager in connection with its investment decision-making process and
constitute in some part services used by the Manager in connection with
administrative or other functions not related to its investment decision-making
process. In such cases, the Manager will make a good faith allocation of
brokerage and research services and will pay out of its own resources for
services used by the Manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the Fund and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
-25-
<PAGE>
The Manager may place a combined order for two or more accounts or
funds engaged in the purchase or sale of the same security if, in its judgment,
joint execution is in the best interest of each participant and will result in
best price and execution. Transactions involving commingled orders are allocated
in a manner deemed equitable to each account or fund. When a combined order is
executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is believed that the ability of the accounts to participate
in volume transactions will generally be beneficial to the accounts and funds.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or fund may obtain, it is the opinion of the Manager and Mutual Funds,
Inc.'s Board of Directors that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"), and subject to seeking
best price and execution, the Manager may place orders with broker/dealers that
have agreed to defray certain expenses of the funds in the Delaware Group of
funds, such as custodian fees, and may, at the request of the Distributor, give
consideration to sales of such funds shares as a factor in the selection of
brokers and dealers to execute portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish the
Fund's objective in relation to anticipated movements in the general level of
interest rates. The Fund is free to dispose of portfolio securities at any time,
subject to complying with the Code and the 1940 Act, when changes in
circumstances or conditions make such a move desirable in light of the
investment objective. The Fund will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. However, it is generally anticipated that the Fund's
portfolio turnover rate will be less than 100%.
The degree of portfolio activity may affect brokerage costs of the
Fund and taxes payable by the Fund's shareholders to the extent of any net
realized capital gains. The Fund's portfolio turnover rate is not expected to
exceed 100%; however, under certain market conditions the Fund may experience a
rate of portfolio turnover which could exceed 100%. The Fund's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the particular
fiscal year, exclusive of securities whose maturities at the time of acquisition
are one year or less. A turnover rate of 100% would occur, for example, if all
the investments in the Fund's portfolio at the beginning of the year were
replaced by the end of the year.
During the period June 7, 1996 (date of initial sale) through
December 31, 1996, the Fund's portfolio turnover rate was 15%, annualized.
The Fund may hold securities for any period of time. The Fund's
portfolio turnover will be increased if the Fund writes a large number of call
options which are subsequently exercised. The portfolio turnover rate also may
be affected by cash requirements from redemptions and repurchases of Fund
shares. Total brokerage costs generally increase with higher portfolio turnover
rates.
-26-
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for the Fund's
classes of shares - Class A Shares, Class B Shares and Class C Shares, and has
agreed to use its best efforts to sell shares of the Fund. See the Prospectus
for additional information on how to invest. Shares of the Fund are offered on a
continuous basis, and may be purchased through authorized investment dealers or
directly by contacting Mutual Funds, Inc. or the Distributor.
The minimum initial investment generally is $1,000 for Class A
Shares, Class B Shares and Class C Shares. Subsequent purchases of such classes
generally must be at least $100. The initial and subsequent minimum investments
for Class A Shares will be waived for purchases by officers, directors and
employees of any Delaware Group fund, the Manager or any of the its affiliates
if the purchases are made pursuant to a payroll deduction program. Shares
purchased pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act and shares purchased in connection with an Automatic Investing Plan
are subject to a minimum initial purchase of $250 and a minimum subsequent
purchase of $25. Accounts opened under the Delaware Group Asset Planner service
are subject to a minimum initial investment of $2,000 per Asset Planner Strategy
selected.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. Mutual Funds, Inc. will reject any purchase order
for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers are responsible for transmitting orders promptly.
Mutual Funds, Inc. reserves the right to reject any order for the purchase of
shares of the Fund if in the opinion of management such rejection is in the
Fund's best interests.
The NASD has adopted Rules of Fair Practice, as amended, relating to
investment company sales charges. Mutual Funds, Inc. and the Distributor intend
to operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 3.75%; however, lower front-end sales charges
apply for larger purchases. See the table below. Class A Shares are also subject
to annual 12b-1 Plan expenses.
Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; and (iv) 1% if
shares are redeemed during the sixth year following purchase. Class B Shares are
also subject to annual 12b-1 Plan expenses which are higher than those to which
Class A Shares are subject and are assessed against Class B Shares for
approximately eight years after purchase. See Automatic Conversion of Class B
Shares under Classes of Shares in the Prospectus.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
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<PAGE>
Class A Shares, Class B Shares and Class C Shares shares represent a
proportionate interest in a Fund's assets and will receive a proportionate
interest in that Fund's income, before application, as to Class A, Class B and
Class C Shares, of any expenses under that Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
in the Class A Shares, unless a shareholder submits a specific request. However,
purchases not involving the issuance of certificates are confirmed to the
investor and credited to the shareholder's account on the books maintained by
Delaware Service Company, Inc. (the "Transfer Agent"). The investor will have
the same rights of ownership with respect to such shares as if certificates had
been issued. An investor that is permitted to obtain a certificate may receive a
certificate representing full share denominations purchased by sending a letter
signed by each owner of the account to the Transfer Agent requesting the
certificate. No charge is assessed by Mutual Funds, Inc. for any certificate
issued. A shareholder may be subject to fees for replacement of a lost or stolen
certificate under certain conditions, including the cost of obtaining a bond
covering the lost or stolen certificate. Please contact the Fund for further
information. Investors who hold certificates representing any of their shares
may only redeem those shares by written request. The investor's certificate(s)
must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class
C Shares of the Fund permit investors to choose the method of purchasing shares
that is most suitable for their needs given the amount of their purchase, the
length of time they expect to hold their shares and other relevant
circumstances. Investors should determine whether, given their particular
circumstances, it is more advantageous to purchase Class A Shares of a Fund and
incur a front-end sales charge and annual 12b-1 Plan expenses of up to a maximum
of 0.25% of the average daily net assets of Class A Shares or to purchase either
Class B or Class C Shares of a Fund and have the entire initial purchase amount
invested in the Fund with the investment thereafter subject to a CDSC and annual
12b-1 Plan expenses. Class B Shares are subject to a CDSC if the shares are
redeemed within six years of purchase, and Class C Shares are subject to a CDSC
if the shares are redeemed within 12 months of purchase. Class B and Class C
Shares are each subject to annual 12b-1 Plan expenses of up to a maximum of 1%
(0.25% of which are service fees to be paid to the Distributor, dealers or
others for providing personal service and/or maintaining shareholder accounts)
of average daily net assets of the respective Class. Class B Shares will
automatically convert to Class A Shares at the end of approximately eight years
after purchase and, thereafter, be subject to annual 12b-1 Plan expenses of up
to a maximum of 0.25% of average daily net assets of such shares. Unlike Class B
Shares, Class C Shares do not convert to another class.
Class A Shares
Purchases of $100,000 or more of Class A Shares at the offering
price carry reduced front-end sales charges as shown in the accompanying table,
and may include a series of purchases over a 13-month period under a Letter of
Intention signed by the purchaser. See Special Purchase Features -- Class A
Shares, below, for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
-28-
<PAGE>
<TABLE>
<CAPTION>
Class A Shares
- -------------------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as a % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 3.93% 3.25%
$100,000 but under $250,000 3.00 3.05 2.50
$250,000 but under $500,000 2.50 2.55 2.00
$500,000 but under $1,000,000* 2.00 2.06 1.75
</TABLE>
* There is no front-end sales charge on purchases of $1 million or more
of Class A Shares but, under certain limited circumstances, a 1%
contingent deferred sales charge may apply upon redemption of such
shares.
** Based on an initial net asset value of the Class A Shares of the end of
Mutual Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify
for the reduced front-end sales charge on the basis of previous or
current purchases. The reduced front-end sales charge will be granted
upon confirmation of the shareholder's holdings by the Fund. Such
reduced front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
the front-end sales charges shown above. Dealers who receive 90% or
more of the sales charge may be deemed to be underwriters under the
1933 Act.
- --------------------------------------------------------------------------------
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission of up to 0.15% of
the offering price in connection with sales of Class A Shares. Such dealers must
meet certain requirements in terms of organization and distribution capabilities
and their ability to increase sales. The Distributor should be contacted for
further information on these requirements as well as the basis and circumstances
upon which the additional commission will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws.
-29-
<PAGE>
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedule:
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Prospectus) may be aggregated with those of Class A Shares of
the Fund. Financial advisers also may be eligible for a dealer's commission in
connection with certain purchases made under a Letter of Intention or pursuant
to an investor's Right of Accumulation. Financial advisers should contact the
Distributor concerning the applicability and calculation of the dealer's
commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestment of dividends or capital gains
distributions. See Waiver of Contingent Deferred Sales Charge - Class B and
Class C Shares under Redemption and Exchange in the Prospectus for a list of the
instances in which the CDSC is waived.
-30-
<PAGE>
The following table sets forth the rates of the CDSC for Class B Shares
of each Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ -------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the Fund.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus. Such conversion will constitute a tax-free exchange for federal
income tax purposes. See Taxes in the Prospectus.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Mutual Funds, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of the Fund (the "Plans"). Each Plan permits the Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the class of shares to which the Plan applies. Such shares are not
included in calculating the Plans' fees.
The Plans permit the Fund, pursuant to its Distribution Agreement, to
pay out of the assets of the Class A Shares, Class B Shares and Class C Shares
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to securities
brokers and dealers who enter into agreements with the Distributor. The Plan
expenses relating to Class B and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, the Fund may make payments out of the assets of Class A,
Class B and Class C Shares directly to other unaffiliated parties, such as
banks, who either aid in the distribution of shares of, or provide services to,
such classes.
The maximum aggregate fee payable by the Fund under its Plans, and the
Fund's Distribution Agreement, is on an annual basis, up to 0.25% of the Class A
Shares' average daily net assets for the year, and up to 1% (0.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
personal service and/or maintaining shareholder accounts) of each of the Class B
Shares' and the Class C Shares' average daily net assets for the year. Mutual
Funds, Inc.'s Board of Directors may reduce these amounts at any time.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
-31-
<PAGE>
reimbursement from the Classes. Subject to seeking best price and execution, the
Fund may, from time to time, buy or sell portfolio securities from or to firms
which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreement, as amended, have all been
approved by the Board of Directors of Mutual Funds, Inc., including a majority
of the directors who are not "interested persons" (as defined in the 1940 Act)
of Mutual Funds, Inc. and who have no direct or indirect financial interest in
the Plans, by vote cast in person at a meeting duly called for the purpose of
voting on the Plans and such Agreements. Continuation of the Plans and the
Distribution Agreements, as amended, must be approved annually by the Board of
Directors in the same manner as specified above.
Each year, the directors must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A Shares,
Class B Shares and Class C Shares of the Fund and that there is a reasonable
likelihood of the Plan relating to a Class providing a benefit to that Class.
The Plans and the Distribution Agreement, as amended, may be terminated with
respect to a Class at any time without penalty by a majority of those directors
who are not "interested persons" or by a majority vote of the outstanding voting
securities of the Class. Any amendment materially increasing the percentage
payable under the Plans must likewise be approved by a majority vote of the
outstanding voting securities of the Class, as well as by a majority vote of
those directors who are not "interested persons." With respect to the Class A
Shares' Plan, any material increase in the maximum percentage payable thereunder
must also be approved by a majority of the outstanding voting securities Class B
Shares of the Fund. Also, any other material amendment to the Plans must be
approved by a majority vote of the directors including a majority of the
noninterested directors of Mutual Funds, Inc. having no interest in the Plans.
In addition, in order for the Plans to remain effective, the selection and
nomination of directors who are not "interested persons" of Mutual Funds, Inc.
must be effected by the directors who themselves are not "interested persons"
and who have no direct or indirect financial interest in the Plans. Persons
authorized to make payments under the Plans must provide written reports at
least quarterly to the Board of Directors for their review.
For the period June 4, 1996 (commencement of operations) through
December 31, 1996, the Fund paid $14,659 in Rule 12b-1 fees.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of Fund Classes exceed certain
limits as set by the Distributor, may receive from the Distributor an additional
payment of up to 0.25% of the dollar amount of such sales. The Distributor may
also provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares. The Distributor may also pay a portion of the
expense of preapproved dealer advertisements promoting the sale of Delaware
Group fund shares.
Special Purchase Features--Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
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Current and former officers, directors and employees of Mutual Funds,
Inc., any other fund in the Delaware Group, the Manager, the Manager's
affiliates, or any of the Manager's affiliates that may in the future be
created, legal counsel to the funds, and registered representatives and
employees of broker/dealers who have entered into Dealer's Agreements with the
Distributor may purchase Class A Shares of the Fund and any such class of shares
of any of the other funds in the Delaware Group, including any fund that may be
created, at the net asset value per share. Family members of such persons at
their direction, and any employee benefit plan established by any of the
foregoing funds, corporations, counsel or broker/dealers may also purchase Class
A Shares at net asset value. Class A Shares may also be purchased at net asset
value by current and former officers, directors and employees (and members of
their families) of the Dougherty Financial Group LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware Group
funds. Officers, directors and key employees of institutional clients of the
Manager or any of its affiliates may purchase Class A Shares at net asset value.
Moreover, purchases may be effected at net asset value for the benefit of the
clients of brokers, dealers and registered investment advisers affiliated with a
broker or dealer, if such broker, dealer or investment adviser has entered into
an agreement with the Distributor providing specifically for the purchase of
Class A Shares in connection with special investment products, such as wrap
accounts or similar fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or Mutual Funds, Inc., which provides for the holding in escrow by the
Transfer Agent of 5% of the total amount of Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Fund and of any class of
any of the other mutual funds in the Delaware Group (except shares of any
Delaware Group fund which do not carry a front-end sales charge, CDSC or Limited
CDSC, other than shares of Delaware Group Premium Fund, Inc. beneficially owned
in connection with the ownership of variable insurance products, unless they
were acquired through an exchange from a Delaware Group fund which carried a
front-end sales charge, CDSC or Limited CDSC) previously purchased and still
held as of the date of their Letter of Intention toward the completion of such
Letter.
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Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of Class A Shares, Class B Shares and/or Class C
Shares of the Fund, as well as shares of any other class of any of the other
Delaware Group funds (except shares of any Delaware Group fund which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC). In addition, assets held in any stable value product available
through the Delaware Group may be combined with other Delaware Group fund
holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $60,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $60,000 purchase would currently be 3.00%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of the Fund who redeem such shares have one
year from the date of redemption to reinvest all or part of their redemption
proceeds in Class A Shares of the Fund or in Class A Shares of any of the other
funds in the Delaware Group, subject to applicable eligibility and minimum
purchase requirements, in states where shares of such other funds may be sold,
at net asset value without the payment of a front-end sales charge. This
privilege does not extend to Class A Shares where the redemption of the shares
triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Group offered without a
front-end sales charge will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
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Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Fund's shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus) in connection with the features
described above.
INVESTMENT PLANS
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions in
any of the mutual funds in the Delaware Group, including the Fund, in states
where their shares may be sold. Such investments will be at net asset value at
the close of business on the reinvestment date without any front-end sales
charge or service fee. The shareholder must notify the Transfer Agent in writing
and must have established an account in the fund into which the dividends and/or
distributions are to be invested. Any reinvestment directed to a fund in which
the investor does not then have an account will be treated like all other
initial purchases of a fund's shares. Consequently, an investor should obtain
and read carefully the prospectus for the fund in which the investment is
intended to be made before investing or sending money. The prospectus contains
more complete information about the fund, including charges and expenses. See
also Additional Methods of Adding to Your Investment - Dividend Reinvestment
Plan under How to Buy Shares in the Prospectus.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Fund,
provided an account has been established. Dividends from Class A Shares may not
be directed to Class B Shares or Class C Shares. Dividends from Class B Shares
may only be directed to other Class B Shares and dividends from Class C Shares
may only be directed to other Class C Shares. See Appendix B -- Classes Offered
in the Prospectus for the funds in the Delaware Group that are eligible for
investment by holders of Fund shares.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for the Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
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of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to the Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
the Fund may liquidate sufficient shares from a shareholder's account to
reimburse the government or the private source. In the event there are
insufficient shares in the shareholder's account, the shareholder is expected to
reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. The Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact Mutual Funds, Inc. for proper
instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Group. Shareholders of the Classes may elect to invest in
one or more of the other mutual funds in the Delaware Group through the Wealth
Builder Option. See Wealth Builder Option and Redemption and Exchange in the
Prospectus.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the Delaware
Group, subject to the conditions and limitations set forth in the Prospectus.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by giving
written notice to their Fund.
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund, its agent or designee. Orders for purchases of
Class B Shares and Class C Shares are effected at the net asset value per share
next calculated by the Fund in which shares are being purchased after receipt of
the order by the Fund, its agent or designee. Selling dealers are responsible
for transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable front-end sales charges. Offering price and net
asset value are computed as of the close of regular trading on the New York
Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is
open. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. When the New York Stock Exchange is closed, the
Fund will generally be closed, pricing calculations will not be made and
purchase and redemption orders will not be processed.
Net asset value data of the Fund as of December 31, 1996 was
calculated as follows:
Class A Net Assets ($6,067,647) = Net Asset Value Per Share ($10.18)
----------------------- Shares Outstanding (596,194)
Class B Net Assets ($2,737,647) = Net Asset Value Per Share ($10.19)
----------------------- Shares Outstanding (268,787)
Class C Net Assets ($900,257) = Net Asset Value Per Share ($10.18)
----------------------- Shares Outstanding (88,448)
The Fund's net asset value per share is computed by adding the value of
all the Fund's securities and other assets, deducting any liabilities of the
Fund, and dividing by the number of Fund shares outstanding. Expenses and fees
are accrued daily. Portfolio securities, except for bonds, which are primarily
traded on a national or foreign securities exchange are valued at the last sale
price on that exchange. Options are valued at the last reported sales price or,
if no sales are reported, at the mean between bid and asked prices. Securities
not traded on a particular day, over-the-counter securities and government and
agency securities are valued at the mean value between bid and asked prices.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Use of a pricing service
has been approved by the Board of Directors. Subject to the foregoing,
securities for which market quotations are not readily available and other
assets are valued at fair value as determined in good faith and in a method
approved by the Board of Directors.
Each Class of the Fund will bear, pro-rata, all of the common expenses
of the Fund. The net asset values of all outstanding shares of each Class of the
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of that Class. All income earned and expenses incurred by the Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in the Fund represented by the value of shares of such Classes. Due
to the specific distribution expenses and other costs that may be allocable to
each Class, the dividends paid to each Class may vary. The net asset value per
share of each Class is expected to be equivalent.
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REDEMPTION AND REPURCHASE
Any shareholder may require the Fund to redeem shares by sending a
written request, signed by the record owner or owners exactly as the shares are
registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares only if a shareholder specifically requests them. Certificates are not
issued for Class B Shares or Class C Shares. If stock certificates have been
issued for shares being redeemed, they must accompany the written request. For
redemptions of $50,000 or less paid to the shareholder at the address of record,
the request must be signed by all owners of the shares or the investment dealer
of record, but a signature guarantee is not required. When the redemption is for
more than $50,000, or if payment is made to someone else or to another address,
signatures of all record owners are required and a signature guarantee may be
required. Each signature guarantee must be supplied by an eligible guarantor
institution. The Fund reserves the right to reject a signature guarantee
supplied by an eligible institution based on its creditworthiness. The Fund may
request further documentation from corporations, retirement plans, executors,
administrators, trustees or guardians.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Fund, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the Fund or its agent,
subject to any applicable CDSC or Limited CDSC. This is computed and effective
at the time the offering price and net asset value are determined. See
Determining Offering Price and Net Asset Value. The Fund and the Distributor end
their business days at 5 p.m., Eastern time. This offer is discretionary and may
be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus. Class B Shares are subject to a CDSC
of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; and (iv) 1% if
shares are redeemed during the sixth year following purchase. Class C Shares are
subject to a CDSC of 1% if shares are redeemed within 12 months following
purchase. See Contingent Deferred Sales Charge - Class B Shares and Class C
Shares under Classes of Shares in the Prospectus. Except for the applicable CDSC
or Limited CDSC and, with respect to the expedited payment by wire described
below for which, in the case of the Classes, there is currently a $7.50 bank
wiring cost, neither the Fund nor the Fund's Distributor charges a fee for
redemptions or repurchases, but such fees could be charged at any time in the
future.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
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The Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared. This potential delay can
be avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for insufficient funds or for any other reason, the
Fund will automatically redeem from the shareholder's account the shares
purchased by the check plus any dividends earned thereon. Shareholders may be
responsible for any losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practical, or it is not reasonably practical for the Fund fairly to value its
assets, or in the event that the SEC has provided for such suspension for the
protection of shareholders, the Fund may postpone payment or suspend the right
of redemption or repurchase. In such case, the shareholder may withdraw the
request for redemption or leave it standing as a request for redemption at the
net asset value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sale by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, Mutual
Funds, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
The value of the Fund's investments is subject to changing market
prices. Thus, a shareholder reselling shares to the Fund may sustain either a
gain or loss, depending upon the price paid and the price received for such
shares.
Small Accounts
Before the Fund involuntarily redeems shares from an account that,
under the circumstances noted in the Prospectus, has remained below the minimum
amounts required by the Prospectus and sends the proceeds to the shareholder,
the shareholder will be notified in writing that the value of the shares in the
account is less than the minimum required and will be allowed 60 days from the
date of notice to make an additional investment to meet the required minimum.
See The Conditions of Your Purchase under How to Buy Shares in the Prospectus.
Any redemption in an inactive account established with a minimum investment may
trigger mandatory redemption. No CDSC or Limited CDSC will apply to the
redemptions described in this paragraph.
* * *
The Fund has made available certain redemption privileges, as described
below. The Fund reserves the right to suspend or terminate these expedited
payment procedures upon 60 days' written notice to shareholders.
Expedited Telephone Redemptions
Shareholders of the Fund Classes or their investment dealers of record
wishing to redeem any amount of shares of $50,000 or less for which certificates
have not been issued may call the Shareholder Service Center at 800-523-1918
prior to the time the offering price and net asset value are determined, as
noted above, and have the proceeds mailed to them at the address of record.
Checks payable to the shareholder(s) of record will normally be
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mailed the next business day, but no later than seven days, after the receipt of
the redemption request. This option is only available to individual, joint and
individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the Fund before the request is received. Payment will
be made by wire or check to the bank account designated on the authorization
form as follows:
1. Payment by Wire: Request that Federal Funds be wired to the bank
account designated on the authorization form. Redemption proceeds will normally
be wired on the next business day following receipt of the redemption request.
There is a $7.50 wiring fee (subject to change) charged by CoreStates Bank, N.A.
which will be deducted from the withdrawal proceeds each time the shareholder
requests a redemption. If the proceeds are wired to the shareholder's account at
a bank which is not a member of the Federal Reserve System, there could be a
delay in the crediting of the funds to the shareholder's bank account.
2. Payment by Check: Request a check be mailed to the bank account
designated on the authorization form. Redemption proceeds will normally be
mailed the next business day, but no later than seven days, from the date of the
telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the Fund
and a signature guarantee may be required. Each signature guarantee must be
supplied by an eligible guarantor institution. The Fund reserves the right to
reject a signature guarantee supplied by an eligible institution based on its
creditworthiness.
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect the
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Fund nor the Fund's Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, the Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders of the Fund Classes are generally tape recorded. A written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
Systematic Withdrawal Plans
Shareholders who own or purchase $5,000 or more of shares at the
offering price, or net asset value, as applicable, for which certificates have
not been issued may establish a Systematic Withdrawal Plan for monthly
withdrawals of $25 or more, or quarterly withdrawals of $75 or more, although
the Fund does not recommend any specific amount of withdrawal. Shares purchased
with the initial investment and through reinvestment of cash dividends and
realized securities profits distributions will be credited to the shareholder's
account and sufficient full and fractional shares will be redeemed at the net
asset value calculated on the third business day preceding the mailing date.
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Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital and the share balance
may, in time, be depleted, particularly in a declining market.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is investing in Delaware Group
funds which do not carry a sales charge. Redemptions of Class A Shares pursuant
to a Systematic Withdrawal Plan may be subject to a Limited CDSC if the purchase
was made at net asset value and a dealer's commission has been paid on that
purchase. Redemptions of Class B Shares or Class C Shares pursuant to a
Systematic Withdrawal Plan may be subject to a CDSC, unless the annual amount
selected to be withdrawn is less than 12% of the account balance on the date
that the Systematic Withdrawal Plan was established. See Waiver of Contingent
Deferred Sales Charge - Class B and Class C Shares and Waiver of Limited
Contingent Deferred Sales Charge - Class A Shares under Redemption and Exchange
in the Prospectus. Shareholders should consult their financial advisers to
determine whether a Systematic Withdrawal Plan would be suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must
complete an authorization form. If the recipient of Systematic Withdrawal Plan
payments is other than the registered shareholder, the shareholder's signature
on this authorization must be guaranteed. Each signature guarantee must be
supplied by an eligible guarantor institution. The Fund reserves the right to
reject a signature guarantee supplied by an eligible institution based on its
creditworthiness. This plan may be terminated by the shareholder or the Transfer
Agent at any time by giving written notice.
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DISTRIBUTIONS AND TAXES
The Fund declares a dividend to shareholders of each Class from net
investment income on a daily basis. Dividends are declared each day the Fund is
open and paid monthly. Net investment income earned on days when the Fund is not
open will be declared as a dividend on the next business day. Purchases of
shares of the Fund by wire begin earning dividends when converted into Federal
Funds and are available for investment, normally the next business day after
receipt. However, if the respective Fund is given prior notice of Federal Funds
wire and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Investors desiring to guarantee wire payments
must have an acceptable financial condition and credit history in the sole
discretion of the Fund. Mutual Funds, Inc. reserves the right to terminate this
option at any time. Purchases by check earn dividends upon conversion to Federal
Funds, normally one business day after receipt.
Each Class of shares of the Fund will share proportionately in the
investment income and expenses of the Fund, except that Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the
same Class of the respective Fund at net asset value, unless an election to
receive dividends in cash has been made. Payment by check of cash dividends will
ordinarily be mailed within three business days after the payable date. Dividend
payments of $1.00 or less will be automatically reinvested, notwithstanding a
shareholder's election to receive dividends in cash. If such a shareholder's
dividends increase to greater than $1.00, the shareholder would have to file a
new election in order to begin receiving dividends in cash again. If a
shareholder redeems an entire account, all dividends accrued to the time of the
withdrawal will be paid by separate check at the end of that particular monthly
dividend period, consistent with the payment and mailing schedule described
above. Any check in payment of dividends or other distributions which cannot be
delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. The Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the United States Post Office or the Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Any distributions from net realized securities profits will be made
twice a year. Payment would be made during the first quarter of the next fiscal
year. Such distributions will be reinvested in shares, unless the shareholders
elect to receive them in cash. The Fund will mail a quarterly statement showing
the dividends paid and all the transactions made during the period.
-42-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
Delaware Management Company, Inc.("Manager"), located at One Commerce
Square, Philadelphia, PA 19103, furnishes investment management services to the
Fund, subject to the supervision and direction of Mutual Funds, Inc.'s Board of
Directors.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as the Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly-owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, Minnesota High Yield Municipal Bond Fund's previous
investment advisory agreement with Voyageur was "assigned", as that term is
defined by the Investment Company Act of 1940, and the previous agreements
therefore terminated upon the completion of the acquisition. The Board of
Directors of Mutual Funds, Inc. unanimously approved new advisory agreements at
a meeting held in person on February 14, 1997, and called for a shareholders
meeting to approve the new agreements. At a meeting held on April 11, 1997, the
shareholders of Minnesota High Yield Municipal Bond Fund approved its Investment
Management Agreement with Voyageur, an indirect wholly-owned subsidiary of LNC,
to become effective after the close of business on April 30, 1997, the date the
acquisition was completed. On May 30, 1997, Voyageur was merged into the Manager
and the Manager became the investment manager for the Fund.
The Investment Management Agreement into which the Fund's Manager has
entered has an initial term of two years and may be renewed each year only so
long as such renewal and continuance are specifically approved at least annually
by the Board of Directors or by vote of a majority of the outstanding voting
securities of the Fund, and only if the terms and the renewal thereof have been
approved by the vote of a majority of the directors of Mutual Funds, Inc. who
are not parties thereto or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The Agreement is
terminable without penalty on 60 days' notice by the directors of Mutual Funds,
Inc. or by the Manager. The Agreement will terminate automatically in the event
of its assignment.
Under its Investment Management Agreement, the Fund pays the Manager
an annual fee equal to 0.65% of its average daily net assets.
Beginning June 9, 1997, the Manager has elected voluntarily to waive
that portion, if any, of the annual management fees payable by the Fund and to
pay certain expenses of the Fund to the extent necessary to ensure that the
Total Operating Expenses of Class A Shares, Class B Shares and Class C Shares of
the Fund (exclusive of taxes, interest, brokerage commissions, extraordinary
expenses but including 12b-1 fees) do not exceed, on an annual basis, 0.30%,
1.05% and 1.05%, respectively, through December 31, 1997.
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. In connection with the
merger transaction described above, the Manager has agreed for a period of two
years ending on April 30, 1999, to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of the
Fund which exceed 1% of the Fund's average daily net assets on an annual basis
up to certain
-43-
<PAGE>
limits as set forth in this Part B. This agreement replaces a similar provision
in the Fund's investment advisory contracts with the Fund's predecessor
investment adviser.
For the period June 4, 1996 (commencement of operations) through
December 31, 1996, the Fund paid $17,203 in advisory fees.
Under the general supervision of the Board of Directors, the Manager
makes and executes all investment decisions for the Fund. The Manager pays the
salaries of all directors, officers and employees of Mutual Funds, Inc.
who are affiliated with the Manager. The Fund pays all of its other expenses.
The ratios of expenses to average daily net assets for the Class A
Shares, Class B Shares and Class C Shares of the Fund for the period ended
December 31, 1996 were as follows:
Period ended
12/31/96
Class A Shares (1) 0.24%*
Class B Shares (2) 0.95%*
Class C Shares (3) 0.99%*
*Annualized
(1) Period from June 4, 1996 (commencement of operations) to December 31, 1996.
(2) Period from June 12, 1996 (commencement of operations) to December 31, 1996.
(3) Period from June 7, 1996 (commencement of operations) to December 31, 1996.
The expense ratios reflect the expense limitations in effect during the
period.
Distribution and Service
The Distributor, Delaware Distributors, L.P., located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of the Fund's
shares under a Distribution Agreement dated March 1, 1997. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by the Fund on behalf of Class A, Class B and
Class C Shares under their respective 12b-1 Plans. The Distributor is an
indirect, wholly owned subsidiaries of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
the Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
April 30, 1997. The Transfer Agent also provides accounting services to the Fund
pursuant to the terms of a separate Fund Accounting Agreement. The Transfer
Agent is also an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc.
-44-
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Mutual Funds, Inc. are managed under the
direction of its Board of Directors.
Certain officers and directors of Mutual Funds, Inc. hold identical
positions in each of the other funds in the Delaware Group. On July 31, 1997,
Mutual Funds, Inc.'s officers and directors owned less than 1% of the
outstanding shares of each Class of the Fund.
As of July 31, 1997, management believes the following shareholders
held 5% or more of the outstanding shares of a Class:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Minnesota High Yield Kaye L. Marvin & Charles C. Marvin 87,512 6.34%
Municipal Bond Fund TTEE Charles C. Marvin Trust
Class A Shares: P.O. Box 625
Warroad MN 56763-0625
Minnesota High Yield MLPF&S for the sole benefit of 73,862 12.14%
Municipal Bond Fund its customers
Class B Shares: Attn: Fund Administration
4800 Deer Lake Drive East, 3rd floor
Jacksonville FL 32246-6484
Minnesota High Yield Bonnie D. Kersting & Steven M Kersting 32,181 13.95%
Municipal Bond Fund TTEE Bonnie D. Kersting Trust
Class C Shares: 17751 Layton Path
Lakeville MN 55044-5217
MLPF&S for the sole benefit of 27,839 12.06%
its customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd floor
Jacksonville FL 32246-6484
</TABLE>
-45-
<PAGE>
DMH Corp., Delaware Voyageur Holdings, Inc., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd., Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH and the Manager are indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National. Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management.
As noted under Investment Management Agreement, after the close of
business on April 30, 1997, Voyageur became an indirect wholly-owned subsidiary
of Lincoln National as a result of Lincoln National's acquisition of DGF.
Directors and principal officers of Mutual Funds, Inc. are noted below
along with their ages and their business experience for the past five years.
Unless otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
-46-
<PAGE>
*Wayne A. Stork (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of Mutual Funds, Inc., 32 other investment companies in the
Delaware Group, Delaware Management Holdings, Inc., DMH Corp.,
Delaware International Holdings Ltd. and Founders Holdings,
Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group, Delaware Management
Holdings, Inc. and Delaware Capital Management, Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware organization.
Paul E. Suckow (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
Mutual Funds, Inc., each of the other 32 investment companies
in the Delaware Group, Delaware Management Company, Inc. and
Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-47-
<PAGE>
Walter P. Babich (69)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (58)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group, Inc.,
New York, from 1988 to 1990. Mr. Knerr founded The Publishing
Group, Inc. in 1988.
Ann R. Leven (56)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business School.
W. Thacher Longstreth (76)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (61)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994, Mr.
Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
-48-
<PAGE>
* Jeffrey J. Nick (44)
Director and/or Trustee of Mutual Funds, Inc. and 32 other investment
companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
Charles E. Peck (71)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of
The Ryland Group, Inc., Columbia, MD.
David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of Mutual Funds, Inc., each of the other 32 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc. Founders CBO Corporation, Delaware Capital Management,
Inc., and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc. and Founders Holdings, Inc.,
Delaware International Holdings Ltd.
Chairman, Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
President/Chief Executive Officer/Chief Financial Officer and Director
of Delaware Service Company, Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer
of Equitable Capital Management Corporation, New York, from
December 1985 through August 1992, Executive Vice President
from December 1985 through March 1992, and Vice Chairman from
March 1992 through August 1992.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-49-
<PAGE>
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of Mutual Funds,
Inc. and each of the other 32 investment companies in the
Delaware Group, Delaware Management Holdings, Inc. and Delaware
Distributors, L.P.
Executive Vice President, Secretary General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President, Secretary General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services, Inc
and Delaware Capital Management, Inc.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware organization.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of Mutual Funds, Inc. and
each of the other 32 investment companies in the Delaware
Group and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc. and Delaware International Holdings
Ltd.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/ Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief
Financial Officer for Prudential Residential Services, L.P.,
New York, NY from 1989 to 1992. Prior to that, Mr. Hastings
served as Controller and Treasurer for Fine Homes
International, L.P., Stamford, CT from 1987 to 1989.
Michael P. Bishof (35)
Senior Vice President/Treasurer of Mutual Funds, Inc. and each of the
other 32 investment companies in the Delaware Group, Delaware
Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/Investment Accounting, Delaware Management
Company, Inc., and Delaware Service Company, Inc.
Senior Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Senior Vice President and Treasurer/Manager of Investment Accounting
of Delaware Distributors, L.P.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a
Vice President for CS First Boston Investment Management, New
York, NY from 1993 to 1994 and an Assistant Vice President for
Equitable Capital Management Corporation, New York, NY from
1987 to 1993.
Elizabeth Howell (35)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc. and
four other investment companies in the Delaware Group and
Delaware Management Company, Inc.
Before joining the Delaware Group in 1997, Ms. Howell was a senior
portfolio manager with Voyageur Fund Managers, Inc.
-50-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation expected to be
received from Mutual Funds, Inc. during the actual fiscal year, the total
compensation received from all Delaware Group investment companies for the
fiscal year ended December 31, 1996, and an estimate of annual benefits to be
received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of December 31, 1996.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued Annual from all 18
Compensation as Part of Benefits Delaware
from Mutual Mutual Funds, Upon Group Investment
Name Funds, Inc.(1) Inc. Expenses Retirement* Companies
<S> <C> <C> <C> <C>
W. Thacher Longstreth $826 None $30,000 $46,187
Ann R. Leven $872 None $30,000 $54,323
Walter P. Babich $863 None $30,000 $53,323
Anthony D. Knerr $863 None $30,000 $53,323
Charles E. Peck $826 None $30,000 $49,323
Thomas F. Madison(2) $826 None $30,000 N/A
</TABLE>
* Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his or
her retirement from the Board, has attained the age of 70 and served on the
Board for at least five continuous years, is entitled to receive payments
from each fund in the Delaware Group for a period equal to the lesser of
the number of years that such person served as a director or the remainder
of such person's life. The amount of such payments will be equal, on an
annual basis, to the amount of the annual retainer that is paid to
directors of each fund at the time of such person's retirement. If an
eligible director retired as of December 31, 1996, he or she would be
entitled to annual payments totaling $30,000, in the aggregate, from all of
the funds in the Delaware Group, based on the number of funds in the
Delaware Group as of that date.
(1) The current Board of Directors was elected by shareholders of Mutual Funds,
Inc. on April 11, 1997 and began serving on May 1, 1997. With the exception
of Thomas F. Madison, none of the current directors had served on the prior
Board. Compensation figures are estimates of payments for Mutual Funds,
Inc.'s current fiscal year.
(2) Thomas F. Madison also received $1,462 for his service on the previous
Board of Directors during the last fiscal year.
-51-
<PAGE>
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and
for shareholders of classes of other funds in the Delaware Group are set forth
in the relevant prospectuses for such classes. The following supplements that
information. The Fund may modify, terminate or suspend the exchange privilege
upon 60 days' notice to shareholders.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and carefully
read that fund's prospectus before buying shares in an exchange. The prospectus
contains more complete information about the fund, including charges and
expenses. A shareholder requesting an exchange will be sent a current prospectus
and an authorization form for any of the other mutual funds in the Delaware
Group. Exchange instructions must be signed by the record owner(s) exactly as
the shares are registered.
An exchange constitutes, for tax purposes, the sale of one fund and the
purchase of another. The sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes.
