<PAGE>
- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1998
- --------------------------------------------------------------------------------
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 -- 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 Mutual Funds, Inc.'s 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.
This Part B supplements the information contained in the current
Prospectus for the Fund dated April 30, 1998 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.
All references to "shares" in this Part B refer to all Classes of
shares of the Fund, except where noted.
-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 Investment Company Act of 1940
(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.
-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 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, amended (the "Code") 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
-4-
<PAGE>
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 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 IBCA, Inc. (formerly Fitch Investors Service, L.P.)
("Fitch"), or Standard & Poor's Ratings Group ("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 Part B. 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, Delaware Management Company (the "Manager"), 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.
-5-
<PAGE>
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) 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
AAA 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 United States Constitution and the 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
-6-
<PAGE>
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 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,
-7-
<PAGE>
bridge and toll road facilities. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for airport use,
occupancy of certain terminal space, service fees and leases. Airport operating
income may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The revenues of issuers which derive their payments from bridge, road or tunnel
toll revenues could be adversely affected by competition from toll-free
vehicular bridges and roads and alternative modes of transportation. Such
revenues could also be adversely affected by a reduction in the availability of
fuel to motorists or significant increases in the costs thereof.
Education Obligations. 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.
-8-
<PAGE>
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 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 102% of the
repurchase price, including the portion representing the Fund's yield under such
agreements which is monitored on a daily basis.
The funds in the Delaware Investments family have obtained an
exemption from the joint-transaction prohibitions of Section 17(d) of the 1940
Act to allow funds the Delaware Investments family 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 listed on a national
securities exchange (an "Exchange") 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.
-9-
<PAGE>
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.
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
-10-
<PAGE>
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 option,
or at any particular time, and for some options no secondary market on an
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the 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.
-11-
<PAGE>
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 (the "SEC"), 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.
-12-
<PAGE>
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 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
-13-
<PAGE>
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 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.
-14-
<PAGE>
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 an 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
-15-
<PAGE>
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 (the "1933 Act"). 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, Mutual Funds, Inc.'s 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 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. In November 1997, the state's unemployment
rate, on a seasonally adjusted basis, was 2.8%, down 1.2 percentage points from
the 4.0% observed one year earlier. The unemployment rate was well below the
national rate of 4.6%. Payroll employment in Minnesota grew by 53,000 jobs
during the 1997 fiscal year. Employment in fiscal year 1997 grew by 2.2%, the
same rate as the
-16-
<PAGE>
U.S. average. At present, the state's most serious economic challenge is
ensuring there will be sufficient workers to fill the jobs currently being
generated.
Personal income in Minnesota is now estimated to have grown at a 6.6%
annual rate during fiscal year 1997, well above the national average of 5.3%.
Wage growth was strong, but as in neighboring Midwestern states, all of whom
also had strong growth in personal income, the agricultural sector was a major
contributor. Prices were higher than average, yields were strong, and federal
farm program payments under the 1996 farm bill were much larger than they would
have been under the previous program.
Personal income in Minnesota is forecast to grow by 5.0% during the
1998 fiscal year, slightly below the average rate forecast for the nation.
Payroll employment is expected to grow at a 2.1% annual rate, consistent with
the national average . Wage and salary income growth, however, is projected to
lag the national average rate as states outside the Midwest also begin to feel
labor market pressures and part-time workers elsewhere increase their hours to,
or beyond, the levels they desire. Farm income in the 1998 fiscal year is also
forecast to be down from the high levels reported during fiscal year 1997 since
commodity prices have returned to more normal levels.
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
adjustments.
During fiscal year 1997, the total fund balance, on a GAAP basis, for
the General Fund increased by $66.9 million to $1.486 billion. At June 30, 1997,
the unreserved, undesignated portion of the fund balance reflected a positive
balance of $642.3 million, after providing for a $583.5 million budgetary
reserve. This compares with a $491.9 million unreserved, undesignated fund
balance at the end of fiscal year 1996 with a $570 million budgetary reserve. On
a budgetary basis, the June 30, 1997, unrestricted (undesignated) fund balance
for the General Fund was $812.7 million, compared with a balance of $506 million
at the end of 1996.
General Fund revenues and transfers-in totaled $10.412 billion for
fiscal year 1997, up 8% from those for fiscal year 1996. General Fund
expenditures and transfers-out for the year totaled $9.926 billion, an increase
of 3% from the previous year. Of this amount, $6.917 billion (70%) is in the
form of grants and subsidies to local governments, individuals and non-profit
organizations.
The Minnesota Department of Finance November 1997 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1999 with a $453 million surplus, plus a $350 million cash
flow account balance, a $522 million budget reserve and $93 million in other
dedicated accounts. Revenues for the 1998-99 biennium are forecast at $21.045
billion. Total General Fund expenditures and transfers for the biennium are
projected to be $20.7 billion. The forecast balance for the General Fund is
$1.36 billion for the 1998-99 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
-17-
<PAGE>
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.
The state issued $170.0 million of new general obligation bonds, and
$172.1 million of general obligation bonds were redeemed during 1997, leaving an
outstanding balance of $2.2 billion. Moody's and Fitch's rates Minnesota general
obligation bonds Aaa and AAA, respectively. In August 1997, S&P upgraded the
state's general obligation bond rating to AAA from AA+.
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 Minnesota State Taxation under Taxes
in the Prospectus.
-18-
<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 intends to
continue to qualify, as regulated investment companies under Subchapter M of 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.
