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As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
1/03/07 Delaware Group Tax Free Fund 485BPOS 1/03/07 7:70 Pietrzykowski Kris..R/FA
Delaware Group Tax Free Fund
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
File No. 002-86606
File No. 811-03850
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
---------
Post-Effective Amendment No. 34 /X/
---------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 34
---------
DELAWARE GROUP TAX-FREE FUND
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
2005 Market Street, Philadelphia, Pennsylvania 19103-7094
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 523-1918
David F. Connor, Esq., 2005 Market Street, Philadelphia, PA 19103-7094
--------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Public Offering: January 3, 2007
It is proposed that this filing will become effective:
/X / immediately upon filing pursuant to paragraph (b)
-----------
/ / on (date) pursuant to paragraph (b)
-----------
/ / 60 days after filing pursuant to paragraph (a) (1)
-----------
/ / on (date) pursuant to paragraph (a)(1)
-----------
/ / 75 days after filing pursuant to paragraph (a) (2)
-----------
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
-----------
If appropriate:
/ / This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
--- C O N T E N T S ---
This Post-Effective Amendment No. 34 to Registration File No. 002-86606 includes
the following:
1. Facing Page
2. Contents Page
3. Part A - Prospectus (1)
4. Part B - Statement of Additional Information (1)
5. Part C - Other Information (1)
6. Signatures
7. Exhibits
(1) This Registration Statement contains one Prospectus and one Statement
of Additional Information for two registrants (each of which offers
its shares in one or more series). A separate Registration Statement,
which incorporates by reference the common Prospectus and common
Statement of Additional Information and includes its own Part C, is
being filed for the other registrant.
The Prospectus and Statement of Additional Information contained in
this Post-Effective Amendment relate to the Class A, B and C shares of
the Registrant's two series, Delaware Tax-Free USA Fund and Delaware
Tax-Free USA Intermediate Fund, and also to the Delaware National
High-Yield Municipal Bond Fund series of Voyageur Mutual Funds. The
Part C contained in this Post-Effective Amendment relates only to the
Registrant's two series. A separate Registration Statement which
incorporates by reference the Prospectus and Statement of Additional
Information as it relates to the Delaware National High-Yield
Municipal Bond Fund and includes its own Part C is being filed for
Voyageur Mutual Funds.
Delaware
Investments(R)
A member of Lincoln Financial Group
FIXED INCOME
Prospectus
DECEMBER 29, 2006
DELAWARE TAX-FREE USA FUND
CLASS A o CLASS B o CLASS C
DELAWARE TAX-FREE USA INTERMEDIATE FUND
CLASS A o CLASS B o CLASS C
DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND
CLASS A o CLASS B o CLASS C
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
Fund profile page 2
Delaware Tax-Free USA Fund 2
Delaware Tax-Free USA Intermediate Fund 4
Delaware National High-Yield Municipal Bond Fund 6
How we manage the Funds page 10
Our investment strategies 10
The securities we typically invest in 11
The risks of investing in the Funds 17
Disclosure of portfolio holdings 19
Who manages the Funds page 20
Investment manager 20
Investment management fees 20
Portfolio managers 20
Manager of managers structure 20
Who's who? 21
About your account page 22
Investing in the Funds 22
Choosing a share class 22
Dealer compensation 25
Payments to intermediaries 25
How to reduce your sales charge 26
How to buy shares 29
Fair valuation 30
Document delivery 30
How to redeem shares 31
Account minimums 32
Special services 32
Frequent trading of Fund shares 34
Dividends, distributions and taxes 36
Financial highlights page 38
Glossary page 44
Additional information page 47
1
Profile: Delaware Tax-Free USA Fund
What is the Fund's goal?
Delaware Tax-Free USA Fund seeks as high a level of current interest income
exempt from federal income tax as is available from municipal obligations and as
is consistent with prudent investment management and preservation of capital.
Although the Fund will strive to meet its goal, there is no assurance that it
will.
What are the Fund's main investment strategies?
Under normal circumstances, the Fund will invest at least 80% of its net assets
in securities the income from which is exempt from federal income taxes,
including the federal alternative minimum tax. This is a fundamental investment
policy that may not be changed without prior shareholder approval.
The Fund will invest primarily in municipal debt obligations that are issued by
state and local governments to raise funds for various public purposes such as
hospitals, schools and general capital expenses. The Fund will invest its assets
in securities with maturities of various lengths, depending on market
conditions, but will have a dollar-weighted average effective maturity of
between five and 30 years. We will attempt to adjust the average maturity of the
bonds in the portfolio to provide a high level of tax-exempt income consistent
with preservation of capital. The Fund's income level will vary depending on
current interest rates and the specific securities in the portfolio. The Fund
may concentrate its investments in certain types of bonds or in a certain
segment of the municipal bond market when the supply of bonds in other sectors
does not suit our investment needs.
What are the main risks of investing in the Fund?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. Over time, the value of your investment in
the Fund will increase and decrease according to changes in the value of the
securities in the Fund's portfolio. This Fund will be affected primarily by
changes in interest rates. For example, when interest rates rise, the value of
bonds in the portfolio will likely decline. The Fund may also be affected by the
ability of individual municipalities to pay interest and repay principal on the
bonds they issue. The Fund is non-diversified as defined under the Investment
Company Act of 1940, as amended (1940 Act), which means that it may invest a
greater percentage of its assets in a single issuer than a diversified fund, and
may be subject to greater volatility or risk of loss than if it were
diversified. The Fund is permitted to invest up to 20% of its net assets in
securities the income from which is subject to the federal alternative minimum
tax. Income from these securities would be taxable for investors subject to that
tax.
For a more complete discussion of risk, please see "The risks of investing in
the Funds" on page 17.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Fund is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Fund with your financial advisor to
determine whether it is an appropriate choice for you.
Who should invest in the Fund
o Investors seeking monthly income, free from federal income taxes.
o Investors with long-term financial goals.
Who should not invest in the Fund
o Investors with very short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
especially over the short term.
2
How has Delaware Tax-Free USA Fund performed?
This bar chart and table can help you evaluate the risks of investing in the
Fund. We show how annual returns for the Fund's Class A shares have varied over
the past ten calendar years, as well as the average annual returns of the Class
A, B and C shares for one-year, five-year and ten-year periods. The Fund's past
performance (before and after taxes) does not necessarily indicate how it will
perform in the future. The returns reflect expense caps in effect during the
periods. The returns would be lower without the expense caps. Please see the
footnotes on page 9 for additional information about the expense caps.