In addition, investment advisers and dealers may make exchanges between
funds in the Delaware Group on behalf of their clients by telephone or other
expedited means. This service may be discontinued or revised at any time by the
Transfer Agent. Such exchange requests may be rejected if it is determined that
a particular request or the total requests at any time could have an adverse
effect on any of the funds. Requests for expedited exchanges may be submitted
with a properly completed exchange authorization form, as described above.
Telephone Exchange Privilege
Shareholders owning shares for which certificates have not been issued
or their investment dealers of record may exchange shares by telephone for
shares in other mutual funds in the Delaware Group. This service is
automatically provided unless the Fund receives written notice from the
shareholder to the contrary.
Shareholders or their investment dealers of record may contact the
Shareholder Service Center at 800-523-1918 to effect an exchange. The
shareholder's current Fund account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and the Fund reserve the right to
record exchange instructions received by telephone and to reject exchange
requests at any time in the future.
-52-
<PAGE>
As described in the Fund's Prospectus, neither the Fund nor the
Transfer Agent is responsible for any shareholder loss incurred in acting upon
written or telephone instructions for redemption or exchange of Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), the Fund will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Group funds from Timing Firms. The Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including accounts administered so as to
redeem or purchase shares based upon certain predetermined market indicators,
will be aggregated for purposes of the exchange limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Group funds: (1) Decatur
Income Fund, (2) Decatur Total Return Fund, (3) Delaware Fund, (4) Limited-Term
Government Fund, (5) Tax-Free USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware Group
funds are available for timed exchanges. Assets redeemed or exchanged out of
Timing Accounts in Delaware Group funds not listed above may not be reinvested
back into that Timing Account. The Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
timing pattern (as described above).
The Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if the
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other
Delaware Group funds:
Delaware Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. Devon Fund
seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
Trend Fund seeks long-term growth by investing in common stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
-53-
<PAGE>
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing primarily in equity securities
of medium- to large- sized companies expected to grow over time that meet the
Fund's "Social Criteria" strategy.
Delchester Fund seeks as high a current income as possible by investing
principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Strategic Income Fund seeks to
provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities.
U.S. Government Fund seeks high current income by investing primarily
in long-term debt obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Limited-Term Government Fund seeks high, stable income by investing
primarily in a portfolio of short-and intermediate-term securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
instruments secured by such securities. U.S. Government Money Fund seeks maximum
current income with preservation of principal and maintenance of liquidity by
investing only in short-term securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or instrumentalities, and
repurchase agreements collateralized by such securities, while maintaining a
stable net asset value.
Delaware Cash Reserve seeks the highest level of income consistent with
the preservation of capital and liquidity through investments in short-term
money market instruments, while maintaining a stable net asset value.
Tax-Free USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
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International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to provide high current
income consistent with preservation of capital. The fund attempts to achieve
this objective primarily by investing in a diversified portfolio of investment
grade fixed-income securities issued by U.S. corporations.
Delaware Group Premium Fund, Inc. offers 15 funds available exclusively
as funding vehicles for certain insurance company separate accounts. Decatur
Total Return Series seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. Delchester Series seeks as high a current
income as possible by investing in rated and unrated corporate bonds, U.S.
government securities and commercial paper. Capital Reserves Series seeks a high
stable level of current income while minimizing fluctuations in principal by
investing in a diversified portfolio of short- and intermediate-term securities.
Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term money
market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap common stocks whose market values
appear low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over
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time. Emerging Markets Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. Convertible Securities Series seeks a high level of total
return on its assets through a combination of capital appreciation and current
income by investing primarily in convertible securities. Quantum Series seeks to
achieve long-term capital appreciation by investing primarily in equity
securities of medium to large-sized companies expected to grow over time that
meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Tax-Free Arizona Insured Fund seeks to provide a high
level of current income exempt from federal income tax and the Arizona personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Minnesota Insured Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax, consistent with
the preservation of capital.
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund seeks to provide
a high level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with preservation of capital. The Fund seeks to
reduce market risk by maintaining an average weighted maturity from five to ten
years.
Delaware-Voyageur Tax-Free California Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the California
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Insured Fund seeks to provide a high level of
current income exempt from federal income tax, consistent with the preservation
of capital. The Fund will seek to select investments that will enable its shares
to be exempt from the Florida intangible personal property tax.
Delaware-Voyageur Tax-Free Florida Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. The Fund will seek to select investments that will enable its shares to
be exempt from the Florida intangible personal property tax. Delaware-Voyageur
Tax-Free Kansas Fund seeks to provide a high level of current income exempt from
federal income tax, the Kansas personal income tax and the Kansas Intangible
personal property tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Missouri Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the Missouri personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free New Mexico Fund seeks to provide a high level of current income exempt
from federal income tax and the New Mexico personal income tax, consistent with
the preservation of capital. Delaware-Voyageur Tax-Free Oregon Insured Fund
seeks to provide a high level of current income exempt from federal income tax
and the Oregon personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Utah Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Washington Insured Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital.
Delaware-Voyageur Tax-Free Florida Intermediate Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. The Fund seeks to reduce market risk by maintaining an average weighted
maturity from five to ten years.
Delaware-Voyageur Tax-Free Arizona Fund seeks to provide a high level
of current income exempt from federal income tax and the Arizona personal income
tax, consistent with the preservation of capital.
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Delaware-Voyageur Tax-Free California Fund seeks to provide a high level of
current income exempt from federal income tax and the California personal income
tax, consistent with the preservation of capital. Delaware-Voyageur Tax-Free
Iowa Fund seeks to provide a high level of current income exempt from federal
income tax and the Iowa personal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Idaho Fund seeks to provide a high level of
current income exempt from federal income tax and the Idaho personal income tax,
consistent with the preservation of capital. National High Yield Municipal Fund
seeks to provide a high level of income exempt from federal income tax,
primarily through investment in medium and lower grade municipal obligations.
Delaware- Voyageur Tax-Free New York Fund seeks to provide a high level of
current income exempt from federal income tax and the personal income tax of the
state of New York and the city of New York, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Wisconsin Fund seeks to provide a high level
of current income exempt from federal income tax and the Wisconsin personal
income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Colorado Fund seeks to provide a high level
of current income exempt from federal income tax and the Colorado personal
income tax, consistent with the preservation of capital.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high total return on an after-tax basis. The Fund will
attempt to achieve this objective by seeking to provide a high long-term
after-tax total return through managing its portfolio in a manner that will
defer the realization of accrued capital gains and minimize dividend income.
Delaware-Voyageur Tax-Free Minnesota Fund seeks to provide a high level
of current income exempt from federal income tax and the Minnesota personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free North Dakota Fund seeks to provide a high level of current income
exempt from federal income tax and the North Dakota personal income tax,
consistent with the preservation of capital.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
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GENERAL INFORMATION
The Manager is the investment manager of the Fund. The Manager also
provides investment management services to certain of the other funds in the
Delaware Group. The Manager, through a separate division, also manages private
investment accounts. While investment decisions of the Fund are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for the Fund.
The Manager, or its affiliate Delaware International Advisers Ltd.,
also manages the investment options for Delaware Medallion (sm) III Variable
Annuity. Medallion is issued by Allmerica Financial Life Insurance and Annuity
Company (First Allmerica Financial Life Insurance Company in New York and
Hawaii). Delaware Medallion offers fifteen different investment series ranging
from domestic equity funds, international equity and bond funds and domestic
fixed income funds. Each investment series available through Medallion utilizes
an investment strategy and discipline the same as or similar to one of the
Delaware Group mutual funds as available outside the annuity. See Discipline
Group Premium Fund, Inc., above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, Delaware International Advisers Ltd. or their
affiliates, are permitted to engage in personal securities transactions subject
to the exceptions set forth in Rule 17j-1 and the following general restrictions
and procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions may only be closed-out at a profit after a 60-day holding
period has elapsed; and (5) the Compliance Officer must be informed periodically
of all securities transactions and duplicate copies of brokerage confirmations
and account statements must be supplied to the Compliance Officer.
The Distributor acts as national distributor for the Fund and for the
other mutual funds in the Delaware Group. Prior to May 31, 1997, Voyageur Fund
Distributors, Inc. served as the national distributor for the Fund.
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The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for each Fund and for the
other mutual funds in the Delaware Group. The Transfer Agent is paid a fee by
the Fund for providing these services consisting of an annual per account charge
of $11.00 plus transaction charges for particular services according to a
schedule. Compensation is fixed each year and approved by the Board of
Directors, including a majority of the unaffiliated directors. The Transfer
Agent also provides accounting services to the Fund. Those services include
performing all functions related to calculating the Fund's net asset value and
providing all financial reporting services, regulatory compliance testing and
other related accounting services. For its services, the Transfer Agent is paid
a fee based on total assets of all funds in the Delaware Group for which it
provides such accounting services. Such fee is equal to 0.25% multiplied by the
total amount of assets in the complex for which the Transfer Agent furnishes
accounting services, where such aggregate complex assets are $10 billion or
less, and 0.20% of assets if such aggregate complex assets exceed $10 billion.
The fees are charged to each fund, including the Fund, on an aggregate pro-rata
basis. The asset-based fee payable to the Transfer Agent is subject to a minimum
fee calculated by determining the total number of investment portfolios and
associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of the Fund's securities and
cash. As custodian for the Fund, Norwest maintains a separate account or
accounts for the Fund; receives, holds and releases portfolio securities on
account of the Fund; receives and disburses money on behalf of the Fund; and
collects and receives income and other payments and distributions on account of
the Fund's portfolio securities.
Capitalization
Mutual Funds, Inc. has a present authorized capitalization of 10
trillion shares of capital stock with a $.01 par value per share.
The Board of Directors has allocated the following number of shares to
the Fund and its respective classes:
Minnesota High Yield Municipal Bond Fund 100 billion
Class A Shares 10 billion
Class B Shares 10 billion
Class C Shares 10 billion
All shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable and, except as described above, have
equal voting rights.
Shares of each Class of the Fund represent a proportionate interest in
the assets of the Fund, and have the same voting and other rights and
preferences as the other classes of the Fund. Shareholders of Class A Shares,
Class B Shares and Class C Shares of a Fund may vote only on matters affecting
the 12b-1 Plan that relates to the Class of shares that they hold. However,
Class B Shares may vote on any proposal to increase materially the fees to be
paid by the Fund under the 12b-1 Plan relating to its Class A Shares. General
expenses of the Fund will be allocated on a pro-rata basis to the classes
according to asset size, except that expenses of the 12b-1 Plans of the Fund's
Class A, Class B and Class C Shares will be allocated solely to those classes.
Beginning June 9, 1997, the name of Voyageur Minnesota High Yield
Municipal Bond Fund changed to Delaware-Voyageur Minnesota High Yield Municipal
Bond Fund.
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Noncumulative Voting
Mutual Funds, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of the shares of Mutual Funds, Inc.
voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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APPENDIX A -- RATINGS
Earnings and Dividend Rankings for Common Stocks
Standard & Poor's Corporation. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, Standard & Poor's
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. The rankings,
however, do not pretend to reflect all of the factors, tangible or intangible,
that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of
protection for principal and interest, called creditworthiness, cannot be
applied to common stocks, and therefore rankings are not to be confused with
bond quality ratings which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
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A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
Commercial Paper Ratings
Standard & Poor's Corporation. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term
promissory obligations.
Prime-2 Strong capacity for repayment of short-term
promissory obligations.
Prime-3 Acceptable capacity for repayment of short-term
promissory obligations.
Corporate Bond Ratings
Standard & Poor's Corporation. Its ratings for corporate bonds have
the following definitions:
Investment grade:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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Speculative Grade:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. Its ratings for corporate bonds
include the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
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Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Preferred Stock Rating
Standard& Poor's Corporation. Its ratings for preferred stock have the
following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Moody's Investors Service, Inc. Its ratings for preferred stock
include the following:
An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
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An issue which is rated "baa" is considered to be medium-grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or
preference stock. Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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APPENDIX B
General Characteristics and Risks of Options and Futures
General. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," the Fund may purchase and sell options on
the securities in which it may invest and the Fund may purchase and sell options
on futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intend to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Fund's investment
objectives, to seek to hedge against the effects of market conditions and to
seek to stabilize the value of its assets. The Fund will engage in hedging and
risk management transactions from time to time in Voyageur's discretion, and may
not necessarily be engaging in such transactions when movements in interest
rates that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the 'CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Fund does not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and
attendant risks, are discussed below.
Futures Contracts and Related Options. The Fund may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund would have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund would be required
to maintain initial margin deposits with respect to the futures contract and to
make variation margin payments until the contract is closed. The Fund will incur
brokerage fees when they purchase or sell futures contracts.
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At the time a futures contract is purchased or sold, the Fund must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts the Fund may purchase or sell may range from approximately
1 1/2% to approximately 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures contract has changed, the Fund will be required
to make or will be entitled to receive a payment in cash or specified high
quality debt securities in an amount equal to any decline or increase in the
value of the futures contract. These additional deposits or credits are
calculated and required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract the Fund purchases or sells and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts purchased or sold by the Fund in a hedging
transaction, even if Voyageur correctly forecasts market trends the Fund's
hedging strategy may not be successful. If this should occur, the Fund could
lose money on the futures contracts and also on the value of its portfolio
securities.
Although the Fund believes that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Fund's
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Fund seeks
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Fund may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
Options on Securities. The Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
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<PAGE>
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
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<PAGE>
The Fund may purchase and sell options that are exchange-traded or
that are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. In the case of options written by the Fund, the inability to enter into
a closing purchase transaction may result in material losses to the Fund.
Regulatory Restrictions. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the Fund
will maintain, in a segregated account, cash or liquid high-grade securities
equal to the value of such contracts. Compliance with such segregation
requirements may restrict the Fund's ability to invest in intermediate- and
long-term Tax Exempt Obligations.
The Fund intend to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation.
Accounting Considerations. When the Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the
Fund, an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
-69-
<PAGE>
FINANCIAL STATEMENTS
KPMG Peat Marwick LLP served as the independent auditors for Voyageur
Mutual Funds, Inc. through December 31, 1996 and, in its capacity as such,
audited the annual financial statements of the Fund. Beginning May 1, 1997,
Ernst & Young LLP began serving in such capacity. The Fund's Statements of Net
Assets, Statements of Operations, Statements of Changes in Net Assets, and Notes
to Financial Statements, as well as the report of KPMG Peat Marwick LLP,
independent auditors, for the fiscal year ended December 31, 1996 are included
in Voyageur Mutual Funds, Inc.'s Annual Report to shareholders. The financial
statements, the notes relating thereto and the report of KPMG Peat Marwick LLP,
listed above are incorporated by reference from the Annual Report into this
Part B.
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<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific funds,
tax-free funds, money market funds, global and international funds and
closed-end equity funds give investors the ability to create a portfolio that
fits their personal financial goals. For more information, shareholders of the
Fund Classes should contact their financial adviser or call Delaware Group at
800-523- 4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55402
- --------------------------------------------------------------------------------
DELAWARE-VOYAGEUR MINNESOTA HIGH
YIELD MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
A CLASS
- --------------------------------------------------------------------------------
B CLASS
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
CLASSES OF VOYAGEUR MUTUAL
FUNDS, INC.
- --------------------------------------------------------------------------------
PART B
STATEMENT OF
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
AUGUST 28, 1997
DELAWARE
GROUP
--------
<PAGE>
- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
AUGUST 28, 1997
- --------------------------------------------------------------------------------
VOYAGEUR MUTUAL FUNDS, INC.
- --------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
For Prospectus and Performance of Class A Shares, Class B Shares and Class C
Shares: Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and Class C
Shares: (SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Cover Page
- --------------------------------------------------------------------------------
Investment Restrictions and Policies
- --------------------------------------------------------------------------------
Accounting and Tax Issues
- --------------------------------------------------------------------------------
Performance Information
- --------------------------------------------------------------------------------
Trading Practices and Brokerage
- --------------------------------------------------------------------------------
Purchasing Shares
- --------------------------------------------------------------------------------
Investment Plans
- --------------------------------------------------------------------------------
Determining Offering Price
and Net Asset Value
- --------------------------------------------------------------------------------
Redemption and Repurchase
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Distributions and Taxes
- --------------------------------------------------------------------------------
Investment Management Agreement
- --------------------------------------------------------------------------------
Officers and Directors
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
Appendix A -- Ratings
- --------------------------------------------------------------------------------
Appendix B -- General Characteristics and Risks of Options and Futures
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
<PAGE>
Voyageur Mutual Funds, Inc. ("Mutual Funds, Inc.") is a
professionally-managed mutual fund of the series type. This Statement of
Additional Information ("Part B" of the registration statement) describes
National High Yield Municipal Bond Fund series (the "Fund") of Mutual Funds,
Inc. The Fund offers Class A Shares, Class B Shares and Class C Shares
(individually, a "Class" and collectively the "Classes").
Class B Shares and Class C Shares of the Fund may be purchased at a
price equal to the next determined net asset value per share. Class A Shares may
be purchased at the public offering price, which is equal to the next determined
net asset value per share, plus a front-end sales charge. Class A Shares are
subject to a maximum front-end sales charge of 3.75% and annual 12b-1 Plan
expenses of up to 0.25%. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within six years
of purchase and annual 12b-1 Plan expenses of up to 1% which are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the Fund's
Prospectus. Class C Shares are subject to a CDSC which may be imposed on
redemptions made within 12 months of purchase and annual 12b-1 Plan expenses of
up to 1% which are assessed against Class C Shares for the life of the
investment. All references to "shares" in this Part B refer to all Classes of
shares of the Fund, except where noted.
This Part B supplements the information contained in the current
Prospectus for the Fund dated August 28, 1997 as it may be amended from time to
time. It should be read in conjunction with the Prospectus. Part B is not itself
a prospectus but is, in its entirety, incorporated by reference into the
Prospectus. A prospectus may be obtained by writing or calling your investment
dealer or by contacting the Fund's national distributor, Delaware Distributors,
L.P. (the "Distributor"), 1818 Market Street, Philadelphia, PA 19103.
2
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
Investment Restrictions
The Fund has adopted certain investment restrictions set forth below
which, together with the investment objectives of the Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the Investment Company Act of 194
("1940 Act"), this means the lesser of the vote of (1) 67% of the shares of the
Fund at a meeting where more than 50% of the outstanding shares of the Fund are
present in person or by proxy or (2) more than 50% of the outstanding shares of
the Fund. The following investment restrictions apply to the Fund. The Fund will
not:
(1) Borrow money (provided that the Fund may enter into reverse
repurchase agreements with respect to not more than 10% of its total assets),
except from banks for temporary or emergency purposes in an amount not exceeding
20% of the value of the Fund's total assets, including the amount borrowed. The
Fund may not borrow for leverage purposes, provided that the Fund may enter into
reverse repurchase agreements for such purposes, and securities will not be
purchased while outstanding borrowings exceed 5% of the value of the Fund's
total assets.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, the Fund may
be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities
which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more if its total assets in the securities of any
industry, although, for purposes of this limitation, tax-exempt securities and
U.S. Government obligations are not considered to be part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (1) above, and except to the extent
that using options, futures contracts and options on futures contracts,
purchasing or selling on a when-issued or forward commitment basis or using
similar investment strategies may be deemed to constitute issuing a senior
security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict the Fund
from purchasing or selling, on a basis consistent with any restrictions
contained in its then-current Prospectus, any financial contracts or instruments
which may be deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect, in each case,
to interest rates, currencies, stock indices, bond indices or interest rate
indices).
The following non-fundamental investment restrictions may be changed by
the Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in securities of two
or more investment companies, except as part of a merger, consolidation or
acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
3
<PAGE>
(3) Write puts if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover such puts.
(4) Make short sales of securities or maintain a short position for the
account of the Fund, unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
The investment objectives, policies and restrictions of the National
High Yield Municipal Bond Fund (the "Fund") are set forth in the Prospectus.
Certain additional investment information is set forth below.
Diversification
Although the Fund is characterized as a non-diversified fund under the
1940 Act, the Fund intends to conduct its operations so that it will qualify
under the Internal Revenue Code of 1986 as a "regulated investment company." In
order to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Code requires that not more than 25% in value of the Fund's total assets may be
invested in the securities of a single issuer at the close of each quarter of
the taxable year.
For purposes of such diversification, the identification of the issuer
of Municipal Obligations depends on the terms and conditions of the security. If
a State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by the Fund
exceeds 10% of the value of the Fund's total assets, the guarantee is considered
a separate security and is treated as an issue of the guarantor. Investments in
municipal obligations refunded with escrowed U.S. government securities will be
treated as investments in U.S. government securities for purposes of determining
the Fund's compliance with the 1940 Act diversification requirements.
Municipal Obligations
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses
4
<PAGE>
and lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service LP ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, Fitch and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings provide an
initial criterion for selection of portfolio investments, the Fund's investment
adviser, Delaware Management Company, Inc. (the "Manager"), will subject these
securities to other evaluative criteria prior to investing in such securities.
Floating and Variable Rate Demand Notes
Variable rate master demand notes, in which the Fund may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between the Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, the Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the period of time remaining
until the principal amount can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Fund will be determined by the
Fund's Manager under guidelines established by the Fund's Board of Directors to
be of comparable quality at the time of purchase to rated instruments eligible
for purchase under the Fund's investment
5
<PAGE>
policies. In making such determinations, the Manager will consider the earning
power, cash flow and other liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by the Fund, the Fund may re-sell the note at any time to a third
party. The absence of such an active secondary market, however, could make it
difficult for the Fund to dispose of the variable or floating rate note involved
in the event the issuer of the note defaulted on its payment obligations, and
the Fund could, for this or other reasons, suffer a loss to the extent of the
default. Variable or floating rate notes may be secured by bank letters of
credit.
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Fund's total assets only if such notes are
subject to a demand feature that will permit the Fund to demand payment of the
Principal within seven days after demand by the Fund. If not rated, such
instruments must be found by the Fund's Manager and/or sub-adviser under
guidelines established by the Fund's Board of Directors, to be of comparable
quality to instruments that are rated high quality. A rating may be relied upon
only if it is provided by a nationally recognized statistical rating
organization that is not affiliated with the issuer or guarantor of the
instruments.
Escrow Secured Bonds or Defeased Bonds
Escrow secured bonds or defeased bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) some of its outstanding bonds
and it becomes necessary or desirable to set aside funds for redemption or
payment of the bonds at a future date or dates. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade interest
bearing debt securities which are then deposited in an irrevocable escrow
account held by an escrow agent to secure all future payments of principal and
interest of the advance refunded bond. Escrow secured bonds will often receive a
triple A rating from S&P, Moody's and Fitch.
State or Municipal Lease Obligations
Municipal leases may take the form of a lease with an option to
purchase, an installment purchase contract, a conditional sales contract or a
participation certificate in any of the foregoing. In determining leases in
which the Fund will invest, the Manager will evaluate the credit rating of the
lessee and the terms of the lease. Additionally, the Manager may require that
certain municipal leases be secured by a letter of credit or put arrangement
with an independent financial institution. State or municipal lease obligations
frequently have the special risks described below which are not associated with
general obligation or revenue bonds issued by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "non-appropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "non-appropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for non-appropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the
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leased property without any recourse to the general credit of the public body.
The disposition of the leased property by the lessor in the event of termination
of the lease might, in many cases, prove difficult or result in loss.
Concentration Policy
As a fundamental policy, the Fund may not invest 25% or more of its
total assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting one
bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk.
Housing Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
Utility Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. The Fund may invest, from time to time, 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs,
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deregulation, traffic constraints and other factors, and several airlines are
experiencing severe financial difficulties. The revenues of issuers which derive
their payments from bridge, road or tunnel toll revenues could be adversely
affected by competition from toll-free vehicular bridges and roads and
alternative modes of transportation. Such revenues could also be adversely
affected by a reduction in the availability of fuel to motorists or significant
increases in the costs thereof.
Education Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. The Fund may invest, from time to time,
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal
income taxes for certain housing, health care, utility, transportation,
education and industrial revenue bonds depends on compliance with relevant
provisions of the Code. The failure to comply with these provisions could cause
the interest on the bonds to become includable in gross income, possibly
retroactively to the date of issuance, thereby reducing the value of the bonds,
subjecting shareholders to unanticipated tax liabilities and possibly requiring
the Fund to sell the bonds at the reduced value. Furthermore, such a failure to
meet these ongoing requirements may not enable the holder to accelerate payment
of the bond or require the issuer to redeem the bond.
Taxable Obligations
As set forth in the Prospectus, the Fund may invest to a limited extent
in obligations and instruments, the interest on which is includable in gross
income for purposes of federal income taxation.
Government Obligations
The Fund may invest in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities. These securities include a
variety of Treasury securities, which differ in their interest rates, maturities
and times of issuance. Treasury Bills generally have maturities of one year or
less; Treasury Notes generally have maturities of one to ten years; and Treasury
Bonds generally have maturities of greater than ten years. Some obligations
issued or guaranteed by U.S. government agencies and instrumentalities, such as
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S.
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Treasury; other obligations, such as those of the Federal Home Loan Banks, are
secured by the right of the issuer to borrow from the Treasury; other
obligations, such as those issued by the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and other obligations,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the instrumentality itself. Although the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law. The Fund will invest in such securities only when
the Manager is satisfied that the credit risk with respect to the issuer is
minimal.
Repurchase Agreements
A repurchase agreement is a short-term investment by which the
purchaser acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the purchaser's holding period. Should an issuer of a
repurchase agreement fail to repurchase the underlying security, the loss to the
Fund, if any, would be the difference between the repurchase price and the
market value of the security. The Fund will limit its investments in repurchase
agreements to those which the Manager, under the guidelines of the Board of
Directors, determines to present minimal credit risks and which are of high
quality. In addition, the Fund must have collateral of at least 100% of the
repurchase price, including the portion representing the Fund's yield under such
agreements which is monitored on a daily basis.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Fund may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described below.
Other Taxable Investments
The Fund also may invest in certificates of deposit, bankers'
acceptances and other time deposits. Certificates of deposit are certificates
representing the obligation of a bank to repay the funds deposited (plus
interest thereon) at a time certain after the deposit. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Options
The Fund may purchase call options, write call options on a covered
basis, write secured put options and purchase put options on a covered basis
only, and will not engage in option writing strategies for speculative purposes.
The Fund may invest in options that are either Exchange listed or
traded over-the-counter. Certain over-the-counter options may be illiquid. Thus,
it may not be possible to close option positions and this may have an adverse
impact on the Fund's ability to effectively hedge its securities. The Fund will
not, however, invest more than 15% of its assets in illiquid securities.
A. Covered Call Writing--The Fund may write covered call options from
time to time on such portion of its portfolio, without limit, as the Manager
determines is appropriate in seeking to obtain the Fund's investment objective.
A call option gives the purchaser of such option the right to buy, and the
writer, in this case the Fund, has the obligation to sell the underlying
security at the exercise price during the option period. The advantage to the
Fund of writing covered calls is that the Fund receives a premium which is
additional income. However, if the security rises in value, the Fund may not
fully participate in the market appreciation.
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During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to options on actual portfolio securities owned by the
Fund, the Fund may enter into closing purchase transactions. A closing purchase
transaction is one in which the Fund, when obligated as a writer of an option,
terminates its obligation by purchasing an option of the same series as the
option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Fund may realize a net
gain or loss from a closing purchase transaction depending upon whether the net
amount of the original premium received on the call option is more or less than
the cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be partially or entirety offset by the premium
received from a sale of a different call option on the same underlying security.
Such a loss may also be wholly or partially offset by unrealized appreciation in
the market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means
that the Fund will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Fund would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Fund will normally have expiration dates between one and
nine months from the date written. The exercise price of a call option may be
below, equal to or above the current market value of the underlying security at
the time the option is written.
B. Purchasing Call Options--The Fund may purchase call options to the
extent that premiums paid by the Fund do not aggregate more than 2% of the
Fund's total assets. The advantage of purchasing call options is that the Fund
may alter portfolio characteristics, and modify portfolio maturities without
incurring the cost associated with portfolio transactions.
The Fund may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same Fund as the option previously purchased. The Fund
will realize a profit from a closing sale transaction if the price received on
the transaction is more than the premium paid to purchase the original call
option; the Fund will realize a loss from a closing sale transaction if the
price received on the transaction is less than the premium paid to purchase the
original call option.
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Although the Fund will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on a
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the results that the Fund would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Fund may expire without any value
to the Fund.
C. Purchasing Put Options--The Fund may invest up to 2% of its total
assets in the purchase of put options. The Fund will, at all times during which
it holds a put option, own the security covered by such option.
The Fund intends to purchase put options in order to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option ("protective puts"). The ability to
purchase put options will allow the Fund to protect an unrealized gain in an
appreciated security in its portfolio without actually selling the security. If
the security does not drop in value, the Fund will lose the value of the premium
paid. The Fund may sell a put option which it has previously purchased prior to
the sale of the securities underlying such option. Such sales will result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the put option which
is sold.
The Fund may sell a put option purchased on individual portfolio
securities. Additionally, the Fund may enter into closing sale transactions. A
closing sale transaction is one in which the Fund, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
D. Writing Put Options--The Fund may also write put options on a
secured basis which means that the Fund will maintain in a segregated account
with its custodian, cash or U.S. government securities in an amount not less
than the exercise price of the option at all times during the option period. The
amount of cash or U.S. government securities held in the segregated account will
be adjusted on a daily basis to reflect changes in the market value of the
securities covered by the put option written by the Fund. Secured put options
will generally be written in circumstances where the Manager wishes to purchase
the underlying security for the Fund's portfolio at a price lower than the
current market price of the security. In such event, the Fund would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay.
Following the writing of a put option, the Fund may wish to terminate
the obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
Futures
Futures contracts are agreements for the purchase or sale for future
delivery of securities. While futures contracts provide for the delivery of
securities, deliveries usually do not occur. Contracts are generally terminated
by entering into an offsetting transaction. When the Fund enters into a futures
transaction, it must deliver to the futures commission merchant selected by the
Fund an amount referred to as "initial margin." This amount is maintained by the
futures commission merchant in an account at the Fund's custodian bank.
Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the
Fund from, such account in accordance with controls set for such account,
depending upon changes in the price of the underlying securities subject to the
futures contract.
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In addition, when the Fund engages in futures transactions, to the
extent required by the Securities and Exchange Commission, it will maintain with
its custodian, assets in a segregated account to cover its obligations with
respect to such contracts, which assets will consist of cash, cash equivalents
or high quality debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the margin payments made by the Fund with respect to such
futures contracts.
The Fund may enter into such futures contracts to protect against the
adverse effects of fluctuations in interest rates without actually buying or
selling such securities. Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to hedge in anticipation of
subsequent purchases of government securities at higher prices.
With respect to options on futures contracts, when the Fund is not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The writing of a call
option on a futures contract constitutes a partial hedge against declining
prices of the securities which are deliverable upon exercise of the futures
contract. If the futures price at the expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities which
are deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
increase in the price of government securities which the Fund intends to
purchase.
If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between the value of its
portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction, the
Fund may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize a loss. For example, if the Fund is hedged
against the possibility of an increase in interest rates which would adversely
affect the price of government securities held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its government securities which it has because it will have
offsetting losses in its futures position. In addition, in such situations, if
the Fund had insufficient cash, it may be required to sell government securities
from its portfolio to meet daily variation margin requirements. Such sales of
government securities may, but will not necessarily, be at increased prices
which reflect the rising market. The Fund may be required to sell securities at
a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, the Fund may
seek to close out an option position by writing or buying an offsetting position
covering the same securities or contracts and have the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making
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additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index or security and the futures market. Second, the margin requirements in the
futures market are lower than margin requirements in the securities market, and
as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures market
may also cause temporary price distortions. Because of possible price distortion
in the futures market and because of imperfect correlation between movements in
indexes of securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the
ability of the Manager to predict correctly movements in the direction of
interest rates or the relevant underlying securities market. If the Fund has
hedged against the possibility of an increase in interest rates adversely
affecting the value of fixed-income securities held in its portfolio and
interest rates decrease instead, the Fund will lose part or all of the benefit
of the increased value of its security which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market or decline
in interest rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
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Risk of Options. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a decline in the value of the Fund's portfolio assets. By
writing a call option, the Fund becomes obligated to sell an underlying
instrument or a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option generates a premium, but
the Fund becomes obligated to purchase the underlying instrument or futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options may exceed the amount of the premium
received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when the
Manager deems it desirable to do so. Although the Fund will enter into an option
position only if the Manager believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Fund's
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the Manager,
which could prove to be inaccurate. Even if the expectations of the Manager are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss
14
<PAGE>
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Fund will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
price of securities that the Fund anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Fund to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when the Manager believes it would be advantageous to do so. Accordingly,
OTC options are subject to the Fund's limitation that a maximum of 15% of its
net assets be invested in illiquid securities. In the event of the bankruptcy of
the writer of an OTC option, the Fund could experience a loss of all or part of
the value of the option. The Manager anticipates that options on Municipal
Obligations will consist primarily of OTC options.
Illiquid Investments
The Fund may invest no more than 15% of the value of its net assets in
illiquid securities. The Fund may invest in restricted securities,
including securities eligible for resale without registration
pursuant to Rule 144A ("Rule 144A Securities") under the Securities Act of 1933.
Rule 144A permits many privately placed and legally restricted securities to be
freely traded among certain institutional buyers such as the Fund.
While maintaining oversight, the Board of Directors has delegated to
the Manager the day-to-day function of determining whether or not individual
Rule 144A Securities are liquid for purposes of a Fund's 15% limitation on
15
<PAGE>
investments in illiquid assets. The Board has instructed the Manager to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security that was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Manager will determine what action to take to ensure that
the Fund continues to adhere to such limitation.
16
<PAGE>
ACCOUNTING AND TAX ISSUES
When the Fund writes a call option, an amount equal to the premium
received by it is included in the section of the Fund's assets and liabilities
as an asset and as an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which the Fund has written expires on its stipulated expiration date, the Fund
reports a realized gain. If the Fund enters into a closing purchase transaction
with respect to an option which the Fund has written, the Fund realizes a gain
(or loss if the cost of the closing transaction exceeds the premium received
when the option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
Any such gain or loss is a short-term capital gain or loss for federal income
tax purposes. If a call option which the Fund has written is exercised, the Fund
realizes a capital gain or loss (long-term or short-term, depending on the
holding period of the underlying security) from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received.
Other Tax Requirements -- The Fund has qualified and intend to continue
to qualify as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The Fund must meet several
requirements to maintain its status as a regulated investment company. Among
these requirements are that at least 90% of its investment company taxable
income be derived from dividends, interest, payment with respect to securities
loans and gains from the sale or disposition of securities; that at the close of
each quarter of its taxable year at least 50% of the value of its assets
consists of cash and cash items, government securities, securities of other
regulated investment companies and, subject to certain diversification
requirements, other securities; and that less than 30% of its gross income be
derived from sales of securities held for less than three months. This 30% rule
is rescinded for tax years beginning after August 5, 1997.
The requirement that not more than 30% of the Fund's gross income be
derived from gains from the sale or other disposition of securities held for
less than three months may restrict the Fund in its ability to write covered
call options on securities which it has held less than three months, to write
options which expire in less than three months, to sell securities which have
been held less than three months and to effect closing purchase transactions
with respect to options which have been written less than three months prior to
such transactions. Consequently, in order to avoid realizing a gain within the
three-month period, the Fund may be required to defer the closing out of a
contract beyond the time when it might otherwise be advantageous to do so.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the following year, subject to the same limitation.
17
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may state each of its Classes' total return
in advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be deducted
from any computation of total return. See the Prospectus for a description of
the Limited CDSC and the limited instances in which it applies. All references
to a CDSC in this Performance Information section will apply to Class B Shares
or Class C Shares of the Fund.
Total return performance for each Class will be computed by adding all
reinvested income and realized securities profits distributions plus the change
in net asset value during a specific period and dividing by the offering price
at the beginning of the period. It will not reflect any income taxes payable by
shareholders on the reinvested distributions included in the calculation.
Because securities prices fluctuate, past performance should not be considered
as a representation of the results which may be realized from an investment in
the Fund in the future.
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of
$1,000 from which, in the case of only Class
A Shares, the maximum front-end sales charge
is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical
$1,000 purchase at the end of the period
after the deduction of the applicable CDSC,
if any, with respect to Class B Shares and
Class C Shares.
Aggregate or cumulative total return is calculated in a similar manner,
except that the results are not annualized. Each calculation assumes the maximum
front-end sales charge, if any, is deducted from the initial $1,000 investment
at the time it is made with respect to Class A Shares and that all distributions
are reinvested at net asset value, and, with respect to Class B Shares and Class
C Shares, reflects the deduction of the CDSC that would be applicable upon
complete redemption of such shares. In addition, the Fund may present total
return information that does not reflect the deduction of the maximum front-end
sales charge or any applicable CDSC.
The performance of Class A Shares of the Fund, as shown below, is the
average annual total return quotations through December 31, 1996, computed as
described above.
18
<PAGE>
The average annual total return for Class A Shares at offer reflects
the maximum front-end sales charge of 3.75% paid on the purchase of shares. The
average annual total return for Class A Shares at net asset value (NAV) does not
reflect the payment of any front-end sales charge.
Securities prices fluctuated during the periods covered and past
results should not be considered as representative of future performance.
Average Annual Total Return
Class A Shares Class A Shares
(at Offer) (at NAV)
1 year ended
12/31/96 2.58% 6.53%
3 years ended
12/31/96 4.71% 6.06%
5 years ended
12/31/96 7.05% 7.87%
10 years ended
12/31/96 7.56% 7.98%
Period 9/22/86(1)
through 12/31/96 7.62% 8.02%
(1) Date of initial public offering.
As stated in the Prospectus, the Fund may also quote the current yield for
each Class in advertisements and investor communications. The yield computation
is determined by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period and
annualizing the resulting figure, according to the following formula:
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends;
d = the maximum offering price per share on the last day
of the period.