-19-
<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 periods, as applicable. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC, 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.
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 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 Fund may also state total return performance for its Classes in the
form of an average annual return. This average annual return figure will be
computed by taking the sum of a Class' annual returns, then dividing that figure
by the number of years in the overall period indicated. The computation will
reflect the impact of the maximum front-end sales charge or CDSC, if any, paid
on the illustrated investment amount against the first year's return.
The performance, as shown below, is the average annual total return
quotations of each Class of the Fund through December 31, 1997, computed as
described above. The average annual total return for Class
-20-
<PAGE>
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. 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, 1997. 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, 1997 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.
Average Annual Total Return
Class A Shares Class A Shares
(at Offer) (at NAV)
-------------- --------------
1 year ended
12/31/97 7.05% 11.26%
Period 6/4/96(1)
through 12/31/97 7.98% 10.63%
(1) Date of initial public offering.
Average Annual Total Return
Class B Shares Class B Shares
(including CDSC) (excluding CDSC)
---------------- ----------------
1 year ended
12/31/97 6.41% 10.41%
Period 6/12/96(1)
through 12/31/97 9.07% 11.51%
(1) Date of initial public offering.
-21-
<PAGE>
Average Annual Total Return
Class C Shares Class C Shares
(including CDSC) (excluding CDSC)
---------------- ----------------
1 year ended
12/31/97 9.41% 10.41%
Period 6/7/96(1)
through 12/31/97 9.90% 9.90%
(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.
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, 1997 using this formula were 6.00%,
5.47% and 5.47% 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.
-22-
<PAGE>
The taxable equivalent yields for each Class of the Fund for the 30-day
period ended December 31, 1997 were:
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Class A 9.11% 9.50% 10.25% 10.86%
Class B 8.30% 8.66% 9.34% 9.90%
Class C 8.30% 8.66% 9.34% 9.90%
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.
Total return performance of each Class will reflect the appreciation or
depreciation of principal, reinvestment of income and any capital gains
distributions paid during any indicated period, and the impact of the maximum
front-end sales charge or CDSC, if any, paid on the illustrated investment
amount, annualized. The results will not reflect any income taxes, if
applicable, payable by shareholders on the reinvested distributions included in
the calculations. As securities prices fluctuate, an illustration of past
performance should not be considered as representative of future results.
From time to time, the Fund may also quote its Classes' actual total
return performance , dividend results and other performance information in
advertising and other types of literature . This information may be compared to
that of other mutual funds with similar investment objectives and to stock, bond
and other relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance of the Fund (or Class) may be compared to
data prepared by Lipper Analytical Services, Inc., Morningstar, Inc. or the
performance of unmanaged indices compiled or maintained by statistical research
firms such as Lehman Brothers or Salomon Brothers, Inc.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare the Fund's
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The total
return performance reported for these indices will reflect the reinvestment of
all distributions on a quarterly basis and market price fluctuations. The
indices do not take into account any sales charge or other fees. A direct
investment in an unmanaged index is not possible.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well as
unmanaged indices compiled and maintained by these firms, will be used in
preparing
-23-
<PAGE>
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.
The Fund may also promote its Classes' yield and/or total return
performance and use comparative performance information computed by and
available from certain industry and general market research and publications,
such as Lipper Analytical Services, Inc., IBC/Donoghue's Money Market Report and
Morningstar, Inc.
Comparative information on the Consumer Price Index may also be included
in advertisements or other literature. The Consumer Price Index, as prepared by
the U.S. Bureau of Labor Statistics, is the most commonly used measure of
inflation. It indicates the cost fluctuations of a representative group of
consumer goods. It does not represent a return from an investment.
The performance of multiple indices compiled and maintained by
statistical research firms, such as Morgan Stanley, Salomon Brothers and Lehman
Brothers, may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the types of
securities in which the Funds may invest and the assumptions that were used in
calculating the blended performance will be described.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Fund may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Fund. The Fund may also compare performance to that of other compilations
or indices that may be developed and made available in the future.
The Fund may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Fund (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments or global or international investments), economic and
political conditions, the relationship between sectors of the economy and the
economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
bills. From time to time advertisements, sales literature, communications to
shareholders or other materials may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund), as well as the views as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to the Fund. In
addition, selected indices may be used to illustrate historic performance of
selected asset classes. The Fund may also include in advertisements, sales
literature,
-24-
<PAGE>
communications to shareholders or other materials, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, domestic and international
stocks, and/or bonds, treasury bills and shares of the Fund. In addition,
advertisements, sales literature, communications to shareholders or other
materials may include a discussion of certain attributes or benefits to be
derived by an investment in the Fund and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning (such as information on Roth IRAs and
Educational IRAs) and investment alternatives to certificates of deposit and
other financial instruments. Such sales literature, communications to
shareholders or other materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the Fund and may illustrate
how to find the listings of the Fund in newspapers and periodicals. Materials
may also include discussions of other Fund products, and services.
The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. The Fund may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Fund may include information
regarding the background and experience of its portfolio managers.
The following tables present examples, for purposes of illustration
only, of cumulative total return performance for each Class through December
31, 1997. For these purposes, the calculations reflect maximum sales charges,
if any, and assume the reinvestment of any capital gains distributions and
income dividends paid during the indicated periods. The performance does not
reflect any income taxes payable by shareholders on the reinvested distributions
included in the calculations. The performance of Class A Shares reflects the
maximum front-end sales charge paid on the purchase of shares but may also be
shown without reflecting the impact of any front-end sales charge. The
performance of Class B Shares and Class C Shares is calculated both with the
applicable CDSC included and excluded.