Year-by-year total return (Class A)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
----- ------- ------ ------- ------- ------- ------- -------- ------- ------
0.84% 8.31% 4.85% -5.18% 10.89% 4.37% 8.72% 6.69% 5.22% 3.80%
As of September 30, 2006, the Fund's Class A shares had a calendar year-to-date
return of 3.93%. During the periods illustrated in this bar chart, Class A's
highest quarterly return was 4.55% for the quarter ended September 30, 2002 and
its lowest quarterly return was -3.30% for the quarter ended June 30, 1999.
The maximum Class A sales charge of 4.50%, which is normally deducted when you
purchase shares, is not reflected in the total returns in the previous paragraph
or in the bar chart. If this fee were included, the returns would be less than
those shown. The average annual returns in the table below do include the sales
charge.
Average annual returns for periods ending 12/31/05
-------------------------------------------------------------------------------
Delaware Tax-Free USA Fund 1 year 5 years 10 years**
-------------------------------------------------------------------------------
Class A return before taxes (0.91%) 4.78% 4.28%
-------------------------------------------------------------------------------
Class A return after taxes on distributions (0.91%) 4.78% 4.21%
-------------------------------------------------------------------------------
Class A return after taxes on distributions
and sale of Fund shares 0.86% 4.78% 4.31%
-------------------------------------------------------------------------------
Class B return before taxes* (0.98%) 4.68% 4.09%
-------------------------------------------------------------------------------
Class C return before taxes* 2.01% 4.93% 3.94%
-------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index 3.51% 5.59% 5.71%
(reflects no deduction for fees,
expenses or taxes)
The Fund's returns are compared to the performance of the Lehman Brothers
Municipal Bond Index. The Index measures the total return performance of
long-term, investment-grade tax-exempt bonds with maturities greater than two
years. You should remember that, unlike the Fund, the Index is unmanaged and
does not reflect the costs of operating a mutual fund, such as the costs of
buying, selling and holding securities. Maximum sales charges are included in
the Fund returns shown above.
After-tax performance is presented only for Class A shares of the Fund. The
after-tax returns for other Fund classes may vary. Actual after-tax returns
depend on the investor's individual tax situation and may differ from the
returns shown. After-tax returns are not relevant for shares held in
tax-deferred investment vehicles such as employer-sponsored 401(k) plans and
individual retirement accounts (IRAs). The after-tax returns shown are
calculated using the highest individual federal marginal income tax rates in
effect during the periods presented and do not reflect the impact of state and
local taxes. The after-tax rate used is based on the current tax
characterization of the elements of the Fund's returns (e.g., qualified vs.
non-qualified dividends). Past performance, both before and after taxes, is not
a guarantee of future results.
* Total returns assume redemption of shares at end of period. Ten-year
returns for Class B shares reflect conversion to Class A shares after
8 years. If shares were not redeemed, the returns before taxes for
Class B would be 3.00%, 4.93% and 4.09% for the one-year, five-year
and ten-year periods, respectively, and the returns before taxes for
Class C would be 3.00%, 4.93% and 3.94% for the one-year, five-year
and ten-year periods, respectively.
** The Lehman Brothers Municipal Bond Index returns shown are for ten
years because the Fund's Class A, Class B and Class C shares commenced
operations more than 10 calendar years ago. The Index reports returns
on a monthly basis as of the last day of the month.
3
Profile: Delaware Tax-Free USA Intermediate Fund
What is the Fund's goal?
Delaware Tax-Free USA Intermediate Fund seeks as high a level of current
interest income exempt from federal income tax as is available from municipal
obligations and as is consistent with prudent investment management and
preservation of capital. Although the Fund will strive to meet its goal, there
is no assurance that it will.
What are the Fund's main investment strategies?
Under normal circumstances, the Fund will invest at least 80% of its net assets
in securities the income from which is exempt from federal income taxes,
including the federal alternative minimum tax. This is a fundamental investment
policy that may not be changed without prior shareholder approval.
The Fund will invest primarily in municipal debt obligations that are issued by
state and local governments to raise funds for various public purposes such as
hospitals, schools and general capital expenses. The Fund will invest its assets
in securities with maturities of various lengths, depending on market
conditions, but will have a dollar-weighted average effective maturity of
between three and 10 years. We will attempt to adjust the average maturity of
the bonds in the portfolio to provide a high level of tax-exempt income
consistent with preservation of capital. The Fund's income level will vary
depending on current interest rates and the specific securities in the
portfolio. The Fund may concentrate its investments in certain types of bonds or
in a certain segmentn of the municipal bond market when the supply of bonds in
other sectors does not suit our investment needs.
What are the main risks of investing in the Fund?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. Over time, the value of your investment in
the Fund will increase and decrease according to changes in the value of the
securities in the Fund's portfolio. This Fund will be affected primarily by
changes in interest rates. For example, when interest rates rise, the value of
bonds in the portfolio will likely decline. The Fund may also be affected by the
ability of individual municipalities to pay interest and repay principal on the
bonds they issue. The Fund is non-diversified as defined under the 1940 Act,
which means that it may invest a greater percentage of its assets in a single
issuer than a diversified fund, and may be subject to greater volatility or risk
of loss than if it were diversified. Under normal circumstances, the Fund may
invest up to 20% of its net assets in securities the income from which is
subject to the federal alternative minimum tax. Income from these securities
would be taxable for investors subject to that tax.
For a more complete discussion of risk, please see "The risks of investing in
the Funds" on page 17.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the FDIC or any other government agency.
You should keep in mind that an investment in the Fund is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Fund with your financial advisor to
determine whether it is an appropriate choice for you.
Who should invest in the Fund
o Investors seeking monthly income, free from federal income taxes.
o Investors with long-term financial goals.
o Investors willing to give up some income potential in exchange for the
reduced risk of principal fluctuation that comes with an intermediate
maturity investment.
Who should not invest in the Fund
o Investors with very short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
especially over the short term.
4
How has Delaware Tax-Free USA Intermediate Fund performed?
This bar chart and table can help you evaluate the risks of investing in the
Fund. We show how annual returns for the Fund's Class A shares have varied over
the past ten calendar years, as well as the average annual returns of the Class
A, B and C shares for one-year, five-year and ten-year periods. The Fund's past
performance (before and after taxes) does not necessarily indicate how it will
perform in the future. The returns reflect expense caps in effect during the
periods. The returns would be lower without the expense caps. Please see the
footnotes on page 9 for additional information about the expense caps.