19
<PAGE>
The above formula will be used in calculating quotations of yield of
each Class, based on specified 30-day periods identified in advertising by the
Fund. The yields as of December 31, 1996 using this formula were 5.35% and 4.84%
for Class A Shares and Class B Shares, respectively. Yield assumes the maximum
front-end sales charge, if any, and does not reflect the deduction of any CDSC
or Limited CDSC and also reflects voluntary waivers in effect during the period.
Actual yield may be affected by variations in front-end sales charges on
investments. Past performance, such as is reflected in quoted yields, should not
be considered as a representation of the results which may be realized from an
investment in any class of the Fund in the future.
The Fund may also publish a tax-equivalent yield for a Class based on
federal and, if applicable, state tax rates, which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to the Class' yield.
For the 30- day period ended December 31, 1996, the tax-equivalent yield
(assuming a federal income tax rate of 31%) of Class A Shares was 8.36% and for
Class B Shares was 7.01%, reflecting voluntary waivers in effect during the
period. These yields were computed by dividing that portion of a Class' yield
which is tax-exempt by one minus a stated income tax rate (in this case, a
federal income tax rate of 31%) and adding the product to that portion, if any,
of the yield that is not tax-exempt. In addition, a Fund may advertise a
tax-equivalent yield assuming other income tax rates, when applicable.
Investors should note that the income earned and dividends paid by the
Fund will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of the fund may change. Unlike money market
funds, the Fund invests in longer-term securities that fluctuate in value and do
so in a manner inversely correlated with changing interest rates. The Fund's net
asset value will tend to rise when interest rates fall. Conversely, the Fund's
net asset value will tend to fall as interest rates rise. Normally, fluctuations
in interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held in the Fund will vary from day to day and investors
should consider the volatility of the Fund's net asset value as well as its
yield before making a decision to invest.
From time to time, the Fund may also quote actual total return
performance of its Classes in advertising and other types of literature compared
to indices or averages of alternative financial products available to
prospective investors. For example, the performance comparisons may include the
average return of various bank instruments, some of which may carry certain
return guarantees offered by leading banks and thrifts as monitored by Bank Rate
Monitor, and those of generally-accepted corporate bond and government security
price indices of various durations prepared by Lehman Brothers and Salomon
Brothers, Inc. These indices are not managed for any investment goal.
Statistical and performance information and various indices compiled and
maintained by organizations such as the following may also be used in preparing
exhibits comparing certain industry trends and competitive mutual fund
performance to comparable activity and performance of the Fund and in
illustrating general financial planning principles. From time to time, certain
mutual fund performance ranking information, calculated and provided by these
organizations, may also be used in the promotion of sales of the Fund. Any
indices used are not managed for any investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe
of independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety
of historical data including total return, capital appreciation and
income on the stock market as well as other investment asset classes,
and inflation. With their permission, this information will be used
primarily for comparative purposes and to illustrate general financial
planning principles.
20
<PAGE>
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed-income price and return information.
Compustat Industrial Databases, a service of Standard & Poor's, may also
be used in preparing performance and historical stock and bond market
exhibits. This firm maintains fundamental databases that provide
financial, statistical and market information covering more than 7,000
industrial and non-industrial companies.
Russell Indexes is an investment analysis service that provides both
current and historical stock performance information, focusing on the
business fundamentals of those firms issuing the security.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as
well as unmanaged indices compiled and maintained by these firms, will
be used in preparing comparative illustrations. In addition, the
performance of multiple indices compiled and maintained by these firms
may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the
types of securities in which the Fund may invest and the assumptions
that were used in calculating the blended performance will be described.
Comparative information on the Consumer Price Index may also be
included. The Consumer Price Index, as prepared by the U.S. Bureau of Labor
Statistics, is the most commonly used measure of inflation. It indicates the
cost fluctuations of a representative group of consumer goods. It does not
represent a return from an investment.
The following table is an example, for purposes of illustration only, of
cumulative total return performance for Class A Shares and Class B Shares
through December 31, 1996. For these purposes, the calculations assume the
reinvestment of any realized securities profits distributions and income
dividends paid during the indicated periods. In addition, these calculations, as
shown below, reflect maximum sales charges, if any, paid on the purchase or
redemption of shares, as applicable, but not any income taxes payable by
shareholders on the reinvested distributions included in the calculations. The
performance of Class A Shares may also be shown without reflecting the impact of
any front-end sales charge. The performance of Class B Shares and Class C Shares
is calculated both with the applicable CDSC included and excluded.
The net asset value of a Class fluctuates so shares, when redeemed, may
be worth more or less than the original investment, and a Class' results should
not be considered as representative of future performance.
21
<PAGE>
Cumulative Total Return
National High Yield Municipal Bond Fund(3)
Class B Class B
Class A Shares Shares
Shares (including (excluding
(at offer) CDSC)(2) CDSC)
Period
3 months 12/18/96
ended through
12/31/96 (0.77%) 12/31/96 (3.57%) 0.43%
6 months
ended
12/31/96 1.72%(4)
9 months
ended
12/31/96 2.69%
1 year
ended
12/31/96 2.58%
3 years
ended
12/31/96 14.80%
5 years
ended
12/31/96 40.56%
10years
ended
12/31/96 107.32%
Period
9/22/86(1)
through
12/31/96 112.74%
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 4% if shares are redeemed within two years of purchase; (ii)
3% if shares are redeemed during the third or fourth year following
purchase; (iii) 2% if shares are redeemed during the fifth year following
purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) For the six months ended December 31, 1996, cumulative total return for
Class A Shares at net asset value was 0.00%.
22
<PAGE>
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Fund and other mutual funds in the Delaware
Group, will provide general information about investment alternatives and
scenarios that will allow investors to assess their personal goals. This
information will include general material about investing as well as materials
reinforcing various industry-accepted principles of prudent and responsible
personal financial planning. One typical way of addressing these issues is to
compare an individual's goals and the length of time the individual has to
attain these goals to his or her risk threshold. In addition, the Distributor
will provide information that discusses the Manager's overriding investment
philosophy and how that philosophy impacts the Fund's, and other Delaware Group
funds', investment disciplines employed in seeking their objectives. The
Distributor may also from time to time cite general or specific information
about the institutional clients of the Manager, including the number of such
clients serviced by the Manager.
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding and the following chart illustrates just how powerful
it can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000
investment compounded monthly for 10 years:
7% Rate 9% Rate 11% Rate
of Return of Return of Return
--------- --------- ---------
1 year $10,723 $10,938 $11,157
2 years $11,498 $11,964 $12,448
3 years $12,330 $13,086 $13,889
4 years $13,221 $14,314 $15,496
5 years $14,177 $15,657 $17,289
6 years $15,201 $17,126 $19,289
7 years $16,300 $18,732 $21,522
8 years $17,479 $20,489 $24,012
9 years $18,743 $22,411 $26,791
10 years $20,098 $24,514 $29,891
These figures are calculated assuming a fixed constant investment
return and assume no fluctuation in the value of principal. These figures, which
do not reflect payment of applicable taxes or any sales charges, are not
intended to be a projection of investment results and do not reflect the actual
performance results of any of the classes.
23
<PAGE>
TRADING PRACTICES AND BROKERAGE
Portfolio transactions are executed by the Manager on behalf of the
Fund in accordance with the standards described below.
Brokers, dealers and banks are selected to execute transactions for
the purchase or sale of portfolio securities on the basis of the Manager's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers, dealers or banks execute transactions at best
price and execution. Best price and execution refers to many factors, including
the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. Trades are generally made on a net basis where
securities are either bought or sold directly from or to a broker, dealer or
bank. In these instances, there is no direct commission charged, but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission. When a commission is paid, the Fund pays reasonably competitive
brokerage commission rates based upon the professional knowledge of its trading
department as to rates paid and charged for similar transactions throughout the
securities industry. In some instances, the Fund pays a minimal share
transaction cost when the transaction presents no difficulty.
The Manager may allocate out of all commission business generated by
all of the funds and accounts under its management, brokerage business to
brokers or dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software and hardware used in
security analyses; and providing portfolio performance evaluation and technical
market analyses. Such services are used by the Manager in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 and the Fund's
Investment Management Agreement, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, Mutual Funds, Inc. believes that
the commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the Manager which constitute in some part brokerage and research services used
by the Manager in connection with its investment decision-making process and
constitute in some part services used by the Manager in connection with
administrative or other functions not related to its investment decision-making
process. In such cases, the Manager will make a good faith allocation of
brokerage and research services and will pay out of its own resources for
services used by the Manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the Fund and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
24
<PAGE>
The Manager may place a combined order for two or more accounts or
funds engaged in the purchase or sale of the same security if, in its judgment,
joint execution is in the best interest of each participant and will result in
best price and execution. Transactions involving commingled orders are allocated
in a manner deemed equitable to each account or fund. When a combined order is
executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is believed that the ability of the accounts to participate
in volume transactions will generally be beneficial to the accounts and funds.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or fund may obtain, it is the opinion of the Manager and Mutual Funds,
Inc.'s Board of Directors that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"), and subject to seeking
best price and execution, the Manager may place orders with broker/dealers that
have agreed to defray certain expenses of the funds in the Delaware Group of
funds, such as custodian fees, and may, at the request of the Distributor, give
consideration to sales of such funds shares as a factor in the selection of
brokers and dealers to execute portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish the
Fund's objective in relation to anticipated movements in the general level of
interest rates. The Fund is free to dispose of portfolio securities at any time,
subject to complying with the Code and the 1940 Act, when changes in
circumstances or conditions make such a move desirable in light of the
investment objective. The Fund will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. However, it is generally anticipated that the Fund's
portfolio turnover rate will be less than 100%.
The degree of portfolio activity may affect brokerage costs of the
Fund and taxes payable by the Fund's shareholders to the extent of any net
realized capital gains. The Fund's portfolio turnover rate is not expected to
exceed 100%; however, under certain market conditions the Fund may experience a
rate of portfolio turnover which could exceed 100%. The Fund's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the particular
fiscal year, exclusive of securities whose maturities at the time of acquisition
are one year or less. A turnover rate of 100% would occur, for example, if all
the investments in the Fund's portfolio at the beginning of the year were
replaced by the end of the year.
The Fund's portfolio turnover rates were 8.45% for the fiscal year
ended July 31, 1995 and 0.00% for the fiscal year ended July 31, 1996. For the
period August 1, 1996 through December 31, 1996, the Fund's portfolio turnover
rate was 7.51%.
The Fund may hold securities for any period of time. The Fund's
portfolio turnover will be increased if the Fund writes a large number of call
options which are subsequently exercised. The portfolio turnover rate also may
be affected by cash requirements from redemptions and repurchases of Fund
shares. Total brokerage costs generally increase with higher portfolio turnover
rates.
25
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for the Fund's
classes of shares - Class A Shares, Class B Shares and Class C Shares, and has
agreed to use its best efforts to sell shares of the Fund. See the Prospectus
for additional information on how to invest. Shares of the Fund are offered on a
continuous basis, and may be purchased through authorized investment dealers or
directly by contacting Mutual Funds, Inc. or the Distributor.
The minimum initial investment generally is $1,000 for Class A
Shares, Class B Shares and Class C Shares. Subsequent purchases of such classes
generally must be at least $100. The initial and subsequent minimum investments
for Class A Shares will be waived for purchases by officers, directors and
employees of any Delaware Group fund, the Manager or any of the its affiliates
if the purchases are made pursuant to a payroll deduction program. Shares
purchased pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act and shares purchased in connection with an Automatic Investing Plan
are subject to a minimum initial purchase of $250 and a minimum subsequent
purchase of $25. Accounts opened under the Delaware Group Asset Planner service
are subject to a minimum initial investment of $2,000 per Asset Planner Strategy
selected.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. Mutual Funds, Inc. will reject any purchase order
for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers are responsible for transmitting orders promptly.
Mutual Funds, Inc. reserves the right to reject any order for the purchase of
shares of the Fund if in the opinion of management such rejection is in the
Fund's best interests.
The NASD has adopted Rules of Fair Practice, as amended, relating to
investment company sales charges. Mutual Funds, Inc. and the Distributor intend
to operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 4.00%; however, lower front-end sales charges
apply for larger purchases. See the table below. Class A Shares are also subject
to annual 12b-1 Plan expenses.
Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; (iv) 1% if
shares are redeemed during the sixth year following purchase; and (v) 0%
thereafter. Class B Shares are also subject to annual 12b-1 Plan expenses which
are higher than those to which Class A Shares are subject and are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
26
<PAGE>
Class A Shares, Class B Shares and Class C Shares shares represent a
proportionate interest in a Fund's assets and will receive a proportionate
interest in that Fund's income, before application, as to Class A, Class B and
Class C Shares, of any expenses under that Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
in the Class A Shares, unless a shareholder submits a specific request. However,
purchases not involving the issuance of certificates are confirmed to the
investor and credited to the shareholder's account on the books maintained by
Delaware Service Company, Inc. (the "Transfer Agent"). The investor will have
the same rights of ownership with respect to such shares as if certificates had
been issued. An investor that is permitted to obtain a certificate may receive a
certificate representing full share denominations purchased by sending a letter
signed by each owner of the account to the Transfer Agent requesting the
certificate. No charge is assessed by Mutual Funds, Inc. for any certificate
issued. A shareholder may be subject to fees for replacement of a lost or stolen
certificate under certain conditions, including the cost of obtaining a bond
covering the lost or stolen certificate. Please contact the Fund for further
information. Investors who hold certificates representing any of their shares
may only redeem those shares by written request. The investor's certificate(s)
must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class
C Shares of the Fund permit investors to choose the method of purchasing shares
that is most suitable for their needs given the amount of their purchase, the
length of time they expect to hold their shares and other relevant
circumstances. Investors should determine whether, given their particular
circumstances, it is more advantageous to purchase Class A Shares of a Fund and
incur a front-end sales charge and annual 12b-1 Plan expenses of up to a maximum
of 0.25% of the average daily net assets of Class A Shares or to purchase either
Class B or Class C Shares of a Fund and have the entire initial purchase amount
invested in the Fund with the investment thereafter subject to a CDSC and annual
12b-1 Plan expenses. Class B Shares are subject to a CDSC if the shares are
redeemed within six years of purchase, and Class C Shares are subject to a CDSC
if the shares are redeemed within 12 months of purchase. Class B and Class C
Shares are each subject to annual 12b-1 Plan expenses of up to a maximum of 1%
(0.25% of which are service fees to be paid to the Distributor, dealers or
others for providing personal service and/or maintaining shareholder accounts)
of average daily net assets of the respective Class. Class B Shares will
automatically convert to Class A Shares at the end of approximately eight years
after purchase and, thereafter, be subject to annual 12b-1 Plan expenses of up
to a maximum of 0.25% of average daily net assets of such shares. Unlike Class B
Shares, Class C Shares do not convert to another class.
Class A Shares
Purchases of $100,000 or more of Class A Shares at the offering
price carry reduced front-end sales charges as shown in the accompanying table,
and may include a series of purchases over a 13-month period under a Letter of
Intention signed by the purchaser. See Special Purchase Features -- Class A
Shares, below, for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
27
<PAGE>
<TABLE>
<CAPTION>
Class A Shares
- -------------------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as a % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 3.94% 3.25%
$100,000 but under $250,000 3.00 3.08 2.50
$250,000 but under $500,000 2.50 2.60 2.00
$500,000 but under $1,000,000* 2.00 2.02 1.75
</TABLE>
* There is no front-end sales charge on purchases of $1 million or more of
Class A Shares but, under certain limited circumstances, a 1% contingent
deferred sales charge may apply upon redemption of such shares.
** Based on an initial net asset value of the Class A Shares of the end of
Mutual Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify
for the reduced front-end sales charge on the basis of previous or
current purchases. The reduced front-end sales charge will be granted
upon confirmation of the shareholder's holdings by the Fund. Such
reduced front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
the front-end sales charges shown above. Dealers who receive 90% or
more of the sales charge may be deemed to be underwriters under the
1933 Act.
- --------------------------------------------------------------------------------
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission of up to 0.15% of
the offering price in connection with sales of Class A Shares. Such dealers must
meet certain requirements in terms of organization and distribution capabilities
and their ability to increase sales. The Distributor should be contacted for
further information on these requirements as well as the basis and circumstances
upon which the additional commission will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws.
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedule:
28
<PAGE>
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Prospectus) may be aggregated with those of Class A Shares of
the Fund. Financial advisers also may be eligible for a dealer's commission in
connection with certain purchases made under a Letter of Intention or pursuant
to an investor's Right of Accumulation. Financial advisers should contact the
Distributor concerning the applicability and calculation of the dealer's
commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestment of dividends or capital gains
distributions. See Waiver of Contingent Deferred Sales Charge - Class B and
Class C Shares under Redemption and Exchange in the Prospectus for a list of the
instances in which the CDSC is waived.
The following table sets forth the rates of the CDSC for Class B Shares
of each Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
29
<PAGE>
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the Fund.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus. Such conversion will constitute a tax-free exchange for federal
income tax purposes. See Taxes in the Prospectus.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Mutual Funds, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of the Fund (the "Plans"). Each Plan permits the Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the class of shares to which the Plan applies. Such shares are not
included in calculating the Plans' fees.
The Plans permit the Fund, pursuant to its Distribution Agreement, to
pay out of the assets of the Class A Shares, Class B Shares and Class C Shares
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to securities
brokers and dealers who enter into agreements with the Distributor. The Plan
expenses relating to Class B and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, the Fund may make payments out of the assets of Class A,
Class B and Class C Shares directly to other unaffiliated parties, such as
banks, who either aid in the distribution of shares of, or provide services to,
such classes.
The maximum aggregate fee payable by the Fund under its Plans, and the
Fund's Distribution Agreement, is on an annual basis, up to 0.25% of the Class A
Shares' average daily net assets for the year, and up to 1% (0.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
personal service and/or maintaining shareholder accounts) of each of the Class B
Shares' and the Class C Shares' average daily net assets for the year. Mutual
Funds, Inc.'s Board of Directors may reduce these amounts at any time.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
reimbursement from the Classes. Subject to seeking best price and execution, the
Fund may, from time to time, buy or sell portfolio securities from or to firms
which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreement, as amended, have all been
approved by the Board of Directors of Mutual Funds, Inc., including a majority
of the directors who are not "interested persons" (as defined in the 1940 Act)
of Mutual Funds, Inc. and who have no direct or indirect financial interest in
the Plans, by vote cast in person at a meeting duly called for the purpose of
voting on the Plans and such Agreements. Continuation of the Plans and the
Distribution Agreements, as amended, must be approved annually by the Board of
Directors in the same manner as specified above.
Each year, the directors must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A Shares,
Class B Shares and Class C Shares of the Fund and that there is a
30
<PAGE>
reasonable likelihood of the Plan relating to a Class providing a benefit to
that Class. The Plans and the Distribution Agreement, as amended, may be
terminated with respect to a Class at any time without penalty by a majority of
those directors who are not "interested persons" or by a majority vote of the
outstanding voting securities of the Class. Any amendment materially increasing
the percentage payable under the Plans must likewise be approved by a majority
vote of the outstanding voting securities of the Class, as well as by a majority
vote of those directors who are not "interested persons." With respect to the
Class A Shares' Plan, any material increase in the maximum percentage payable
thereunder must also be approved by a majority of the outstanding voting
securities Class B Shares of the Fund. Also, any other material amendment to the
Plans must be approved by a majority vote of the directors including a majority
of the noninterested directors of Mutual Funds, Inc. having no interest in the
Plans. In addition, in order for the Plans to remain effective, the selection
and nomination of directors who are not "interested persons" of Mutual Funds,
Inc. must be effected by the directors who themselves are not "interested
persons" and who have no direct or indirect financial interest in the Plans.
Persons authorized to make payments under the Plans must provide written reports
at least quarterly to the Board of Directors for their review.
For the fiscal years ended July 31, 1996, 1995 and 1994, the Fund's
predecessor Distributors earned distribution fees of $120,396, $126,890 and
$140,340 and waived distribution fees of $73,210, $78,426 and $71,584,
respectively. For the period August 1, 1996 through December 31, 1996, the Fund
paid $72,184 in Rule 12b-1 fees.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of Fund Classes exceed certain
limits as set by the Distributor, may receive from the Distributor an additional
payment of up to 0.25% of the dollar amount of such sales. The Distributor may
also provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares. The Distributor may also pay a portion of the
expense of preapproved dealer advertisements promoting the sale of Delaware
Group fund shares.
Special Purchase Features--Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
Current and former officers, directors and employees of Mutual Funds,
Inc., any other fund in the Delaware Group, the Manager, the Manager's
affiliates, or any of the Manager's affiliates that may in the future be
created, legal counsel to the funds, and registered representatives and
employees of broker/dealers who have entered into Dealer's Agreements with the
Distributor may purchase Class A Shares of the Fund and any such class of shares
of any of the other funds in the Delaware Group, including any fund that may be
created, at the net asset value per share. Family members of such persons at
their direction, and any employee benefit plan established by any of the
foregoing funds, corporations, counsel or broker/dealers may also purchase Class
A Shares at net asset value. Class A Shares may also be purchased at net asset
value by current and former officers, directors and employees (and members of
their families) of the Dougherty Financial Group LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers
31
<PAGE>
concerning sales of shares of Delaware Group funds. Officers, directors and key
employees of institutional clients of the Manager or any of its affiliates may
purchase Class A Shares at net asset value. Moreover, purchases may be effected
at net asset value for the benefit of the clients of brokers, dealers and
registered investment advisers affiliated with a broker or dealer, if such
broker, dealer or investment adviser has entered into an agreement with the
Distributor providing specifically for the purchase of Class A Shares in
connection with special investment products, such as wrap accounts or similar
fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or Mutual Funds, Inc., which provides for the holding in escrow by the
Transfer Agent of 5% of the total amount of Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Fund and of any class of
any of the other mutual funds in the Delaware Group (except shares of any
Delaware Group fund which do not carry a front-end sales charge, CDSC or Limited
CDSC, other than shares of Delaware Group Premium Fund, Inc. beneficially owned
in connection with the ownership of variable insurance products, unless they
were acquired through an exchange from a Delaware Group fund which carried a
front-end sales charge, CDSC or Limited CDSC) previously purchased and still
held as of the date of their Letter of Intention toward the completion of such
Letter.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of Class A Shares, Class B Shares and/or Class C
Shares of the Fund, as well as shares of any other class of any of the other
Delaware Group funds (except shares of any Delaware Group fund which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC). In addition, assets held in any stable value product available
through the Delaware Group may be combined with other Delaware Group fund
holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
32
<PAGE>
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $60,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $60,000 purchase would currently be 3.00%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of the Fund who redeem such shares have one
year from the date of redemption to reinvest all or part of their redemption
proceeds in Class A Shares of the Fund or in Class A Shares of any of the other
funds in the Delaware Group, subject to applicable eligibility and minimum
purchase requirements, in states where shares of such other funds may be sold,
at net asset value without the payment of a front-end sales charge. This
privilege does not extend to Class A Shares where the redemption of the shares
triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Group offered without a
front-end sales charge will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Fund's shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus) in connection with the features
described above.
INVESTMENT PLANS
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions in
any of the mutual funds in the Delaware Group, including the Fund, in states
where their shares may be sold. Such investments will be at net asset value at
the close of business on the reinvestment date without any front-end sales
charge or service fee. The shareholder must notify the Transfer Agent in writing
and must have established an account in the fund into which the dividends and/or
distributions are to be invested. Any reinvestment directed to a fund in which
the investor does not then have an account will be treated like all other
initial purchases of a fund's shares.
33
<PAGE>
Consequently, an investor should obtain and read carefully the prospectus for
the fund in which the investment is intended to be made before investing or
sending money. The prospectus contains more complete information about the fund,
including charges and expenses. See also Additional Methods of Adding to Your
Investment - Dividend Reinvestment Plan under How to Buy Shares in the
Prospectus.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Fund,
provided an account has been established. Dividends from Class A Shares may not
be directed to Class B Shares or Class C Shares. Dividends from Class B Shares
may only be directed to other Class B Shares and dividends from Class C Shares
may only be directed to other Class C Shares. See Appendix B -- Classes Offered
in the Prospectus for the funds in the Delaware Group that are eligible for
investment by holders of Fund shares.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for the Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to the Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
the Fund may liquidate sufficient shares from a shareholder's account to
reimburse the government or the private source. In the event there are
insufficient shares in the shareholder's account, the shareholder is expected to
reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. The Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll
34
<PAGE>
allotments, by mail directly from the third party. Investors should contact
their employers or financial institutions who in turn should contact Mutual
Funds, Inc. for proper instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Group. Shareholders of the Classes may elect to invest in
one or more of the other mutual funds in the Delaware Group through the Wealth
Builder Option. See Wealth Builder Option and Redemption and Exchange in the
Prospectus.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the Delaware
Group, subject to the conditions and limitations set forth in the Prospectus.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by giving
written notice to their Fund.
35
<PAGE>
DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund, its agent or designee. Orders for purchases of
Class B Shares and Class C Shares are effected at the net asset value per share
next calculated by the Fund in which shares are being purchased after receipt of
the order by the Fund, its agent or designee. Selling dealers are responsible
for transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable front-end sales charges. Offering price and net
asset value are computed as of the close of regular trading on the New York
Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is
open. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. When the New York Stock Exchange is closed, the
Fund will generally be closed, pricing calculations will not be made and
purchase and redemption orders will not be processed.
The Fund's net asset value per share is computed by adding the value
of all the Fund's securities and other assets, deducting any liabilities of the
Fund, and dividing by the number of Fund shares outstanding. Expenses and fees
are accrued daily. Portfolio securities, except for bonds, which are primarily
traded on a national or foreign securities exchange are valued at the last sale
price on that exchange. Options are valued at the last reported sales price or,
if no sales are reported, at the mean between bid and asked prices. Securities
not traded on a particular day, over-the-counter securities and government and
agency securities are valued at the mean value between bid and asked prices.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Use of a pricing service
has been approved by the Board of Directors. Subject to the foregoing,
securities for which market quotations are not readily available and other
assets are valued at fair value as determined in good faith and in a method
approved by the Board of Directors.
Net asset value data of the Fund as of December 31, 1996 was
calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Net Assets ($59,104,609) = Net Asset Value Per Share ($10.40)
-----------------------------
Shares Outstanding (5,684,868)
Maximum Public Offering Price = $10.40 + 3.75% of POP = $10.81
Class B Net Assets ($88,367) = Net Asset Value Per Share ($10.40)
--------------------------------
Shares Outstanding (8,498)
</TABLE>
Each Class of the Fund will bear, pro-rata, all of the common expenses
of the Fund. The net asset values of all outstanding shares of each Class of the
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of that Class. All income earned and expenses incurred by the Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in the Fund represented by the value of shares of such Classes. Due
to the specific distribution expenses and other costs that may be allocable to
each Class, the dividends paid to each Class may vary. The net asset value per
share of each Class is expected to be equivalent.
36
<PAGE>
REDEMPTION AND REPURCHASE
Any shareholder may require the Fund to redeem shares by sending a
written request, signed by the record owner or owners exactly as the shares are
registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares only if a shareholder specifically requests them. Certificates are not
issued for Class B Shares or Class C Shares. If stock certificates have been
issued for shares being redeemed, they must accompany the written request. For
redemptions of $50,000 or less paid to the shareholder at the address of record,
the request must be signed by all owners of the shares or the investment dealer
of record, but a signature guarantee is not required. When the redemption is for
more than $50,000, or if payment is made to someone else or to another address,
signatures of all record owners are required and a signature guarantee may be
required. Each signature guarantee must be supplied by an eligible guarantor
institution. The Fund reserves the right to reject a signature guarantee
supplied by an eligible institution based on its creditworthiness. The Fund may
request further documentation from corporations, retirement plans, executors,
administrators, trustees or guardians.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Fund, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the Fund or its agent,
subject to any applicable CDSC or Limited CDSC. This is computed and effective
at the time the offering price and net asset value are determined. See
Determining Offering Price and Net Asset Value. The Fund and the Distributor end
their business days at 5 p.m., Eastern time. This offer is discretionary and may
be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus. Class B Shares are subject to a CDSC
of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; (iv) 1% if
shares are redeemed during the sixth year following purchase; and (v) 0%
thereafter. Class C Shares are subject to a CDSC of 1% if shares are redeemed
within 12 months following purchase. See Contingent Deferred Sales Charge -
Class B Shares and Class C Shares under Classes of Shares in the Prospectus.
Except for the applicable CDSC or Limited CDSC and, with respect to the
expedited payment by wire described below for which, in the case of the Classes,
there is currently a $7.50 bank wiring cost, neither the Fund nor the Fund's
Distributor charges a fee for redemptions or repurchases, but such fees could be
charged at any time in the future.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
37
<PAGE>
The Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared. This potential delay can
be avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for insufficient funds or for any other reason, the
Fund will automatically redeem from the shareholder's account the shares
purchased by the check plus any dividends earned thereon. Shareholders may be
responsible for any losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practical, or it is not reasonably practical for the Fund fairly to value its
assets, or in the event that the SEC has provided for such suspension for the
protection of shareholders, the Fund may postpone payment or suspend the right
of redemption or repurchase. In such case, the shareholder may withdraw the
request for redemption or leave it standing as a request for redemption at the
net asset value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sale by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, Mutual
Funds, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
The value of the Fund's investments is subject to changing market
prices. Thus, a shareholder reselling shares to the Fund may sustain either a
gain or loss, depending upon the price paid and the price received for such
shares.
Small Accounts
Before the Fund involuntarily redeems shares from an account that,
under the circumstances noted in the Prospectus, has remained below the minimum
amounts required by the Prospectus and sends the proceeds to the shareholder,
the shareholder will be notified in writing that the value of the shares in the
account is less than the minimum required and will be allowed 60 days from the
date of notice to make an additional investment to meet the required minimum.
See The Conditions of Your Purchase under How to Buy Shares in the Prospectus.
Any redemption in an inactive account established with a minimum investment may
trigger mandatory redemption. No CDSC or Limited CDSC will apply to the
redemptions described in this paragraph.
* * *
The Fund has made available certain redemption privileges, as described
below. The Fund reserves the right to suspend or terminate these expedited
payment procedures upon 60 days' written notice to shareholders.
Expedited Telephone Redemptions
Shareholders of the Fund Classes or their investment dealers of record
wishing to redeem any amount of shares of $50,000 or less for which certificates
have not been issued may call the Shareholder Service Center at 800-523-1918
prior to the time the offering price and net asset value are determined, as
noted above, and have the proceeds mailed to them at the address of record.
Checks payable to the shareholder(s) of record will normally be
38
<PAGE>
mailed the next business day, but no later than seven days, after the receipt of
the redemption request. This option is only available to individual, joint and
individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the Fund before the request is received. Payment will
be made by wire or check to the bank account designated on the authorization
form as follows:
1. Payment by Wire: Request that Federal Funds be wired to the bank
account designated on the authorization form. Redemption proceeds will normally
be wired on the next business day following receipt of the redemption request.
There is a $7.50 wiring fee (subject to change) charged by CoreStates Bank, N.A.
which will be deducted from the withdrawal proceeds each time the shareholder
requests a redemption. If the proceeds are wired to the shareholder's account at
a bank which is not a member of the Federal Reserve System, there could be a
delay in the crediting of the funds to the shareholder's bank account.
2. Payment by Check: Request a check be mailed to the bank account
designated on the authorization form. Redemption proceeds will normally be
mailed the next business day, but no later than seven days, from the date of the
telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the Fund
and a signature guarantee may be required. Each signature guarantee must be
supplied by an eligible guarantor institution. The Fund reserves the right to
reject a signature guarantee supplied by an eligible institution based on its
creditworthiness.
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect the
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Fund nor the Fund's Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, the Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders of the Fund Classes are generally tape recorded. A written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
Systematic Withdrawal Plans
Shareholders who own or purchase $5,000 or more of shares at the
offering price, or net asset value, as applicable, for which certificates have
not been issued may establish a Systematic Withdrawal Plan for monthly
withdrawals of $25 or more, or quarterly withdrawals of $75 or more, although
the Fund does not recommend any specific amount of withdrawal. Shares purchased
with the initial investment and through reinvestment of cash dividends and
realized securities profits distributions will be credited to the shareholder's
account and sufficient full and fractional shares will be redeemed at the net
asset value calculated on the third business day preceding the mailing date.
39
<PAGE>
Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital and the share balance
may, in time, be depleted, particularly in a declining market.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is investing in Delaware Group
funds which do not carry a sales charge. Redemptions of Class A Shares pursuant
to a Systematic Withdrawal Plan may be subject to a Limited CDSC if the purchase
was made at net asset value and a dealer's commission has been paid on that
purchase. Redemptions of Class B Shares or Class C Shares pursuant to a
Systematic Withdrawal Plan may be subject to a CDSC, unless the annual amount
selected to be withdrawn is less than 12% of the account balance on the date
that the Systematic Withdrawal Plan was established. See Waiver of Contingent
Deferred Sales Charge - Class B and Class C Shares and Waiver of Limited
Contingent Deferred Sales Charge - Class A Shares under Redemption and Exchange
in the Prospectus. Shareholders should consult their financial advisers to
determine whether a Systematic Withdrawal Plan would be suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must
complete an authorization form. If the recipient of Systematic Withdrawal Plan
payments is other than the registered shareholder, the shareholder's signature
on this authorization must be guaranteed. Each signature guarantee must be
supplied by an eligible guarantor institution. The Fund reserves the right to
reject a signature guarantee supplied by an eligible institution based on its
creditworthiness. This plan may be terminated by the shareholder or the Transfer
Agent at any time by giving written notice.
40
<PAGE>
DISTRIBUTIONS AND TAXES
The Fund declares a dividend to shareholders of each Class from net
investment income on a daily basis. Dividends are declared each day the Fund is
open and paid monthly. Net investment income earned on days when the Fund is not
open will be declared as a dividend on the next business day. Purchases of
shares of the Fund by wire begin earning dividends when converted into Federal
Funds and are available for investment, normally the next business day after
receipt. However, if the respective Fund is given prior notice of Federal Funds
wire and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Investors desiring to guarantee wire payments
must have an acceptable financial condition and credit history in the sole
discretion of the Fund. Mutual Funds, Inc. reserves the right to terminate this
option at any time. Purchases by check earn dividends upon conversion to Federal
Funds, normally one business day after receipt.
Each Class of shares of the Fund will share proportionately in the
investment income and expenses of the Fund, except that Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the
same Class of the respective Fund at net asset value, unless an election to
receive dividends in cash has been made. Payment by check of cash dividends will
ordinarily be mailed within three business days after the payable date. Dividend
payments of $1.00 or less will be automatically reinvested, notwithstanding a
shareholder's election to receive dividends in cash. If such a shareholder's
dividends increase to greater than $1.00, the shareholder would have to file a
new election in order to begin receiving dividends in cash again. If a
shareholder redeems an entire account, all dividends accrued to the time of the
withdrawal will be paid by separate check at the end of that particular monthly
dividend period, consistent with the payment and mailing schedule described
above. Any check in payment of dividends or other distributions which cannot be
delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. The Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the United States Post Office or the Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Any distributions from net realized securities profits will be made
annually. Payments would be made during the first quarter of the next fiscal
year. Such distributions will be reinvested in shares, unless the shareholders
elect to receive them in cash. The Fund will mail a quarterly statement showing
the dividends paid and all the transactions made during the period.
41
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to the Fund, subject to the supervision
and direction of Mutual Funds, Inc.'s Board of Directors.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as the Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly-owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG. LNC,
headquartered in Fort Wayne, Indiana, owns and operates insurance and investment
management businesses, including Delaware Management Holding, Inc. ("DMH").
Affiliates of DMH serve as adviser, distributor and transfer agent for the
Delaware Group of Mutual Funds.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, the National High Yield Muncipal Bond Fund's previous
investment advisory agreement with Voyageur was "assigned", as that term is
defined by the Investment Company Act of 1940, and the previous agreements
therefore terminated upon the completion of the acquisition. The Board of
Directors of Mutual Funds, Inc. unanimously approved new advisory agreements at
a meeting held in person on February 14, 1997, and called for a shareholders
meeting to approve the new agreement. At a meeting held on April 11, 1997, the
shareholders of National High Yield Municipal Bond Fund approved its Investment
Management Agreement with the Manager, an indirect wholly-owned subsidiary of
LNC, to become effective after the close of business on April 30, 1997, the date
the acquisition was completed.
Beginning May 1, 1997, Delaware Management Company, Inc. became the
Funds' investment manager. The Investment Management Agreement into which the
Fund's investment manager has entered has an initial term of two years and may
be renewed each year only so long as such renewal and continuance are
specifically approved at least annually by the Board of Directors or by vote of
a majority of the outstanding voting securities of the Fund, and only if the
terms and the renewal thereof have been approved by the vote of a majority of
the directors of Mutual Funds, Inc. who are not parties thereto or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Agreement is terminable without penalty on 60 days'
notice by the directors of Mutual Funds, Inc. or by the Manager. The Agreement
will terminate automatically in the event of its assignment.
Under its Investment Management Agreement, the Fund pays the Manager
an annual fee equal to 0.65% of its average daily net assets.
Beginning June 9, 1997, the Manager has elected voluntarily to waive
that portion, if any, of the annual management fees payable by the Fund and to
pay certain expenses of the Fund to the extent necessary to ensure that the
Total Operating Expenses of Class A Shares, Class B Shares and Class C Shares of
the Fund (exclusive of taxes, interest, brokerage commissions, extraordinary
expenses but including 12b-1 fees) do not exceed, on an annual basis, 0.84%,
1.59% and 1.59%, respectively, through December 31, 1997.
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. In
42
<PAGE>
connection with the merger transaction described above, the Manager has agreed
for a period of two years ending on April 30, 1999, to pay the operating
expenses (excluding interest expense, taxes, brokerage fees, commissions and
Rule 12b-1 fees) of the Fund which exceed 1% of the Fund's average daily net
assets on an annual basis up to certain limits as set forth in this Part B. This
agreement replaces a similar provision in the Fund's investment advisory
contracts with the Fund's predecessor investment adviser.