The net asset value of a Class fluctuates so shares, when redeemed, may
be worth more or less than the original investment, and a Class' results should
not be considered as representative of future performance.
-25-
<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>
3 months 3 months 3 months
ended ended ended
12/31/97 (0.51%) 12/31/97 (0.80%) 3.20% 12/31/97 2.20% 3.20%
6 months 6 months 6 months
ended ended ended
12/31/97 2.99%(3) 12/31/97 2.60% 6.60% 12/31/97 5.61% 6.61%
9 months 9 months 9 months
ended ended ended
12/31/97 6.34% 12/31/97 4.84% 9.84% 12/31/97 8.84% 9.84%
1 year 1 year 1 year
ended ended ended
12/31/97 7.05% 12/31/97 6.41% 10.41% 12/31/97 9.41% 10.41%
Period Period Period
6/4/96(4) 6/12/96(4) 6/7/96(4)
through through through
12/31/97 12.86% 12/31/97 14.45% 18.45% 12/31/97 15.95% 15.95%
</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, 1997, cumulative total return for
Class A Shares at net asset value was 7.00%.
(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 available from
the Delaware Investments family, will provide general information about
investment alternatives and scenarios that will allow investors to assess their
personal goals. This information will include general material about investing
as well as materials reinforcing various industry-accepted principles of prudent
and responsible personal financial planning. One typical way of addressing these
issues is to compare an individual's goals and the length of time the individual
has to attain these goals to his or her risk threshold. In addition, the
Distributor will provide information that discusses the Manager's overriding
investment philosophy and how that philosophy impacts the Fund's, and other
funds in the Delaware Investments family, 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.
-26-
<PAGE>
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick the
highs and the lows. By using a strategy known as dollar-cost averaging, you
schedule your investments ahead of time. If you invest a set amount on a regular
basis, that money will always buy more shares when the price is low and fewer
when the price is high. You can choose to invest at any regular interval--for
example, monthly or quarterly--as long as you stick to your regular schedule.
Dollar-cost averaging looks simple and it is, but there are important things to
remember.
Dollar-cost averaging works best over longer time periods, and it
doesn't guarantee a profit or protect against losses in declining markets. If
you need to sell your investment when prices are low, you may not realize a
profit no matter what investment strategy you utilize. That's why dollar-cost
averaging can make sense for long-term goals. Since the potential success of a
dollar-cost averaging program depends on continuous investing, even through
periods of fluctuating prices, you should consider your dollar-cost averaging
program a long-term commitment and invest an amount you can afford and probably
won't need to withdraw. You also should consider your financial ability to
continue to purchase shares during periods of high fund share prices. Delaware
Investments offers three services -- Automatic Investing Plan, Direct Deposit
Purchase Plan and the Wealth Builder Option --that can help to keep your regular
investment program on track. See Investing by Electronic Fund Transfer -Direct
Deposit Purchase Plan, Automatic Investing Plan 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 any stock or bond fund in the Delaware
Investments family.
-27-
<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. The Fund may include illustrations showing the power
of compounding in advertisements and other types of literature.
-28-
<PAGE>
TRADING PRACTICES AND BROKERAGE
Fund 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 (the "1934 Act") 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 available from
the Delaware Investments family. 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.
-29-
<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 Conduct Rules 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 available from the Delaware Investments
family, such as custodian fees, and may, at the request of the Distributor, give
consideration to sales of shares of such funds 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 and for the fiscal year ended December 31, 1997, the Fund's portfolio
turnover rates were 15% and 23%, respectively.
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.
-30-
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for the Fund's
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
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 fund in the Delaware Investments family, the Manager or any
of the its affiliates if the purchases are made pursuant to a payroll deduction
program. Shares purchased pursuant to the Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act and shares purchased in connection with an Automatic
Investing Plan are subject to a minimum initial purchase of $250 and a minimum
subsequent purchase of $25. Accounts opened under the Asset Planner service
are subject to a minimum initial investment of $2,000 per Asset Planner Strategy
selected.
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 amendments to its Conduct Rules, 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. 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. 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.
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
-31-
<PAGE>
the investment which are equal to those to which Class B Shares are subject.
Unlike Class B Shares, Class C Shares do not convert to another class.
Class A Shares, Class B Shares and Class C Shares represent a
proportionate interest in a Fund's assets and will receive a proportionate
interest in that Fund's income, before application, as to Class A Shares, Class
B Shares and Class C Shares, of any expenses under 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.
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 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 Shares, Class B Shares
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 A Shares
Purchases of $100,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges and may include a series of purchases
over a 13-month period under a Letter of Intention signed by the purchaser. See
Front-End Sales Charge Alternative - Class A Shares in the Prospectus for a
table illustrating reduced front-end sales charges. See also 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.
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Investments products and services and who increase
sales of funds in the Delaware Investments family may receive an additional
commission of up to 0.15% of the offering price in connection with sales of
Class A Shares. Such dealers must meet certain requirements in terms of
organization and distribution capabilities and their ability to increase sales.
The Distributor should be contacted for further information on these
requirements as well as the basis and circumstances upon which the additional
commission will be paid. Participating dealers may be deemed to have additional
responsibilities under the securities laws.