Year-by-year total return (Class A)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
----- ------- -------- ------- ------- ------- -------- ------- ------- ------
4.61% 6.50% 5.83% -1.41% 9.44% 5.12% 9.10% 6.10% 4.93% 3.45%
As of September 30, 2006, the Fund's Class A shares had a calendar year-to-date
return of 3.26%. During the periods illustrated in this bar chart, Class A's
highest quarterly return was 4.69% for the quarter ended September 30, 2002 and
its lowest quarterly return was -2.15% for the quarter ended June 30, 2004.
The maximum Class A sales charge of 2.75%, which is normally deducted when you
purchase shares, is not reflected in the total returns in the previous paragraph
or in the bar chart. If this fee were included, the returns would be less than
those shown. The average annual returns in the table below do include the sales
charge.
Average annual returns for periods ending 12/31/05
--------------------------------------------------------------------------------
Delaware Tax-Free USA Intermediate Fund 1 year 5 years 10 years**
--------------------------------------------------------------------------------
Class A return before taxes 0.65% 5.13% 5.03%
--------------------------------------------------------------------------------
Class A return after taxes on distributions 0.65% 5.13% 5.03%
--------------------------------------------------------------------------------
Class A return after taxes on distributions
and sale of Fund shares 1.66% 4.98% 4.94%
--------------------------------------------------------------------------------
Class B return before taxes* 0.50% 4.81% 4.88%
--------------------------------------------------------------------------------
Class C return before taxes* 1.58% 4.83% 4.44%
--------------------------------------------------------------------------------
Lehman Brothers Municipal Bond 3-15 Year Index
(reflects no deduction for fees, expenses, or
taxes) 2.25% 5.18% 5.42%
--------------------------------------------------------------------------------
Merrill Lynch 3-7 Year Municipal Bond Index
(reflects no deduction for fees, expenses,
or taxes) 1.25% 4.86% 4.97%
The Fund's returns are compared to the performance of the Lehman Brothers
Municipal Bond 3-15 Year Index and the Merrill Lynch 3-7 Year Municipal Bond
Index. You should remember that, unlike the Fund, the Indices are unmanaged and
do not reflect the costs of operating a mutual fund, such as the costs of
buying, selling and holding securities. Maximum sales charges are included in
the Fund returns shown above.
After-tax performance is presented only for Class A shares of the Fund. The
after-tax returns for other Fund classes may vary. Actual after-tax returns
depend on the investor's individual tax situation and may differ from the
returns shown. After-tax returns are not relevant for shares held in
tax-deferred investment vehicles such as employer-sponsored 401(k) plans and
IRAs. The after-tax returns shown are calculated using the highest individual
federal marginal income tax rates in effect during the periods presented and do
not reflect the impact of state and local taxes. The after-tax rate used is
based on the current tax characterization of the elements of the Fund's returns
(e.g., qualified vs. non-qualified dividends). Past performance, both before and
after taxes, is not a guarantee of future results.
* Total returns assume redemption of shares at end of period. Ten-year
returns for Class B shares reflect conversion to Class A shares after
5 years. If shares were not redeemed, the returns before taxes for
Class B would be 2.49%, 4.81% and 4.88% for the one-year, five-year
and ten-year periods, respectively, and the returns before taxes for
Class C would be 2.58%, 4.83% and 4.44% for the one-year, five-year
and ten-year periods, respectively.
** The Merrill Lynch 3-7 Year Municipal Bond Index and Lehman Brothers
Municipal Bond 3-15 Year Index returns shown are for ten years because
the Fund's Class A, Class B and Class C shares commenced operations
more than 10 calendar years ago. The Lehman Brothers Municipal Bond
3-15 Year Index is replacing the Merrill Lynch 3-7 Year Index as the
Fund's benchmark. As a result of the changes in the Fund's investment
strategy, the investment manager (Manager) believes the Lehman
Brothers Municipal Bond 3-15 Year Index is a more accurate benchmark
of the Fund's investments. The Merrill Lynch 3-7 year Municipal Bond
Index may be excluded from this comparison in the future. The Indices
report returns on a monthly basis as of the last day of the month.
5
Profile: Delaware National High-Yield Municipal Bond Fund
What is the Fund's goal?
Delaware National High-Yield Municipal Bond Fund seeks a high level of current
income exempt from federal income tax primarily through investment in medium-
and lower-grade municipal obligations. Although the Fund will strive to meet its
goal, there is no assurance that it will.
What are the Fund's main investment strategies?
Under normal circumstances, the Fund will invest at least 80% of its net assets
in municipal securities the income from which is exempt from federal income
taxes. This is a fundamental investment policy that may not be changed without
prior shareholder approval.
Municipal debt obligations are issued by state and local governments to raise
funds for various public purposes such as hospitals, schools and general capital
expenses. The Fund will invest its assets in securities with maturities of
various lengths, depending on market conditions, but will typically have a
dollar-weighted average effective maturity between five and 30 years. We will
attempt to adjust the average maturity of the bonds in the portfolio to provide
a high level of tax-exempt income consistent with preservation of capital. The
Fund's income will vary depending on current interest rates and the specific
securities in the portfolio. The Fund may concentrate its investments in certain
types of bonds or in a certain segment of the municipal bond market when the
supply of bonds in other sectors does not suit our investment needs.
Under normal circumstances, Delaware National High-Yield Municipal Bond Fund
will invest primarily in lower rated municipal securities, which typically offer
higher income potential and involve greater risk than higher quality securities.
What are the main risks of investing in the Fund?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. Over time, the value of your investment in
the Fund will increase and decrease according to changes in the value of the
securities in the Fund's portfolio. This Fund will be affected primarily by
changes in interest rates. For example, when interest rates rise, the value of
bonds in the portfolio will likely decline.
The Fund may also be affected by the ability of individual municipalities to pay
interest and repay principal on the bonds they issue. This risk is significant
for the Fund because the issuers of the bonds in the portfolio are generally
considered to be in a less secure financial situation and may be affected more
by adverse economic conditions. The Fund may be subject to greater volatility
during periods of adverse economic conditions and it may experience a greater
incidence of credit problems. The Fund is non-diversified as defined under the
1940 Act, which means that it may invest a greater percentage of its assets in a
single issuer than a diversified fund, and may be subject to greater volatility
or risk of loss than if it were diversified. Under normal circumstances, the
Fund may to invest up to 100% of its net assets in securities the income from
which is subject to the federal alternative minimum tax. Income from these
securities would be taxable for investors subject to that tax.
For a more complete discussion of risk, please see "The risks of investing in
the Funds" on page 17.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the FDIC or any other government agency.