For the fiscal years ended July 31, 1996, 1995 and 1994, the Fund's
predecessor adviser paid advisory fees of $322,677, $342,193 and $353,208,
respectively. For the period August 1, 1996 through December 31, 1996, the Fund
paid $140,548 in advisory fees.
Under the general supervision of the Board of Directors, the Manager
makes and executes all investment decisions for the Fund. The Manager pays the
salaries of all directors, officers and employees of Mutual Funds, Inc.
who are affiliated with the Manager. The Fund pays all of its other expenses.
The ratios of expenses to average daily net assets for each Class of
the Fund were as follows:
National High Yield Municipal Bond Fund
Period
12/18/96
through Year ended
12/31/96 7/31/96
-------- ----------
Class A Shares 0.87%* 0.85%
Class B Shares(1) 1.45%* N/A
*Annualized
(1) For the period December 18, 1996 (commencement of operations) through
December 31, 1996.
The expense ratios for Class A Shares, Class B Shares and Class C
Shares reflect the impact of their 12b-1 Plans and the voluntary waivers of fees
in effect during the year.
Distribution and Service
The Distributor, Delaware Distributors, L.P., located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of the Fund's
shares under a Distribution Agreement dated March 1, 1997. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by the Fund on behalf of Class A, Class B and
Class C Shares under their respective 12b-1 Plans. The Distributor is an
indirect, wholly owned subsidiaries of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
the Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
April 30, 1997. The Transfer Agent also provides accounting services to the Fund
pursuant to the terms of a separate Fund Accounting Agreement. The Transfer
Agent is also an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc.
43
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Mutual Funds, Inc. are managed under the
direction of its Board of Directors.
Certain officers and directors of Mutual Funds, Inc. hold identical
positions in each of the other funds in the Delaware Group. On July 31, 1997,
Mutual Funds, Inc.'s officers and directors owned less than 1% of the
outstanding shares of each Class of the Fund.
As of July 31, 1997, management believes the following shareholders
held 5% or more of the outstanding shares of a Class:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
National High Yield Dain Bosworth Inc. FBO 385,416 7.66%
Municipal Bond Fund Juanita M. Daly
Class A Shares 1200 Racho Cr.
Las Vegas NV 89107-4629
National High Yield PaineWebber for the benefit of 21,067 15.00%
Municipal Bond Fund Katherine C. Sladky
Class B Shares 1121 SE 13th Street
Cape Coral FL 33990-3711
Wilma Kobrinsky TTEE Wilma 11,917 8.48%
Kobrinsky Living Trust
1230 Calle Lerrito
Santa Barbara CA 93101-4966
Southwest Securities Inc. FBO 9,053 6.44%
Phyllis Cox Frank 1994 Trust
P.O. Box 509002
Dallas TX 75250-9002
Southwest Securities Inc. FBO 9,053 6.44%
Suzanne Cox 1994 Trust
P.O. Box 509002
Dallas TX 75250-9002
Southwest Securities Inc. FBO 9,053 6.44%
Carolyn Cox Smith 1994 Trust
P.O. Box 509002
Dallas TX 75250-9002
Lorrain K. Linderman 8,771 6.24%
Arthur Gratias
605 Jefferson Street
Dysart IA 52224-9708
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
National High Yield BHC Securities Inc. 8,581 6.11%
Municipal Bond Fund Attn: Mutual Funds Dept.
Class B Shares One Commerce Square
2005 Market Street, Suite 1200
Philadelphia PA 19103-7042
National High Yield PaineWebber for the benefit of 9,469 43.09%
Municipal Bond Fund Donald L. Barnett and Carrie J.
Class C Shares Barnett TEN COM
P.O. Box 25233
Houston TX 77265-5233
Merrill Lynch 6,796 30.92%
4800 Deer Lake Drive E.
Jacksonville FL 32246-6484
Calvin Romriell & Colleen Reeves & 1,933 8.79%
Gordon Romriell JT TEN
4702 Mills Drive
Anchorage AK 99508-4733
Woodrow F. Hatcher 1,892 8.61%
Mary Ann Glaeser
117 Hibiscus Ave.
Gulf Breeze FL 32561-4321
PaineWebber for the benefit of 1,883 8.56%
Miss Alma Helen Goolsby
2711 Briarhurst
Apt. #23
Houston TX 77057-5365
</TABLE>
45
<PAGE>
DMH Corp., Delaware Voyageur Holdings, Inc., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd., Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH and the Manager are indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National. Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management.
As noted under Investment Management Agreement, after the close of
business on April 30, 1997, Voyageur became an indirect wholly-owned subsidiary
of Lincoln National as a result of Lincoln National's acquisition of DGF.
Directors and principal officers of Mutual Funds, Inc. are noted below
along with their ages and their business experience for the past five years.
Unless otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
46
<PAGE>
*Wayne A. Stork (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of Mutual Funds, Inc., 32 other investment companies in the
Delaware Group, Delaware Management Holdings, Inc., DMH Corp.,
Delaware International Holdings Ltd. and Founders Holdings,
Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of Mutual Funds, Inc., each of the other 32
investment companies in the Delaware Group, Delaware
Management Holdings, Inc. and Delaware Capital Management,
Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
Paul E. Suckow (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
Mutual Funds, Inc., each of the other 32 investment companies
in the Delaware Group, Delaware Management Company, Inc. and
Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
47
<PAGE>
Walter P. Babich (69)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (58)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
Ann R. Leven (56)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (76)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (61)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
48
<PAGE>
* Jeffrey J. Nick (44)
Director and/or Trustee of Mutual Funds, Inc. and 32 other investment
companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
Charles E. Peck (71)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of
The Ryland Group, Inc., Columbia, MD.
David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of Mutual Funds, Inc., each of the other 32 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc, Founders CBO Corporation, Delaware Capital Management,
Inc. and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc., Founders Holdings, Inc.
and Delaware International Holdings Ltd.
President/Chief Executive Officer/Chief Financial Officer and Director
of Delaware Service Company, Inc.
Chairman,Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer
of Equitable Capital Management Corporation, New York, from
December 1985 through August 1992, Executive Vice President
from December 1985 through March 1992, and Vice Chairman from
March 1992 through August 1992.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
49
<PAGE>
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of Mutual Funds,
Inc., each of the other 32 investment companies in the
Delaware Group, Delaware Distributors, L.P. and Delaware
Management Holdings, Inc.
Senior Vice President, Secretary, General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc. and Delaware Capital Management, Inc.
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of Mutual Funds, Inc.,
each of the other 32 investment companies in theDelaware Group
and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc. and Delaware International Holdings
Ltd.
Chief Financial Officer/Treasurer of Delaware Investment &
Retirement Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief
Financial Officer for Prudential Residential Services, L.P.,
New York, NY from 1989 to 1992. Prior to that, Mr. Hastings
served as Controller and Treasurer for Fine Homes
International, L.P., Stamford, CT from 1987 to 1989.
50
<PAGE>
Michael P. Bishof (35)
Senior Vice President/Treasurer of Mutual Funds, Inc., each of the
other 32 investment companies in the Delaware Group, Delaware
Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc. and Delaware Service Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting
of Delaware Distributors, L.P.
Senior Vice President and Manager of Investment Accounting of
Delaware International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a
Vice President for CS First Boston Investment Management, New
York, NY from 1993 to 1994 and an Assistant Vice President for
Equitable Capital Management Corporation, New York, NY from
1987 to 1993.
Patrick P. Coyne (34)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc., and
each of the tax-exempt and the fixed-income funds in the
Delaware Group and Delaware Capital Management, Inc.
During the past five years, Mr. Coyne has served in various
capacities at different times within the Delaware
organization.
Mitchell L. Conery (38)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc., each
of the tax-exempt and the fixed-income funds in the Delaware
Group and Delaware Capital Management.
Before joining the Delaware Group in 1997, Mr. Conery was an
investment officer with Travelers Insurance from 1995 through
1996 and a research analyst with CS First Boston from 1992 to
1995.
51
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation expected to be
received from Mutual Funds, Inc. during the actual fiscal year, the total
compensation received from all Delaware Group investment companies for the
fiscal year ended December 31, 1996, and an estimate of annual benefits to be
received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of December 31, 1996.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued Annual from all 18
Compensation as Part of Benefits Delaware
from Mutual Mutual Funds, Upon Group Investment
Name Funds, Inc.(1) Inc. Expenses Retirement* Companies
<S> <C> <C> <C> <C>
W. Thacher Longstreth $826 None $30,000 $46,187
Ann R. Leven $872 None $30,000 $54,323
Walter P. Babich $863 None $30,000 $53,323
Anthony D. Knerr $863 None $30,000 $53,323
Charles E. Peck $826 None $30,000 $49,323
Thomas F. Madison(2) $826 None $30,000 N/A
</TABLE>
* Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his or
her retirement from the Board, has attained the age of 70 and served on the
Board for at least five continuous years, is entitled to receive payments
from each fund in the Delaware Group for a period equal to the lesser of
the number of years that such person served as a director or the remainder
of such person's life. The amount of such payments will be equal, on an
annual basis, to the amount of the annual retainer that is paid to
directors of each fund at the time of such person's retirement. If an
eligible director retired as of December 31, 1996, he or she would be
entitled to annual payments totaling $30,000, in the aggregate, from all of
the funds in the Delaware Group, based on the number of funds in the
Delaware Group as of that date.
(1) The current Board of Directors was elected by shareholders of Mutual Funds,
Inc. on April 11, 1997 and began serving on May 1, 1997. With the exception
of Thomas F. Madison, none of the current directors had served on the prior
Board. Compensation figures are estimates of payments for Mutual Funds,
Inc.'s current fiscal year.
(2) Thomas F. Madison also received $1,462 for his service on the previous
Board of Directors during the last fiscal year.
52
<PAGE>
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and
for shareholders of classes of other funds in the Delaware Group are set forth
in the relevant prospectuses for such classes. The following supplements that
information. The Fund may modify, terminate or suspend the exchange privilege
upon 60 days' notice to shareholders.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and carefully
read that fund's prospectus before buying shares in an exchange. The prospectus
contains more complete information about the fund, including charges and
expenses. A shareholder requesting an exchange will be sent a current prospectus
and an authorization form for any of the other mutual funds in the Delaware
Group. Exchange instructions must be signed by the record owner(s) exactly as
the shares are registered.
An exchange constitutes, for tax purposes, the sale of one fund and the
purchase of another. The sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes.
In addition, investment advisers and dealers may make exchanges between
funds in the Delaware Group on behalf of their clients by telephone or other
expedited means. This service may be discontinued or revised at any time by the
Transfer Agent. Such exchange requests may be rejected if it is determined that
a particular request or the total requests at any time could have an adverse
effect on any of the funds. Requests for expedited exchanges may be submitted
with a properly completed exchange authorization form, as described above.
Telephone Exchange Privilege
Shareholders owning shares for which certificates have not been issued
or their investment dealers of record may exchange shares by telephone for
shares in other mutual funds in the Delaware Group. This service is
automatically provided unless the Fund receives written notice from the
shareholder to the contrary.
Shareholders or their investment dealers of record may contact the
Shareholder Service Center at 800-523-1918 to effect an exchange. The
shareholder's current Fund account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and the Fund reserve the right to
record exchange instructions received by telephone and to reject exchange
requests at any time in the future.
53
<PAGE>
As described in the Fund's Prospectus, neither the Fund nor the
Transfer Agent is responsible for any shareholder loss incurred in acting upon
written or telephone instructions for redemption or exchange of Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), the Fund will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Group funds from Timing Firms. The Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including accounts administered so as to
redeem or purchase shares based upon certain predetermined market indicators,
will be aggregated for purposes of the exchange limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Group funds: (1) Decatur
Income Fund, (2) Decatur Total Return Fund, (3) Delaware Fund, (4) Limited-Term
Government Fund, (5) Tax-Free USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware Group
funds are available for timed exchanges. Assets redeemed or exchanged out of
Timing Accounts in Delaware Group funds not listed above may not be reinvested
back into that Timing Account. The Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
timing pattern (as described above).
The Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if the
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other
Delaware Group funds:
Delaware Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. Devon Fund
seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
Trend Fund seeks long-term growth by investing in common stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
54
<PAGE>
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing primarily in equity securities
of medium- to large-sized companies expected to grow over time that meet the
Fund's "Social Criteria" strategy.
Delchester Fund seeks as high a current income as possible by investing
principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Strategic Income Fund seeks to
provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities.
U.S. Government Fund seeks high current income by investing primarily
in long-term debt obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Limited-Term Government Fund seeks high, stable income by investing
primarily in a portfolio of short- and intermediate-term securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
instruments secured by such securities. U.S. Government Money Fund seeks maximum
current income with preservation of principal and maintenance of liquidity by
investing only in short-term securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or instrumentalities, and
repurchase agreements collateralized by such securities, while maintaining a
stable net asset value.
Delaware Cash Reserve seeks the highest level of income consistent with
the preservation of capital and liquidity through investments in short-term
money market instruments, while maintaining a stable net asset value.
Tax-Free USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
55
<PAGE>
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to provide high current
income consistent with preservation of capital. The fund attempts to achieve
this objective primarily by investing in a diversified portfolio of investment
grade fixed-income securities issued by U.S. corporations.
Delaware Group Premium Fund, Inc. offers 15 funds available exclusively
as funding vehicles for certain insurance company separate accounts. Decatur
Total Return Series seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. Delchester Series seeks as high a current
income as possible by investing in rated and unrated corporate bonds, U.S.
government securities and commercial paper. Capital Reserves Series seeks a high
stable level of current income while minimizing fluctuations in principal by
investing in a diversified portfolio of short- and intermediate-term securities.
Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term money
market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap common stocks whose market values
appear low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over
56
<PAGE>
time. Emerging Markets Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. Convertible Securities Series seeks a high level of total
return on its assets through a combination of capital appreciation and current
income by investing primarily in convertible securities. Quantum Series seeks to
achieve long-term capital appreciation by investing primarily in equity
securities of medium to large-sized companies expected to grow over time that
meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Tax-Free Arizona Insured Fund seeks to provide a high
level of current income exempt from federal income tax and the Arizona personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Minnesota Insured Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax, consistent with
the preservation of capital.
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund seeks to provide
a high level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with preservation of capital. The Fund seeks to
reduce market risk by maintaining an average weighted maturity from five to ten
years.
Delaware-Voyageur Tax-Free California Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the California
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Insured Fund seeks to provide a high level of
current income exempt from federal income tax, consistent with the preservation
of capital. The Fund will seek to select investments that will enable its shares
to be exempt from the Florida intangible personal property tax.
Delaware-Voyageur Tax-Free Florida Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. The Fund will seek to select investments that will enable its shares to
be exempt from the Florida intangible personal property tax. Delaware-Voyageur
Tax-Free Kansas Fund seeks to provide a high level of current income exempt from
federal income tax, the Kansas personal income tax and the Kansas Intangible
personal property tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Missouri Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the Missouri personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free New Mexico Fund seeks to provide a high level of current income exempt
from federal income tax and the New Mexico personal income tax, consistent with
the preservation of capital. Delaware-Voyageur Tax-Free Oregon Insured Fund
seeks to provide a high level of current income exempt from federal income tax
and the Oregon personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Utah Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Washington Insured Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital.
Delaware-Voyageur Tax-Free Florida Intermediate Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. The Fund seeks to reduce market risk by maintaining an average weighted
maturity from five to ten years.
Delaware-Voyageur Tax-Free Arizona Fund seeks to provide a high level
of current income exempt from federal income tax and the Arizona personal income
tax, consistent with the preservation of capital.
57
<PAGE>
Delaware-Voyageur Tax-Free California Fund seeks to provide a high level of
current income exempt from federal income tax and the California personal income
tax, consistent with the preservation of capital. Delaware-Voyageur Tax-Free
Iowa Fund seeks to provide a high level of current income exempt from federal
income tax and the Iowa personal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Idaho Fund seeks to provide a high level of
current income exempt from federal income tax and the Idaho personal income tax,
consistent with the preservation of capital. Delaware-Voyageur Minnesota High
Yield Municipal Bond Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax primarily through
investment in medium and lower grade municipal obligations. Delaware-Voyageur
Tax-Free New York Fund seeks to provide a high level of current income exempt
from federal income tax and the personal income tax of the state of New York and
the city of New York, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Wisconsin Fund seeks to provide a high level of
current income exempt from federal income tax and the Wisconsin personal income
tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Colorado Fund seeks to provide a high level
of current income exempt from federal income tax and the Colorado personal
income tax, consistent with the preservation of capital.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high total return on an after-tax basis. The Fund will
attempt to achieve this objective by seeking to provide a high long-term
after-tax total return through managing its portfolio in a manner that will
defer the realization of accrued capital gains and minimize dividend income.
Delaware-Voyageur Tax-Free Minnesota Fund seeks to provide a high level
of current income exempt from federal income tax and the Minnesota personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free North Dakota Fund seeks to provide a high level of current income
exempt from federal income tax and the North Dakota personal income tax,
consistent with the preservation of capital.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
58
<PAGE>
GENERAL INFORMATION
The Manager is the investment manager of the Fund. The Manager also
provides investment management services to certain of the other funds in the
Delaware Group. The Manager, through a separate division, also manages private
investment accounts. While investment decisions of the Fund are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for the Fund.
The Manager, or its affiliate Delaware International Advisers Ltd.,
also manages the investment options for Delaware Medallion (sm) III Variable
Annuity. Medallion is issued by Allmerica Financial Life Insurance and Annuity
Company (First Allmerica Financial Life Insurance Company in New York and
Hawaii). Delaware Medallion offers fifteen different investment series ranging
from domestic equity funds, international equity and bond funds and domestic
fixed income funds. Each investment series available through Medallion utilizes
an investment strategy and discipline the same as or similar to one of the
Delaware Group mutual funds as available outside the annuity. See Discipline
Group Premium Fund, Inc., above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, Delaware International Advisers Ltd. or their
affiliates, are permitted to engage in personal securities transactions subject
to the exceptions set forth in Rule 17j-1 and the following general restrictions
and procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions may only be closed-out at a profit after a 60-day holding
period has elapsed; and (5) the Compliance Officer must be informed periodically
of all securities transactions and duplicate copies of brokerage confirmations
and account statements must be supplied to the Compliance Officer.
The Distributor acts as national distributor for the Fund and for the
other mutual funds in the Delaware Group. Prior to May 31, 1997, Voyageur Fund
Distributors, Inc. served as the national distributor for the Fund.
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The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for each Fund and for the
other mutual funds in the Delaware Group. The Transfer Agent is paid a fee by
the Fund for providing these services consisting of an annual per account charge
of $11.00 plus transaction charges for particular services according to a
schedule. Compensation is fixed each year and approved by the Board of
Directors, including a majority of the unaffiliated directors. The Transfer
Agent also provides accounting services to the Fund. Those services include
performing all functions related to calculating the Fund's net asset value and
providing all financial reporting services, regulatory compliance testing and
other related accounting services. For its services, the Transfer Agent is paid
a fee based on total assets of all funds in the Delaware Group for which it
provides such accounting services. Such fee is equal to 0.25% multiplied by the
total amount of assets in the complex for which the Transfer Agent furnishes
accounting services, where such aggregate complex assets are $10 billion or
less, and 0.20% of assets if such aggregate complex assets exceed $10 billion.
The fees are charged to each fund, including the Fund, on an aggregate pro-rata
basis. The asset-based fee payable to the Transfer Agent is subject to a minimum
fee calculated by determining the total number of investment portfolios and
associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of the Fund's securities and
cash. As custodian for the Fund, Norwest maintains a separate account or
accounts for the Fund; receives, holds and releases portfolio securities on
account of the Fund; receives and disburses money on behalf of the Fund; and
collects and receives income and other payments and distributions on account of
the Fund's portfolio securities.
Capitalization
Mutual Funds, Inc. has a present authorized capitalization of 10
trillion shares of capital stock with a $0.01 par value per share.
The Board of Directors has allocated the following number of shares to
the Fund and its respective classes:
National High Yield Municipal Bond Fund 100 billion
Class A Shares 10 billion
Class B Shares 10 billion
Class C Shares 10 billion
All shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable and, except as described above, have
equal voting rights.
Shares of each Class of the Fund represent a proportionate interest in
the assets of the Fund, and have the same voting and other rights and
preferences as the other classes of the Fund. Shareholders of Class A Shares,
Class B Shares and Class C Shares of a Fund may vote only on matters affecting
the 12b-1 Plan that relates to the Class of shares that they hold. However,
Class B Shares may vote on any proposal to increase materially the fees to be
paid by the Fund under the 12b-1 Plan relating to its Class A Shares. General
expenses of the Fund will be allocated on a pro-rata basis to the classes
according to asset size, except that expenses of the 12b-1 Plans of the Fund's
Class A, Class B and Class C Shares will be allocated solely to those classes.
Beginning June 9, 1997, the name of Voyageur National High Yield
Municipal Bond Fund changed to National High Yield Municipal Bond Fund.
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Noncumulative Voting
Mutual Funds, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of the shares of Mutual Funds, Inc.
voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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APPENDIX A -- RATINGS
Earnings and Dividend Rankings for Common Stocks
Standard & Poor's Corporation. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, Standard & Poor's
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. The rankings,
however, do not pretend to reflect all of the factors, tangible or intangible,
that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of
protection for principal and interest, called creditworthiness, cannot be
applied to common stocks, and therefore rankings are not to be confused with
bond quality ratings which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
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recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
Commercial Paper Ratings
Standard & Poor's Corporation. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations.
Prime-2 Strong capacity for repayment of short-term promissory
obligations.
Prime-3 Acceptable capacity for repayment of short-term
promissory obligations.
Corporate Bond Ratings
Standard & Poor's Corporation. Its ratings for corporate bonds have
the following definitions:
Investment grade:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
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speculation and "C" the highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. Its ratings for corporate bonds
include the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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Preferred Stock Rating
Standard& Poor's Corporation. Its ratings for preferred stock have the
following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Moody's Investors Service, Inc. Its ratings for preferred stock
include the following:
An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "baa" is considered to be medium-grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
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An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or
preference stock. Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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APPENDIX B
General Characteristics and Risks of Options and Futures
General. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," the Fund may purchase and sell options on
the securities in which it may invest and the Fund may purchase and sell options
on futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intend to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Fund's investment
objectives, to seek to hedge against the effects of market conditions and to
seek to stabilize the value of its assets. The Fund will engage in hedging and
risk management transactions from time to time in Voyageur's discretion, and may
not necessarily be engaging in such transactions when movements in interest
rates that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the 'CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Fund does not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and
attendant risks, are discussed below.
Futures Contracts and Related Options. The Fund may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund would have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund would be required
to maintain initial margin deposits with respect to the futures contract and to
make variation margin payments until the contract is closed. The Fund will incur
brokerage fees when they purchase or sell futures contracts.
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At the time a futures contract is purchased or sold, the Fund must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts the Fund may purchase or sell may range from approximately 1
1/2% to approximately 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures contract has changed, the Fund will be required
to make or will be entitled to receive a payment in cash or specified high
quality debt securities in an amount equal to any decline or increase in the
value of the futures contract. These additional deposits or credits are
calculated and required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract the Fund purchases or sells and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts purchased or sold by the Fund in a hedging
transaction, even if Voyageur correctly forecasts market trends the Fund's
hedging strategy may not be successful. If this should occur, the Fund could
lose money on the futures contracts and also on the value of its portfolio
securities.
Although the Fund believes that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Fund's
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Fund seeks
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Fund may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
Options on Securities. The Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
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The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
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The Fund may purchase and sell options that are exchange-traded or
that are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. In the case of options written by the Fund, the inability to enter into
a closing purchase transaction may result in material losses to the Fund.
Regulatory Restrictions. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the Fund
will maintain, in a segregated account, cash or liquid high-grade securities
equal to the value of such contracts. Compliance with such segregation
requirements may restrict the Fund's ability to invest in intermediate- and
long-term Tax Exempt Obligations.
The Fund intend to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation.
Accounting Considerations. When the Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the
Fund, an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
70
<PAGE>
FINANCIAL STATEMENTS
KPMG Peat Marwick LLP served as the independent auditors for Voyageur
Mutual Funds, Inc. through December 31, 1996 and, in its capacity as such,
audited the annual financial statements of the Fund. Beginning May 1, 1997,
Ernst & Young LLP began serving in such capacity. The Fund's Statements of Net
Assets, Statements of Operations, Statements of Changes in Net Assets, and Notes
to Financial Statements, as well as the report of KPMG Peat Marwick LLP,
independent auditors, for the fiscal year ended December 31, 1996 are included
in Voyageur Mutual Funds, Inc.'s Annual Report to shareholders. The financial
statements, the notes relating thereto and the report of KPMG Peat Marwick LLP,
listed above are incorporated by reference from the Annual Report into this Part
B.
71
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific funds,
tax-free funds, money market funds, global and international funds and
closed-end equity funds give investors the ability to create a portfolio that
fits their personal financial goals. For more information, shareholders of the
Fund Classes should contact their financial adviser or call Delaware Group at
800-523- 4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIANS
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55402
- --------------------------------------------------------------------------------
NATIONAL HIGH YIELD MUNICIPAL BOND
FUND
- --------------------------------------------------------------------------------
A CLASS
- --------------------------------------------------------------------------------
B CLASS
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
CLASSES OF VOYAGEUR MUTUAL
FUNDS, INC.
- --------------------------------------------------------------------------------
PART B
STATEMENT OF
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
AUGUST 28, 1997
DELAWARE
GROUP
<PAGE>
PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part A - Financial Highlights
*Part B - Statement of Net Assets
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Accountant's Report
* The financial statements and Accountant's Report listed above
relating to Voyageur Mutual Funds, Inc. are incorporated into this
filing by reference into the Fund's Part B from the Registrant's
Annual Report for the fiscal year ended December 31, 1996.
(b) Exhibits:
(1) Articles of Incorporation.
(a) Articles of Incorporation (April 14, 1993) incorporated
into this filing by reference to Post-Effective
Amendment No. 16 filed December 5, 1996.
(b) Articles of Incorporation (April 14, 1993) incorporated
into this filing by reference to Post-Effective
Amendments Nos. 8 and 9 filed April 30, 1996.
(c) Certification of Designation (February 27, 1995)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5, 1996.
(d) Certification of Designation (November 30, 1994)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5, 1996.
(e) Certification of Designation (November 30, 1994)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5, 1996.
<PAGE>
PART C - Other Information
(Continued)
(f) Certification of Designation incorporated into this
filing by reference to Post-Effective Amendment No. 10
filed May 31, 1996.
(g) Certification of Designation incorporated into this
filing by reference to Post-Effective Amendment No. 14
filed November 12, 1996.
(h) Certification of Designation incorporated into this
filing by reference to Post-Effective Amendment No. 15
filed November 20, 1996.
(2) By-Laws. By-Laws, as amended (May 14, 1996) incorporated into
this filing by reference to Post-Effective Amendment No. 10
filed May 31, 1996.
(3) Voting Trust Agreement. Inapplicable.
(4) Copies of All Instruments Defining the Rights of Holders.
(a) Articles of Incorporation and Articles Supplementary.
(i) Article __ of Articles of Incorporation (April 14,
1993) incorporated into this filing by reference
to Post-Effective Amendment No. 16 filed December
5, 1996.
(ii) Article __ of Articles of Incorporation (April 14,
1993) incorporated into this filing by reference
to Post-Effective Amendments Nos. 8 and 9 filed
April 30, 1996.
(iii) Certificate of Designation (February 27, 1995)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5,
1996.
(iv) Certificate of Designation (November 30, 1994)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5,
1996.
(v) Certificate of Designation (November 30, 1994)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5,
1996.
(vi) Certificate of Designation incorporated into this
filing by reference to Post-Effective Amendment
No. 10 filed May 31, 1996.
<PAGE>
PART C - Other Information
(Continued)
(vii) Certificate of Designation incorporated into this
filing by reference to Post-Effective Amendment
No. 14 filed November 12, 1996.
(viii) Certificate of Designation incorporated into this
filing by reference to Post-Effective Amendment
No. 15 filed November 20, 1996.
(ix) Certificate of Designation (November 30, 1994)
incorporated into this filing by reference to
Post-Effective Amendment No. 16 filed December 5,
1996.
(b) By-Laws.
(i) Article__ incorporated into this filing by
reference to Post-Effective Amendment No. 10 filed
May 31, 1996.
(5) Investment Management Agreement.
(a) Investment Management Agreement (April 30, 1997) between
Voyageur Fund Managers, Inc. and the Registrant on
behalf of Tax-Free New York Fund and National High Yield
Municipal Bond Fund attached as Exhibit.
(b) Investment Management Agreement (April 30, 1997) between
Voyageur Fund Managers, Inc. and the Registrant on
behalf of Minnesota High Yield Municipal Bond Fund,
Tax-Free Iowa Fund, Tax-Free Wisconsin Fund, Tax-Free
Idaho Fund, Tax-Free Arizona Fund and Tax-Free
California Fund attached as Exhibit.
(6) (a) Distribution Agreements.
(i) Proposed Distribution Agreement (1997) between
Delaware Distributors, L.P. and the Registrant on
behalf of each Fund attached as Exhibit.
(b) Administration and Service Agreement Form of
Administration and Service Agreement (as amended
November 1995) included as Module.
<PAGE>
PART C - Other Information
(Continued)
(c) Dealer's Agreement. Dealer's Agreement (as amended
November, 1995) included as Module.
(d) Mutual Fund Agreement for the Delaware Group of Funds
(as amended November, 1995) included as Module.
(7) Bonus, Profit Sharing, Pension Contracts. Inapplicable.
(8) Custodian Agreement.
(a) Custodian Contract with Norwest Bank Minnesota N.A.
(August 27, 1993) incorporated into this filing by
reference to Post-Effective Amendment No. 14 filed
November 12, 1996.
(9) Other Material Contracts.
(a) Shareholder Services Agreement (1997) between
Delaware Service Company, Inc. and the Registrant on
behalf of each Fund included as Module.
(b) Executed Fund Accounting Agreement (August 19, 1996)
between Delaware Service Company, Inc. and the
Registrant on behalf of each Fund included as Module.
(i) Executed Amendment No. 1 (September 30, 1996) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
(ii) Executed Amendment No. 2 (November 30, 1996) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
(iii) Executed Amendment No. 3 (December 27, 1996) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
(iv) Executed Amendment No. 4 (February 24, 1997) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
<PAGE>
PART C - Other Information
(Continued)
(v) Executed Amendment No. 4A (April 14, 1997) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
(vi) Executed Amendment No. 5 (May 1, 1997) to Schedule
A to Delaware Group of Funds Fund Accounting
Agreement attached as Exhibit.
(vi) Executed Amendment No. 6 (July 21, 1997) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
(10) Opinion of Counsel. Filed with letter relating to Rule 24f-2
on February 26, 1997.
(11) Consents of Auditors. Attached as Exhibit.
(12) Inapplicable.
(13) Letter of Investment Intent incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed on August
27, 1993.
(14) Inapplicable
(15) Plans under Rule 12b-1.
(a) Proposed Plan under Rule 12b-1 for Class A, B and C
Shares (1997) of Voyageur Mutual Funds, Inc. on behalf of
each Fund incorporated to Exhibit 6(a)(i).
(16) Schedules of Computation for each Performance Quotation.
(a) Schedule of Computation of Fund Performance for each Fund
to be filed by Amendment.
(17) Financial Data Schedules. To be filed by Amendment.
(18) Plan under Rule 18f-3.
(a) Plan under Rule 18f-3 (April 30, 1997) attached as
Exhibit.
(19) Other: Directors' Power of Attorney. Attached as Exhibit.
<PAGE>
PART C - Other Information
(Continued)
Item 25. Persons Controlled by or under Common Control with Registrant. None.
Item 26. Number of Holders of Securities.
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Tax-Free Iowa Fund A Shares:
Common Stock Par Value 1,676 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Iowa Fund Class B Shares:
Common Stock Par Value 58 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Iowa Fund Class C Shares:
Common Stock Par Value 37 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Wisconsin Fund Class A Shares:
Common Stock Par Value 828 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Wisconsin Fund Class B Shares:
Common Stock Par Value 53 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Wisconsin Fund Class C Shares:
Common Stock Par Value 22 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Idaho Fund Class A Shares:
Common Stock Par Value 561 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Idaho Fund Class B Shares:
Common Stock Par Value 140 Accounts
$.01 Per Share as of July 31, 1997
<PAGE>
PART C - Other Information
(Continued)
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Tax-Free Idaho Fund Class C Shares:
Common Stock Par Value 43 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Arizona Fund Class A Shares:
Common Stock Par Value 143 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Arizona Fund Class B Shares:
Common Stock Par Value 74 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free Arizona Fund Class C Shares:
Common Stock Par Value 7 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free California Fund Class A Shares:
Common Stock Par Value 46 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free California Fund Class B Shares:
Common Stock Par Value 84 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free California Fund Class C Shares:
Common Stock Par Value 6 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free New York Fund Class A Shares:
Common Stock Par Value 474 Accounts
$.01 Per Share as of July 31, 1997
Tax-Free New York Fund Class B Shares:
Common Stock Par Value 15 Accounts
$.01 Per Share as of July 31, 1997
<PAGE>
PART C - Other Information
(Continued)
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Tax-Free New York Fund Class C Shares:
Common Stock Par Value 4 Accounts
$.01 Per Share as of July 31, 1997
Minnesota High Yield Municipal Bond
Fund Class A Shares:
Common Stock Par Value 357 Accounts
$.01 Per Share as of July 31, 1997
Minnesota High Yield Municipal Bond
Fund Class B Shares:
Common Stock Par Value 159 Accounts
$.01 Per Share as of July 31, 1997
Minnesota High Yield Municipal Bond
Fund Class C Shares:
Common Stock Par Value 63 Accounts
$.01 Per Share as of July 31, 1997
National High Yield Municipal Bond
Fund Class A Shares:
Common Stock Par Value 1,067 Accounts
$.01 Per Share as of July 31, 1997
National High Yield Municipal Bond
Fund Class B Shares:
Common Stock Par Value 30 Accounts
$.01 Per Share as of July 31, 1997
National High Yield Municipal Bond
Fund Class C Shares:
Common Stock Par Value 5 Accounts
$.01 Per Share as of July 31, 1997
Item 27. Indemnification. Incorporated into this filing by reference to
Post-Effective Amendment No. 10 filed May 31, 1996.
Item 28. Business and Other Connections of Investment Adviser.
Delaware Management Company, Inc. (the "Manager") serves as investment
manager to the Registrant and also serves as investment manager or sub-adviser
to certain of the other funds in the Delaware Group (Delaware Group Equity Funds
I, Inc., Delaware Group Equity Funds II, Inc., Delaware Group Trend Fund, Inc.,
Delaware Group Equity Funds IV, Inc., Delaware Group Equity Funds V, Inc.,
Delaware Group Government Fund, Inc., Delaware Group Limited-Term Government
Funds, Inc., Delaware Group Cash Reserve, Inc., Delaware Group Tax-Free Fund,
Inc., DMC Tax-Free Income Trust-Pennsylvania, Delaware Group Tax-Free Money
Fund, Inc., Delaware Group Premium Fund, Inc., Delaware Group Global &
International Funds, Inc., Delaware Pooled Trust, Inc., Delaware Group Adviser
Funds, Inc., Delaware Group Dividend and Income Fund, Inc., Delaware Group
Global Dividend and Income Fund, Inc., Voyageur Tax-Free Funds, Inc., Voyageur
Intermediate Tax-Free Funds, Inc., Voyageur Insured Funds, Inc., Voyageur Funds,
Inc., Voyageur Investment Trust, Voyageur Investment Trust II, Voyageur Mutual
Funds II, Inc., Voyageur Mutual Funds III, Inc., Voyageur Arizona Municipal
Income Fund, Inc., Voyageur Colorado Insured Municipal Income Fund, Inc.,
Voyageur Florida Insured Municipal Income Fund, Voyageur Minnesota Municipal
Fund, Inc., Voyageur Minnesota Municipal Fund II, Inc. and Voyageur Minnesota
Municipal Fund III, Inc.) and provides investment advisory services to
institutional accounts, primarily retirement plans and endowment funds. In
addition, certain directors of the Manager also serve as directors/trustees of
the other Delaware Group funds, and certain officers are also officers of these
other funds. A company owned by the Manager's parent company acts as principal
underwriter to the mutual funds in the Delaware Group (see Item 29 below) and
another such company acts as the shareholder services, dividend disbursing,
accounting servicing and transfer agent for all of the mutual funds in the
Delaware Group.
<PAGE>
PART C - Other Information
(Continued)
The following persons serving as directors or officers of the Manager
have held the following positions during the past two years:
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Wayne A. Stork Chairman of the Board, President, Chief Executive Officer, Chief Investment
Officer and Director of Delaware Management Company, Inc.; Chairman of
the Board, President, Chief Executive Officer and Director of the Registrant,
each of the other funds in the Delaware Group, Delaware Management
Holdings, Inc., DMH Corp., Delaware International Holdings Ltd. and
Founders Holdings, Inc.; Chairman of the Board and Director of Delaware
Distributors, Inc. and Delaware Capital Management, Inc.; Director of
Delaware Service Company, Inc. and Delaware Investment & Retirement
Services, Inc.; and Chairman, Chief Executive Officer and Director of
Delaware International Advisers Ltd.
Richard G. Unruh, Jr. Executive Vice President and Director of Delaware Management Company,
Inc.; Executive Vice President of the Registrant, each of the other funds in the
Delaware Group, Delaware Management Holdings, Inc. and Delaware Capital
Management, Inc; and Director of Delaware International Advisers Ltd.