Dealer's Commission
As described more fully in the Prospectus, for initial purchases of
Class A Shares of $1,000,000 or more, a dealer's commission may be paid by the
Distributor to financial advisers through whom such purchases are
-32-
<PAGE>
effected. See Front-End Sales Charge Alternative - Class A Shares in the
Prospectus for the applicable schedule and further details.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth above, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestment of dividends or capital gains
distributions. See Waiver of Contingent Deferred Sales Charge - Class B Shares
and Class C Shares under Redemption and Exchange in the Prospectus for a list of
the instances in which the CDSC is waived. During the seventh year after
purchase and, thereafter, until converted automatically into Class A Shares,
Class B Shares 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
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 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 Shares and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, the Fund may make payments out of the assets of Class A
Shares, Class B Shares and Class C Shares directly to other unaffiliated
parties, such as banks, who either aid in the distribution of shares of, or
provide services to, such classes.
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 average
daily net assets of Class A Shares, and up to 1% (0.25% of which are service
fees to be paid to the Distributor, dealers and others for providing personal
service and/or maintaining shareholder accounts) of each of the Class B Shares'
and Class C Shares' average daily net assets for the year.
Mutual Funds, 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 Shares, Class B Shares and Class C Shares would be borne by such persons
without any payment 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,
-33-
<PAGE>
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 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 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 of the Fund's B Class. 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.
-34-
<PAGE>
For the fiscal year ended December 31, 1997, payments from Class A
Shares, Class B Shares and Class C Shares of the Fund amounted to $15,124,
$46,484 and $21,367, respectively. For the period May 1, 1997 through December
31, 1997, such amounts were used for the following purposes:
A Class B Class C Class
------- ------- -------
Advertising -- -- --
Annual/Semi-Annual Reports $348 -- --
Broker Trails $1,250 $10,238 $3,189
Broker Sales Charges -- $13,261 $10,860
Dealer Service Expenses -- $259 $157
Interest on Broker Sales Charges -- $14,232 $2,046
Commissions to Wholesalers $11 -- --
Promotional-Broker Meetings $1,015 $486 $112
Promotional-Other $4,801 -- --
Prospectus Printing $4,185 -- --
Telephone -- $38 $32
Wholesaler Expenses -- $764 --
Other -- -- --
Other Payments to Dealers -- Class A Shares, Class B Shares and Class C Shares
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of 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 funds in the Delaware Investments fmaily. In some instances, these
incentives or payments may be offered only to certain dealers who maintain, have
sold or may sell certain amounts of shares. The Distributor may also pay a
portion of the expense of preapproved dealer advertisements promoting the sale
of fund shares in the Delaware Investments family.
Special Purchase Features--Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be 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 Investments family, the Manager or any
of the Manager's current affiliates and those that may in the future be created,
legal counsel to the funds, and registered representatives and employees of
broker/dealers who have entered into Dealer's Agreements with the Distributor
may purchase Class A Shares of the Fund and any such class of shares of any of
the other funds available from the Delaware Investments family, including
any fund that may be created, at the net asset value per share. 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 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
-35-
<PAGE>
asset value by bank employees who provide services in connection with agreements
between the bank and unaffiliated brokers or dealers concerning sales of shares
of funds in the Delaware Investments family. Officers, directors and key
employees of institutional clients of the Manager or any of its affiliates may
purchase Class A Shares at net asset value. Moreover, purchases may be effected
at net asset value for the benefit of the clients of brokers, dealers and
registered investment advisers affiliated with a broker or dealer, if such
broker, dealer or investment adviser has entered into an agreement with the
Distributor providing specifically for the purchase of Class A Shares in
connection with special investment products, such as wrap accounts or similar
fee based programs.
Investors in Delaware Investments Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds available from the Delaware Investments family at net
asset value.
Mutual Funds, Inc. 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 available from the Delaware Investments family
(except shares of any fund in the Delaware Investments family which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a fund in the Delaware Investments family which carried a
front-end sales charge, CDSC or Limited CDSC) previously purchased and still
held as of the date of their Letter of Intention toward the completion of such
Letter.
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 Investments funds (except shares of any fund in the Delaware
Investments family which do not carry a front-end sales charge, CDSC or Limited
CDSC, other than shares of Delaware Group Premium Fund, Inc. beneficially owned
in connection with the ownership of variable insurance products, unless they
were acquired through an exchange from a fund in the Delaware Investments
family which carried a front-end sales charge, CDSC or Limited CDSC). In
addition, assets held by investment advisory clients of the Manager or its
affiliates in a stable value account may be combined with other fund holding in
the Delaware Investments family.
-36-
<PAGE>
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other funds in the Delaware
Investments family which offer such classes (except shares of any fund in the
Delaware Investments family which do not carry a front-end sales charge, CDSC
or Limited CDSC, other than shares of Delaware Group Premium Fund, Inc.
beneficially owned in connection with the ownership of variable insurance
products, unless they were acquired through an exchange from a fund in the
Delaware Investments family which carried a front-end sales charge, CDSC or
Limited CDSC). 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 in the Prospectus 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 available from the Delaware Investments family, subject to applicable
eligibility and minimum purchase requirements, in states where shares of such
other funds may be sold, at net asset value without the payment of a front-end
sales charge. This privilege does not extend to Class A Shares where the
redemption of the shares triggered the payment of a Limited CDSC. Persons
investing redemption proceeds from direct investments in mutual funds
available from the Delaware Investments family offered without a front-end
sales charge will be required to pay the applicable sales charge when purchasing
Class A Shares. The reinvestment privilege does not extend to a redemption of
either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
Investors should consult their financial advisers or the Transfer Agent,
which also serves as the 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.