You should keep in mind that an investment in the Fund is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Fund with your financial advisor to
determine whether it is an appropriate choice for you.
Who should invest in the Fund
o Investors seeking monthly income, free from federal income taxes.
o Investors with long-term financial goals.
o Investors willing to accept the possibility of significant fluctuations in
share price, particularly in the short term.
Who should not invest in the Fund
o Investors with very short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
especially in the short term.
6
How has Delaware National High-Yield Municipal Bond Fund performed?
This bar chart and table can help you evaluate the risks of investing in the
Fund. We show how annual returns for the Fund's Class A shares have varied over
the past ten calendar years, as well as the average annual returns of the Class
A, B and C shares for one-year, five-year and ten-year or lifetime periods, as
applicable. The Fund's past performance (before and after taxes) does not
necessarily indicate how it will perform in the future. The returns reflect
expense caps in effect during the periods. The returns would be lower without
the caps. Please see the footnotes on page 9 for additional information about
the expense caps.
Year-by-year total return (Class A)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
------ ------- ------- ------- -------- ------- -------- ------- -------- ------
6.53% 10.32% 6.68% -3.57 6.98% 5.36% 4.69% 6.57% 7.36% 5.92%
As of September 30, 2006, the Fund's Class A shares had a calendar year-to-date
return of 4.46%. During the periods illustrated in this bar chart, Class A's
highest quarterly return was 3.00% for the quarter ended September 30, 2000 and
its lowest quarterly return was -2.83% for the quarter ended December 31, 1999.
The maximum Class A sales charge of 4.50%, which is normally deducted when you
purchase shares, is not reflected in the total returns in the previous paragraph
or in the bar chart. If this fee were included, the returns would be less than
those shown. The average annual returns in the table below do include the sales
charge.
Average annual returns for periods ending 12/31/05
--------------------------------------------------------------------------------
Delaware National High-Yield Municipal 1 year 5 years 10 years or
Bond Fund lifetime**
--------------------------------------------------------------------------------
Class A return before taxes 1.14% 5.00% 5.14%
--------------------------------------------------------------------------------
Class A return after taxes on distributions 1.14% 5.00% 5.10%
--------------------------------------------------------------------------------
Class A return after taxes on distributions
and sale of Fund shares 2.39% 5.02% 5.15%
--------------------------------------------------------------------------------
Class B return before taxes* 1.12% 4.90% 4.87%
--------------------------------------------------------------------------------
Class C return before taxes* 4.11% 5.14% 4.67%
--------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index
(reflects no deduction for fees, expenses,
or taxes) 3.51% 5.59% 5.71%
--------------------------------------------------------------------------------
The Fund's returns are compared to the performance of the Lehman Brothers
Municipal Bond Index. The Index measures the total return performance of
long-term, investment-grade tax-exempt bonds with maturities greater than two
years. You should remember that, unlike the Fund, the Index is unmanaged and
does not reflect the costs of operating a mutual fund, such as the costs of
buying, selling and holding securities. Maximum sales charges are included in
the Fund returns shown above.
After-tax performance is presented only for Class A shares of the Fund. The
after-tax returns for other Fund classes may vary. Actual after-tax returns
depend on the investor's individual tax situation and may differ from the
returns shown. After-tax returns are not relevant for shares held in
tax-deferred investment vehicles such as employer-sponsored 401(k) plans and
IRAs. The after-tax returns shown are calculated using the highest individual
federal marginal income tax rates in effect during the periods presented and do
not reflect the impact of state and local taxes. The after-tax rate used is
based on the current tax characterization of the elements of the Fund's returns
(e.g., qualified vs. non-qualified dividends). Past performance, both before and
after taxes, is not a guarantee of future results.
* Total returns assume redemption of shares at end of period. Lifetime
returns for Class B shares reflect conversion to Class A shares after
8 years. If shares were not redeemed, the returns before taxes for
Class B would be 5.12%, 5.15% and 4.87% for the one-year, five-year
and lifetime periods, respectively, and the returns before taxes for
Class C would be 5.11%, 5.14% and 4.67% for the one-year, five-year
and lifetime periods, respectively.
** Lifetime returns are shown if the Class existed for less than 10
years. The Lehman Brothers Municipal Bond Index return shown is for 10
years because the Fund's Class A shares commenced operations more than
10 years ago. The inception dates for Class B and Class C shares of
the Fund were December 18, 1996 and May 26, 1997, respectively. The
Index returns for Class B's and Class C's lifetime periods are 5.86%
and 5.89%, respectively. The Index reports returns on a monthly basis
as of the last day of the month. As a result, the Index returns for
Class B and Class C lifetimes reflect the returns from December 31,
1996 and May 31, 1997, respectively, through December 31, 2005.
7
Profiles:(continued)
What are the Funds' fees and expenses?