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company
since 1989, 2040 Market Street, Philadelphia, PA; Board of Directors, Chairman
of Finance Committee, AAA Mid Atlantic, Inc. since 1989, 2040 Market Street,
Philadelphia, PA; Board of Directors, Metron, Inc. since 1995, 11911 Freedom
Drive, Reston, VA
Paul E. Suckow Executive Vice President/Chief Investment Officer, Fixed Income of
Delaware Management Company, Inc., the Registrant, each of the other funds
in the Delaware Group and Delaware Management Holdings, Inc.; Executive
Vice President and Director of Founders Holdings, Inc.; Executive Vice
President of Delaware Capital Management, Inc.; and Director of Founders
CBO Corporation
Director, HYPPCO Finance Company Ltd.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
David K. Downes Executive Vice President, Chief Operating Officer, Chief Financial Officer
and Director of Delaware Management Company, Inc., DMH Corp, Delaware
Distributors, Inc., Founders Holdings, Inc. and Delaware International
Holdings Ltd.; Executive Vice President, Chief Operating Officer and Chief
Financial Officer of the Registrant and each of the other funds in the
Delaware Group, Delaware Management Holdings, Inc., Founders CBO
Corporation, Delaware Capital Management, Inc. and Delaware Distributors,
L.P.; President, Chief Executive Officer, Chief Financial Officer and Director
of Delaware Service Company, Inc.; Chairman, Chief Executive Officer and
Director of Delaware Investment & Retirement Services, Inc.; Chairman and
Director of Delaware Management Trust Company; and Director of
Delaware International Advisers Ltd.
Chief Executive Officer and Director of Forewarn, Inc. since 1993, 8 Clayton
Place, Newtown Square, PA
George M. Senior Vice President, General Counsel, Secretary and Director of
Chamberlain, Jr. Delaware Management Company, Inc., DMH Corp., Delaware Distributors,
Inc., Delaware Service Company, Inc., Founders Holdings, Inc., Delaware Capital
Management, Inc. and Delaware Investment & Retirement Services, Inc.; Senior
Vice President, Secretary and General Counsel of the Registrant, each of the
other funds in the Delaware Group, Delaware Distributors, L.P. and Delaware
Management Holdings, Inc.; Executive Vice President, Secretary, General Counsel
and Director of Delaware Management Trust Company; Secretary and Director of
Delaware International Holdings Ltd.; and Director of Delaware International
Advisers Ltd.
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ ------------------------------------------------
<S> <C>
Richard J. Flannery Senior Vice President/Corporate and International Affairs of the Registrant,
each of the other funds in the Delaware Group, Delaware Management
Holdings, Inc., DMH Corp., Delaware Management Company, Inc.,
Delaware Distributors, Inc., Delaware Distributors, L.P., Delaware
Management Trust Company, Delaware Capital Management, Inc.,
Delaware Service Company, Inc. and Delaware Investment & Retirement
Services, Inc.; Senior Vice President/ Corporate and International Affairs
and Director of Founders Holdings, Inc. and Delaware International
Holdings Ltd.; Senior Vice President of Founders CBO Corporation; and
Director of Delaware International Advisers Ltd.
Director, HYPPCO Finance Company Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd.,
Elverton, PA; Director and Member of Executive Committee of Stonewall
Links, Inc. since 1991, Bulltown Rd., Elverton, PA
Michael P. Bishof Senior Vice President and Treasurer of the Registrant, each of the other
funds in the Delaware Group, Delaware Distributors, Inc. and Founders
Holdings, Inc.; Senior Vice President/Investment Accounting of Delaware
Management Company, Inc. and Delaware Service Company, Inc.; Senior
Vice President and Treasurer/ Manager, Investment Accounting of
Delaware Distributors, L.P.; Assistant Treasurer of Founders CBO
Corporation; and Senior Vice President and Manager of Investment
Accounting of Delaware International Holdings Ltd.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Joseph H. Hastings Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, Inc., Delaware Capital Management,
Inc., Delaware Distributors, L.P., Delaware Service Company, Inc. and
Delaware International Holdings Ltd.; Senior Vice President/Corporate
Controller of the Registrant, each of the other funds in the Delaware Group
and Founders Holdings, Inc.; Executive Vice President, Chief Financial
Officer and Treasurer of Delaware Management Trust Company; Chief
Financial Officer and Treasurer of Delaware Investment & Retirement
Services, Inc.; and Senior Vice President/Assistant Treasurer of Founders
CBO Corporation
Michael T. Taggart Senior Vice President/Facilities Management and Administrative Services
of Delaware Management Company, Inc.
Douglas L. Anderson Senior Vice President/Operations of Delaware Management Company, Inc.,
Delaware Investment and Retirement Services, Inc. and Delaware Service
Company, Inc.; Senior Vice President/ Operations and Director of Delaware
Management Trust Company
James L. Shields Senior Vice President/Chief Information Officer of Delaware Management
Company, Inc., Delaware Service Company, Inc. and Delaware Investment
& Retirement Services, Inc.
Eric E. Miller Vice President, Assistant Secretary and Deputy General Counsel of the Registrant
and each of the other funds in the Delaware Group, Delaware Management Company,
Inc., Delaware Management Holdings, Inc., DMH Corp., Delaware Distributors,
L.P., Delaware Distributors Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Founders Holdings, Inc., Delaware Capital Management,
Inc. and Delaware Investment & Retirement Services, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Richelle S. Maestro Vice President and Assistant Secretary of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group,
Delaware Management Holdings, Inc., Delaware Distributors, L.P.,
Delaware Distributors, Inc., Delaware Service Company, Inc., DMH Corp.,
Delaware Management Trust Company, Delaware Capital Management,
Inc., Delaware Investment & Retirement Services, Inc. and Founders
Holdings, Inc.; Secretary of Founders CBO Corporation; and Assistant
Secretary of Delaware International Holdings Ltd.
Partner of Tri-R Associates since 1989, 10001 Sandmeyer Lane, Philadelphia, PA
Richard Salus(1) Vice President/Assistant Controller of Delaware Management Company,
Inc. and Delaware Management Trust Company
Bruce A. Ulmer Vice President/Director of LNC Internal Audit of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp., Delaware Management Trust Company and
Delaware Investment & Retirement Services, Inc.
Steven T. Lampe(2) Vice President/Taxation of Delaware Management Company, Inc., the
Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp., Delaware Distributors, L.P.,
Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Founders Holdings, Inc., Founders CBO
Corporation, Delaware Capital Management, Inc. and Delaware Investment
& Retirement Services, Inc.
Christopher Adams(3) Vice President/Strategic Planning of Delaware Management Company, Inc.
and Delaware Service Company, Inc.
Susan L. Hanson Vice President/Strategic Planning of Delaware Management Company, Inc.
and Delaware Service Company, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Dennis J. Mara(4) Vice President/Acquisitions of Delaware Management Company, Inc.
Scott Metzger Vice President/Business Development of Delaware Management Company, Inc. and
Delaware Service Company, Inc.
Lisa O. Brinkley Vice President/Compliance of Delaware Management Company, Inc., the Registrant,
each of the other funds in the Delaware Group, DMH Corp., Delaware Distributors,
L.P., Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Delaware Capital Management, Inc. and Delaware
Investment & Retirement Services, Inc.
Rosemary E. Milner Vice President/Legal Registrations of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group,
Delaware Distributors, L.P. and Delaware Distributors, Inc.
Gerald T. Nichols Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds, the fixed income funds and the
closed-end funds in the Delaware Group; Vice President of Founders Holdings,
Inc.; and Treasurer, Assistant Secretary and Director of Founders CBO
Corporation
Paul A. Matlack Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds, the fixed income funds and the
closed-end funds in the Delaware Group; Vice President of Founders Holdings,
Inc.; and President and Director of Founders CBO Corporation.
Gary A. Reed Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds and the fixed income funds in the
Delaware Group and Delaware Capital Management, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Patrick P. Coyne Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds and the fixed income funds in the
Delaware Group and Delaware Capital Management, Inc.
Roger A. Early Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds and the fixed income funds in the
Delaware Group
Mitchell L. Conery(5) Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant and each of the tax-exempt and fixed income funds in the Delaware
Group
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
George H. Burwell Vice President/Senior Portfolio Manager of Delaware Management
Company, Inc. and each of the equity funds in the Delaware Group
John B. Fields Vice President/Senior Portfolio Manager of Delaware Management
Company, Inc. and each of the equity funds in the Delaware Group and
Delaware Capital Management, Inc.
Gerald S. Frey(6) Vice President/Senior Portfolio Manager of Delaware Management
Company, Inc., the Registrant and each of the equity funds in the Delaware
Group
Christopher Beck Vice President/Senior Portfolio Manager of Delaware Management
Company, Inc. and each of the equity funds in the Delaware Group
Elizabeth H. Howell(7) Vice President/Senior Portfolio Manager of Delaware Management
Company, Inc. and the Registrant
Chrisopher Beck Vice President/Senior Portfolio Manager of Delaware Management
Company, Inc.
Andrew M. Vice President/Senior Portfolio Manager of Delaware Management
McCullagh, Jr.(8) Company, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principle Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Paul Grillo Vice President/Portfolio Manager of Delaware Management Company, Inc., the
Registrant and each of the tax-exempt and fixed income funds in the Delaware
Group
William H. Miller Vice President/Assistant Portfolio Manager of Delaware Management Company, Inc.
and the Registrant
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
- ------------------------------
(1) SENIOR MANAGER, Ernst & Young LLP prior to December 1996.
(2) TAX MANAGER, Price Waterhouse prior to October 1995.
(3) SENIOR ASSOCIATE, FAS, Coopers & Lybrand LLP prior to October 1995.
(4) CORPORATE CONTROLLER, IIS prior to July 1997 and DIRECTOR, FINANCIAL
PLANNING, Decision One prior to March 1996.
(5) INVESTMENT OFFICER, Travelers Insurance prior to January 1997.
(6) SENIOR DIRECTOR, Morgan Grenfell Capital Management prior to June 1996.
(7) SENIOR PORTFOLIO MANAGER, Voyageur Fund Managers, Inc. prior to May 1997.
(8) SENIOR PORTFOLIO MANAGER, Voyageur Asset Management, LLC prior to April
1997.
Item 29. Principal Underwriters.
(a) Delaware Distributors, L.P. serves as principal underwriter for all the
mutual funds in the Delaware Group.
(b) Information with respect to each director, officer or partner of
principal underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Delaware Distributors, Inc. General Partner None
Delaware Management
Company, Inc. Limited Partner Investment Manager
Delaware Capital
Management, Inc. Limited Partner None
Bruce D. Barton President and Chief Executive None
Officer
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
David K. Downes Senior Vice President/ Executive Vice President/
Chief Administrative Officer/ Chief Operating Officer/
Chief Financial Officer Chief Financial Officer
George M. Chamberlain, Jr. Senior Vice President/Secretary/ Senior Vice President/
General Counsel Secretary/General Counsel
Terrence P. Cunningham Senior Vice President/Financial None
Institutions
Thomas E. Sawyer Senior Vice President/ None
National Sales Director
Dana B. Hall Senior Vice President/Key Accounts None
Mac McAuliffe Senior Vice President/Sales None
Manager, Western Division
William F. Hostler Senior Vice President/Marketing None
Services
J. Chris Meyer Senior Vice President/ None
Director Product Management
Stephen H. Slack Senior Vice President/Wholesaler None
William M. Kimbrough Senior Vice President/Wholesaler None
Daniel J. Brooks Senior Vice President/Wholesaler None
Richard J. Flannery Senior Vice President/Corporate Senior Vice President/
and International Affairs Corporate and
International Affairs
Bradley L. Kolstoe Senior Vice President/Western None
Division Sales Manager
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Henry W. Orvin Senior Vice President/Eastern None
Division Sales Manager - Wire/
Regional Channel
Michael P. Bishof Senior Vice President and Treasurer/ Senior Vice
Manager, Investment Accounting President/Treasurer
Eric E. Miller Vice President/Assistant Secretary/ Vice President/Assistant
Deputy General Counsel Secretary/Deputy General
Counsel
Richelle S. Maestro Vice President/Assistant Secretary Vice President/Assistant
Secretary
Steven T. Lampe Vice President/Taxation Vice President/Taxation
Joseph H. Hastings Vice President/Corporate Senior Vice President/
Controller & Treasurer Corporate Controller
Lisa O. Brinkley Vice President/Compliance Vice President/
Compliance
Rosemary E. Milner Vice President/Legal Registrations Vice President/Legal
Registrations
Daniel H. Carlson Vice President/Strategic Marketing None
Diane M. Anderson Vice President/Plan Record Keeping None
and Administration
Anthony J. Scalia Vice President/Defined Contribution None
Sales, SW Territory
Courtney S. West Vice President/Defined Contribution None
Sales, NE Territory
Denise F. Guerriere Vice President/Client Services None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Gordon E. Searles Vice President/Client Services None
Julia R. Vander Els Vice President/Participant Services None
Jerome J. Alrutz Vice President/Retail Sales None
Joanne A. Mettenheimer Vice President/New Business None
Development
Scott Metzger Vice President/Business Development Vice President/Business
Development
Stephen C. Hall Vice President/Institutional Sales None
Gregory J. McMillan Vice President/ National Accounts None
Christopher H. Price Vice President/Manager, Insurance None
Stephen J. DeAngelis Vice President/Product Development None
Zina DeVassal Vice President/Financial Institutions None
Andrew W. Whitaker Vice President/Financial Institutions None
Jesse Emery Vice President/ Marketing None
Communications
Darryl S. Grayson Vice President, Broker/Dealer None
Internal Sales
Susan T. Friestedt Vice President/Client Service None
Dinah J. Huntoon Vice President/Product None
Manager Equity
Soohee Lee Vice President/Fixed Income None
Product Management
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Michael J. Woods Vice President/UIT Product None
Management
Ellen M. Krott Vice President/Marketing None
Dale L. Kurtz Vice President/Marketing Support None
Holly W. Reimel Vice President/Manager, Key Accounts None
David P. Anderson Vice President/Wholesaler None
Lee D. Beck Vice President/Wholesaler None
Gabriella Bercze Vice President/Wholesaler None
Terrence L. Bussard Vice President/Wholesaler None
William S. Carroll Vice President/Wholesaler None
William L. Castetter Vice President/Wholesaler None
Thomas J. Chadie Vice President/Wholesaler None
Thomas C. Gallagher Vice President/Wholesaler None
Douglas R. Glennon Vice President/Wholesaler None
Ronald A. Haimowitz Vice President/Wholesaler None
Christopher L. Johnston Vice President/Wholesaler None
Michael P. Jordan Vice President/Wholesaler None
Jeffrey A. Keinert Vice President/Wholesaler None
Thomas P. Kennett Vice President/Wholesaler None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Debbie A. Marler Vice President/Wholesaler None
Nathan W. Medin Vice President/Wholesaler None
Roger J. Miller Vice President/Wholesaler None
Patrick L. Murphy Vice President/Wholesaler None
Stephen C. Nell Vice President/Wholesaler None
Julia A. Nye Vice President/Wholesaler None
Joseph T. Owczarek Vice President/Wholesaler None
Mary Ellen Pernice-Fadden Vice President/Wholesaler None
Mark A. Pletts Vice President/Wholesaler None
Philip G. Rickards Vice President/Wholesaler None
Laura E. Roman Vice President/Wholesaler None
Linda Schulz Vice President/Wholesaler None
Edward B. Sheridan Vice President/Wholesaler None
Robert E. Stansbury Vice President/Wholesaler None
Julia A. Stanton Vice President/Wholesaler None
Larry D. Stone Vice President/Wholesaler None
Edward J. Wagner Vice President/Wholesaler None
Wayne W. Wagner Vice President/Wholesaler None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Scott Whitehouse Vice President/Wholesaler None
John A. Wells Vice President/Marketing Technology None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
(c) Not Applicable.
Item 30. Location of Accounts and Records.
All accounts and records are maintained in Philadelphia at 1818 Market
Street, Philadelphia, PA 19103 or One Commerce Square, Philadelphia, PA
19103 or 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota
55402.
Item 31. Management Services. None.
Item 32. Undertakings.
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
(d) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal
of any director when requested in writing to do so by the record
holders of not less than 10% of the outstanding shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, this Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Philadelphia, Commonwealth of Pennsylvania on this
26th day of August, 1997.
VOYAGEUR MUTUAL FUNDS, INC.
By /s/ Wayne A. Stork
------------------------------
Wayne A. Stork
Chairman of the Board, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- --------------------------------- ---------------
<S> <C> <C>
Chairman of the Board, President,
/s/ Wayne A. Stork Chief Executive Officer and Director August 26, 1997
- ---------------------------------------
Wayne A. Stork
Executive Vice President/Chief Operating
Officer/Chief Financial Officer
(Principal Financial Officer and
/s/ David K. Downes Principal Accounting Officer) August 26, 1997
- ---------------------------------------
David K. Downes
/s/Walter P. Babich * Director August 26, 1997
- ---------------------------------------
Walter P. Babich
/s/Anthony D. Knerr * Director August 26, 1997
- ---------------------------------------
Anthony D. Knerr
/s/Ann R. Leven * Director August 26, 1997
- ---------------------------------------
Ann R. Leven
/s/ W. Thacher Longstreth * Director August 26, 1997
- ---------------------------------------
W. Thacher Longstreth
/s/Thomas F. Madison * Director August 26, 1997
- ---------------------------------------
Thomas F. Madison
/s/Jeffrey J. Nick * Director August 26, 1997
- ---------------------------------------
Jeffrey J. Nick
/s/Charles E. Peck * Director August 26, 1997
- ---------------------------------------
Charles E. Peck
</TABLE>
*By /s/ Wayne A. Stork
------------------------
Wayne A. Stork
as Attorney-in-Fact for
each of the persons indicated
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Exhibits
to
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
EX-99.B5A Investment Management Agreement (April 30, 1997) between Voyageur Fund
Managers, Inc. and the Registrant on behalf of Tax-Free New York Fund and
National High Yield Municipal Bond Fund
EX-99.B5B Investment Management Agreement (April 30, 1997) between Voyageur Fund
Managers, Inc. and the Registrant on behalf of Minnesota High Yield Municipal
Bond Fund,Tax-Free Iowa Fund, Tax-Free Wisconsin Fund, Tax-Free Idaho
Fund, Tax-Free Arizona Fund and Tax-Free California Fund
EX-99.B6AI Proposed Distribution Agreement (1997) between Delaware Distributors, L.P. and
the Registrant on behalf of each Fund.
EX-99.B6B Form of Administration and Service Agreement (as amended November,
(Module Name 1995)
ADMIN_SER_AGREE)
EX-99.B6C Dealer's Agreement (as amended November, 1995)
(Module Name
DEALERS_AGREE)
EX-99.B6D Mutual Fund Agreement for the Delaware Group of Funds (as amended
(Module Name November, 1995)
MUTUAL_FUND_AGR)
EX-99.B9A Shareholder Services Agreement (1997) between Delaware Service
(Module Name Company, Inc. and the Registrant on behalf of each Fund
SH_SVC_AGT)
EX-99.B9B Executed Fund Accounting Agreement (August 19, 1996) between
(Module Name Delaware Service Company, Inc. and the Registrant on behalf of each Fund
FUND_ACCT_AGT)
EX-99.B9BI Executed Amendment No. 1 (September 30, 1996) to Schedule A to Delaware
Group of Funds Fund Accounting Agreement
EX-99.B9BII Executed Amendment No. 2 (November 30, 1996) to Schedule A to Delaware
Group of Funds Fund Accounting Agreement
EX-99.B9BIII Executed Amendment No. 3 (December 27, 1996) to Schedule A to Delaware
Group of Funds Fund Accounting Agreement
</TABLE>
<PAGE>
INDEX TO EXHIBITS
(CONTINUED)
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
EX-99.B9BIV Executed Amendment No. 4 (February 24, 1997) to Schedule A to Delaware
Group of Funds Fund Accounting Agreement
EX-99.B9BV Executed Amendment No. 4A (April 14, 1997) to Schedule A to Delaware Group
of Funds Fund Accounting Agreement
EX-99.B9BVI Executed Amendment No. 5 (May 1, 1997) to Schedule A to Delaware Group of
Funds Fund Accounting Agreement
EX-99.B9BVII Executed Amendment No. 6 (July 21, 1997) to Schedule A to Delaware Group of
Funds Fund Accounting Agreement
EX-99.B11 Consents of Auditors
EX-99.B18 Rule 18f-3 Plan
EX-99.B19 Directors' Power of Attorney
</TABLE>
<PAGE>
INVESTMENT ADVISORY AGREEMENT
This Agreement, made as of this 30th day of April, 1997, by
and between Voyageur Mutual Funds, Inc., a Minnesota corporation (the
"Company"), on behalf of each Fund represented by a series of shares of common
stock of the Fund that adopts this Agreement (each a "Fund" and, collectively,
the "Funds") (the Funds, together with the date each Fund adopts this Agreement,
are set forth in Exhibit A hereto, which shall be updated from time to time to
reflect additions, deletions or other changes thereto), and Delaware Management
Company, Inc., a Delaware corporation ("Adviser").
WITNESSETH
WHEREAS, the Company has been organized and operates as an investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, Adviser is an investment adviser registered under the
Investment Advisers Act of 1940, as amended, and engages in the business of
providing investment management services;
WHEREAS, a subsidiary of Adviser's indirect parent company completed as
of the date of this Agreement a merger transaction (the "Merger") with the
indirect parent company of the investment adviser to the Company, Voyageur Fund
Managers, Inc. ("VFM"), which resulted in a change of control of VFM and the
assignment (as defined under the 1940 Act) and automatic termination of the
investment advisory agreement that was in effect between VFM and the Company at
the time of the Merger; and
WHEREAS, the Board of Directors of the Company and the shareholders of
the Company have determined that the Company should enter into an investment
advisory agreement with Adviser to be effective upon consummation of the Merger;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. INVESTMENT ADVISORY SERVICES.
a. The Company hereby engages Adviser on behalf of
the Funds, and Adviser hereby agrees to act, as investment adviser for, and to
manage the investment of the assets of, the Funds.
b. The investment of the assets of each Fund shall at
all times be subject to the applicable provisions of the Articles of
Incorporation, the Bylaws, the Registration Statement, and the current
Prospectus and the Statement of Additional Information, if any, of the Company
and each Fund and shall conform to the policies and purposes of each Fund as set
forth in such documents and as interpreted from time to time by the Board of
Directors of the Company. Within the framework of the investment policies of
each Fund, and subject to such
<PAGE>
other limitations and directions as the Board of Directors may from time to time
prescribe, Adviser shall have the sole and exclusive responsibility for the
management of each Fund's assets and the making and execution of all investment
decisions for each Fund, except as set forth in the following paragraph. Adviser
shall report to the Board of Directors regularly at such times and in such
detail as the Board may from time to time determine appropriate, in order to
permit the Board to determine the adherence of Adviser to the investment
policies of the Funds.
c. Adviser may, at its expense, select and contract
with one or more registered investment advisers ("Sub-Adviser") for any of the
Funds to perform some or all of the services for such Funds. Such Sub-Adviser
shall be responsible for executing orders for the purchase and sale of portfolio
securities. Adviser will compensate any Sub-Adviser for its services to the
Funds. Adviser may terminate the services of any Sub-Adviser at any time in its
sole discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected.
d. Adviser shall, at its own expense, furnish all
office facilities, equipment and personnel necessary to discharge its
responsibilities and duties hereunder. Adviser shall arrange, if requested by
the Company, for officers or employees of Adviser to serve without compensation
from any Fund as directors, officers, or employees of the Company if duly
elected to such positions by the shareholders or directors of the Company (as
required by law).
e. Adviser hereby acknowledges that all records
pertaining to each Fund's investments are the property of the Company, and in
the event that a transfer of investment advisory services to someone other than
Adviser should ever occur, Adviser will promptly, and at its own cost, take all
steps necessary to segregate such records and deliver them to the Company.
f. Subject to the primary objective of obtaining the
best available prices and execution, Adviser will place orders for the purchase
and sale of portfolio securities with such broker/dealers who provide
statistical, factual and financial information and services to the Funds,
Adviser or to any other fund for which Adviser provides investment advisory
services and/or with broker/dealers who sell shares of the Funds or who sell
shares of any other fund for which Adviser provides investment advisory
services. Broker/dealers who sell shares of the funds of which Adviser is
investment manager, shall only receive orders for the purchase or sale of
portfolio securities to the extent that the placing of such orders is in
compliance with the Rules of the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc.
g. Notwithstanding the provisions of subparagraph (f)
above, and subject to such policies and procedures as may be adopted by the
Board of Directors and officers of the Company, Adviser may ask the Funds and
the Funds may agree to pay a member of an exchange, broker or dealer an amount
of commission for effecting a securities transaction in excess of the amount of
commission another member of an exchange, broker or dealer would
-2-
<PAGE>
have charged for effecting that transaction, in such instances where it and
Adviser have determined in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such member, broker or dealer, viewed in terms of either that
particular transaction or Adviser's overall responsibilities with respect to the
Funds and to other funds and other advisory accounts for which Adviser exercises
investment discretion.
2. COMPENSATION FOR SERVICES.
In payment for the investment advisory and management
services to be rendered by Adviser hereunder, each Fund shall pay to Adviser a
monthly fee, which fee shall be paid to Adviser not later than the fifth
business day of the month following the month in which said services were
rendered. The monthly fee payable by each Fund shall be as set forth in Exhibit
A hereto, which may be updated from time to time to reflect amendments, if any,
to Exhibit A. The monthly fee payable by each Fund shall be based on the average
of the net asset values of all of the issued and outstanding shares of the Fund
as determined as of the close of each business day of the month pursuant to the
Articles of Incorporation, Bylaws, and currently effective Prospectus and
Statement of Additional Information of the Company and the Fund. For purposes of
calculating each Fund's average daily net assets, as such term is used in this
Agreement, each Fund's net assets shall equal its total assets minus (a) its
total liabilities and (b) its net orders receivable from dealers.
3. ALLOCATION OF EXPENSES.
a. In addition to the fee described in Section 2
hereof, each Fund shall pay all its costs and expenses which are not assumed by
Adviser. These Fund expenses include, by way of example, but not by way of
limitation, all expenses incurred in the operation of the Fund and any public
offering of its shares, including, among others, fees (if any) associated with a
plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act ("Plan of
Distribution"), interest, taxes, brokerage fees and commissions, fees of the
directors who are not employees of Adviser or the principal underwriter of the
Fund's shares (the "Underwriter"), or any of their affiliates, expenses of
directors' and shareholders' meetings, including the cost of printing and
mailing proxies, expenses of insurance premiums for fidelity and other coverage,
expenses of redemption of shares, expenses of issue and sale of shares (to the
extent not borne by the Underwriter under its agreement with the Fund), expenses
of printing and mailing stock certificates representing shares of the Fund,
association membership dues, charges of custodians, transfer agents, dividend
disbursing agents, accounting services agents, investor servicing agents, and
bookkeeping, auditing, and legal expenses. Each Fund will also pay the fees and
bear the expense of registering and maintaining the registration of the Fund and
its shares with the Securities and Exchange Commission and registering or
qualifying its shares under state or other securities laws and the expense of
preparing and mailing prospectuses and reports to shareholders.
-3-
<PAGE>
b. The Underwriter shall bear all advertising and
promotional expenses in connection with the distribution of each Fund's shares,
including paying for prospectuses for new shareholders, except as provided in
the following sentence. No Fund shall use any of its assets to finance costs
incurred in connection with the distribution of its shares except pursuant to a
Plan of Distribution.
4. FREEDOM TO DEAL WITH THIRD PARTIES.
Adviser shall be free to render services to others
similar to those rendered under this Agreement or of a different nature except
as such services may conflict with the services to be rendered or the duties to
be assumed hereunder.
5. REPORTS TO DIRECTORS OF THE FUND.
Appropriate officers of Adviser shall provide the
directors of the Company with such information as is required by any Plan of
Distribution adopted by the Company on behalf of any Fund pursuant to Rule 12b-1
under the 1940 Act.
6. STANDARD OF CARE.
In the absence of willful misfeasance, bad faith,
gross negligence or a reckless disregard of the performance of duties of the
Adviser to the Funds, the Adviser shall not be subject to liabilities to the
Funds or to any shareholders of the Funds for any action or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security, or
otherwise.
7. EFFECTIVE DATE, DURATION AND TERMINATION OF AGREEMENT.
a. The effective date of this Agreement with respect
to each Fund shall be the date set forth on Exhibit A hereto.
b. Unless sooner terminated as hereinafter provided,
this Agreement shall continue in effect with respect to each Fund for a period
of two years from the date of its execution, and thereafter shall continue in
effect only so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the applicable Fund, and (ii)
by the vote of a majority of the directors of the Company who are not parties to
this Agreement or "interested persons," as defined in the 1940 Act, of Adviser
or of the Company cast in person at a meeting called for the purpose of voting
on such approval.
c. This Agreement may be terminated with respect to
any Fund at any time, without the payment of any penalty, by the Board of
Directors of the Company or by the
-4-
<PAGE>
vote of a majority of the outstanding voting securities of such Fund, or by
Adviser, upon 60 days' written notice to the other party.
d. This agreement shall terminate automatically in
the event of its "assignment" (as defined in the 1940 Act).
e. No amendment to this Agreement shall be effective
with respect to any Fund until approved by the vote of: (i) a majority of the
directors of the Company who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of Adviser or of the Company cast in
person at a meeting called for the purpose of voting on such approval; and (ii)
a majority of the outstanding voting securities of the applicable Fund.
f. Wherever referred to in this Agreement, the vote
or approval of the holders of a majority of the outstanding voting securities or
shares of a Fund shall mean the lesser of (i) the vote of 67% or more of the
voting securities of such Fund present at a regular or special meeting of
shareholders duly called, if more than 50% of the Fund's outstanding voting
securities are present or represented by proxy, or (ii) the vote of more than
50% of the outstanding voting securities of such Fund.
8. NOTICES.
Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Company and Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
VOYAGEUR MUTUAL FUNDS, INC.
By: /s/ George M. Chamberlain
---------------------------
Its: Senior Vice President
DELAWARE MANAGEMENT COMPANY, INC.
By: /s/Wayne A. Stork
---------------------------
Its:Chariman. President and Chief Executive Officer
-5-
<PAGE>
Exhibit A
to
Investment Advisory Agreement
between
Delaware Management Company, Inc.
and
Voyageur Mutual Funds, Inc.
<TABLE>
<CAPTION>
EQUIVALENT
MONTHLY ANNUAL
ADVISORY FEE ADVISORY FEE
(as % of average (as % of average
FUND EFFECTIVE DATE daily net assets) daily net assets)
---- -------------- ----------------- -----------------
<S> <C> <C> <C>
Series J - Voyageur New
York Tax Free Fund May 1, 1997 0.50%/12 0.50%
Series K - Voyageur
National High Yield
Municipal Bond Fund May 1, 1997 0.65%/12 0.65%
</TABLE>
-6-
<PAGE>
INVESTMENT ADVISORY AGREEMENT
This Agreement, made as of this 30th day of April, 1997, by
and between Voyageur Mutual Funds, Inc., a Minnesota corporation (the
"Company"), on behalf of each Fund represented by a series of shares of common
stock of the Fund that adopts this Agreement (each a "Fund" and, collectively,
the "Funds") (the Funds, together with the date each Fund adopts this Agreement,
are set forth in Exhibit A hereto, which shall be updated from time to time to
reflect additions, deletions or other changes thereto), and Voyageur Fund
Managers, Inc., a Minnesota corporation ("Adviser").
WITNESSETH
WHEREAS, the Company has been organized and operates as an investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, Adviser is an investment adviser registered under the
Investment Advisers Act of 1940, as amended, and engages in the business of
providing investment management services;
WHEREAS, Adviser's indirect parent company completed as of the date of
this Agreement a merger transaction (the "Merger") which resulted in a change of
control of Adviser and the assignment (as defined under the 1940 Act) and
automatic termination of the investment advisory agreement that was in effect
between Adviser and the Company at the time of the Merger; and
WHEREAS, the Board of Directors of the Company and the shareholders of
the Company have determined that the Company should enter into a new investment
advisory agreement with Adviser to be effective upon consummation of the Merger;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. INVESTMENT ADVISORY SERVICES.
a. The Company hereby engages Adviser on behalf of
the Funds, and Adviser hereby agrees to act, as investment adviser for, and to
manage the investment of the assets of, the Funds.
b. The investment of the assets of each Fund shall at
all times be subject to the applicable provisions of the Articles of
Incorporation, the Bylaws, the Registration Statement, and the current
Prospectus and the Statement of Additional Information, if any, of the Company
and each Fund and shall conform to the policies and purposes of each Fund as set
forth in such documents and as interpreted from time to time by the Board of
Directors of the Company. Within the framework of the investment policies of
each Fund, and subject to such other limitations and directions as the Board of
Directors may from time to time prescribe,
-1-
<PAGE>
Adviser shall have the sole and exclusive responsibility for the management of
each Fund's assets and the making and execution of all investment decisions for
each Fund, except as set forth in the following paragraph. Adviser shall report
to the Board of Directors regularly at such times and in such detail as the
Board may from time to time determine appropriate, in order to permit the Board
to determine the adherence of Adviser to the investment policies of the Funds.
c. Adviser may, at its expense, select and contract
with one or more registered investment advisers ("Sub-Adviser") for any of the
Funds to perform some or all of the services for such Funds. Such Sub-Adviser
shall be responsible for executing orders for the purchase and sale of portfolio
securities. Adviser will compensate any Sub-Adviser for its services to the
Funds. Adviser may terminate the services of any Sub-Adviser at any time in its
sole discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected.
d. Adviser shall, at its own expense, furnish all
office facilities, equipment and personnel necessary to discharge its
responsibilities and duties hereunder. Adviser shall arrange, if requested by
the Company, for officers or employees of Adviser to serve without compensation
from any Fund as directors, officers, or employees of the Company if duly
elected to such positions by the shareholders or directors of the Company (as
required by law).
e. Adviser hereby acknowledges that all records
pertaining to each Fund's investments are the property of the Company, and in
the event that a transfer of investment advisory services to someone other than
Adviser should ever occur, Adviser will promptly, and at its own cost, take all
steps necessary to segregate such records and deliver them to the Company.
f. Subject to the primary objective of obtaining the
best available prices and execution, Adviser will place orders for the purchase
and sale of portfolio securities with such broker/dealers who provide
statistical, factual and financial information and services to the Funds,
Adviser or to any other fund for which Adviser provides investment advisory
services and/or with broker/dealers who sell shares of the Funds or who sell
shares of any other fund for which Adviser provides investment advisory
services. Broker/dealers who sell shares of the funds of which Adviser is
investment manager, shall only receive orders for the purchase or sale of
portfolio securities to the extent that the placing of such orders is in
compliance with the Rules of the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc.
g. Notwithstanding the provisions of subparagraph (f)
above, and subject to such policies and procedures as may be adopted by the
Board of Directors and officers of the Company, Adviser may ask the Funds and
the Funds may agree to pay a member of an exchange, broker or dealer an amount
of commission for effecting a securities transaction in excess of the amount of
commission another member of an exchange, broker or dealer would have charged
for effecting that transaction, in such instances where it and Adviser have
-2-
<PAGE>
determined in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
member, broker or dealer, viewed in terms of either that particular transaction
or Adviser's overall responsibilities with respect to the Funds and to other
funds and other advisory accounts for which Adviser exercises investment
discretion.
2. COMPENSATION FOR SERVICES.
In payment for the investment advisory and management
services to be rendered by Adviser hereunder, each Fund shall pay to Adviser a
monthly fee, which fee shall be paid to Adviser not later than the fifth
business day of the month following the month in which said services were
rendered. The monthly fee payable by each Fund shall be as set forth in Exhibit
A hereto, which may be updated from time to time to reflect amendments, if any,
to Exhibit A. The monthly fee payable by each Fund shall be based on the average
of the net asset values of all of the issued and outstanding shares of the Fund
as determined as of the close of each business day of the month pursuant to the
Articles of Incorporation, Bylaws, and currently effective Prospectus and
Statement of Additional Information of the Company and the Fund. For purposes of
calculating each Fund's average daily net assets, as such term is used in this
Agreement, each Fund's net assets shall equal its total assets minus (a) its
total liabilities and (b) its net orders receivable from dealers.
3. ALLOCATION OF EXPENSES.
a. In addition to the fee described in Section 2
hereof, each Fund shall pay all its costs and expenses which are not assumed by
Adviser. These Fund expenses include, by way of example, but not by way of
limitation, all expenses incurred in the operation of the Fund and any public
offering of its shares, including, among others, fees (if any) associated with a
plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act ("Plan of
Distribution"), interest, taxes, brokerage fees and commissions, fees of the
directors who are not employees of Adviser or the principal underwriter of the
Fund's shares (the "Underwriter"), or any of their affiliates, expenses of
directors' and shareholders' meetings, including the cost of printing and
mailing proxies, expenses of insurance premiums for fidelity and other coverage,
expenses of redemption of shares, expenses of issue and sale of shares (to the
extent not borne by the Underwriter under its agreement with the Fund), expenses
of printing and mailing stock certificates representing shares of the Fund,
association membership dues, charges of custodians, transfer agents, dividend
disbursing agents, accounting services agents, investor servicing agents, and
bookkeeping, auditing, and legal expenses. Each Fund will also pay the fees and
bear the expense of registering and maintaining the registration of the Fund and
its shares with the Securities and Exchange Commission and registering or
qualifying its shares under state or other securities laws and the expense of
preparing and mailing prospectuses and reports to shareholders.
-3-
<PAGE>
b. The Underwriter shall bear all advertising and
promotional expenses in connection with the distribution of each Fund's shares,
including paying for prospectuses for new shareholders, except as provided in
the following sentence. No Fund shall use any of its assets to finance costs
incurred in connection with the distribution of its shares except pursuant to a
Plan of Distribution.
4. FREEDOM TO DEAL WITH THIRD PARTIES.
Adviser shall be free to render services to others
similar to those rendered under this Agreement or of a different nature except
as such services may conflict with the services to be rendered or the duties to
be assumed hereunder.