-37-
<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 the
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 Fund Class.
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 Investments Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A Shares,
Class B Shares and Class C Shares may automatically reinvest dividends and/or
distributions in any of the mutual funds available from the Delaware
Investments family, 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 available from the Delaware Investments family 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.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for the Fund to
accept for investment in Class A Shares, Class B Shares 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 Shares, Class B
Shares and Class C Shares may make automatic investments by authorizing, in
advance, monthly payments directly from their checking account for
-38-
<PAGE>
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 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
available from the Delaware Investments family. Shareholders of the Classes
may elect to invest in one or more of the other mutual funds available from
the Delaware Investments family 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 available
from the Delaware Investments family, 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
-39-
<PAGE>
their financial ability to continue to participate in the program through
periods of low fund share prices. This program involves automatic exchanges
between two or more fund accounts and is treated as a purchase of shares of the
fund into which investments are made through the program. See Exchange Privilege
for a brief summary of the tax consequences of exchanges. Shareholders can
terminate their participation in Wealth Builder at any time by giving written
notice to the fund from which exchanges are made.
Asset Planner
To invest in funds in the Delaware Investments family using the Asset
Planner asset allocation service, you should complete an Asset Planner Account
Registration Form, which is available only from a financial adviser or
investment dealer. Effective September 1, 1997, the Asset Planner Service is
only available to financial advisers or investment dealers who have previously
used this service. The Asset Planner service offers a choice of four predesigned
asset allocation strategies (each with a different risk/reward profile) in
predetermined percentages in funds in the Delaware Investments family. With the
help of a financial adviser, you may also design a customized asset allocation
strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing accounts
in the Delaware Investments family into the Asset Planner service may be made at
net asset value under the circumstances described under Investing by Exchange in
the Prospectus. Also see Buying Class A Shares at Net Asset Value under Classes
of Shares. 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 Shares, Class B Shares
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 available from the Delaware
Investments family may be used in the same Strategy with consultant class shares
that are offered by certain other funds in the Delaware Investments family.
An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30 of each subsequent year. The fee,
payable to Delaware Service Company, Inc. to defray extra costs associated with
administering the Asset Planner service, will be deducted automatically from one
of the funds within your Asset Planner account if not paid by September 30.
However, effective November 1, 1996, the annual maintenance fee is waived until
further notice. Investors who utilize the Asset Planner for an IRA will continue
to pay an annual IRA fee of $15 per Social Security number. Investors will
receive a customized quarterly Strategy Report summarizing all Asset Planner
investment performance and account activity during the prior period.
Confirmation statements will be sent following all transactions other than those
involving a reinvestment of distributions.
Certain shareholder services are not available to investors using the
Asset Planner service, due to its special design. These include Delaphone,
Checkwriting, Wealth Builder Option and Letter of Intention. Systematic
Withdrawal Plans are available after the account has been open for two years.
-40-
<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 certain other authorized
persons. 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 certain
other authorized persons. 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.
An example showing how to calculate the net asset value per share and,
in the case of Class A Shares, the offering price per share, is included in the
Fund's financial statements which are incorporated by reference into this Part
B.
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. However, the net asset
value per share of each Class is expected to be equivalent.
-41-
<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 certain
other authorized persons, subject to any applicable CDSC or Limited CDSC. See
Distribution and Service under Investment Management Agreement. 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.
-42-
<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 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
-43-
<PAGE>
proceeds mailed to them at the address of record. 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 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 of Class A Shares, Class B Shares and Class C Shares who
own or purchase $5,000 or more of shares at the offering price, or net asset
value, as applicable, for which certificates have not been issued may establish
a Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or
quarterly withdrawals of $75 or more, although the 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.
-44-
<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 a 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 funds in the
Delaware Investments family 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 Shares 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.
-45-
<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 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
once 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.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is
required to track its sales of portfolio securities and to report its capital
gain distributions to you according to the following categories of holding
periods:
"Pre-Act long-term capital gains" or "28 percent rate gain":
securities sold by the Fund before May 7, 1997, that were held for
more than 12 months. These gains will be taxable to individual
investors at a maximum rate of 28%.
"Mid-term capital gains" or "28 percent rate gain": securities sold by
the Fund after July 28, 1997 that were held more than one year but not
more than 18 months. These gains will be taxable to individual
investors at a maximum rate of 28%.
-46-
<PAGE>
"1997 Act long-term capital gains" or "20 percent rate gain":
securities sold by the Fund between May 7, 1997 and July 28, 1997 that
were held for more than 12 months, and securities sold by the Fund
after July 28, 1997 that were held for more than 18 months. These
gains will be taxable to individual investors at a maximum rate of 20%
for investors in the 28% or higher federal income tax brackets, and at
a maximum rate of 10% for investors in the 15% federal income tax
bracket.
"Qualified 5-year gains": For individuals in the 15% bracket,
qualified 5-year gains are net gains on securities held for more than
5 years which are sold after December 31, 2000. For individuals who
are subject to tax at higher rate brackets, qualified 5-year gains are
net gains on securities which are purchased after December 31, 2000
and are held for more than 5 years. Taxpayers subject to tax at a
higher rate brackets may also make an election for shares held on
January 1, 2001 to recognize gain on their shares (any loss is
disallowed) in order to qualify such shares as qualified 5-year
property as though purchased after December 31, 2000. These gains will
be taxable to individual investors at a maximum rate of 18% for
investors in the 28% or higher federal income tax brackets, and at a
maximum rate of 8% for investors in the 15% federal income tax bracket
when sold after the 5 year holding period.