Sales charges are fees DELAWARE TAX-FREE USA FUND AND DELAWARE NATIONAL HIGH-YIELD
paid directly from your MUNICIPAL BOND FUND
investments when you buy CLASS A B C
or sell shares of the Funds. ----------------------------- ----------- ---------- ----------
Maximum sales charge
(load) imposed on
purchases as a percentage
of offering price 4.50% none none
----------------------------- ----------- ---------- ----------
Maximum contingent
deferred sales charge
(load) as a percentage of
original purchase price
or redemption price,
whichever is lower none(1) 4.00%(2) 1.00%(3)
----------------------------- ----------- ---------- ----------
Maximum sales charge
(load) imposed on
reinvested dividends none none none
----------------------------- ----------- ---------- ----------
Redemption fees none none none
DELAWARE TAX-FREE USA INTERMEDIATE FUND
CLASS A B C
----------------------------- ----------- ---------- ----------
Maximum sales charge
(load) imposed on
purchases as a percentage
of offering price 2.75% none none
----------------------------- ----------- ---------- ----------
Maximum contingent
deferred sales charge
(load) as a percentage of
original purchase price
or redemption price,
whichever is lower none(1) 4.00%(2) 1.00%(3)
----------------------------- ----------- ---------- ----------
Maximum sales charge
(load) imposed on
reinvested dividends none none none
----------------------------- ----------- ---------- ----------
Redemption fees none none none
Annual fund operating DELAWARE TAX-FREE USA FUND
expenses are deducted from CLASS A B C
the Funds' assets. ----------------------------- ----------- ---------- ----------
Management fees(6) 0.55% 0.55% 0.55%
----------------------------- ----------- ---------- ----------
Distribution and service
(12b-1) fees 0.27%(4,5) 1.00% 1.00%
----------------------------- ----------- ---------- ----------
Other expenses 0.18% 0.18% 0.18%
----------------------------- ----------- ---------- ----------
Total operating expenses 1.00% 1.73% 1.73%
----------------------------- ----------- ---------- ----------
Fee waivers and payments (0.15%) (0.11%) (0.11%)
----------------------------- ----------- ---------- ----------
Net expenses 0.85% 1.62% 1.62%
----------------------------- ----------- ---------- ----------
DELAWARE TAX-FREE USA INTERMEDIATE FUND
CLASS A B C
----------------------------- ----------- ---------- ----------
Management fees(6) 0.50% 0.50% 0.50%
----------------------------- ----------- ---------- -----------
Distribution and service
(12b-1) fees 0.30%(5) 1.00% 1.00%
---------------------------------------------------------------
Other expenses 0.27% 0.27% 0.27%
---------------------------------------------------------------
Total operating expenses 1.07% 1.77% 1.77%
---------------------------------------------------------------
Fee waivers and payments (0.32%) (0.17%) (0.17%)
------------------------------------- -------------------------
Net expenses 0.75% 1.60% 1.60%
---------------------------------------------------------------
DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND
CLASS A B C
---------------------------------------------------------------
Management fees(6) 0.55% 0.55% 0.55%
--------------------------------------- -----------------------
Distribution and service
(12b-1) fees 0.25 1.00% 1.00%
----------------------------- ----------- ---------- ----------
Other expenses 0.22% 0.22% 0.22%
----------------------------- ----------- ---------- ----------
Total operating expenses 1.02% 1.77% 1.77%
----------------------------- ----------- ---------- ----------
Fee waivers and payments (0.12%) (0.12%) (0.12%)
----------------------------- ----------- ---------- ----------
Net expenses 0.90% 1.65% 1.65%
----------------------------- ----------- ---------- ----------
8
This example is intended DELAWARE TAX-FREE USA FUND
to help you compare the
cost of investing in the CLASS (8) A B B (if C C (if
Funds to the cost of redeemed) redeemed)
investing in other mutual ------------------------------------------------------------------
funds with similar investment 1 year $533 $165 $565 $165 $265
objectives. We show the 3 years $740 $534 $759 $534 $534
cumulative amount of Fund 5 years $964 $928 $1,078 $928 $928
expenses on a hypothetical 10 years $1,607 $1,838 $1,838 $2,032 $2,032
investment of $10,000 with ------------------------------------------------------------------
an annual 5% return over the
time shown.(7) This is an
example only, and does not DELAWARE TAX-FREE USA INTERMEDIATE FUND
represent future expenses,
which may be greater or CLASS (8) A B B (if C C (if
less than those shown here. redeemed) redeemed)
------------------------------------------------------------------
1 year $349 $163 $363 $163 $263
3 years $575 $541 $641 $541 $541
5 years $819 $943 $943 $943 $943
10 years $1,517 $1,885 $1,885 $2,070 $2,070
------------------------------------------------------------------
DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND
CLASS (8) A B B (if C C (if
redeemed) redeemed)
------------------------------------------------------------------
1 year $538 $168 $568 $168 $268
3 years $749 $546 $771 $546 $546
5 years $977 $948 $1,098 $948 $948
10 years $1,631 $1,876 $1,876 $2,074 $2,074
------------------------------------------------------------------
(1) A purchase of Class A shares of $1 million or more may be made at net asset
value. However, if you buy the shares through a financial advisor who is
paid a commission, a contingent deferred sales charge will apply to
redemptions made within two years of purchase. Additional Class A purchase
options that involve a contingent deferred sales charge may be permitted
from time to time and will be disclosed in the Prospectus if they are
available.
(2) For Delaware Tax-Free USA Fund and Delaware National High-Yield Municipal
Bond Fund, if you redeem Class B shares during the first year after you buy
them, you will pay a contingent deferred sales charge of 4.00%, which
declines to 3.00% during the second year, 2.25% during the third year,
1.50% during the fourth and fifth years, 1.00% during the sixth year and 0%
thereafter. For Delaware Tax-Free USA Intermediate Fund, if you redeem
Class B shares during the first year after you buy them, you will pay a
contingent deferred sales charge of 2.00%, which declines to 1.00% during
the second and third years and 0% thereafter.
(3) Class C shares redeemed within one year of purchase are subject to a 1.00%
contingent deferred sales charge.
(4) The Board of Trustees has adopted a formula for calculating 12b-1 plan fees
for the Delaware Tax-Free USA Fund's Class A shares that went into effect
on June 1, 1992. The total 12b-1 fees to be paid by Class A shareholders of
the Fund will be the sum of 0.10% of the average daily net assets
representing shares that were acquired prior to June 1, 1992 and 0.30% of
the average daily net assets representing the shares that were acquired on
or after June 1, 1992. All Class A shareholders will bear 12b-1 fees at the
same rate, the blended rate based upon the allocation of the 0.10% and
0.30% rates described above.
(5) The Funds' distributor has contracted to waive the Class A 12b-1 fees
through December 31, 2007 to 0.25% and 0.15% of average daily net assets of
the Delaware Tax-Free USA Fund and the Delaware Tax-Free USA Intermediate
Fund, respectively. This contractual waiver is applied to the shares of the
Delaware Tax-Free USA Fund that were acquired on or after June 1, 1992 in
calculating the applicable 12b-1 fee rate.
(6) The Manager has contracted to waive all or a portion of its investment
advisory fees and/or reimburse expenses through December 31, 2007 in order
to prevent total annual fund operating expenses (excluding any 12b-1 plan
expenses, taxes, interest, brokerage fees, certain insurance costs and
non-routine expenses or costs, including but not limited to, those relating
to reorganizations, litigation, certain Trustee retirement plan expenses,
conducting shareholder meetings and liquidations [collectively,
"non-routine expenses"]) from exceeding, in an aggregate amount, 0.62%,
0.60% and 0.65% of average daily net assets of the Delaware Tax-Free USA
Fund, Delaware Tax-Free USA Intermediate Fund and the Delaware National
High-Yield Municipal Bond Fund, respectively. For purposes of these waivers
and reimbursements, non-routine expenses may also include such additional
costs and expenses as may be agreed upon from time to time by the Funds'
Boards and the Manager.
(7) The Funds' actual rate of return may be greater or less than the
hypothetical 5% return we use here. This example reflects the net operating
expenses with expense waivers for the one-year contractual period and the
total operating expenses without expense waivers for years two through 10.