5. REPORTS TO DIRECTORS OF THE FUND.
Appropriate officers of Adviser shall provide the
directors of the Company with such information as is required by any Plan of
Distribution adopted by the Company on behalf of any Fund pursuant to Rule 12b-1
under the 1940 Act.
6. STANDARD OF CARE.
In the absence of willful misfeasance, bad faith,
gross negligence or a reckless disregard of the performance of duties of the
Adviser to the Funds, the Adviser shall not be subject to liabilities to the
Funds or to any shareholders of the Funds for any action or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security, or
otherwise.
7. EFFECTIVE DATE, DURATION AND TERMINATION OF AGREEMENT.
a. The effective date of this Agreement with respect
to each Fund shall be the date set forth on Exhibit A hereto.
b. Unless sooner terminated as hereinafter provided,
this Agreement shall continue in effect with respect to each Fund for a period
of two years from the date of its execution, and thereafter shall continue in
effect only so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the applicable Fund, and (ii)
by the vote of a majority of the directors of the Company who are not parties to
this Agreement or "interested persons," as defined in the 1940 Act, of Adviser
or of the Company cast in person at a meeting called for the purpose of voting
on such approval.
c. This Agreement may be terminated with respect to
any Fund at any time, without the payment of any penalty, by the Board of
Directors of the Company or b they
-4-
<PAGE>
vote of a majority of the outstanding voting securities of such Fund, or by
Adviser, upon 60 days' written notice to the other party.
d. This agreement shall terminate automatically in
the event of its "assignment" (as defined in the 1940 Act).
e. No amendment to this Agreement shall be effective
with respect to any Fund until approved by the vote of: (i) a majority of the
directors of the Company who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of Adviser or of the Company cast in
person at a meeting called for the purpose of voting on such approval; and (ii)
a majority of the outstanding voting securities of the applicable Fund.
f. Wherever referred to in this Agreement, the vote
or approval of the holders of a majority of the outstanding voting securities or
shares of a Fund shall mean the lesser of (i) the vote of 67% or more of the
voting securities of such Fund present at a regular or special meeting of
shareholders duly called, if more than 50% of the Fund's outstanding voting
securities are present or represented by proxy, or (ii) the vote of more than
50% of the outstanding voting securities of such Fund.
8. NOTICES.
Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Company and Adviser have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
VOYAGEUR MUTUAL FUNDS, INC.
By: /s/ George M. Chamberlain
-----------------------------------------
Its: Senior Vice President
VOYAGEUR FUND MANAGERS, INC.
By: /s/ Wayne A. Stork
-----------------------------------------
Its: Chairman, President, Chief Executive Officer
-5-
<PAGE>
Exhibit A
to
Investment Advisory Agreement
between
Voyageur Fund Managers, Inc.
and
Voyageur Mutual Funds, Inc.
<TABLE>
<CAPTION>
EQUIVALENT
MONTHLY ANNUAL
ADVISORY FEE ADVISORY FEE
(as % of average (as % of average
FUND EFFECTIVE DATE daily net assets) daily net assets)
---- -------------- ----------------- -----------------
<S> <C> <C> <C>
Series B - Voyageur Iowa
Tax Free Fund May 1, 1997 0.50%/12 0.50%
Series C - Voyageur
Wisconsin Tax Free Fund May 1, 1997 0.50%/12 0.50%
Series E - Voyageur Idaho
Tax Free Fund May 1, 1997 0.50%/12 0.50%
Series F - Voyageur
Arizona Tax Free Fund May 1, 1997 0.50%/12 0.50%
Series G - Voyageur
California Tax Free Fund May 1, 1997 0.50%/12 0.50%
Series I - Voyageur
Minnesota High Yield May 1, 1997 0.65%/12 0.65%
Municipal Bond Fund
</TABLE>
-6-
<PAGE>
Exhibit 99.B6ai
VOYAGEUR ____________________
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made and entered into as of this __th day of
________________, 1997, by and between VOYAGEUR ____________________, a
_____________________ (the "Company"), for and on behalf of each series of the
Company (each series is referred to hereinafter as a "Fund"), and Delaware
Distributors, L.P., a Delaware limited partnership (the "Underwriter"). This
Agreement shall apply to each class of shares offered by the following Funds:
[______________________________________________________________]
1. UNDERWRITING SERVICES
The Company, on behalf of each Fund, hereby engages the Underwriter,
and the Underwriter hereby agrees to act, a principal underwriter for each Fund
in the sale and distribution of the shares of each class of such Fund to the
public, either through dealers or otherwise. The Underwriter agrees to offer
such shares for sale at all times when such shares are available for sale and
may lawfully be offered for sale and sold.
2. SALE OF SHARES
The shares of each Fund are to be sold only on the following terms:
(a) All subscriptions, offers, or sales shall be subject to acceptance
or rejection by the Company. Any offer for or sale of shares shall be
conclusively presumed to have been accepted by the Company if the Company shall
fail to notify the Underwriter of the rejection of such offer or sale prior to
the computation of the net asset value of such shares next following receipt by
the Company of notice of such offer or sale.
(b) No share of a Fund shall be sold by the Underwriter (i) for any
consideration other than cash or, pursuant to any exchange privilege provided
for by the applicable currently effective Prospectus or Statement of Additional
Information (hereinafter referred to collectively as the "Prospectus"), shares
of any other investment company for which the Underwriter acts as an
underwriter, or (ii) except in instances otherwise provided for by the
applicable currently effective Prospectus, for any amount less than the public
offering price per share, which shall be determined in accordance with the
applicable currently effective Prospectus.
<PAGE>
(c) In connection with certain sales of shares, a contingent deferred
sales charge will be imposed in the event of a redemption transaction occurring
within a certain period of time following such a purchase, as described in the
applicable currently effective Prospectus.
(d) The front-end sales charge, if any, for any class of shares of a
Fund may, at the discretion of the Company and the Co-Underwriters, be reduced
or eliminated as permitted by the 1940 Act, and the rules and regulations
thereunder, as they may be amended from time to time, provided that such
reduction or elimination shall be set forth in the Prospectus for such class,
and provided that the Company shall in no event receive for any shares sold an
amount less than the net asset value thereof. In addition, any contingent
deferred sales charge for any class of shares of a Fund may, at the discretion
of the Company and the Co-Underwriters, be reduced or eliminated in accordance
with the terms of an exemptive order received from, or any applicable rule or
rules promulgated by, the Securities and Exchange Commission, provided that such
reduction or elimination shall be set forth in the Prospectus for such class of
shares.
(e) The Underwriter shall require any securities dealer entering into a
selected dealer agreement with the Underwriter to disclose to prospective
investors the existence of all available classes of shares of a Fund and to
determine the suitability of each available class as an investment for each such
prospective investor.
3. QUALIFICATION OF SHARES
The Company agrees to make prompt and reasonable efforts to effect and
keep in effect, at its expense, the registration or qualification of each Fund's
shares for sale in such jurisdictions as the Company may designate.
4. INFORMATION TO BE FURNISHED TO THE UNDERWRITER
The Company agrees that it will furnish the Underwriter with such
information with respect to the affairs and accounts of the Company (and each
Fund or class thereof) as the Underwriter may from time to time reasonably
require, and further agrees that the Underwriter, at all time reasonable times,
shall be permitted to inspect the books and records of the Company.
5. ALLOCATION OF EXPENSES
During the period of this Agreement, the Company shall pay or cause to
be paid all expenses, costs and fees incurred by the Company which are not
assumed by the Co- Underwriters. The Underwriter agrees to provide, and shall
pay costs which it incurs in connection with providing, administrative or
accounting services to shareholders of each Fund (such costs are referred to as
"Shareholder Servicing Costs"). Shareholder Servicing Costs include all expenses
of the Underwriter incurred in connection with providing administrative or
-2-
<PAGE>
accounting services to shareholders of each Fund, including, but not limited to,
an allocation of the Underwriter's overhead and payments made to persons,
including employees of the Underwriter, who respond to inquiries of shareholders
regarding their ownership of Fund shares, or who provide other administrative or
accounting services not otherwise required to be provided by the applicable
Fund's investment adviser or transfer agent. The Underwriter has also agreed to
pay all costs of distributing the shares of each Fund ("Distribution Expenses").
DDLP may pay all or a portion of the Distribution Expenses as agreed to from
time to time by the Co-Underwriters. Distribution Expenses include, but are not
limited to, initial and ongoing sales compensation (in addition to sales loads)
paid to investment executives of the Co-Underwriters, and to other
broker-dealers and participating financial institutions; expenses incurred in
the printing of prospectuses, statements of additional information and reports
used for sales purposes; expenses of preparation and distribution of sales
literature; expenses of advertising of any type; an allocation of the Co-
Underwriters' overhead; payments to and expenses of persons who provide support
services in connection with the distribution of Fund shares; and other
distribution related expenses.
6. COMPENSATION TO THE UNDERWRITER
As compensation for all of its services provided and its costs assumed
under this Agreement, the Underwriter shall receive the following forms and
amounts of compensation;
(a) The Underwriter shall, as agreed from time to time with DDLP and as
permitted by applicable law or regulation, be entitled to receive or retain any
front-end sales charge imposed in connection with sales of shares of each Fund,
as set forth in the applicable current Prospectus. Up to the entire amount of
such front-end sales charge may be reallowed by the Underwriter to
broker-dealers and participating financial institutions in connection with their
sale of Fund shares. The amount of the front-end sales charge (if any) may be
retained or deducted by the Underwriter from any sums received by it in payment
for shares so sold. If such amount is not deducted by the Underwriter from such
payments, such amount shall be paid to the Underwriter by the Company not later
than five business days after the close of any calendar quarter during which any
such sales were made by the Underwriter and payment received by the Company.
(b) The Underwriter shall, as agreed from time to time with DDLP and as
permitted by applicable law or regulation, be entitled to receive or retain any
contingent deferred sales charge imposed in connection with any redemption of
shares of each Fund, as set forth in the applicable current Prospectus.
(c) Pursuant to the Company's Plan of Distribution adopted in
accordance with Rule 12b-1 under the 1940 Act (the "Plan"):
(i) Class A of each Fund is obligated to pay the Underwriter
and/or DDLP, as agreed from time to time by such parties and as
-3-
<PAGE>
permitted by applicable law or regulation, a total fee in connection
with the servicing of shareholder accounts of such class and in
connection with distribution-related services provided in respect of
such class, calculated and payable quarterly, at the annual rate of
.25% of the value of the average daily net assets of such class. All or
any portion of such total fee may be payable as a Shareholder Servicing
Fee, and all or any portion of such total fee may be payable as a
Distribution Fee, as determined from time to time by the Company's
Board of Directors. Until further action by the Board of Directors, all
of such fee shall be designated and payable as a Shareholder Servicing
Fee.
(ii) Class B of each Fund offering shares of such Class is
obligated to pay the Underwriter and/or DDLP, as agreed from time to
time by such parties and as permitted by applicable law or regulation,
a total fee in connection with the servicing of shareholder accounts of
such Class and in connection with distribution-related services
provided in respect of such Class, calculated and payable quarterly, at
the annual rate of 1.00% of the value of the average daily net assets
of such Class. All or any portion of such total fee may be payable as a
Shareholder Servicing Fee, and all or any portion of such total fee may
be payable as a Distribution Fee, as determined from time to time by
the Company's Board of Directors. Until further action by the Board of
Directors, a portion of such fee equal to .25% per annum of Class B's
average net assets shall be designated and payable as a Shareholder
Servicing Fee and the remainder of such fee shall be designated as a
Distribution Fee.
(iii) Class C of each Fund is obligated to pay the Underwriter
and/or DDLP, as agreed from time to time by such parties and as
permitted by applicable law or regulation, a total fee in connection
with the servicing of shareholder accounts of such class and in
connection with distribution-related services provided in respect of
such class, calculated and payable quarterly, at the annual rate of
1.00% of the value of the average daily net assets of such class. All
or any portion of such total fee may be payable as a Shareholder
Servicing Fee, and all or any portion of such total fee may be payable
as a Distribution Fee, as determined from time to time by the Company's
Board of Directors. Until further action by the Board of Directors, a
portion of such total fee equal to .25% per annum of the average daily
net assets of such class shall be designated and payable as a
Shareholder Servicing Fee and the remainder of such fee shall be
designated as a Distribution Fee.
Average daily net assets shall be computed in accordance with the
applicable currently effective Prospectus. Amounts payable under the Plan may
exceed or be less than actual Distribution Expenses and Shareholder Servicing
Costs. In the event such Distribution Expenses and Shareholder Servicing Costs
exceed amounts payable under the Plan, the Underwriter shall not be entitled to
reimbursement by the Company.
(d) In each year during which this Agreement remains in effect, the
Underwriter and/or DDLP, as agreed from time to time with DDLP, will prepare and
-4-
<PAGE>
furnish to the Board of Directors of the Company, and the Board will review, on
a quarterly basis, written reports complying with the requirements of Rule 12b-1
under the 1940 Act that set forth the amounts expended under this Agreement and
the Plan, on a class by class basis as applicable, and the purposes for which
those expenditures were made.
7. LIMITATION OF THE UNDERWRITER'S AUTHORITY
The Underwriter shall be deemed to be an independent contractor and,
except as specifically provided or authorized herein, shall have no authority to
act for or represent any Fund or the Company.
8. SUBSCRIPTION FOR SHARES-REFUND FOR CANCELED ORDERS
The Underwriter shall subscribe for the shares of a Fund only for the
purpose of covering purchase orders already received by it or for the purpose of
investment for its own account. In the event that an order for the purchase of
shares of a Fund is placed with the Underwriter by a customer or dealer and
subsequently canceled, the Underwriter shall forthwith cancel the subscription
for such shares entered on the books of the Fund, and, if the Underwriter has
paid the Fund for such shares, shall be entitled to receive from the Fund in
refund of such payment the lesser of:
(a) the consideration received by the Fund for said shares; or
(b) the net asset value of such shares at the time of cancellation
by the Underwriter.
9. INDEMNIFICATION OF THE COMPANY
The Underwriter agrees to indemnify each Fund and the Company against
any and all litigation and other legal proceedings of any kind or nature and
against any liability, judgment, cost, or penalty imposed as a result of such
litigation or proceedings in any way arising out of or in connection with the
sale or distribution of the shares of such Fund by the Underwriter. In the event
of the threat or institution of any such litigation or legal proceedings against
any Fund, the Underwriter shall defend such action on behalf of the Fund or the
Company at the Underwriter's own expense, and shall pay any such liability,
judgment, cost, or penalty resulting therefrom, whether imposed by legal
authority or agreed upon by way of compromise and settlement; provided, however,
the Underwriter shall not be required to pay or reimburse a Fund for any
liability, judgment, cost, or penalty incurred as a result of information
supplied by, or as the result of the omission to supply information by, the
Company to the Underwriter, or to the Underwriter by a director, officer, or
employee of the Company who is not an "interested person," as defined in the
provisions of the 1940 Act, of the Underwriter, unless the information so
supplied or omitted was available to the Underwriter without recourse to the
Fund or the Company or any such person referred to above.
-5-
<PAGE>
10. FREEDOM TO DEAL WITH THIRD PARTIES
The Underwriter shall be free to render to others services of a nature
either similar to or different from those rendered under this contract, except
such as may impair its performance of the services and duties to be rendered by
it hereunder.
11. EFFECTIVE DATE, DURATION AND TERMINATION OF AGREEMENT
(a) The effective date of this Agreement shall be ____________, 1997.
Unless sooner terminated as hereinafter provided, this Agreement shall continue
in effect for a period of one year after the date of its execution, and from
year to year thereafter, but only so long as such continuance is specifically
approved at least annually by a vote of the Board of Directors of the Company,
and of the directors who are not "interested persons" (as defined in the
provisions of the 1940 Act) of the Company and have no direct or indirect
financial interest in the operation of the Plan or in any agreement related to
the Plan (including, without limitation, this Agreement), cast in person at a
meeting called for the purpose of voting on this Agreement.
(b) This Agreement may be terminated at any time with respect to any
Fund or class thereof, without the payment of any penalty, by the vote of a
majority of the members of the Board of Directors of the Company who are not
"interested persons" (as defined in the provisions of the 1940 Act) of the
Company and have no direct or indirect financial interest in the operation of
the Plan or in any agreement related to the Plan (including, without limitation,
this Agreement), or by the vote of a majority of the outstanding voting
securities of such Fund (or class thereof), or by the Underwriter, upon 60 days'
written notice to the other party.
(c) This Agreement shall automatically terminate in the event of
its "assignment" (as defined by the provisions of the 1940 Act).
(d) Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities of a Fund (or class
thereof) shall mean the lesser of (i) the vote of 67% or more of the voting
securities of such Fund (or class thereof) present at a regular or special
meeting of shareholders duly called, if more than 50% of the Fund's (or class's,
as applicable) outstanding voting securities are present or represented by
proxy, or (ii) the vote of more than 50% of the outstanding voting securities of
such Fund (or class thereof).
12. AMENDMENTS TO AGREEMENT
No material amendment to this Agreement shall be effective until
approved by the Underwriter and by vote of a majority of the Board of Directors
of the Company who are not interested persons of the Underwriter.
-6-
<PAGE>
13. NOTICES
Any notice under this Agreement shall be in writing, addressed,
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate in writing for receipt of such notice.
-7-
<PAGE>
IN WITNESS WHEREOF, the Company and the Underwriter have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
VOYAGEUR ____________________
By___________________________________
Its__________________________________
DELAWARE DISTRIBUTORS, L.P.
by its General Partner
DELAWARE DISTRIBUTORS, INC.
By___________________________________
Its__________________________________
-8-
<PAGE>
<PAGE>
DELAWARE GROUP
Administration and Service Agreement
Gentlemen:
We are the national distributor of the shares of all of the classes
(now existing or hereafter added) of all of the Funds in the Delaware Group of
Funds. The term "Fund" as used in this Agreement refers to each fund in the
Delaware Group which retains the Distributor to promote and sell its shares, and
any fund which may hereafter be added to the Delaware Group and retain us as
national distributor. You have indicated that you wish to provide certain
services to your customers relating to their ownership of Fund shares, in
accordance with the terms of this Agreement.
TERMS
1. With respect to any Fund that offers shares of classes for which
Distribution Plans have been adopted under Rule 12b-1 (individually a "12b-1
Plan") of the Investment Company Act of 1940 (the "1940 Act"), which 12b-1 Plans
provide for the payment of service fees, we expect you to provide administrative
and other services, including, but not limited to, furnishing personal and other
services and assistance to your customers who own Fund shares, answering routine
inquiries regarding a Fund, assisting in changing dividend options, account
designations and addresses, maintaining such accounts, or such other services as
a Fund may require, to the extent permitted by applicable statutes, rules, or
regulations. For such services, we shall pay you a fee, as established by us
from time to time, based on the value of the shares of each class of each Fund
which are attributable to customers of your firm. We are permitted to make this
payment under the terms of the 12b-1 Plans adopted by certain of the Funds, as
such Plans may be in effect from time to time.
2. You shall furnish us and each Fund with such information as shall
reasonably be requested by the Board of Directors or Trustees with respect to
the fees paid to you pursuant to this Agreement.
3. We shall furnish to the Board of Directors or Trustees, for their
review, on a quarterly basis, a written report of the amounts expended under
<PAGE>
the Plan by us with respect to the relevant Fund and the purposes for which
such expenditures were made.
4. This Agreement may be terminated by either party at any time by
written notice to that effect and will terminate without notice upon any act of
insolvency by you. Notwithstanding the termination of this Agreement, you shall
remain liable for any amounts otherwise owing to the Distributor or the Funds
and for your portion of any transfer tax or other liability which may be
asserted or assessed against the Distributor or the Fund, or upon any one or
more of the Distributor's dealers, based upon a claim that you and such dealers
or any of them constitute a partnership, an unincorporated business or other
separate entity.
5. Any obligation assumed by a Fund pursuant to this Agreement shall be
limited in all cases to the assets of such Fund and no person shall seek
satisfaction thereof from shareholders of a Fund.
6. The 12b-1 Plans in effect on the date of this Agreement are
described in the Funds' Prospectuses. Each Fund reserves the right to terminate
or suspend its 12b-1 Plan(s) at any time as specified in such Plan(s) and we
reserve the right, at any time, without notice, to modify, suspend or terminate
payments hereunder in connection with such 12b-1 Plan(s).
7. This Agreement shall take effect on the date set forth below.
8. The terms and provisions of the current Prospectus and Statement of
Additional Information for each relevant Fund are hereby accepted and agreed to
by the parties hereto as evidenced by our execution hereof.
GENERAL
9. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of Pennsylvania, without reference to that
state's choice of law doctrine.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one Agreement.
11. Severability. In the event that any provision of this Agreement,
or the application of any such provision to any person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
<PAGE>
to persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
12. Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto and supersedes all prior agreements and
understandings between the parties hereto relating to the subject matter hereof.
13. Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
DELAWARE DISTRIBUTORS, L.P.
By: DELAWARE DISTRIBUTORS, INC.,
General Partner
By:
--------------------------------
Agreed and Accepted:
- ------------------------------
(Name)
By:
---------------------------
(Authorized Officer)
Date:
-------------------------
<PAGE>
<PAGE>
DEALER'S AGREEMENT
We invite you, as a selected dealer, to participate as principal in the
distribution of the shares of all of the classes (now existing or hereafter
added) of all of the Funds in the Delaware Group of Investment Companies which
retain us, Delaware Distributors, L.P., to act as exclusive national
distributor. The term "Fund" as used in this Agreement, refers to each Fund in
the Delaware Group which retains us to promote and sell its shares, and any Fund
which may hereafter be added to the Delaware Group and retain us as national
distributor. Such additional Funds will be included in this Agreement upon our
providing you with written notice of such inclusion.
OFFERING PRICE TO PUBLIC: Orders for shares received from you and accepted by a
Fund or its agent, Delaware Service Company, Inc., will be at the public
offering price applicable to each order as set forth in that Fund's Prospectus.
The manner of computing the net asset value of shares, the public offering price
and the effective time of orders received from you are described in the
Prospectus for each Fund. We reserve the right, at any time and without notice,
to suspend the sale of Fund shares.
CONCESSIONS TO YOU: You will be entitled to deduct the applicable concession as
set forth in the then current Prospectus of a Fund from the purchase price of
certain purchase orders placed by you for shares of a Fund having a sales
charge. We reserve the right from time to time, without prior notice, to modify,
suspend or eliminate such concessions by amendment, sticker or supplement to the
Prospectus for the Fund. If any shares confirmed to you under the terms of this
Agreement are redeemed or repurchased by the Fund or by us as agent for the
Fund, or are tendered for redemption or repurchase, within seven business days
after the date of our confirmation of the original purchase order, you shall
promptly refund to us the concession allowed to you on such shares.
PURCHASE PLANS: The purchase price on all orders placed by you and any
concessions or other fees otherwise due to you under this Agreement will be
subject to the then current terms and provisions of any applicable special plans
and accounts (e.g., volume purchases, letters of intent, rights of accumulation,
combined purchases privilege, exchange and reinvestment privileges and
<PAGE>
retirement plan accounts) as set forth from time to time in the Prospectus. We
must be notified when an order is placed if it qualifies for a reduced sales
charge under any of these plans. We reserve the right, at any time, without
prior notice, to modify, suspend or eliminate any such plans or accounts by
amendment, sticker or supplement to the Prospectus for the Fund.
SALES, ORDERS AND CONFIRMATIONS: In offering Fund shares to the public or
otherwise, you shall act as dealer for your own account, and in no transaction
shall you have any authority to act as agent for the Fund, for any other
selected dealer or for us. No person is authorized to make any representations
concerning the shares to the Fund except those contained in the Prospectus and
in written information issued by the Fund or by us as a supplement to such
Prospectus. In purchasing Fund shares, you shall rely only on such
representations.
All sales must be made subject to confirmation and orders are subject
to acceptance or rejection by the Fund in its sole discretion. Your orders must
be wired, telephoned or written to the Fund or its agent. You agree to place
orders for the same number of shares sold by you at the price at which such
shares are sold. You agree that you will not purchase Fund shares except for
investment or for the purpose of covering purchase orders already received and
that you will not, as principal, sell Fund shares unless purchased by you from
the Fund under the terms hereof. You also agree that you will not withhold
placing with us orders received from your customers so as to profit yourself
from such withholding. Each of your orders shall be confirmed by you in writing
on the same day.
PAYMENT AND ISSUANCE OF CERTIFICATES: The shares purchased by you hereunder
shall be paid for in full at the public offering price, less any concession to
you as set forth above, by check payable to the Fund, at its office, within
three business days after our acceptance of your order. If not so paid, we
reserve the right to cancel the sale and to hold you responsible for any loss
sustained by us or the Fund (including lost profit) in consequence. Certificates
representing the Fund's shares will not be issued unless (i) the Fund's
Prospectus indicates that certificates may be issued for the class of shares
being purchased, and (ii) a specific request is received from the purchaser.
Certificates, if requested, will be issued in the names indicated by
registration instructions accompanying your payment.
-2-
<PAGE>
REDEMPTION: The Prospectus describes the provisions whereby the Fund, under all
ordinary circumstances, will redeem shares held by shareholders on demand. You
agree that you will not make any representations to shareholders relating to the
redemption of their shares other than the statements contained in the Prospectus
and the underlying organizational documents of the Fund, to which it refers, and
that you will quote as the redemption price only the price determined by the
Fund. You shall not repurchase any shares from your customers at a price below
that next quoted by the Fund for redemption. You may charge a reasonable fee for
services in connection with the repurchase by you from your customers of shares.
You may hold such repurchased shares only for investment purposes or submit such
shares to the Fund for redemption.
12b-1 PLAN: With respect to any Fund that offers shares of classes for which
Distribution Plans have been adopted under Rule 12b-1 (individually a "12b-1
Plan") of the Investment Company Act of 1940 (the "1940 Act"), we expect you to
provide distribution and marketing services in the promotion of the Fund's
shares. In connection with the receipt of distribution fees and/or the receipt
of service fees as set forth under the 12b-1 Plan(s) applicable to the class or
classes of Fund shares purchased by your customers, we expect you to provide
administrative and other services to your customers who own Fund shares,
including, but not limited to, furnishing personal and other services and
assistance, answering routine inquiries regarding a Fund, assisting in changing
dividend options, account designations and addresses, maintaining such accounts,
or such other services as the Fund may require, to the extent permitted by
applicable statutes, rules, or regulations. For such services we will pay you a
fee, as established by us from time to time, based on a portion of the net asset
value of the accounts of your clients in the Fund. We are permitted to make this
payment under the terms of the 12b-1 Plans adopted by certain of the Funds, as
such Plans may be in effect from time to time. The 12b-1 Plans in effect on the
date of this Agreement are described in the Funds' Prospectuses. Each Fund
reserves the right to terminate or suspend its 12b-1 Plan at any time as
specified in the Plan and we reserve the right, at any time, without notice, to
modify, suspend or terminate payments hereunder in connection with such 12b-1
Plan. You will furnish the Fund and us with such information as may be
-3-
<PAGE>
reasonably requested by the Fund or its directors or trustees or by us with
respect to such fees paid to you pursuant to this Agreement.
LEGAL COMPLIANCE: This Agreement and any transaction with, or payment to, you
pursuant to the terms hereof is conditioned on your representation to us that,
as of the date of this Agreement you are, and at all times during its
effectiveness you will be: (a) a registered broker/dealer under the Securities
Exchange Act of 1934 and qualified under applicable state securities laws in
each jurisdiction in which you are required to be qualified to act as a
broker/dealer in securities, and a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"); or (b) a foreign
broker/dealer not eligible for membership in the NASD and otherwise in
compliance with applicable U.S. federal and state securities laws. You agree to
notify us promptly in writing and immediately suspend sales of Fund shares if
this representation ceases to be true. You also agree that, whether you are a
member of the NASD or a foreign broker/dealer not eligible for such membership,
you will comply with the rules of the NASD including, in particular, Sections 2
and 26 of Article III thereof, and that you will maintain adequate records with
respect to your transactions with the Funds.
BLUE SKY MATTERS: We shall have no obligation or responsibility with respect to
your right to sell Fund shares in any state or jurisdiction. From time to time
we may furnish you with information identifying the states and jurisdictions
under the securities laws of which it is believed a Fund's shares may be sold.
You will not transact orders for Fund shares in states or jurisdictions in which
we indicate Fund shares may not be sold. You agree to offer and sell Fund shares
outside the United States only in compliance with all applicable laws, rules and
regulations of any foreign government having jurisdiction over such transactions
in addition to any applicable laws, rules and regulations of the United States.
LITERATURE: We will furnish you with copies of each Fund's Prospectus, sales
literature and other information made publicity available by the Fund, in
reasonable quantities upon your request. You agree to deliver a copy of the
current Prospectus in accordance with the provisions of the Securities Act of
1933 to each purchaser of Fund shares for whom you act as broker. We shall file
Fund sales literature and promotional material with the NASD and SEC as
required.
-4-
<PAGE>
You may not publish or use any sales literature or promotional materials with
respect to the Funds without our prior review and written approval.
NOTICES AND COMMUNICATIONS: All communications from you should be addressed to
us at One Commerce Square, 2005 Market Street, Philadelphia, PA 19103. Any
notice from us to you shall be deemed to have been duly given if mailed or
telegraphed to you at the address set forth below. Each of us may change the
address to which notices shall be sent by notice to the other in accordance with
the terms hereof.
TERMINATION: This Agreement may be terminated by either party at any time by
written notice to that effect and will terminate without notice upon the
appointment of a trustee for you under the Securities Investor Protection Act,
or any other act of insolvency by you. Notwithstanding the termination of this
Agreement, you shall remain liable for any amounts otherwise owing to us or the
Funds and for your portion of any transfer tax or other liability which may be
asserted or assessed against the Fund, or us, or upon any one or more of the
selected dealers based upon the claim that the selected dealers or any of them
constitute a partnership, an unincorporated business or other separate entity.
AMENDMENT: This Agreement may be amended or revised at any time by us upon
notice to you and, unless you notify us in writing to the contrary, you will be
deemed to have accepted such modifications.
GENERAL: Your acceptance hereof will constitute an obligation on your part to
observe all the terms and conditions hereof. In the event you breach any of the
terms and conditions of this Agreement, you will indemnify us, the Funds, and
our affiliates for any damages, losses, costs and expenses (including reasonable
attorneys' fees) arising out of or relating to such breach and we may offset any
such damages, losses, costs and expenses against any amounts due to you
hereunder. Nothing contained herein shall constitute you, us and any dealers an
association or partnership. All references in this Agreement to the "Prospectus"
refer to the then current version of the Prospectus and include the Statement of
Additional Information incorporated by reference therein and any stickers or
supplements thereto. This Agreement supercedes and replaces any prior agreement
-5-
<PAGE>
between us and you with respect to your purchase and sale of Fund shares and is
to be construed in accordance with the laws of the State of Delaware.
Please confirm this Agreement by executing one copy of this Agreement
below and returning it to us. Keep the enclosed duplicate copy for your records.
DELAWARE DISTRIBUTORS, L.P.
By: Delaware Distributors, Inc.,
General Partner
By:/s/Keith E. Mitchell
----------------------
Name: Keith E. Mitchell
Title: President/Chief Executive Officer
-6-
<PAGE>
DEALER'S AGREEMENT ACCEPTANCE
DELAWARE DISTRIBUTORS, L.P.
The undersigned hereby confirms the Dealer's Agreement and acknowledges
that any purchase of Fund shares made during the effectiveness of this Agreement
is subject to all the applicable terms and conditions set forth in this
Agreement, and agrees to pay for the shares at the price and upon the terms and
conditions stated in the Agreement. The undersigned hereby acknowledges receipt
of Prospectuses relating to the Fund shares and confirms that, in executing the
Dealer's Agreement, it has relied on such Prospectuses and not on any other
statement whatsoever, written or oral.
INVESTMENT DEALER PLEASE SIGN HERE AND COMPLETE BELOW
By: DATE
------------------------------- ----------------------------
Name:
-----------------------------
Title:
----------------------------
- ----------------------------------
FIRM
- ----------------------------------
FIRM'S TAX IDENTIFICATION NUMBER
- ----------------------------------
STREET ADDRESS
- ----------------------------------
CITY/STATE/ZIP
<PAGE>
<PAGE>
MUTUAL FUND AGREEMENT
FOR THE DELAWARE GROUP OF FUNDS
Gentlemen:
We are the national distributor for the Delaware Group of Funds with exclusive
right to sell and distribute Fund shares. (The term "Funds" in this Agreement
refers to each or any of the Funds that from time to time comprise the Delaware
Group and for whom we act as distributor.) You have indicated that you wish to
act as agent for your customers in connection with the purchase, sale and
redemption of Fund shares and desire to provide certain services to your
customers relating to their ownership of Fund shares, all in accordance with the
terms of this Agreement.
AGENT FOR CUSTOMERS: In placing orders for the purchase and sale of Fund shares,
you will be acting as agent for your customers and will not have any authority
to act as agent for us, any of the Funds or any of our affiliates or
representatives. Neither you nor any of your employees or agents are authorized
to make any representations concerning the Funds or Fund shares except those
contained in the then current "Prospectus" and in written information issued by
the Fund or by us as a supplement to the Prospectus. In purchasing Fund shares
your customers may rely on such authorized information.
OFFERING PRICE TO PUBLIC: Orders for shares received from you and accepted by
the Fund or its agent, Delaware Service Co., Inc., will be at the public
offering price applicable to each order as set forth in the Prospectus. The
manner of computing the net asset value, the public offering price and the
effective time of orders received from you are described in the Prospectus for
each Fund. We reserve the right at any time, without notice, to suspend the sale
of Fund shares or withdraw the public offering.
SALES, ORDERS AND CONFIRMATIONS: All orders must be made subject to
confirmation. Your orders must be wired, telephoned or written to the Fund or
its agent. You agree to place orders on behalf of your customers for the number
of shares, and at the price, as in bona fide orders from your customers. We will
not accept any conditional orders. We will send a written confirmation of each
trade indicating that the trade was on a fully disclosed basis to your customer.
It is agreed and understood that, whether shares are registered in the
purchaser's name, in your name or in the name of your nominee, your customer
will have full beneficial ownership of the Fund shares.
AGENCY FEES: On each order accepted by us for a Fund with a sales charge, we
understand that you will charge your customer an agency commission or agency
transaction fee ("agency fee") as set forth in the schedule of sales concessions
and agency fees set forth in that Fund's Prospectus, as it may be amended from
time to time. This fee shall be subject to the provisions of all terms set forth
in the Prospectus for volume purchases and special plans and accounts (e.g.
retirement plans, letters of intent, etc.) You will not receive from us a
<PAGE>
dealer's concession or similar allowance out of the sales charge. In accordance
with interpretations by the Staff of the Securities and Exchange Commission (the
"Commission"), the agency fee will be your sole charge to your customers for
placing such orders. You may elect to make payments in either of two ways: (a)
you may send us the public offering price for the Fund shares purchased less the
amount of the agency fee due you or (b) you or your customer may send us the
entire public offering price for the Fund shares and we will, on a periodic
basis, remit to you the agency fee due. You will notify us in writing of which
method of payment you elect. If any shares sold to your customer under the terms
of this Agreement are repurchased by the Fund or by us, or are tendered to a
Fund for redemption or repurchase, within seven (7) business days after the date
of the confirmation of the original purchase order, you will promptly refund to
us full agency fee paid or allowed to you on such shares.
PAYMENT AND ISSUANCE OF CERTIFICATES: Regardless of the payment method elected,
Fund shares purchased by you for your customers hereunder shall be paid for in
full by check payable to the Fund at its office within three business days after
our acceptance of your order. If not so paid, the Fund reserves the right,
without notice, to cancel the sale and to hold you responsible for any loss,
including lost profit, sustained by us or the Fund in consequence. Certificates
representing Fund shares will not be issued unless a specific request is
received from you or your customer. Certificates, if requested, will be issued
in the names indicated by registration instructions accompanying payment.
REDEMPTION: The Prospectus describes the provisions whereby the Fund, under all
ordinary circumstances, will repurchase its shares from shareholders on demand.
You agree that you will not make any representations to shareholders relating to
the purchase of their Fund shares other than the statements contained in the
Prospectus and the underlying organizational documents of the Fund, to which it
refers, and that you will quote to your customers as the redemption price only
the price determined by the Fund.
12b-1 PLAN: With respect to any Fund that has a Distribution Plan under Rule
12b-1 (a "12b-1Plan") of the Investment Company Act of 1940 (the "1940 Act"), we
expect you will provide shareholder and administrative services to your
customers who own Fund shares, such as: answering inquiries regarding the Fund;
assisting in changing dividend options, account designations and addresses;
establishing and maintaining shareholder accounts and records; arranging for
bank wires; or such other services as the Fund may require to the extent
permitted by applicable statutes, rules or regulations. You will promptly answer
all written complaints received by you relating to Fund accounts or promptly
forward such complaints to us and assist us in answering such complaints. For
such services we will pay you a fee as set by us from time to time, based on a
portion of the net asset value of the accounts of your clients in the Fund. We
are permitted to make this payment under the terms of the 12b-1 Plan adopted by
2
<PAGE>
certain of the Funds, as such 12b-1 Plans may be in effect from time to time.
Each Fund reserves the right, at any time, to suspend payments under its 12b-1
Plan. You will furnish the Fund and us with such information as may be
reasonably requested by the Fund or its directors or trustees or by us with
respect to fees paid to you pursuant to this Agreement. In accordance with
interpretations and rulings to the Staff of the Commission, you will not charge
your customers any fees for services for which you are being compensated under a
12b-1 Plan of a Fund.
SALES OF NO-LOAD - NON 12b-1 PLAN FUNDS: In connection with any orders placed by
you on behalf of your customers for shares of Funds that do not charge a sales
load and do not have a 12b-1 Plan, we understand that you may charge your
customers a limited service or transaction fee, in accordance with
interpretations and rulings of the Staff of the Commission.