See also Accounting and Tax Issues.
-47-
<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
Delaware Investments since 1938. On December 31, 1997, the Manager and its
affiliates within the Delaware Investments family, including Delaware
International Advisers Ltd., were managing in the aggregate more than $40
billion in assets in the various institutional or separately managed
(approximately $24,040,760,000) and investment company (approximately
$16,482,523,000) 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 Investments family.
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 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 the 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.
-48-
<PAGE>
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 this Part B. This agreement replaces a
similar provision in the Fund's investment advisory contracts with the Fund's
predecessor investment adviser.
On December 31, 1997, the total net assets of Mutual Funds, Inc. were
$242,960,530.
Investment management fees incurred by the Fund for the last 2 fiscal
periods follow:
Period Incurred Paid Waived
------ -------- ---- ------
Year Ended
December 31, 1997 $136,823 $-0- $136,823
Period Ended
December 31, 1996 $ 17,203 $-0- $ 17,203
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.
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. and, therefore, Lincoln National Corporation.
The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders in addition to the Transfer Agent. Such brokers
are authorized to designate other intermediaries to accept purchase and
redemption orders on the behalf of the Fund. For purposes of pricing, the Fund
will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Investors may be charged a fee when effecting transactions through a
broker or agent.
-49-
<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 available from the Delaware Investments
family. On February 28, 1998, Mutual Funds, Inc.'s officers and directors owned
less than 1% of the outstanding shares of each Class of the Fund.
As of February 28, 1998, 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 Marvin J. Schmidtz 110,255 5.70%
Municipal Bond Fund 1616 Rice Creek Road
Class A Shares: Minneapolis, MN 55432
Minnesota High Yield Merrill Lynch, Pierce, Fenner & Smith 177,213 19.07%
Municipal Bond Fund For the Sole Benefit of its Customers
Class B Shares Attn: Fund Administration
4800 Deer Lake Drive East, Third Floor
Jacksonville, FL 32246
Minnesota High Yield Merrill Lynch, Pierce, Fenner & Smith 75,784 21.58%
Municipal Bond Fund For the Sole Benefit of its Customers
Class C Shares Attn: Fund Administration
4800 Deer Lake Drive East, Third Floor
Jacksonville FL 32246
Bonnie D. Kersting and 37,626 10.71%
Steven M. Kersting TTEES
Bonnie D. Kersting REV TRUST
17751 Layton Path
Lakeville , MN 55044
</TABLE>
DMH Corp., Delvoy, 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 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.
-50-
<PAGE>
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.
Certain officers and directors of Mutual Funds, Inc. hold identical
positions in each of the other funds available from the Delaware Investments
family. 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.
-51-
<PAGE>
*Wayne A. Stork (60)
Chairman and Director of Mutual Funds, Inc., 33 other investment
companies in the Delaware Investments family and Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer and Director of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director/Trustee of Delaware Management Company, Inc.
and Delaware Management Business Trust
Chairman, President, Chief Executive Officer and Chief Investment
Officer of Delaware Management Company (a series of Delaware
Management Business Trust)
Chairman, Chief Executive Officer and Chief Investment Officer of
Delaware Investment Advisers (a series of Delaware Management
Business Trust)
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd., Delaware International Holdings
Ltd. and Delaware Management Holdings, Inc.
President and Chief Executive Officer of Delvoy, Inc.
Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc. and 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.
* Jeffrey J. Nick (45)
President, Chief Executive Officer and Director of Mutual Funds, Inc.
and 33 other investment companies in the Delaware Investments
family
President and Director of Delaware Management Holdings, Inc.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc.
President of Lincoln Funds Corporation
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.
Richard G. Unruh, Jr. (58)
Executive Vice President of Mutual Funds, Inc. and 33 other
investment companies in the Delaware Investments family,
Delaware Management Holdings, Inc., Delaware Management
Company (a series of Delaware Management Business Trust) and
Delaware Capital Management, Inc.
President of Delaware Investment Advisers (a series of Delaware
Management Business Trust)
Executive Vice President and Director/Trustee of Delaware Management
Company, Inc. and Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
- ----------------------
* Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-52-
<PAGE>
Paul E. Suckow (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
Mutual Funds, Inc., 33 other investment companies in the
Delaware Investments family, Delaware Management Company,
Inc., Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a
series of Delaware Management Business Trust) and Delaware
Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc. and
Delaware Management Business Trust
Director of Founders CBO Corporation
Director of HYPPCO Finance Company Ltd.
Before returning to Delaware Investments 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 Delaware Investments.
David K. Downes (58)
Executive Vice President, Chief Operating Officer, Chief Financial
Officer of Mutual Funds, Inc., 33 other investment companies
in the Delaware Investments family, Delaware Management
Holdings, Inc, Founders CBO Corporation, Delaware Capital
Management, Inc., Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Investment
Advisers (a series of Delaware Management Business Trust) and
Delaware Distributors, L.P.
Executive Vice President, Chief Financial Officer, Chief Administrative
Officer and Trustee of Delaware Management Business Trust
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc., Founders Holdings, Inc.
and Delvoy, Inc.
President, Chief Executive Officer, Chief Financial Officer and
Director of Delaware Service Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and
Director of Delaware International Holdings Ltd.
Chairman,Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
Director of Delaware International Advisers Ltd.