(8) For Delaware Tax-Free USA Fund and Delaware National High-Yield Municipal
Bond Fund, Class B shares automatically convert to Class A shares at the
end of the eighth year. Information for the ninth and tenth years reflects
expenses of the Class A shares. For Delaware Tax-Free USA Intermediate
Fund, Class B shares automatically convert to class A shares at the end of
the fifth year. Information for years six through ten reflects expenses of
the Class A shares.
9
How we manage the Funds
Our investment strategies
We analyze economic and market conditions, seeking to identify the securities or
market sectors that we think are the best investments for a particular Fund. The
following is a general description of the investment strategies used to manage
the Funds and a list of securities the Funds may invest in.
We take a disciplined approach to investing, combining investment strategies and
risk management techniques that can help shareholders meet their goals.
We will generally invest in debt obligations issued by state and local
governments and their political subdivisions, agencies, authorities and
instrumentalities that are exempt from federal income tax. We may also invest in
debt obligations issued by or for the District of Columbia, and its political
subdivisions, agencies, authorities and instrumentalities or territories and
possessions of the United States that are exempt from federal income tax.
We will generally invest in securities for income rather than seeking capital
appreciation through active trading. However, we may sell securities for a
variety of reasons such as to reinvest the proceeds in higher yielding
securities, to eliminate investments not consistent with the preservation of
capital or to honor redemption requests. As a result, we may realize losses or
capital gains which could be taxable to shareholders.
Delaware Tax-Free USA Fund and Delaware National High-Yield Municipal Bond Fund
will generally have a dollar-weighted average effective maturity of between five
and 30 years. Delaware Tax-Free USA Intermediate Fund will generally have a
dollar-weighted average effective maturity between three and 10 years. This is a
more conservative strategy than funds with longer average maturities, which
should result in the Fund experiencing less price volatility when interest rates
rise or fall.
The investment objective of each Fund described in this Prospectus is
fundamental. This means the Boards of Trustees may not change the objective
without obtaining shareholder approval. If the objective were changed, we would
notify the shareholders before the change in the objective became effective.
10
The securities we typically invest in
Fixed income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation. Municipal bond securities
typically pay income free of federal income taxes and may be free of state
income taxes in the state where they are issued.
-------------------------- -----------------------------------------------------
Securities How we use them
-------------------------- ---------------- ---------------- -------------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
-------------------------- --------------------------------- -------------------
Tax-exempt obligations: Under normal conditions, we may Under normal
Commonly known as invest 80% of each Fund's conditions, we
municipal bonds. These assets in tax-exempt debt will invest
are debt obligations obligations rated in the top primarily in
issued by or for a state four quality grades by Standard medium- and
or territory, its & Poor's (S&P) or another lower-grade
agencies or nationally recognized tax-exempt
instrumentalities, statistical rating organization obligations rated
municipalities or other (NRSRO), or in unrated between BBB and B-.
political tax-exempt obligations if, in
sub-divisions. The the Manager's opinion, they are We will not make
interest on these debt equivalent in quality to the initial
obligations can top four quality grades. These investments in
generally be excluded bonds may include general securities rated
from federal income tax obligation bonds and revenue below B-, although
as well, as personal bonds. it may continue to
income tax in the state hold such
where the bond is securities if
issued. Determination of their rating has
a bond's tax-exempt been reduced below
status is based on the that grade.
opinion of the bond
issuer's legal counsel. We may invest all
or a portion of
the Delaware
National
High-Yield
Municipal Bond
Fund's assets in
higher grade
securities if the
Manager determines
that abnormal
market conditions
make investing in
lower rated
securities
inconsistent with
shareholders' best
interest.
--------------------------- -------------------------------- -------------------
General obligation bonds: We may invest without limit in We may invest in
Municipal bonds on which general obligation bonds in general
the payment of principal the top four quality grades or obligations and
and interest is secured bonds that are unrated, but will typically
by the issuer's pledge of which the Manager determines invest in lower
its full faith, credit to be of equal quality. quality bonds
and taxing power. rated between BBB
and B- by S&P or
another NRSRO.
--------------------------- -------------------------------- -------------------
Revenue bonds: Municipal We may invest without limit in The Fund may
bonds on which principal revenue bonds in the top four invest in revenue
and interest payments are quality grades or bonds that bonds and will
made from revenues are unrated, but which the typically invest
derived from a particular Manager determines to be of in lower quality
facility, from the equal quality. bonds rated
proceeds of a special between BBB and B-
excise tax or from by S&P or another
revenue generated by an NRSRO.
operating project.
Principal and interest
are not secured by the
general taxing power.
Tax-exempt industrial
development bonds, in
most cases, are a type of
revenue bond that is not
backed by the credit of
the issuing municipality
and may therefore involve
more risk.
--------------------------- -------------------------------- -------------------
11
How we manage the Funds (continued)
-------------------------- -----------------------------------------------------
Securities How we use them
-------------------------- ---------------- ---------------- -------------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
-------------------------- --------------------------------- -------------------
Insured municipal bonds: We may invest without limit in insured bonds. We do
Municipal issuers may not evaluate the creditworthiness of the private
obtain insurance for insurer. Instead, we focus first on the
their obligations. In the creditworthiness of the actual bond issuer and its
event of a default, the ability to pay interest and principal.
insurer is required to
make payments of interest It is possible that a substantial portion of each
and principal when due to Fund's portfolio may consist of municipal bonds
the bondholders. that are insured by a single insurance company.
However, there is no
assurance that the Insurance is available on uninsured bonds and each
insurance company will Fund may purchase such insurance directly. We will
meet its obligations. generally do so only if we believe that purchasing
Insured obligations are and insuring a bond provides an investment
typically rated in the opportunity at least comparable to owning other
top quality grades by an available insured securities.
NRSRO.
The purpose of insurance is to protect against
credit risk. It does not insure against market risk
or guarantee the value of the securities in the
portfolio or the value of shares of any of the
Funds.
Insured bonds will typically not be a significant
portion of the investments of the Funds.
--------------------------- --------------------------------- ------------------
Private activity or We may invest up to 20% of each We may invest
private placement bonds: Fund's assets in bonds whose without limit in
Municipal bond issues income is subject to the these bonds.
whose proceeds are used federal alternative minimum
to finance certain tax. This means that a portion
non-government of each Fund's distributions
activities, including could be subject to the federal
some types of industrial alternative minimum tax that
revenue bonds such as applies to certain taxpayers.
privately owned sports
and convention
facilities. The Tax
Reform Act of 1986
subjects interest income
from these bonds to the
federal alternative
minimum tax and makes the
tax-exempt status of
certain bonds dependent
on the issuer's
compliance with specific
requirements after the
bonds are issued.