LEGAL COMPLIANCE: This Agreement and any transaction with or payment to you
pursuant to the terms hereof is conditioned on your representation to us that,
as of the date of this Agreement you are and at all times during its
effectiveness you will be (a) a registered broker-dealer under the Securities
Exchange Act of 1934 and qualified under applicable state securities laws, if
any, to act as a broker or dealer in securities, and a member in good standing
of the National Association of Securities Dealers, Inc. (the "NASD"); or (b) a
"bank" as defined in Section 3(a)(6) of the Securities and Exchange Act of 1934
(or other financial institution) and not otherwise required to register as a
broker or dealer under such Act. You agree to notify us promptly in writing if
this representation ceases to be true. You also agree that you will comply with
the rules of the NASD including, in particular, Sections 2 and 26 of Article III
thereof, to the extent applicable, that you will maintain adequate records with
respect to your customers and their transactions, and that such transactions
will be without recourse against you by your customers. We recognize that, in
addition to applicable provisions of state and federal securities laws, you may
be subject to the provisions of the Glass-Steagall Act and other laws governing,
among other things, the conduct of activities by federal and state chartered and
supervised financial institutions and their affiliated organizations. Because
you will be the only one having a direct relationship with the customer, you
will be responsible in that relationship for insuring compliance with all laws
and regulations, including those of all applicable federal and state regulatory
authorities and bodies having jurisdiction over you or your customers to the
extent applicable to securities purchases hereunder.
BLUE SKY MATTERS: We shall have no obligation or responsibility with respect to
your right to sell Fund shares in any state or jurisdiction. From time to time
we shall furnish you with information identifying the states under the
securities laws of which it is believed a Fund's shares may be sold. You will
not transact orders for Fund shares in states which we indicate Fund shares may
not be sold.
LITERATURE: We will furnish you with copies of each Fund's Prospectus, sales
literature and other information made publicly available by the Fund, in
3
<PAGE>
reasonable quantities upon your request. We shall file Fund sales literature and
promotional material with the NASD and SEC as required. You may not publish or
use any sales literature or promotional material with respect to the Funds
without our prior review and written approval.
CUSTOMERS: The name of your customers will remain your sole property and will
not be used by us except for servicing or informational mailings and other
correspondence in the normal course of business.
NOTICES AND COMMUNICATIONS: All communications from you should be addressed to
us at 1818 Market Street, Philadelphia, PA 19103. Any notice from us to you
shall be deemed to have been duly given if mailed or telegraphed to you at the
address set forth above. Each of us may change the address to which notices
shall be sent by notice to the other in accordance with the terms hereof.
TERMINATION: This Agreement may be terminated by either party at any time by
written notice to that effect. Notwithstanding the termination of this
Agreement, you shall remain liable for any amounts otherwise owing to us or the
Fund and for your portion of any transfer tax or other liability which may be
asserted or assessed against the Fund, us or any one or more of our dealers,
based upon the claim that you and such dealers or any of them constitute a
partnership, an unincorporated business or other separate entity.
AMENDMENT: This Agreement may be amended or revised at any time by us upon
notice to you and, unless you promptly notify us in writing to the contrary, you
will be deemed to have accepted such modifications.
GENERAL: Your acceptance hereof will constitute an obligation on your part to
observe all the terms and conditions hereof. In the event you breach any of the
terms and conditions of this Agreement, you will indemnify us, the Funds, and
our affiliates for any damages, losses, costs and expenses (including reasonable
attorneys' fees) arising out of or relating to such breach. Nothing contained
herein shall constitute you, us and any dealers an association or partnership.
All references in this Agreement to the "Prospectus" include the Statement of
Additional Information incorporated by reference therein and any stickers or
supplements thereto, provided that any requirement in this Agreement to deliver
a copy of the Prospectus shall not include the Statement of Additional
Information unless requested by the customer. This Agreement is to be construed
in accordance with the laws of the State of Delaware.
4
<PAGE>
Please confirm this Agreement by executing one copy of this Agreement below and
returning it to us. Keep the enclosed duplicate copy for your records.
Date: DELAWARE DISTRIBUTORS, L.P.
----------------------------
BY: DELAWARE DISTRIBUTORS, INC.
General Partner
BY:
--------------------------------
Accepted and Agreed to:
- ---------------------------------
(Name of Firm)
BY:
------------------------------
Name:
Title:
5
<PAGE>
<PAGE>
PROPOSED AGREEMENT
SUBJECT TO BOARD APPROVAL
[Name of Investment Company]
[Names of Portfolio(s)]
SHAREHOLDERS SERVICES AGREEMENT
THIS AGREEMENT, made as of the ____ day of _________, 199_ by and
between [Name of Investment Company] ("Fund"), a Maryland corporation, for the
[Names of Portfolio(s)] series (together, the "Series"), and DELAWARE SERVICE
COMPANY, INC. ("DSC"), a Delaware corporation.
W I T N E S S E T H:
WHEREAS, the Investment Management Agreements between the Fund on
behalf of the Series and Delaware Management Company, Inc. provide that the Fund
shall conduct its own business affairs and shall bear the expenses and salaries
necessary and incidental thereto including, but not in limitation of the
foregoing, the costs incurred in: the maintenance of its corporate existence;
the maintenance of its own books, records and procedures; dealing with its own
shareholders; the payment of dividends; transfers of stock, including issuance,
redemption and repurchase of shares; preparation of share certificates; reports
and notices to stockholders; calling and holding of stockholders' meetings;
miscellaneous office expenses; brokerage commissions; custodian fees; legal and
accounting fees; taxes; and federal and state registration fees; and
<PAGE>
WHEREAS, the FUND and DSC desire to have a written agreement concerning
the performance of the foregoing services and providing compensation therefor;
and
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, and intending legally to be bound, it is agreed:
I. APPOINTMENT AS AGENT
1.1 The Fund hereby appoints DSC Shareholder Services Agent for the
Series to provide as agent for the Fund services as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent and DSC hereby accepts such
appointment and agrees to provide the Fund, as its agent, the services described
herein.
1.2 The Fund shall pay DSC and DSC shall accept, for the services
provided hereunder, the compensation provided for in Section VIII hereof. The
Fund also shall reimburse DSC for expenses incurred or advanced by it for the
Fund in connection with its services hereunder.
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<PAGE>
II. DOCUMENTATION
2.1 The Fund represents that it has provided or made available to DSC
(or has given DSC an opportunity to examine) copies of, and DSC represents that
it has received from the Fund (or is otherwise familiar with), the following
documents:
(a) The Articles of Incorporation or other documents
evidencing the Fund's form of organization and any current amendments or
supplements thereto;
(b) The By-Laws of the Fund;
(c) Any resolution or other action of the Fund or the Board of
Directors of the Fund establishing or affecting the rights, privileges or other
status of each class or series of shares of the Fund, including those relating
to the Series, or altering or abolishing such class or series;
(d) A certified copy of a resolution of the Board of Directors
of the Fund appointing DSC as Shareholder Services Agent for the Series and
authorizing the execution of this Agreement;
(e) The forms of share certificates for the Series in the form
approved by the Board of Directors of the Fund;
(f) A copy of the Fund's currently effective Prospectuses and
Statement of Additional Information under the Securities Act of 1933, if
effective;
(g) Copies of all account application forms and other
documents relating to stockholder accounts in the Series;
(h) Copies of documents relating to Plans of the Fund for the
purchase, sale or repurchase of its shares, including
-3-
<PAGE>
periodic payment or withdrawal plans, reinvestment plans or retirement plans, if
any;
(i) Any opinion of counsel to the Fund relating to the
authorization and validity of the shares of the Series issued or proposed to be
issued under the law of the State of the Fund's organization, including the
status thereof under any applicable securities laws;
(j) A certified copy of any resolution of the Board of
Directors of the Fund authorizing any person to give instructions to DSC under
this Agreement (with a specimen signature of such person if not already
provided), setting forth the scope of such authority; and
(k) Any amendment, revocation or other documents altering,
adding, qualifying or repealing any document or authority called for under this
Section 2.1.
2.2 The Fund and DSC may consult as to forms or documents that may be
required in performing services hereunder.
2.3 The Fund shall provide or make available to DSC a certified copy of
any resolution of the stockholders or the Board of Directors of the Fund
providing for a dividend, capital gains distribution, distribution of capital,
stock dividend, stock split or other similar action affecting the authorization
or issuance of shares of the Series or the payment of dividends.
2.4 In the case of any recapitalization or other capital adjustment
requiring a change in the form of stock certificates or
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<PAGE>
the books recording the same, the Fund shall deliver or make available to DSC:
(a) A certified copy of any document authorizing or effecting
such change;
(b) Written instructions from an authorized officer
implementing such change; and
(c) An opinion of counsel to the Fund as to the validity of
such action, if requested by DSC.
2.5 The Fund warrants the following:
(a) The Fund is, or will be, a properly registered investment
company under the Investment Company Act of 1940 and any and all Series shares
which it issues will be properly registered and lawfully issued under applicable
federal and state laws.
(b) The provisions of this Agreement do not violate the terms
of any instrument by which the Fund is bound; nor do they violate any law or
regulation of any body having jurisdiction over the Fund or its property.
2.6 DSC warrants the following:
(a) DSC is and will be properly registered as a transfer agent
under the Securities Exchange Act of 1934 and is duly authorized to serve, and
may lawfully serve as such.
(b) The provisions of this Agreement do not violate the terms
of any instrument by which DSC is bound; nor do they violate any law or
regulation of any body having jurisdiction over DSC or its property.
-5-
<PAGE>
III. STOCK CERTIFICATES
3.1 The Fund shall furnish or authorize DSC to obtain, at the Fund's
expense, a sufficient supply of blank stock certificates for the Series, and
from time to time will replenish such supply upon the request of DSC. The Fund
agrees to indemnify and exonerate, save and hold DSC harmless, from and against
any and claims or demands that may be asserted against DSC concerning the
genuineness of any stock certificate supplied to DSC pursuant to this Section.
3.2 DSC shall safeguard, and shall account to the Fund, upon its demand
for, all such stock certificates: (a) as issued, showing to whom issued, or (b)
as unissued, establishing the safekeeping, cancellation or destruction thereof.
3.3 The Fund shall promptly inform DSC in writing of any change in the
officers authorized to sign stock certificates or in the form thereof. If an
officer whose manual or facsimile signature is affixed to any blank share
certificate shall die, resign or be removed prior to the issuance of such
certificate, DSC may nevertheless issue such certificate notwithstanding such
death, resignation or removal, and the Fund shall with respect thereto promptly
provide to DSC any approval, adoption or ratification as may be required by DSC.
IV. TRANSFER AGENT
4.1 As Transfer Agent for the Fund, DSC shall issue, redeem and
transfer shares of the Series, and, in connection therewith but not in
limitation thereof, it shall:
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(a) Upon receipt of authority to issue shares, determine the
total shares to be issued and issue such shares by crediting shares to accounts
created and maintained in the registration forms provided; as applicable,
prepare, issue and deliver stock certificates.
(b) Upon proper transfer authorization, transfer shares by
debiting transferor-stockholder accounts and crediting such shares to accounts
created and/or maintained for transferee- stockholders; if applicable, issue
and/or cancel stock certificates.
(c) Upon proper redemption authorization, determine the total
shares redeemed and to be redeemed; determine the total redemption payments made
and to be made; redeem shares by debiting stockholder accounts; as applicable,
receive and cancel stock certificates for shares redeemed; and remit or cause to
be remitted the redemption proceeds to stockholders.
(d) Create and maintain accounts; reconcile and control cash
due and paid, shares issued and to be issued, cash remitted and to be remitted
and shares debited and credited to accounts; provide such notices, instructions
or authorizations as the Fund may require.
4.2 DSC shall not be required to issue, transfer or redeem Series
shares upon receipt of DSC from the Fund, or from any federal or state
regulatory agency or authority, written notice that the issuance, transfer or
redemption of Series shares has been suspended or discontinued.
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V. DIVIDEND DISBURSING AGENT
5.1 As Dividend Disbursing Agent for the Fund, DSC shall disburse and
cause to be disbursed to stockholders of each Series dividends, capital gains
distributions or any payments from other sources as directed by the Fund. In
connection therewith, but not in limitation thereof, DSC shall:
(a) Calculate the total disbursement due and payable and the
disbursement to each stockholder as to shares owned, in accordance with the
Fund's authorization.
(b) Calculate the total disbursements for each stockholder, as
aforesaid, to be disbursed in cash; prepare and mail checks therefor.
(c) Calculate the total disbursement for each stockholder of
each Series, as aforesaid, for which shares are to be issued and authorized and
instruct the issuance of such shares in accordance with Section IV hereof.
(d) Prepare and mail or deliver such forms and notices
pertaining to disbursements as required by federal or state authority.
(e) Create and maintain records, reconcile and control
disbursements to be made and made, both as to cash and shares, as aforesaid;
provide such notices, instruction or authorization as the Fund may require.
5.2 DSC shall not be required to make any disbursement upon the receipt
of DSC from the Fund, or from any federal or state
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agency or authority, written notice that such disbursement shall not be made.
VI. SHAREHOLDER SERVICING AGENT
6.1 As Shareholder Servicing Agent for the Fund, DSC shall provide
those services ancillary to but in implementation of the services provided under
Sections I through V hereof, and those generally defined and accepted as
shareholder services. In connection therewith, but not in limitation thereof,
DSC shall:
(a) Except where instructed in writing by the Fund not to do
so, and where in compliance with applicable law, accept orders on behalf of the
Fund; receive and process investments and applications; remit to the Fund or its
custodian payments for shares acquired and to be issued; and direct the issuance
of shares in accordance with Section IV hereof.
(b) Receive, record and respond to communications of
stockholders and their agents.
(c) As instructed by the Fund, prepare and mail stockholder
account information, mail Series stockholder reports and Series prospectuses.
(d) Prepare and mail proxies and material for Fund stockholder
meetings, receive and process proxies from stockholders, and deliver such
proxies as directed by the Fund.
(e) Administer investment plans offered by the Fund to
investors and stockholders of each Series, including retirement plans, including
activities not otherwise provided in Sections I through V of this Agreement
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<PAGE>
VII. PERFORMANCE OF DUTIES
7.1 The parties hereto intend that Series stockholders and their
stockholdings shall be confidential, and any information relating thereto shall
be released by DSC only to those persons or authorities who DSC has reason to
believe are authorized to receive such information; or, as instructed by the
Fund.
7.2 DSC may, in performing this Agreement, require the Fund or the
Fund's distributor to provide it with an adequate number of copies of
prospectuses, reports or other documents required to be furnished to investors
or stockholders.
7.3 DSC may request or receive instructions from the Fund and may, at
the Fund's expense, consult with counsel for the Fund or its own counsel with
respect to any matter arising in connection with the performance of its duties
hereunder, and shall not be liable for any action taken or omitted by it in good
faith in accordance with such instructions or opinions of counsel.
7.4 DSC shall maintain reasonable insurance coverage for errors and
omissions and reasonable bond coverage for fraud.
7.5 Upon notice thereof to the Fund, DSC may employ others to provide
services to DSC in its performance of this Agreement.
7.6 Personnel and facilities of DSC used to perform services hereunder
may be used to perform similar services to other funds of the Delaware Group and
to others, and may be used to perform other services for the Fund, the other
funds of the Delaware Group and others.
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7.7 DSC shall provide its services as transfer agent hereunder in
accordance with Section 17 of the Securities Exchange Act of 1934, and the rules
and regulations thereunder. Further, the parties intend that the processes,
procedures, safeguard and controls employed should be those generally applied
and accepted for the type services provided hereunder by other institutions
providing the same or similar services, and, those which should provide
efficient, safe and economical services so as to promote promptness and accuracy
and to maintain the integrity of the Fund's records.
7.8 The Fund and DSC may, from time to time, set forth in writing
Guidelines For Selective Procedures to be applicable to the services hereunder.
VIII. COMPENSATION
8.1 The Fund and DSC acknowledge that because DSC has common ownership
and close management ties with the Fund's investment advisor and the Fund's
distributor and serves the other funds of the Delaware Group (DSC having been
originally established to provide the services hereunder for the funds of the
Delaware Group), advantages and benefits to the Fund in the employment of DSC
hereunder can be available which may not generally be available to it from
others providing similar services.
8.2 The Fund and DSC further acknowledge that the compensation by the
Fund to DSC is intended to induce DSC to provide services under this Agreement
of a nature and quality which the Board of Directors of the Fund, including a
majority who are
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<PAGE>
not parties to this Agreement or interested persons of the parties hereto, has
determined after due consideration to be necessary for the conduct of the
business of the Fund, in the best interests of the Fund, the Series and their
stockholders.
8.3 Compensation by the Fund to DSC hereunder shall be determined in
accordance with Schedule A hereto as it shall be amended from time to time as
provided for herein and which is incorporated herein as a part hereof.
8.4 Compensation as provided in Schedule A shall be reviewed and
approved in the manner set forth in Section 10.1 hereof by the Board of
Directors of the Fund at least annually and may be reviewed and approved more
frequently at the request of either party. The Board may request, and DSC shall
provide, such information as the Board may reasonably require to evaluate the
basis of and approve the compensation.
IX. STANDARD OF CARE
9.1 The Fund acknowledges that DSC shall not be liable for, and in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of the performance of its duties under this Agreement, agrees to
indemnify DSC against, any claim or deficiency arising from the performance of
DSC's duties hereunder, including DSC's costs, counsel fees and expenses
incurred in investigating or defending any such claim or any administrative or
other proceeding, and acknowledges that any risk of loss or damage arising from
the conduct of the Fund's affairs in accordance
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<PAGE>
herewith or in accordance with Guidelines or instructions given hereunder, shall
be borne by the Fund.
X. CONTRACTUAL STATUS
10.1 This Agreement shall be executed and become effective on the date
first written above if approved by a vote of the Board of Directors of the Fund,
including an affirmative vote of a majority of the non-interested members of the
Board, cast in person at a meeting called for the purpose of voting on such
approval. It shall continue in effect for an indeterminate period, and is
subject to termination on sixty (60) days notice by either party unless earlier
terminated or amended by agreement among the parties. Compensation under this
Agreement shall require approval by a majority vote of the Board of Directors of
the Fund, including an affirmative vote of the majority of the non-interested
members of the Board cast in person at a meeting called for the purpose of
voting on such approval.
10.2 This Agreement may not be assigned without the approval of the
Fund.
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<PAGE>
10.3 This Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania.
DELAWARE SERVICE COMPANY, INC.
Attest: By:
------------------- --------------------------
Name: Name:
Title: Title:
[Name of Investment Company]
for the [Name(s) of Portfolio(s)]
series
Attest: By:
------------------- --------------------------
Name: Name:
Title: Title:
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<PAGE>
SCHEDULE A
[Name of Investment Company]
SHAREHOLDERS SERVICES AGREEMENT
COMPENSATION SCHEDULE
1. Delaware Service Company, Inc. ("DSC") will determine and
report to the Fund, at least annually, the compensation
for services to be provided to the Fund for DSC's
forthcoming fiscal year or period.
2. In determining such compensation, DSC will fix and report a
fee to be charged per account and/or transaction, as may be
applicable, for services provided. DSC will bill, and the Fund
will pay, such compensation monthly.
3. For the period commencing on _________ __, 199_, the charge
will consist of two charges, an annual charge and a per
transaction charge for each account on DSC's records and each
account on an automated retirement processing system. These
charges are as follows:
A. ANNUAL CHARGE
Daily Dividend Funds $11.00 Per Annum
Non-Daily Dividend Funds $ 5.50 Per Annum
Merrill Lynch - Omnibus Accounts:
Regular Accounts $11.00 Per Annum
Accounts with a Contingent
Deferred Sales Charge $14.00 Per Annum
Networked Accounts $3.00-$6.00 Per Annum
<PAGE>
SCHEDULE A
[Name of Investment Company]
SHAREHOLDERS SERVICES AGREEMENT
COMPENSATION SCHEDULE
PAGE 2
B. TRANSACTION CHARGE
Transaction Charge
1. Dividend Payment $ 0.25
2. New Account $ 6.00
3. Purchase:
a. Wire $ 8.00
b. Automated $ 1.50
c. Other $ 2.60
4. Transfer $ 8.00
5. Certificate Issuance $ 4.00
6. Liquidations
a. Wires $12.25
b. Drafts $ 0.75
c. Money Market Regular $ 4.50
d. Other Regular $ 4.50
7. Exchanges
a. Dividend Exchanges $ 3.00
b. Other $10.00
<PAGE>
<PAGE>
PROPOSED AGREEMENT
SUBJECT TO BOARD APPROVAL
DELAWARE GROUP OF FUNDS
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT, made as of this 19th day of August, 1996 by and between
the registered investment companies in the Delaware Group listed on Schedule A,
which Schedule may be amended from time to time as provided in Section 8 hereof
(each corporation or common law or business trust, hereinafter referred to as a
"Company," and all such entities collectively hereinafter referred to as, the
"Companies"), on behalf of the portfolio(s) of securities of such Companies
listed on Schedule A, which Schedule may be amended from time to time (when used
in this Agreement in the context of a Company that offers only a single
portfolio/series of shares, the term "Portfolio" shall be a reference to such
Company, and when used in the context of a Company that offers multiple
portfolios/series of shares, shall be a reference to each portfolio/series of
such Company) and DELAWARE SERVICE COMPANY, INC. ("DSC"), a Delaware
corporation, having its principal office and place of business at 1818 Market
Street, Philadelphia, Pennsylvania 19103.
W I T N E S S E T H:
WHEREAS, the Investment Management Agreements between the
Companies with respect to each Portfolio and either Delaware
Management Company, Inc. or its U.K. affiliate, Delaware
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<PAGE>
International Advisers Ltd., provide, in part, that each Portfolio shall conduct
its business and affairs and shall bear the expenses necessary and incidental
thereto including, but not in limitation of the foregoing, the costs incurred
with respect to accounting services; and
WHEREAS, the services to be provided under this agreement
previously were provided by employees of the Companies; and
WHEREAS, the Companies and DSC desire to have a written agreement
concerning the performance of accounting services for each Portfolio and
providing compensation therefor;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, and intending legally to be bound, it is agreed:
I. APPOINTMENT AS AGENT
Section 1.1 The Companies hereby appoint DSC the accounting
agent ("Accounting Agent") for all of the classes of each Portfolio, to provide
such accounting services as are set forth herein and DSC hereby accepts such
appointment and agrees to provide the Companies, as their agent, the services
described herein.
Section 1.2 The Companies shall pay DSC and DSC shall accept,
for the services provided hereunder, the compensation provided for in Section VI
hereof. The Companies
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<PAGE>
also shall reimburse DSC for expenses incurred or advanced by it for the
Companies in connection with its services hereunder.
II. DOCUMENTATION
Section 2.1 Each Company represents that it has provided or
made available to DSC (or has given DSC an opportunity to examine) copies of,
and, DSC represents that it has received from the Companies (or is otherwise
familiar with), the following documents:
A. The Articles of Incorporation or Agreement and
Declaration of Trust or other document, as relevant, evidencing each Company's
form of organization and any current amendments thereto;
B. The By-Laws or Procedural Guidelines of each
Company;
C. Any resolution or other action of each Company or
the Board of Directors or Trustees of each Company establishing or affecting the
rights, privileges or other status of any class of shares of a Portfolio, or
altering or abolishing any such class;
D. A certified copy of a resolution of the Board of
Directors or Trustees of each Company appointing DSC as Accounting Agent for
each Portfolio and authorizing the execution of this Agreement or an amendment
to Schedule A of this Agreement;
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<PAGE>
E. A copy of each Company's currently effective
prospectus[es] and Statement[s] of Additional Information under the Securities
Act of 1933, if effective;
F. A certified copy of any resolution of the Board of
Directors or Trustees of each Company authorizing any person to give
instructions to DSC under this Agreement (with a specimen signature of such
person if not already provided), setting forth the scope of such authority; and
G. Any amendment, revocation or other document
altering, adding, qualifying or repealing any document or authority called for
under this Section 2.1.
Section 2.2 Each Company and DSC may consult as to forms or
documents that may be required in performing services hereunder.
Section 2.3 Each Company warrants the following:
A. The Company is, or will be, a properly registered
investment company under the Investment Company Act of 1940 (the "1940 Act") and
any and all shares of a Portfolio which it issues will be properly registered
and lawfully issued under applicable federal and state laws.
B. The provisions of this contract do not violate the
terms of any instrument by which the Company or the Company on behalf of a
Portfolio is bound; nor do they violate any law or regulation of any body having
jurisdiction over the Company or its property.
Section 2.4 DSC warrants the following:
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<PAGE>
A. The provisions of this contract do not violate the
terms of any instrument by which DSC is bound; nor do they violate any law or
regulation of any body having jurisdiction over DSC or its property.
III. SERVICES TO BE PROVIDED BY DSC
Section 3.1 Daily Net Asset Value ("NAV") Calculation. As
Accounting Agent for each Portfolio of the Companies, DSC will perform all
functions necessary to provide daily Portfolio NAV calculations, including:
A. Maintaining each Portfolio's securities portfolio
history by:
1. recording portfolio purchases and sales;
2. recording corporate actions and capital
changes relating to portfolio securities;
3. accruing interest, dividends and
expenses; and
4. maintaining the income history for
securities purchased by a Portfolio.
B. Determining distributions to Portfolio
shareholders;
C. Recording and reconciling shareholder activity
including:
1. recording subscription, liquidations and
dividend reinvestments;
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<PAGE>
2. recording settlements of shareholder
activity; and
3. reconciling Portfolio shares outstanding
to the records maintained by DSC, as transfer agent of the Portfolio.
D. Valuing a Portfolio's securities portfolio which
includes determining the NAVs for all classes of the Portfolio;
E. Disseminating Portfolio NAVs and dividends to
interested parties (including the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the Investment Company Institute ("ICI"),
Morningstar, and Lipper Analytical Services, Inc. ("Lipper")); and
F. Resolving pricing and/or custody discrepancies.
Section 3.2 Financial Reporting. As Accounting Agent, DSC
shall perform financial reporting services for each Portfolio, which shall
include:
A. The preparation of semi-annual and annual reports
for shareholders which involves the performance of the following functions:
1. preparing all statements of net assets,
statements of operations and statements of changes in net assets for the
Portfolio;
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<PAGE>
2. preparing footnotes to financial
statements for the Portfolio;
3. preparing workpapers for each Company's
annual audit by its independent public accountants; and
4. coordinating the annual audit by each
Company's independent public accountants.
B. Reporting to the ICI in response to requests for
monthly and other periodic information;
C. Performing statistical reporting, which includes
daily, monthly, quarterly and annual reports for Lipper, Weisenberger and other
third party reporting agencies; and
D. Furnishing financial information for any
additional required SEC reporting, such as the preparation of financial
information for each Company's reporting on Form N-SAR, the furnishing of
financial information for each Company's prospectus[es] and statement[s] of
additional information, and the financial information required for each
Company's annual Rule 24f-2 notice filing;
Section 3.3 Compliance Testing. DSC will monitor, test and
prepare and maintain supporting schedules which evidence compliance with the
definitional and distribution requirements under the Internal Revenue Code of
1986, as amended ("IRC"), including the following:
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<PAGE>
A. The requirement to be registered at all times
during the taxable year under the 1940 Act (IRC ss.851(a));
B. The annual ninety percent gross income test (IRC
ss.851(b)(2));
C. The short/short (thirty percent) gross income test
(IRC ss.851(b)(3));
D. The quarterly IRC industry diversification tests
(IRC ss.ss.851(b)(4) and 817(h)); and
E. The 90% distribution requirements (IRC ss.852(a)).
Section 3.4 Other Services. In addition to the above, DSC, in
its capacity as Accounting Agent for the Company, will perform the following
services:
A. The calculation of required Portfolio monthly
yields and total return calculations in accordance with the prescribed rules of
the U.S. Securities and Exchange Commission;
B. Providing the financial information necessary for
the preparation of all federal and state tax returns and ancillary schedules,
including:
1. year-end excise tax distributions; and
2. compliance with Subchapter M and Section
4982 of the IRC;
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C. Performing special tax reporting to shareholders,
including the preparation of reports which reflect income earned by each
Portfolio by state, exempt income and distributions that qualify for the
corporate dividends received deduction;
D. The preparation of expense and budget figures for
each Portfolio, including the maintenance of detailed records pertaining to
expense accruals and payments and adjusting reports to reflect accrual
adjustments;
E. The preparation of reports for Board of Directors'
or Trustees' meetings;
F. Coordination of the custody relationships;
G. Facilitating security settlements;
H. Performance of required foreign security
accounting functions;
I. Performance of daily cash reconciliations for each
Portfolio;
J. Providing identified reports to portfolio managers
including:
1. providing portfolio holdings and security
valuation reports;
2. preparing cash forecasts and
reconciliations as mutually agreed upon; and
3. preparing income projections.
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IV. PERFORMANCE OF DUTIES
Section 4.1 DSC may request or receive instructions from a
Company and may, at a Portfolio's expense, consult with counsel for the Company
or its own counsel, with respect to any matter arising in connection with the
performance of its duties hereunder, and shall not be liable for any action
taken or omitted by it in good faith in accordance with such instructions or
opinions of counsel.
Section 4.2 DSC shall maintain reasonable insurance coverage
for errors and omissions and reasonable bond coverage for fraud.
Section 4.3 Upon notice thereof to a Company, DSC may employ
others to provide services to DSC in its performance of this Agreement.
Section 4.4 Personnel and facilities of DSC used to perform
services hereunder may be used to perform similar services to all Companies of
the Delaware Group and their Portfolios and to others, and may be used to
perform other services for all of the Companies of the Delaware Group and
others.
Section 4.5 The Companies and DSC may, from time to time, set
forth in writing at the Companies' expense certain guidelines to be applicable
to the services hereunder.
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<PAGE>
V. ACCOUNTS AND RECORDS
Section 5.1 The parties hereto agree and acknowledge that the
accounts and records maintained by DSC with respect to a Portfolio shall be the
property of such Portfolio, and shall be made available to the relevant Company
promptly upon request and shall be maintained for the periods prescribed in Rule
31a-2 under the Investment Company Act of 1940 or such longer period as shall be
agreed to by the parties hereto, at such Portfolio's expense.
VI. COMPENSATION
Section 6.1 The Companies and DSC acknowledge that the
compensation to be paid hereunder to DSC is intended to induce DSC to provide
services under this Agreement of a nature and quality which the Boards of
Directors or Trustees of the Companies, including a majority who are not parties
to this Agreement or interested person of the parties hereto, have determined
after due consideration to be necessary for the conduct of the business of a
Portfolio in the best interests of a Portfolio and its shareholders.
Section 6.2 Compensation by a Portfolio hereunder shall be
determined in accordance with Schedule B hereto as it shall be amended from time
to time as provided for herein and which is incorporated herein as a part
hereof.
Section 6.3 Compensation as provided in Schedule B shall be
reviewed and approved for each Portfolio in the manner
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<PAGE>
set forth in Section 8.1 hereof by the Boards of Directors or Trustees of the
Companies at least annually and may be reviewed and approved more frequently at
the request of either party. The Boards may request and DSC shall provide such
information as the Boards may reasonably require to evaluate the basis of and
approve the compensation.
VII. STANDARD OF CARE
Section 7.1 The Companies on behalf of each Portfolio
acknowledge that DSC shall not be liable for, and in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
performance of its duties under this contract, agree to indemnify DSC against,
any claim or deficiency arising from the performance of DSC's duties hereunder,
including DSC's costs, counsel fees and expenses incurred in investigating or
defending any such claim or any administrative or other proceeding, and
acknowledge that any risk of loss or damage arising from the conduct of a
Portfolio's affairs in accordance herewith or in accordance with guidelines or
instructions given hereunder, shall be borne by the Portfolio. The
indemnification provided for in this Section 7.1 shall be made Portfolio by
Portfolio so that DSC is only entitled to indemnification from a Company on
behalf of a Portfolio for actions arising from the performance of DSC's duties
as to that Portfolio.
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VIII. CONTRACTUAL STATUS
Section 8.1 This Agreement shall be executed and become
effective as to a Company with regard to a Portfolio listed on Schedule A as of
the date first written above if approved by a vote of such Company's Board of
Directors or Trustees, including an affirmative vote of a majority of the non-
interested members of the Board of such Company, cast in person at a meeting
called for the purpose of voting on such approval. It shall continue in effect
for an indeterminate period, and is subject to termination as to a Company on
behalf of a Portfolio or DSC, as the case may be, on sixty (60) days notice by
either that Company or DSC, unless earlier terminated or amended by agreement
among the parties. A Company shall be permitted to terminate this Agreement as
to a Portfolio on sixty (60) days notice to DSC. Compensation under this
Agreement by a Portfolio shall require approval by a majority vote of the Board
of Directors or Trustees of such Portfolio's Company, including an affirmative
vote of the majority of the non-interested members of such Board cast in person
at a meeting called for the purpose of voting such approval.
Section 8.2 This Agreement shall become effective as to any
Company or Portfolio not included on Schedule A as of the date first written
above, but desiring to participate in this Agreement, on such date as an amended
Schedule A adding such new Company or Portfolio to such Schedule is executed by
DSC and such new Company or a Company on behalf of a new Portfolio following
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approval by the Company or by the Company on behalf of a new Portfolio desiring
to be included in this Agreement in accordance with the method specified in
Section 8.1. Any such amended Schedule A shall not affect the validity of this
Agreement as between DSC and the other Companies which have executed this
Agreement or any subsequent amendment to Schedule A of this Agreement.
Section 8.3 This Agreement may not be assigned by DSC without
the approval of all of the Companies.
Section 8.4 This Agreement shall be governed by the laws of
the Commonwealth of Pennsylvania.
DELAWARE SERVICE COMPANY, INC.
/s/ David K. Downes
By:_____________________________________
David K. Downes
Senior Vice President/Chief
Administrative Officer/Chief
Financial Officer
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP DECATUR FUND, INC.
DELAWARE GROUP DELAWARE FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT
FUNDS, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP DELCHESTER HIGH-YIELD
BOND FUND, INC.
DMC TAX-FREE INCOME TRUST - PENNSYLVANIA
DELAWARE GROUP VALUE FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL
FUNDS, INC.
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DELAWARE GROUP DELCAP FUND, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
/s/Wayne A. Stork
By:_____________________________________
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
/s/ Wayne A. Stork
By:_____________________________________
Wayne A. Stork, Chairman
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SCHEDULE A
COMPANIES AND PORTFOLIOS COMPRISING THE DELAWARE GROUP*
Delaware Group Cash Reserve, Inc.
Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Total Return Fund
Delaware Group Delaware Fund, Inc.
Delaware Fund
Devon Fund
Delaware Group Tax-Free Fund, Inc.
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Trend Fund, Inc.
Delaware Group Delchester High-Yield Bond Fund, Inc.
- --------
* Except as otherwise noted, all Portfolios included on this Schedule A are
Existing Portfolios for purposes of the compensation described on Schedule B to
that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
Portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
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DMC Tax-Free Income Trust - Pennsylvania
Delaware Group Value Fund, Inc.
Delaware Group Global & International Funds, Inc.
International Equity Fund
Global Bond Fund
Global Assets Fund
Emerging Markets Fund (New)
Delaware Group DelCap Fund, Inc.
Delaware Pooled Trust, Inc.
The Defensive Equity Portfolio
The Aggressive Growth Portfolio
The International Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Labor Select International Equity Portfolio
The Real Estate Investment Trust Portfolio
The Fixed Income Portfolio
The Limited-Term Maturity Portfolio (New)
The Global Fixed Income Portfolio
The International Fixed Income Portfolio (New)
The High-Yield Bond Portfolio (New)
Delaware Group Premium Fund, Inc.
Equity/Income Series
High Yield Series
Capital Reserves Series
Money Market Series
Growth Series
Multiple Strategy Series
International Equity Series
Value Series
Emerging Growth Series
Global Bond Series (New)
Delaware Group Government Fund, Inc.
-18-
<PAGE>
Delaware Group Adviser Funds, Inc.
Enterprise Fund
U.S. Growth Fund
World Growth Fund
New Pacific Fund
Federal Bond Fund
Corporate Income Fund
Dated as of: August 19, 1996
-19-
<PAGE>
SCHEDULE B
COMPENSATION
Fee Schedule for The Delaware Group of Funds
Part 1 -- Fees for Existing Portfolios
Existing Portfolios are those so designated on Schedule A to the Fund Accounting
Agreement between Delaware Service Company, Inc. and the Delaware Group of Funds
dated as of August 19, 1996 ("Agreement").
Annual Asset Based Fees
First $10 Billion of Aggregate
Complex Net Assets 2.5 Basis Points
Aggregate Complex Net Assets
over $10 Billion 2.0 Basis Points
Annual asset based fees will be charged at a rate of 2.5 basis points for the
first $10 Billion of Aggregate Complex Net Assets. Aggregate Complex Net Assets
over $10 Billion will be charged at a rate of 2.0 basis points. These fees will
be charged to a Portfolio on an aggregated pro rated basis.
Annual Minimum Fees
Domestic Equity Portfolio $35,000
Domestic Fixed Income Portfolio $45,000
International Series Portfolio $70,000
Per Class of Share Fee $ 4,000
There is an annual minimum fee that will be charged only if the annual asset
based fee is less than the calculation for the minimum fee. This fee is based on
the type and the number of classes per Portfolio. For an equity Portfolio
$35,000 will be charged; for a fixed income Portfolio $45,000 will be charged,
and for an international Portfolio $70,000 will be charged. For each class of
shares, $4,000 will be charged, such amount to be prorated over a period of less
than a year for any classes added after April 30, 1996. A total of all minimum
fees will be compared to the total asset based fee to determine which fee is
higher and, subsequently, will be used to bill the Companies.