Vice President of Lincoln Funds Corporation
During the past five years, Mr. Downes has served in various
executive capacities at different times within the Delaware
organization.
Walter P. Babich (70)
Director of Mutual Funds, Inc. and 33 other investment companies in the
Delaware Investments family
460 North Gulph Road, King of Prussia, PA 19406 Board Chairman,
Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
-53-
<PAGE>
Anthony D. Knerr (59)
Director of Mutual Funds, Inc. and 33 other investment companies in the
Delaware Investments family
500 Fifth Avenue, New York, NY 10110
Founder and Managing Director, Anthony Knerr & Associates
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
Ann R. Leven (57)
Director of Mutual Funds, Inc. and 33 other investment companies in the
Delaware Investments family
785 Park Avenue, New York, NY 10021
Treasurer, National Gallery of Art
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (77)
Director of Mutual Funds, Inc. and 33 other investment companies in the
Delaware Investments family
City Hall, Philadelphia, PA 19107
Philadelphia City Councilman.
Thomas F. Madison (62)
Director of Mutual Funds, Inc. and 33 other investment companies in the
Delaware Investments family
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402
President and Chief Executive Officer, MLM Partners, Inc.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
Charles E. Peck (72)
Director of Mutual Funds, Inc. and 33 other investment companies in the
Delaware Investments family
P.O. Box 1102, Columbia, MD 21044
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive
Officer of The Ryland Group, Inc., Columbia, MD.
-54-
<PAGE>
George M. Chamberlain, Jr. (51)
Senior Vice President, Secretary and General Counsel of Mutual Funds,
Inc., 33 other investment companies in the Delaware
Investments family, Delaware Distributors, L.P., Delaware
Management Company (a series of Delaware Management Business
Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Delaware Management Holdings,
Inc.
Senior Vice President, Secretary, General Counsel and Director/Trustee
of DMH Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc., Delaware Capital Management, Inc., Delvoy, Inc.
and Delaware Management Business Trust
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company
Senior Vice President and Director of Delaware International Holdings
Ltd.
Director of Delaware International Advisers Ltd.
Secretary of Lincoln Funds Corporation
Attorney.
During the past five years, Mr. Chamberlain has served in various
executive capacities at different times within the Delaware
organization.
Joseph H. Hastings (48)
Senior Vice President/Corporate Controller of Mutual Funds, Inc., 33
other investment companies in the Delaware Investments family
and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Distributors,
L.P., Delaware Distributors, Inc., Delaware Service Company,
Inc., Delaware Capital Management, Inc., Delaware
International Holdings Ltd., Delvoy, Inc. and Delaware
Management Business Trust
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
Treasurer of Lincoln Funds Corporation
During the past five years, Mr. Hastings has served in various
executive capacities at different times within the Delaware
organization.
-55-
<PAGE>
Michael P. Bishof (35)
Senior Vice President/Treasurer of Mutual Funds, Inc., 33 other
investment companies in the Delaware Investments family and
Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc., Delaware Management Company (a series of
Delaware Management Business Trust) and Delaware Service
Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting
of Delaware Distributors, L.P. and Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Senior Vice President and Manager of Investment Accounting of
Delaware International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation
Before joining Delaware Investments in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a
Vice President for CS First Boston Investment Management, New
York, NY from 1993 to 1994 and an Assistant Vice President for
Equitable Capital Management Corporation, New York, NY from
1987 to 1993.
John B. Fields (52)
Vice President/Senior Portfolio Manager of ten investment companies
in the Delaware Investments family, Delaware Capital
Management, Inc., Delaware Management Company, Inc, Delaware
Management Company (a series of Delaware Management Business
Trust) and Delaware Investment Advisers (a series of Delaware
Management Business Trust)
Trustee of Delaware Management Business Trust
Before joining Delaware Investments in 1992, Mr. Fields served as a
director of domestic equity risk management for DuPont,
Wilmington, DE.
Elizabeth Howell (35)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc. and
seven other investment companies in the Delaware Investments
family and Delaware Management Company, Inc.
Before joining Delaware Investments in 1997, Ms. Howell was a
Senior Portfolio Manager with Voyageur Fund Managers, Inc., a
Portfolio Manager, Fixed Income with Windsor Financial Group,
a Municipal Credit Analyst with Loomis Sayles & Co. and a
Credit Analyst with Eaton Vance Management.
-56-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation received from
Mutual Funds, Inc. , the total compensation received from all funds in the
Delaware Investments family for the fiscal year ended December 31, 1997, and
an estimate of annual benefits to be received upon retirement under the Delaware
Investments Retirement Plan for Directors/Trustees as of December 31, 1997.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation from
Aggregate Accrued Annual all 34 Investment
Compensation as Part of Benefits Companies in
from Mutual Mutual Funds, Upon Delaware
Name Funds, Inc.(1) Inc. Expenses Retirement* Investments(2)
- ---- -------------- -------------- ----------- ------------------
<S> <C> <C> <C> <C>
W. Thacher Longstreth $879 None $38,500 $59,827
Ann R. Leven $924 None $38,500 $65,160
Walter P. Babich $916 None $38,500 $64,160
Anthony D. Knerr $916 None $38,500 $64,160
Charles E. Peck $784 None $38,500 $56,682
Thomas F. Madison $879 None $38,500 $43,537
</TABLE>
* Under the terms of the Delaware Investments 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 available from the Delaware Investments family 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, 1997, he or she would be
entitled to annual payments totaling $38,500, in the aggregate, from all of
the funds available from the Delaware Investments family, based on the
number of funds available from the Delaware Investments family 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) Each independent director currently receives a total annual retainer fee of
$38,500 for serving as a director or trustee for all funds in Delaware
Investments, plus $3,145 for each Board Meeting attended. Ann R. Leven,
Walter P. Babich, and Anthony D. Knerr serve on the Fund's audit committee;
Ms. Leven is the chairperson. Members of the audit committee currently
receive additional annual compensation of $5,000 from all funds, with the
exception of the chairperson, who receives $6,000.