--------------------------- ----------------------------------------------------
Zero coupon bonds: Debt We may invest in zero coupon bonds. The market
obligations which do not prices of these bonds are generally more volatile
entitle the holder to any than the market prices of securities that pay
periodic payments of interest periodically and are likely to react to
interest prior to changes in interest rates to a greater degree than
maturity or a specified interest-paying bonds having similar maturities and
date when the securities credit quality. They may have certain tax
begin paying current consequences which, under certain conditions, could
interest. Therefore, they be adverse to the Funds.
are issued and traded at
a price lower than their
face amounts or par value.
--------------------------- ----------------------------------------------------
12
---------------------------- ---------------------------------------------------
Securities How we use them
---------------------------- ---------------- ---------------- -----------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
---------------------------- --------------------------------- -----------------
Inverse floaters: Inverse We may invest in inverse We may invest up
floaters are instruments floaters. We may invest up to to 25% of
with floating or variable 25% of each Fund's respective Delaware National
interest rates that move net assets in inverse floaters High-Yield
in the opposite direction when the underlying bond is Municipal Bond
of short-term interest tax-exempt. Otherwise, each Fund's net assets
rates. Consequently, the Fund's investments in taxable in inverse
market values of inverse investments and securities floaters.
floaters will generally be rated below investment grade,
more volatile than other including inverse floaters on
tax-exempt investments. taxable bonds, are limited to
These securities may be 20% of each Fund's net assets.
considered to be
derivative securities.
---------------------------- ---------------------------------------------------
Variable rate and floating We may purchase "floating rate" and "variable
rate obligations: Pay rate" obligations without limit.
interest at rates that are
not fixed, but instead
vary with changes in
specified market rates or
indices on pre-designated
dates.
---------------------------- ---------------------------------------------------
Advance refunded bonds: We may invest without limit in advance refunded
In an advance refunding, bonds. These bonds are generally considered to be
the issuer uses the of very high quality because of the escrow account,
proceeds of a new bond which typically holds U.S. Treasuries.
issue to purchase high
grade interest bearing
debt securities. These
securities are then
deposited into an
irrevocable escrow
account held by a trustee
bank to secure all future
principal and interest
payments on pre-existing
bonds, which are then
considered to be "advance
refunded bonds." Escrow
secured bonds often
receive the highest
rating from S&P and
Moody's.
---------------------------- ---------------------------------------------------
Short-term tax-free We may invest without limit in high-quality
instruments: Include short-term tax-free instruments.
instruments such as
tax-exempt commercial
paper and general
obligation, revenue and
project notes, as well as
variable floating rate
demand obligations.
--------------------------- ----------------------------------------------------
13
How we manage the Funds (continued)
---------------------------- ---------------------------------------------------
Securities How we use them
---------------------------- ---------------- ---------------- -----------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
---------------------------- --------------------------------- -----------------
High yield, high risk We may invest up to 20% of each We will invest
municipal bonds: Fund's net assets in high yield, primarily in
Municipal debt high risk fixed-income lower rated,
obligations rated lower securities. high-yield
than investment grade by securities.
an NRSRO or, if unrated,
of comparable quality.
These securities are
often referred to as
"junk bonds" and are
considered to be of poor
standing and
predominately speculative.
--------------------------- ----------------------------------------------------
Options: Options We may invest in futures, options and closing
represent a right to buy transactions related thereto. These activities
or sell a security at an will not be entered into for speculative purposes,
agreed upon price at a but rather for hedging purposes and to facilitate
future date. The the ability to quickly deploy into the market a
purchaser of an option Fund's cash, short-term debt securities and other
may or may not choose to money market instruments at times when each Fund's
go through with the assets are not fully invested. We may only enter
transaction. into these transactions for hedging purposes if it
is consistent with a Fund's respective investment
Certain options may be objective and policies.
considered to be
derivative securities. We may invest up to an aggregate of 20% of a Fund's
net assets in futures, options and swaps as long as
each Fund's investment in these securities when
aggregated with other taxable instruments and
securities rated below investment grade (other than
the Delaware National High-Yield Municipal Bond
Fund) does not exceed 20% of each Fund's total net
assets.
Use of these strategies can increase the operating
costs of the Funds and can lead to loss of
principal.
---------------------------- ---------------------------------------------------
Futures contracts: Futures We may invest in futures, options and closing
contacts are agreements transactions related thereto. These activities
for the purchase or sale will not be entered into for speculative
of securities (or index of purposes, but rather for hedging purposes and
securities) at a specified to facilitate the ability to quickly deploy
price, on a specified into the market a Fund's cash, short-term debt
date. Unlike an option, a securities and other money market instruments
futures contract must be at times when each Fund's assets are not fully
executed unless it is sold invested. We may only enter into these
before the settlement transactions for hedging purposes if it is
date. consistent with a Fund's respective investment
objective and policies.
Certain futures and
options on futures may be We may invest up to an aggregate of 20% of each
considered to be Fund's net assets in futures, options and swaps
derivative securities. as long as each Fund's investment in these
securities when aggregated with other taxable
instruments and securities rated below
investment grade (other than Delaware National
High-Yield Municipal Bond Fund) does not exceed
20% of each Fund's total net assets.
At times when we anticipate adverse conditions,
we may want to protect gains on securities
without actually selling them. We might use
futures or options on futures to neutralize the
effect of any price declines, without selling a
bond or bonds.
Use of these strategies can increase the
operating costs of the Funds and can lead to
loss of principal.
---------------------------- -------------------------------------------------
14
---------------------------- ---------------------------------------------------
Securities How we use them
---------------------------- ---------------- ---------------- -----------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
---------------------------- --------------------------------- -----------------
Restricted securities: We may invest without limitation in
Privately-placed privately-placed securities including those
securities whose resale is that are eligible for resale only among certain
restricted under institutional buyers without registration,
securities law. which are commonly known as "Rule 144A
Securities."
---------------------------- ---------==---------------------- -----------------
Illiquid securities: We may invest up to 10% of We may invest
Securities that do not each Fund's net assets in up to 15% of
have a ready market, and illiquid securities. Delaware
cannot be easily sold National
within seven days at High-Yield
approximately the price Municipal Bond
that a fund has valued Fund's net
them. assets in
illiquid
securities.