Part 2 -- Fees for New Portfolios
For each Portfolio designated as a New Portfolio on Schedule A to the Agreement,
there will be a fee of 2.0 basis points, providing that the Delaware complex net
assets are above $10 Billion (the
<PAGE>
rate would be 2.5 basis points if under $10 Billion and then 2.0 basis points
once the net assets cross $10 Billion), or an annual minimum fee calculated in
the manner described above, whichever is higher. This new fee would be added to
the total of Existing Portfolio fees and then pro rated. Fees shall not be
charged for New Portfolios included on Schedule A until such Portfolios shall
have commenced operations.
Dated as of: August 19, 1996
-21-
<PAGE>
AMENDMENT NO. 1 TO
SCHEDULE A
TO DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Cash Reserve, Inc.
Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Total Return Fund
Delaware Group Delaware Fund, Inc.
Delaware Fund
Devon Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Tax-Free Fund, Inc.
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Trend Fund, Inc.
Delaware Group Income Funds, Inc.
Delchester Fund
Strategic Income Fund (New)
DMC Tax-Free Income Trust - Pennsylvania
*Except as otherwise noted, all Portfolios included on this Schedule A are
Existing Portfolios for purposes of the compensation described on Schedule B to
that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
<PAGE>
Delaware Group Value Fund, Inc.
Delaware Group Global & International Funds, Inc.
International Equity Fund
Global Bond Fund
Global Assets Fund
Emerging Markets Fund (New)
Delaware Group DelCap Fund, Inc.
Delaware Pooled Trust, Inc.
The Defensive Equity Portfolio
The Aggressive Growth Portfolio
The International Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Labor Select International Equity Portfolio
The Real Estate Investment Trust Portfolio
The Fixed Income Portfolio
The Limited-Term Maturity Portfolio (New)
The Global Fixed Income Portfolio
The International Fixed Income Portfolio (New)
The High-Yield Bond Portfolio (New)
Delaware Group Premium Fund, Inc.
Equity/Income Series
High Yield Series
Capital Reserves Series
Money Market Series
Growth Series
Multiple Strategy Series
International Equity Series
Value Series
Emerging Growth Series
Global Bond Series (New)
Delaware Group Government Fund, Inc.
<PAGE>
Delaware Group Adviser Funds, Inc.
Enterprise Fund
U.S. Growth Fund
World Growth Fund
New Pacific Fund
Federal Bond Fund
Corporate Income Fund
Dated as of: September 30, 1996
DELAWARE SERVICE COMPANY, INC.
By: /s/ David K. Downes
-----------------------------------
David K. Downes
Senior Vice President/Chief
Administrative Officer/Chief
Financial Officer
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP DECATUR FUND, INC.
DELAWARE GROUP DELAWARE FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY
FUND,INC.
DELAWARE GROUP LIMITED-TERM
GOVERNMENT FUNDS, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DMC TAX-FREE INCOME TRUST -
PENNSYLVANIA
DELAWARE GROUP VALUE FUND, INC.
DELAWARE GROUP GLOBAL &
INTERNATIONAL FUNDS, INC.
DELAWARE GROUP DELCAP FUND, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
By:/s/ Wayne A. Stork
-------------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
By:/s/Wayne A. Stork
-------------------------
Wayne A. Stork
Chairman
-3-
<PAGE>
AMENDMENT NO. 2 TO
SCHEDULE A
TO DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Adviser Funds, Inc.
Corporate Income Fund
Enterprise Fund
Federal Bond Fund
New Pacific Fund
U.S. Growth Fund
World Growth Fund
Delaware Group Cash Reserve, Inc.
Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Total Return Fund
Delaware Group Delaware Fund, Inc.
Delaware Fund
Devon Fund
Delaware Group Equity Funds IV, Inc.
Capital Appreciation Fund (New)
DelCap Fund
Delaware Group Equity Funds V, Inc.
Retirement Income Fund (New)
Value Fund
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
1
<PAGE>
Delaware Group Global & International Funds, Inc.
Emerging Markets Fund (New)
Global Assets Fund
Global Bond Fund
International Equity Fund
Delaware Group Government Fund, Inc.
Delaware Group Income Funds, Inc.
Delchester Fund
Strategic Income Fund (New)
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Premium Fund, Inc.
Capital Reserves Series
Emerging Growth Series
Equity/Income Series
Global Bond Series (New)
Growth Series
High Yield Series
International Equity Series
Money Market Series
Multiple Strategy Series
Value Series
Delaware Group Tax-Free Fund, Inc.
Tax-Free Insured Fund
Tax-Free USA Fund
Tax-Free USA Intermediate Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Trend Fund, Inc.
2
<PAGE>
Delaware Pooled Trust, Inc.
The Aggressive Growth Portfolio
The Defensive Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Fixed Income Portfolio
The Global Fixed Income Portfolio
The High-Yield Bond Portfolio (New)
The International Equity Portfolio
The International Fixed Income Portfolio (New)
The Labor Select International Equity Portfolio
The Limited-Term Maturity Portfolio (New)
The Real Estate Investment Trust Portfolio
DMC Tax-Free Income Trust - Pennsylvania
3
<PAGE>
Dated as of: November 29, 1996
--------------------
DELAWARE SERVICE COMPANY, INC.
By: /s/David K. Downes
--------------------------------
David K. Downes
Senior Vice President/
Chief Administrative Officer/
Chief Financial Officer
DELAWARE GROUP ADVISER FUNDS, INC.
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP DECATUR FUND, INC.
DELAWARE GROUP DELAWARE FUND, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL
FUNDS, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT
FUNDS, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND, INC.
DELAWARE GROUP TREND FUND, INC.
DMC TAX-FREE INCOME TRUST-PENNSYLVANIA
By: /s/ Wayne A. Stork
------------------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
By: /s/ Wayne A. Stork
---------------------------
Wayne A. Stork
Chairman
4
<PAGE>
AMENDMENT NO.3 TO
SCHEDULE A
TO DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Cash Reserve, Inc.
Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Total Return Fund
Delaware Group Delaware Fund, Inc.
Delaware Fund
Devon Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Tax-Free Fund, Inc.
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Trend Fund, Inc.
Delaware Group Income Funds, Inc.
Delchester Fund
Strategic Income Fund (New)
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
1
<PAGE>
DMC Tax-Free Income Trust - Pennsylvania
Delaware Group Value Fund, Inc.
Value Fund
Retirement Income Fund (New)
Delaware Group Global & International Funds, Inc.
International Equity Fund
Global Bond Fund
Global Assets Fund
Emerging Markets Fund (New)
Delaware Group Equity Funds IV, Inc.
DelCap Fund
Multi-Cap Equity Fund (New)
Delaware Pooled Trust, Inc.
The Defensive Equity Portfolio
The Aggressive Growth Portfolio
The International Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Labor Select International Equity Portfolio
The Real Estate Investment Trust Portfolio
The Fixed Income Portfolio
The Limited-Term Maturity Portfolio (New)
The Global Fixed Income Portfolio
The International Fixed Income Portfolio (New)
The High-Yield Bond Portfolio (New)
Delaware Group Premium Fund, Inc.
Equity/Income Series
High Yield Series
Capital Reserves Series
Money Market Series
Growth Series
Multiple Strategy Series
International Equity Series
Value Series
Emerging Growth Series
Global Bond Series (New)
Delaware Group Government Fund, Inc.
2
<PAGE>
Delaware Group Adviser Funds, Inc.
Enterprise Fund
U.S. Growth Fund
World Growth Fund
New Pacific Fund
Federal Bond Fund
Corporate Income Fund
Dated as of: December 27, 1996
DELAWARE SERVICE COMPANY, INC.
By: /s/David K. Downes
--------------------
David K. Downes
Senior Vice President/Chief
Administrative Officer/Chief
Financial Officer
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP DECATUR FUND, INC.
DELAWARE GROUP DELAWARE FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND,INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT
FUNDS, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DMC TAX-FREE INCOME TRUST - PENNSYLVANIA
DELAWARE GROUP VALUE FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL
FUNDS, INC.
DELAWARE GROUP DELCAP FUND, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
By: /s/ Wayne A. Stork
--------------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
By: /s/ Wayne A. Stork
--------------------------
Wayne A. Stork
Chairman
3
<PAGE>
AMENDMENT NO. 4 TO
SCHEDULE A
TO DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Cash Reserve, Inc.
Delaware Group Equity Funds II, Inc.
Decatur Income Fund
Decatur Total Return Fund
Blue Chip Fund (New)
Quantum Fund (New)
Delaware Group Equity Funds I, Inc.
Delaware Fund
Devon Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Tax-Free Fund, Inc.
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Trend Fund, Inc.
Delaware Group Income Funds, Inc.
Delchester Fund
Strategic Income Fund
High-Yield Opportunities Fund (New)
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement. DMC Tax-Free Income Trust - Pennsylvania
1
<PAGE>
Delaware Group Equity Funds V, Inc.
Value Fund
Retirement Income Fund
Delaware Group Global & International Funds, Inc.
International Equity Fund
Global Bond Fund
Global Assets Fund
Emerging Markets Fund
Delaware Group Equity Funds IV, Inc.
DelCap Fund
Capital Appreciation Fund
Delaware Pooled Trust, Inc.
The Defensive Equity Portfolio
The Aggressive Growth Portfolio
The International Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio
The Defensive Equity Utility Portfolio
The Labor Select International Equity Portfolio
The Real Estate Investment Trust Portfolio
The Fixed Income Portfolio
The Limited-Term Maturity Portfolio
The Global Fixed Income Portfolio
The International Fixed Income Portfolio
The High-Yield Bond Portfolio
Delaware Group Premium Fund, Inc.
Equity/Income Series
High Yield Series
Capital Reserves Series
Money Market Series
Growth Series
Multiple Strategy Series
International Equity Series
Value Series
Emerging Growth Series
Global Bond Series
Delaware Group Government Fund, Inc.
2
<PAGE>
Delaware Group Adviser Funds, Inc.
Enterprise Fund
U.S. Growth Fund
World Growth Fund
New Pacific Fund
Federal Bond Fund
Corporate Income Fund
Dated as of: FEBRUARY 24, 1997
DELAWARE SERVICE COMPANY, INC.
By: /s/ David K. Downes
--------------------
David K. Downes
Senior Vice President/Chief
Administrative Officer/Chief
Financial Officer
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP EQUITY FUNDS II, INC.
DELAWARE GROUP EQUITY FUNDS I, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND,INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT FUNDS, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DMC TAX-FREE INCOME TRUST - PENNSYLVANIA
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL FUNDS, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
By: /s/ Wayne A. Stork
---------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
By: /s/ Wayne A. Stork
---------------------
Wayne A. Stork
Chairman
3
<PAGE>
AMENDMENT NO. 4A
to
SCHEDULE A
of
DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Adviser Funds, Inc.
Corporate Income Fund
Enterprise Fund
Federal Bond Fund
New Pacific Fund
U.S. Growth Fund
World Growth Fund
Delaware Group Cash Reserve, Inc.
Delaware Group Equity Funds I, Inc. (formerly Delaware)
Delaware Fund
Devon Fund
Delaware Group Equity Funds II, Inc. (formerly Decatur)
Blue Chip Fund (New)
Decatur Income Fund
Decatur Total Return Fund
Quantum Fund (New)
Delaware Group Equity Funds IV, Inc. (formerly DelCap)
Capital Appreciation Fund (New)
DelCap Fund
Delaware Group Equity Funds V, Inc. (formerly Value)
Value Fund
Retirement Income Fund (New)
Delaware Group Government Fund, Inc.
Government Income Series (U.S. Government Fund)
- --------------------
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
<PAGE>
Delaware Group Global & International Funds, Inc.
Emerging Markets Fund (New)
Global Assets Fund
Global Bond Fund
International Equity Fund
Delaware Group Income Funds, Inc. (formerly Delchester)
Delchester Fund
High-Yield Opportunities Fund (New)
Strategic Income Fund (New)
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Pooled Trust, Inc.
The Aggressive Growth Portfolio
The Defensive Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Emerging Markets Portfolio (New)
The Fixed Income Portfolio
The Global Fixed Income Portfolio
The High-Yield Bond Portfolio (New)
The International Equity Portfolio
The International Fixed Income Portfolio (New)
The Labor Select International Equity Portfolio
The Limited-Term Maturity Portfolio (New)
The Real Estate Investment Trust Portfolio
Delaware Group Premium Fund, Inc.
Capital Reserves Series
Cash Reserve Series
Decatur Total Return Series
Delaware Series
Delchester Series
DelCap Series
Global Bond Series (New)
International Equity Series
Trend Series
Value Series
2
<PAGE>
Delaware Group Tax-Free Fund, Inc.
Tax-Free Insured Fund
Tax-Free USA Fund
Tax-Free USA Intermediate Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Trend Fund, Inc.
DMC Tax-Free Income Trust - Pennsylvania (doing business as Tax-Free
Pennsylvania Fund)
Dated as of: April 14, 1997
3
<PAGE>
DELAWARE SERVICE COMPANY, INC.
By: /s/ David K. Downes
------------------------
David K. Downes
President, Chief Executive Officer and Chief Financial Officer
DELAWARE GROUP ADVISER FUNDS, INC.
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP EQUITY FUNDS I, INC.
DELAWARE GROUP EQUITY FUNDS II, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL FUNDS, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT FUNDS, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND, INC.
DELAWARE GROUP TREND FUND, INC.
DMC TAX-FREE INCOME TRUST-PENNSYLVANIA
By: /s/ Wayne A. Stork
-------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
By: /s/ Wayne A. Stork
-------------------
Wayne A. Stork
President and
Chief Executive Officer
4
<PAGE>
AMENDMENT NO. 5
to
SCHEDULE A
of
DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Adviser Funds, Inc.
Corporate Income Fund
Enterprise Fund
Federal Bond Fund
New Pacific Fund
U.S. Growth Fund
World Growth Fund
Delaware Group Cash Reserve, Inc.
Delaware Group Equity Funds I, Inc. (formerly Delaware)
Delaware Fund
Devon Fund
Delaware Group Equity Funds II, Inc. (formerly Decatur)
Blue Chip Fund (New)
Decatur Income Fund
Decatur Total Return Fund
Quantum Fund (New)
Delaware Group Equity Funds IV, Inc. (formerly DelCap)
Capital Appreciation Fund (New)
DelCap Fund
Delaware Group Equity Funds V, Inc. (formerly Value)
Value Fund
Retirement Income Fund (New)
Delaware Group Government Fund, Inc.
Government Income Series (U.S. Government Fund )
- ------------------
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
<PAGE>
Delaware Group Global & International Funds, Inc.
Emerging Markets Fund (New)
Global Assets Fund
Global Bond Fund
International Equity Fund
Delaware Group Income Funds, Inc. (formerly Delchester)
Delchester Fund
High-Yield Opportunities Fund (New)
Strategic Income Fund (New)
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U. S. Government Money Fund
Delaware Pooled Trust, Inc.
The Aggressive Growth Portfolio
The Defensive Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Emerging Markets Portfolio (New)
The Fixed Income Portfolio
The Global Fixed Income Portfolio
The High-Yield Bond Portfolio (New)
The International Equity Portfolio
The International Fixed Income Portfolio (New)
The Labor Select International Equity Portfolio
The Limited-Term Maturity Portfolio (New)
The Real Estate Investment Trust Portfolio
Delaware Group Premium Fund, Inc.
Capital Reserves Series
Cash Reserve Series
Convertible Securities Series (New)
Decatur Total Return Series
Delaware Series
Delchester Series
Devon Series (New)
Emerging Markets Series (New)
DelCap Series
Global Bond Series (New)
International Equity Series
Quantum Series (New)
Strategic Income Series (New)
Trend Series
Value Series
2
<PAGE>
Delaware Group Tax-Free Fund, Inc.
Tax-Free Insured Fund
Tax-Free USA Fund
Tax-Free USA Intermediate Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Trend Fund, Inc.
DMC Tax-Free Income Trust-Pennsylvania (doing business as Tax-Free Pennsylvania
Fund)
Voyageur Funds, Inc.
Voyageur U.S. Government Securities Fund (New)
Voyageur Insured Funds, Inc.
Arizona Insured Tax Free Fund (New)
Colorado Insured Fund (New)
Minnesota Insured Fund (New)
National Insured Tax Free Fund (New)
Voyageur Intermediate Tax Free Funds, Inc.
Arizona Limited Term Tax Free Fund (New)
California Limited Term Tax Free Fund (New)
Colorado Limited Term Tax Free Fund (New)
Minnesota Limited Term Tax Free Fund (New)
National Limited Term Tax Free Fund (New)
Voyageur Investment Trust
California Insured Tax Free Fund (New)
Florida Insured Tax Free Fund (New)
Florida Tax Free Fund (New)
Kansas Tax Free Fund (New)
Missouri Insured Tax Free Fund (New)
New Mexico Tax Free Fund (New)
Oregon Insured Tax Free Fund (New)
Utah Tax Free Fund (New)
Washington Insured Tax Free Fund (New)
3
<PAGE>
Voyageur Investment Trust II
Florida Limited Term Tax Free Fund (New)
Voyageur Mutual Funds, Inc.
Arizona Tax Free Fund (New)
California Tax Free Fund (New)
Iowa Tax Free Fund (New)
Idaho Tax Free Fund (New)
Minnesota High Yield Municipal Bond Fund (New)
National High Yield Municipal Bond Fund (New)
National Tax Free Fund (New)
New York Tax Free Fund (New)
Wisconsin Tax Free Fund (New)
Voyageur Mutual Funds II, Inc.
Colorado Tax Free Fund (New)
Voyageur Mutual Funds III, Inc.
Aggressive Growth Fund (New)
Growth Stock Fund (New)
International Equity Fund (New)
Tax Efficient Equity Fund (New)
Voyageur Tax Free Funds, Inc.
Minnesota Tax Free Fund (New)
North Dakota Tax Free Fund (New)
Dated as of May 1, 1997
4
<PAGE>
DELAWARE SERVICE COMPANY, INC.
By: /s/ David K. Downes
----------------------------
David K. Downes
President, Chief Executive Officer and Chief Financial Officer
DELAWARE GROUP ADVISER FUNDS, INC.
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP EQUITY FUNDS I, INC.
DELAWARE GROUP EQUITY FUNDS II, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL FUNDS, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DELAWARE GROUP LIMITED -TERM GOVERNMENT FUNDS, INC.
DELAWARE POOLED TRUST, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX FREE MONEY FUND, INC.
DELAWARE GROUP TREND FUND, INC.
DMC TAX-FREE INCOME TRUST-PENNSYLVANIA
VOYAGEUR FUNDS, INC.
VOYAGEUR INSURED FUNDS, INC.
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC.
VOYAGEUR INVESTMENT TRUST
VOYAGEUR INVESTMENT TRUST II
VOYAGEUR MUTUAL FUNDS, INC.
VOYAGEUR MUTUAL FUNDS II, INC.
VOYAGEUR MUTUAL FUNDS III, INC.
By: /s/ Wayne A. Stork
----------------------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
5
<PAGE>
AMENDMENT NO. 6
to
SCHEDULE A
of
DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Adviser Funds, Inc.
Corporate Income Fund
Enterprise Fund
Federal Bond Fund
New Pacific Fund
U.S. Growth Fund
World Growth Fund
Delaware Group Cash Reserve, Inc.
Delaware Group Equity Funds I, Inc. (formerly Delaware)
Delaware Fund
Devon Fund
Delaware Group Equity Funds II, Inc. (formerly Decatur)
Blue Chip Fund (New)
Decatur Income Fund
Decatur Total Return Fund
Quantum Fund (New)
Delaware Group Equity Funds IV, Inc. (formerly DelCap)
Capital Appreciation Fund (New)
DelCap Fund
Delaware Group Equity Funds V, Inc. (formerly Value)
Value Fund
Retirement Income Fund (New)
Delaware Group Government Fund, Inc.
Government Income Series (U.S. Government Fund )
- ------------------
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
<PAGE>
Delaware Group Global & International Funds, Inc.
Emerging Markets Fund (New)
Global Assets Fund
Global Bond Fund
International Equity Fund
Global Equity Fund (New)
International Small Cap Fund (New)
Delaware Group Income Funds, Inc. (formerly Delchester)
Delchester Fund
High-Yield Opportunities Fund (New)
Strategic Income Fund (New)
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U. S. Government Money Fund
Delaware Pooled Trust, Inc.
The Aggressive Growth Portfolio
The Defensive Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Emerging Markets Portfolio (New)
The Fixed Income Portfolio
The Global Fixed Income Portfolio
The High-Yield Bond Portfolio (New)
The International Equity Portfolio
The International Fixed Income Portfolio (New)
The Labor Select International Equity Portfolio
The Limited-Term Maturity Portfolio (New)
The Real Estate Investment Trust Portfolio
Delaware Group Premium Fund, Inc.
Capital Reserves Series
Cash Reserve Series
Convertible Securities Series (New)
Decatur Total Return Series
Delaware Series
Delchester Series
Devon Series (New)
Emerging Markets Series (New)
DelCap Series
Global Bond Series (New)
International Equity Series
Quantum Series (New)
Strategic Income Series (New)
2
<PAGE>
Trend Series
Value Series
Delaware Group State Tax-Free Income Trust
Tax-Free New Jersey Fund (New)
Tax-Free Ohio Fund (New)
Tax-Free Pennsylvania Fund
Delaware Group Tax-Free Fund, Inc.
Tax-Free Insured Fund
Tax-Free USA Fund
Tax-Free USA Intermediate Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Trend Fund, Inc.
Voyageur Funds, Inc.
Voyageur U.S. Government Securities Fund (New)
Voyageur Insured Funds, Inc.
Arizona Insured Tax Free Fund (New)
Colorado Insured Fund (New)
Minnesota Insured Fund (New)
National Insured Tax Free Fund (New)
Voyageur Intermediate Tax Free Funds, Inc.
Arizona Limited Term Tax Free Fund (New)
California Limited Term Tax Free Fund (New)
Colorado Limited Term Tax Free Fund (New)
Minnesota Limited Term Tax Free Fund (New)
National Limited Term Tax Free Fund (New)
Voyageur Investment Trust
California Insured Tax Free Fund (New)
Florida Insured Tax Free Fund (New)
Florida Tax Free Fund (New)
Kansas Tax Free Fund (New)
Missouri Insured Tax Free Fund (New)
New Mexico Tax Free Fund (New)
Oregon Insured Tax Free Fund (New)
Utah Tax Free Fund (New)
Washington Insured Tax Free Fund (New)
3
<PAGE>
Voyageur Investment Trust II
Florida Limited Term Tax Free Fund (New)
Voyageur Mutual Funds, Inc.
Arizona Tax Free Fund (New)
California Tax Free Fund (New)
Iowa Tax Free Fund (New)
Idaho Tax Free Fund (New)
Minnesota High Yield Municipal Bond Fund (New)
National High Yield Municipal Bond Fund (New)
National Tax Free Fund (New)
New York Tax Free Fund (New)
Wisconsin Tax Free Fund (New)
Voyageur Mutual Funds II, Inc.
Colorado Tax Free Fund (New)
Voyageur Mutual Funds III, Inc.
Aggressive Growth Fund (New)
Growth Stock Fund (New)
International Equity Fund (New)
Tax Efficient Equity Fund (New)
Voyageur Tax Free Funds, Inc.
Minnesota Tax Free Fund (New)
North Dakota Tax Free Fund (New)
Dated as of July 21, 1997
4
<PAGE>
DELAWARE SERVICE COMPANY, INC.
By: /s/ David K. Downes
----------------------------------
David K. Downes
President, Chief Executive Officer and Chief Financial Officer
DELAWARE GROUP ADVISER FUNDS, INC.
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP EQUITY FUNDS I, INC.
DELAWARE GROUP EQUITY FUNDS II, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL FUNDS, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT FUNDS, INC.
DELAWARE POOLED TRUST, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX FREE MONEY FUND, INC.
DELAWARE GROUP TREND FUND, INC.
DMC TAX-FREE INCOME TRUST-PENNSYLVANIA
VOYAGEUR FUNDS, INC.
VOYAGEUR INSURED FUNDS, INC.
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC.
VOYAGEUR INVESTMENT TRUST
VOYAGEUR INVESTMENT TRUST II
VOYAGEUR MUTUAL FUNDS, INC.
VOYAGEUR MUTUAL FUNDS II, INC.
VOYAGEUR MUTUAL FUNDS III, INC.
By: /s/ Wayne A. Stork
------------------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
5
<PAGE>
Exhibit 99.B11
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Voyageur Tax Free Funds, Inc.
Voyageur Intermediate Tax-Free Funds, Inc.
Voyageur Insured Funds, Inc.
Voyageur Investment Trust
Voyageur Investment Trust II
Voyageur Mutual Funds, Inc.
Voyageur Mutual Funds II, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" in Part A and
"FINANCIAL STATEMENTS" in Part B of the Registration Statement.
/s/KPMG Peat Marwick LLP
Minneapolis, Minnesota
August 25, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Voyageur Mutual Funds, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" in Part A and
"FINANCIAL STATEMENTS" in Part B of the Registration Statement.
/s/KPMG Peat Marwick LLP
Minneapolis, Minnesota
August 25, 1997
<PAGE>
VOYAGEUR TAX FREE FUNDS, INC.
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC.
VOYAGEUR INSURED FUNDS, INC.
VOYAGEUR FUNDS, INC.
VOYAGEUR INVESTMENT TRUST
VOYAGEUR INVESTMENT TRUST II
VOYAGEUR MUTUAL FUNDS, INC.
VOYAGEUR MUTUAL FUNDS II, INC.
VOYAGEUR MUTUAL FUNDS III, INC.
VAM INSTITUTIONAL FUNDS, INC.
Multiple Class Plan Pursuant to Rule 18f-3
As Approved as of June 19, 1997
I. Preamble
Each of the funds listed below (each a "Fund", and collectively the
"Funds"), is a separate series of one of the above-captioned registrants (each,
a "Company"). Each Fund has elected to rely on Rule 18f-3 under the Investment
Company Act of 1940, as amended (the "1940 Act") in offering multiple classes of
shares in such Fund:
<TABLE>
<CAPTION>
<S> <C>
Delaware-Voyageur US Government Securities Fund Delaware-Voyageur Tax-Free Washington Insured Fund
Delaware-Voyageur Tax-Free Arizona Insured Fund Delaware-Voyageur Tax-Free Florida Intermediate Fund
Delaware-Voyageur Tax-Free Colorado Insured Fund Delaware-Voyageur Tax-Free Arizona Fund
Delaware-Voyageur Minnesota Insured Fund Delaware-Voyageur Tax-Free California Fund
Delaware-Voyageur Tax-Free Arizona Intermediate Fund Delaware-Voyageur Tax-Free Iowa Fund
Delaware-Voyageur Tax-Free California Intermediate Fund Delaware-Voyageur Tax-Free Idaho Fund
Delaware-Voyageur Tax-Free Colorado Intermediate Fund Delaware-Voyageur Minnesota High Yield Municipal Bond Fund
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund National High Yield Municipal Bond Fund
Delaware-Voyageur Tax-Free California Insured Fund Delaware-Voyageur Tax-Free New York Fund
Delaware-Voyageur Tax-Free Florida Insured Fund Delaware-Voyageur Tax-Free Wisconsin Fund
Delaware-Voyageur Tax-Free Florida Fund Delaware-Voyageur Tax-Free Colorado Fund
Delaware-Voyageur Tax-Free Kansas Fund Aggressive Growth Fund
Delaware-Voyageur Tax-Free Missouri Insured Fund Growth Stock Fund
Delaware-Voyageur Tax-Free New Mexico Fund Tax Efficient Equity Fund
Delaware-Voyageur Tax-Free Oregon Insured Fund Delaware-Voyageur Tax-Free Minnesota Fund
Delaware-Voyageur Tax-Free Utah Fund Delaware-Voyageur Tax-Free North Dakota Fund
</TABLE>
<PAGE>
This plan pursuant to rule 18f-3 (the "Plan"), which shall become effective for
the Funds on the Effective Date (as defined in section VI of this Plan), sets
forth the differences among classes of shares of the Funds, including
distribution arrangements, shareholder services, income gains and expense
allocations, conversion and exchange options, and voting rights.
II. Attributes of Share Classes.
The attributes of each existing class of the existing Funds with
respect to distribution arrangements, shareholder services, and conversion and
exchange options shall be as set forth in the following materials:
A. Prospectus and Statement of Additional Information of each
respective Fund as in effect (including supplements) as of the Effective Date
(as defined in section VI hereof).
B. Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act
("Rule 12b-1 Plan") for each Company and Fund as in effect on the Effective Date
(as defined in section VI hereof).
Expenses, income and gains of such existing classes of the Funds shall be
allocated in the manner set forth in III and IV below. Each such existing class
shall have exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement for shareholder services and the distribution
of shares and shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interest of any
other class, and shall have in all other respects the same rights and
obligations as each other class.
III. Expense Allocation.
A. Class-specific expenses. Each Company shall allocate to each class
of shares of a Fund any fees and expenses incurred by the Company in connection
with the distribution or servicing of such class of shares under a Rule 12b-1
Plan, if any, adopted for such class. In addition, the Company reserves the
right, subject to approval by the Company's Board of Directors/Trustees, to
allocate fees and expenses of the following nature to a particular class of
shares of a Fund (to the extent that such fees and expenses actually vary among
each class of shares or vary by types of services provided to each class of
shares of the Fund):
(i) transfer agency and other recordkeeping costs;
(ii) Securities and Exchange Commission and blue sky registration
or qualification fees;
(iii) printing and postage expenses related to printing and
distributing class specific materials, such as shareholder
reports, prospectuses and proxies to current shareholders of a
particular class or to regulatory authorities with respect to
such class of shares;
(iv) audit or accounting fees or expenses relating solely to such
class;
-2-
<PAGE>
(v) the expenses of administrative personnel and services as
required to support the shareholders of such class;
(vi) litigation or other legal expenses relating solely to such
class of shares;
(vii) Directors'/Trustees' fees and expenses incurred as a result
of issues relating solely to such class of shares; and
(viii) other expenses subsequently identified and determined to be
properly allocated to such class of shares.
B. Common Expenses.
(i) For Funds which declare a dividend to shareholders on a daily
basis ("Daily Dividend Funds"), except for any expenses that
are allocated to a particular class as described in paragraph
A above, all expenses incurred by a Fund will be allocated to
each class of shares of such Fund on the basis of "settled
shares" (net assets valued in accordance with generally
accepted accounting principles but excluding the value of
subscriptions receivable) of each class in relation to the net
assets of the Fund.
(ii) For Funds which do not declare a dividend to shareholders on a
daily basis ("Non-Daily Dividend Funds"), except for any
expenses that are allocated to a particular class as described
in paragraph A above, all expenses incurred by a Fund will be
allocated to each class of shares of such Fund on the basis of
the net asset value of each such class in relation to the net
asset value of the Fund.
IV. Allocation of Income and Gains.
A. Daily Dividend Funds.
(i) Income of a Daily Dividend Fund will be allocated to each
class of shares of such Fund on the basis of settled shares of
each class in relation to the net assets of the Fund.
(ii) Realized and unrealized capital gains and losses of a Fund
will be allocated to each class of shares of such Fund on the
basis of the net asset value of each such class in relation to
the net asset value of the Fund.
B. Non-Daily Dividend Funds.
(i) Income of a Non-Daily Dividend Fund will be allocated to each
class of shares of such Fund on the basis of the net asset
value of each such class in relation to the net asset value of
the Fund.
-3-
<PAGE>
(ii) Realized and unrealized gains and losses of a Non-Daily
Dividend Fund will be allocated to each class of shares of
such Fund on the basis of the net asset value of each such
class in relation to the net asset value of the Fund.
V. Amendment of Plan; Periodic Review.
A. New Funds and New Classes. With respect to any new portfolio of a
Company created after the date of this Plan and any new class of shares of the
existing Funds created after the date of this Plan, the Board of
Directors/Trustees of such Company shall approve amendments to this Plan setting
forth the attributes of the classes of shares of such new portfolio or of such
new class of shares.
B. Material Amendments and Periodic Reviews. The Board of
Directors/Trustees of each Company, including a majority of the independent
directors/trustees, shall periodically review this Plan for its continued
appropriateness and shall approve any material amendment of this Plan as it
relates to any class of any Fund covered by this Plan.
VI. Effective Date of Plan.
This Plan shall become effective for a Fund upon conversion of the
accounting system for such Fund (the "Effective Date"). Upon the Effective Date,
this Plan shall supersede any other plan pursuant to Rule 18f-3 which previously
has been adopted for a Fund.
-4-
<PAGE>
POWER OF ATTORNEY
Each of the undersigned, a member of the Board of Directors of VOYAGEUR
MUTUAL FUNDS, INC., hereby constitutes and appoints Wayne A. Stork, W. Thacher
Longstreth and Walter P. Babich and any one of them acting singly, his true and
lawful attorneys-in-fact, in his name, place, and stead, to execute and cause to
be filed with the Securities and Exchange Commission and other federal or state
government agency or body, such registration statements, and any and all
amendments thereto as either of such designees may deem to be appropriate under
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all other applicable federal and state securities laws.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
this 1st day of May, 1997.
/s/Walter P. Babich /s/ W. Thacher Longstreth
- ------------------------------ --------------------------------
Walter P. Babich W. Thacher Longstreth
/s/ Anthony D. Knerr /s/ Charles E. Peck
- ------------------------------ --------------------------------
Anthony D. Knerr Charles E. Peck
/s/ Ann R. Leven /s/ Wayne A. Stork
- ------------------------------ --------------------------------
Ann R. Leven Wayne A. Stork
<PAGE>
POWER OF ATTORNEY
The undersigned, a member of the Boards of Directors/Trustees of the
Delaware Group Funds listed on Exhibit A to this Power of Attorney, hereby
constitutes and appoints Wayne A. Stork, W. Thacher Longstreth and Walter P.
Babich and any one of them acting singly, his true and lawful attorneys-in-fact,
in his name, place, and stead, to execute and cause to be filed with the
Securities and Exchange Commission and other federal or state government agency
or body, such registration statements, and any and all amendments thereto as
either of such designees may deem to be appropriate under the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all other
applicable federal and state securities laws.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of this
1st day of May, 1997.
/s/Thomas F. Madison
- ---------------------------
Thomas F. Madison
<PAGE>
POWER OF ATTORNEY
EXHIBIT A
DELAWARE GROUP FUNDS
DELAWARE GROUP EQUITY FUNDS I, INC.
DELAWARE GROUP EQUITY FUNDS II, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT FUNDS, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL FUNDS, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
DELAWARE POOLED TRUST, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DMC TAX-FREE INCOME TRUST-PENNSYLVANIA
DELAWARE GROUP DIVIDEND AND INCOME FUND, INC.
DELAWARE GROUP GLOBAL DIVIDEND AND INCOME FUND, INC.
VOYAGEUR FUNDS, INC.
VOYAGEUR INSURED FUNDS, INC.
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC.
VOYAGEUR INVESTMENT TRUST
VOYAGEUR INVESTMENT TRUST II
VOYAGEUR MUTUAL FUNDS, INC.
VOYAGEUR MUTUAL FUNDS II, INC.
VOYAGEUR MUTUAL FUNDS III, INC.
VOYAGEUR TAX FREE FUNDS, INC.
VOYAGEUR ARIZONA MUNICIPAL INCOME FUND, INC.
VOYAGEUR COLORADO INSURED MUNICIPAL INCOME FUND, INC.
VOYAGEUR FLORIDA INSURED MUNICIPAL INCOME FUND
VOYAGEUR MINNESOTA MUNICIPAL INCOME FUND, INC.
VOYAGEUR MINNESOTA MUNICIPAL INCOME FUND II, INC.
VOYAGEUR MINNESOTA MUNICIPAL INCOME FUND III, INC.
<PAGE>
POWER OF ATTORNEY
The undersigned, a member of the Boards of Directors/Trustees of the
Delaware Group Funds listed on Exhibit A to this Power of Attorney, hereby
constitutes and appoints Wayne A. Stork, W. Thacher Longstreth and Walter P.
Babich and any one of them acting singly, his true and lawful attorneys-in-fact,
in his name, place, and stead, to execute and cause to be filed with the
Securities and Exchange Commission and other federal or state government agency
or body, such registration statements, and any and all amendments thereto as
either of such designees may deem to be appropriate under the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all other
applicable federal and state securities laws.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of this
1st day of May, 1997.
/s/Jeffrey J. Nick
- -------------------------
Jeffrey J. Nick
<PAGE>
POWER OF ATTORNEY
EXHIBIT A
DELAWARE GROUP FUNDS
DELAWARE GROUP EQUITY FUNDS I, INC.
DELAWARE GROUP EQUITY FUNDS II, INC.
DELAWARE GROUP EQUITY FUNDS IV, INC.
DELAWARE GROUP EQUITY FUNDS V, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT FUNDS, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL FUNDS, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
DELAWARE POOLED TRUST, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DMC TAX-FREE INCOME TRUST-PENNSYLVANIA
DELAWARE GROUP DIVIDEND AND INCOME FUND, INC.
DELAWARE GROUP GLOBAL DIVIDEND AND INCOME FUND, INC.
VOYAGEUR FUNDS, INC.
VOYAGEUR INSURED FUNDS, INC.
VOYAGEUR INTERMEDIATE TAX FREE FUNDS, INC.
VOYAGEUR INVESTMENT TRUST
VOYAGEUR INVESTMENT TRUST II
VOYAGEUR MUTUAL FUNDS, INC.
VOYAGEUR MUTUAL FUNDS II, INC.
VOYAGEUR MUTUAL FUNDS III, INC.
VOYAGEUR TAX FREE FUNDS, INC.
VOYAGEUR ARIZONA MUNICIPAL INCOME FUND, INC.
VOYAGEUR COLORADO INSURED MUNICIPAL INCOME FUND, INC.
VOYAGEUR FLORIDA INSURED MUNICIPAL INCOME FUND
VOYAGEUR MINNESOTA MUNICIPAL INCOME FUND, INC.
VOYAGEUR MINNESOTA MUNICIPAL INCOME FUND II, INC.
VOYAGEUR MINNESOTA MUNICIPAL INCOME FUND III, INC.