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and
for shareholders of classes of other funds available from the Delaware
Investments family are set forth in the relevant prospectuses for such
-57-
<PAGE>
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 available from the
Delaware Investments family. 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 available from the Delaware Investments family, 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 available from the Delaware Investments family.
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 available from the Delaware Investments family. 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.
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.
-58-
<PAGE>
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 funds in
the Delaware Investments family 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 funds in the Delaware
Investments family: (1) Decatur Income Fund, (2) Decatur Total Return Fund, (3)
Delaware Fund, (4) Limited-Term Government Fund, (5) USA Fund, (6) Delaware
Cash Reserve, (7) Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other
funds in the Delaware Investments family are available for timed exchanges.
Assets redeemed or exchanged out of Timing Accounts in funds available from the
Delaware Investments family 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 funds
in the Delaware Investments family:
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.
-59-
<PAGE>
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. Social Awareness Fund seeks to achieve long-term capital
appreciation. It seeks to achieve this objective by investing primarily in
equity securities of medium- to large-sized companies expected to grow over time
that meet the Fund's "Social Criteria" strategy.
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. High-Yield Opportunities Fund seeks to provide
investors with total return and, as a secondary objective, high current income.
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.
REIT Fund seeks to achieve maximum long-term total return with capital
appreciation as a secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in the real estate
industry.
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.
-60-
<PAGE>
Tax-Free New Jersey Fund seeks a high level of current interest income
exempt from federal income tax and New Jersey state and local taxes, consistent
with preservation of capital. Tax-Free Ohio Fund seeks a high level of current
interest income exempt from federal income tax and Ohio state and local taxes,
consistent with preservation of capital. 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.
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. Overseas
Equity 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.
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
-61-
<PAGE>
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 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
-62-
<PAGE>
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. 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 funds in the Delaware
Investments family, including charges and expenses, you can obtain a prospectus
from the Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
-63-
<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
available from the Delaware Investments family. 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 15 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 mutual
funds in the Delaware Investments family as available outside the annuity. See
Delaware Group Premium Fund, Inc., above.
Access persons and advisory persons of Delaware Investments, 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 available from the Delaware Investments family. Prior to
May 31, 1997, Voyageur Fund Distributors, Inc. served as the national
distributor for the Fund. The Distributor received net commissions from each
Fund on behalf of Class A Shares, after reallowances to dealers, as follows:
-64-
<PAGE>
Class A Shares
Total
Fiscal Amount of Amounts Net
Period Underwriting Reallowed Commission
Ended Commissions to Dealers to Distributor
------ ------------ ---------- --------------
12/31/97 $137,364 $19,727 $117,637
The Distributor received in the aggregate CDSC payments with
respect to each Class of the Fund as follows:
CDSC Payments
Fiscal
Period
Ended A Class B Class C Class
------ ------- ------- -------
12/31/97 $-0- $14,833 $2,925
12/31/96 -0- -0- -0-
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 available from the Delaware Investments family.
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
available from the Delaware Investments family for which it provides such
accounting services. Such fee is equal to 0.25% multiplied by the total amount
of assets in the complex for which the Transfer Agent furnishes accounting
services, where such aggregate complex assets are $10 billion or less, and 0.20%
of assets if such aggregate complex assets exceed $10 billion. The fees are
charged to each fund, including the 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.
The Manager and its affiliates own the name "Delaware Group."
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.
-65-
<PAGE>
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 Shares, Class B Shares and Class C Shares will be allocated solely to
those classes.
Effective June 9, 1997, the name of Voyageur Minnesota High Yield
Municipal Bond Fund changed to Delaware-Voyageur Minnesota High Yield Municipal
Bond Fund.
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.
-66-
<PAGE>
APPENDIX A - GENERAL CHARACTERISTICS AND RISKS OF OPTIONS AND FUTURES
General Characteristics and Risks of Options and Futures
General. As described in Options and Futures under Investment
Objectives and Policies in the Prospectus, 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.
-67-
<PAGE>
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
1.5% 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
-68-
<PAGE>
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 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.
-69-
<PAGE>
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.
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 the 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, Financial Highlights and Notes
to Financial Statements, as well as the report of Ernst & Young LLP, independent
auditors, for the fiscal year ended December 31, 1997 are included in its Annual
Report to shareholders. The financial statements, financial highlights, the
notes relating thereto and the report of Ernst & Young LLP, listed above are
incorporated by reference from the Annual Report into this Part B.
-71-
<PAGE>
Delaware Investments includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific tax-exempt
funds, money market funds, global and international funds and closed-end funds
give investors the ability to create a portfolio that fits their personal
financial goals. For more information, shareholders of the Fund Classes should
contact their financial adviser or call Delaware Investments at 800-523-4640.
INVESTMENT MANAGER
Delaware Management Company
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
- --------------------------------------------------------------------------------
APRIL 30, 1998
[GRAPHIC OMITTED]
-72-