---------------------------- --------------------==----------- -----------------
Repurchase agreements: Typically, we use repurchase agreements as a
Agreements between a buyer short-term investment for our cash position. We
of securities, such as a may use repurchase agreements which are at
fund, and a seller of least 102% collateralized by securities in
securities, in which the which a Fund is permitted to invest directly.
seller agrees to buy the We will only enter into repurchase agreements
securities back within a in which the collateral is comprised of U.S.
specified time at the same government securities.
price the buyer paid for
them, plus an amount equal We may not enter into repurchase agreements
to an agreed upon interest that represent more than 10% of Delaware
rate. Repurchase National High-Yield Municipal Bond Fund's total
agreements are often assets except when investing for defensive
viewed as equivalent to purposes during periods of adverse market
cash. conditions.
---------------------------- ------------------------------- -----------------
Reverse repurchase This is not a principal We may enter
agreements: The same as strategy for the Funds. into reverse
repurchase agreements repurchase
except that a fund would agreements for
act as the seller and amounts
agree to buy back the aggregating up
securities at the same to 10% of
price the buyer paid for Delaware
them, plus an agreed upon National
interest rate. High-Yield
Municipal Bond
Fund's total
assets. This
may be
preferable to a
regular sale
because it
avoids certain
market risk and
transaction
costs. However,
it is a form of
leveraging
which may
exaggerate any
increases or
decreases in
the Fund's net
asset value.
Because use of
this technique
is limited, we
believe it may
facilitate the
Fund's ability
to provide
current income
without
adversely
affecting our
ability to
preserve
capital.
---------------------------- ------------------------------- -----------------
15
How we manage the Funds (continued)
-------------------------- -----------------------------------------------------
Securities How we use them
-------------------------- ---------------- ---------------- -------------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
---------------------------- --------------------------------- -----------------
Interest rate swaps and We may use interest rate swaps to adjust each
index swap agreements: In Fund's sensitivity to interest rates by
an interest rate swap, a changing its duration. We may also use
fund receives payment from interest rate swaps to hedge against changes in
another party based on a interest rates. We may use index swaps to gain
floating interest rate in exposure to markets that each Fund invests in
return for making payments and may also use index swaps as a substitute
based on a fixed interest for futures, options or forward contracts if
rate. An interest rate such contracts are not directly available to
swap can also work in each Fund on favorable terms.
reverse, with a fund
receiving payments based We may invest up to an aggregate of 20% of each
on a fixed interest rate Fund's net assets in futures, options and swaps
and making payments based as long as each Fund's investment in these
on a floating interest securities when aggregated with other taxable
rate. In an index swap, a instruments and securities rated below
fund receives gains or investment grade (other than the Delaware
incurs losses based on the National High-Yield Municipal Bond Fund) does
total return of an index, not exceed 20% of each Fund's total assets.
in exchange for making
fixed or floating interest Use of these strategies can increase the
rate payments to another operating costs of the Funds and can lead to
party. loss of principal.
---------------------------- -------------------------------------------------
Please see the Statement of Additional Information (SAI) for additional
descriptions of these securities.
Borrowing money
Each Fund may borrow money from banks as a temporary measure for extraordinary
or emergency purposes or to facilitate redemptions but normally does not do so.
Each Fund may borrow up to 10% of the value of its total assets (20% for
Delaware National High-Yield Municipal Bond Fund). A Fund will be required to
pay interest to the lending banks on the amount borrowed. As a result, borrowing
money could result in a Fund being unable to meet its investment objective. The
Funds will not borrow money in excess of one-third of the value of their assets.
Purchasing securities on a when-issued or delayed delivery basis
Each Fund may buy securities on a when-issued or delayed-delivery basis; that
is, paying for securities before delivery or taking delivery at a later date.
The Funds will designate cash or securities in amounts sufficient to cover
obligations and will value the designated assets daily.
Lending securities
Delaware Tax-Free USA Intermediate Fund may lend up to 25% of its assets to
qualified brokers/dealers and institutional investors for their use in
securities transactions. Borrowers of the Fund's securities must provide
collateral to the Fund and adjust the amount of collateral each day to reflect
changes in the value of loaned securities. These transactions, if any, may
generate additional income for the Fund.
Concentration
Where we feel there is a limited supply of appropriate investments, each Fund
may concentrate its investments (invest more than 25% of total assets) in
municipal obligations relating to similar types of projects or with other
similar economic, business or political characteristics (such as bonds of
housing finance agencies or health care facilities). In addition, each Fund may
invest more than 25% of its assets in industrial development bonds or, in the
case of Delaware Tax-Free USA Fund and Delaware Tax-Free USA Intermediate Fund,
pollution control bonds, which may be backed only by the assets and revenues of
a nongovernmental issuer. Each Fund will not, however, invest more than 25% of
its total assets in bonds issued for companies in the same industry.
Temporary defensive measures
In response to unfavorable market conditions, each Fund may invest in taxable
instruments for temporary defensive purposes. These could include securities
such as obligations of the U.S. government, its agencies and instrumentalities,
commercial paper, cash, certificates of deposit of domestic banks, other cash
equivalents and other debt instruments. These investments may not be consistent
with each Fund's investment objective. To the extent that a Fund holds these
investments, it may be unable to achieve its investment objective.
Portfolio turnover
It is possible that each Fund's annual portfolio turnover may be greater than
100%. A turnover rate of 100% would occur if, for example, a Fund bought and
sold all of the securities in its portfolio once in the course of a year or
frequently traded a single security. A high rate of portfolio turnover in any
year may result in increased transaction costs for investors and may affect each
Fund's performance.
16
The risks of investing in the Funds
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in a Fund, you should
carefully evaluate the risks. Because of the nature of the Funds, you should
consider your investment to be a long-term investment that typically provides
the best results when held for a number of years. The table below describes the
principal risks you assume when investing in these funds. Please see the SAI for
further discussion of these risks and other risks not discussed here.
------------------------- ------------------------------------------------------
Risks How we strive to manage them
------------------------- ---------------- ----------------- -------------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
------------------------- ---------------------------------- -------------------
Interest rate risk: The We do not try to increase return In an attempt to
risk that securities, by predicting and aggressively reduce interest
particularly bonds with capitalizing on interest rate rate risk, we will
longer maturities, will moves. adjust the Fund's
decrease in value if average maturity
interest rates rise. In an attempt to reduce interest based on our view
rate risk, we will adjust a of interest
Fund's average maturity based on rates. In
our view of interest rates. In anticipation of an
anticipation of an interest rate interest rate
decline, we may extend average decline, we may
maturity and when we anticipate extend average
an increase we may shorten maturity and when
average maturity. we anticipate an
increase we may
shorten average
maturity.
------------------------- ------------------------------------------------------
Market risk: The risk We maintain a long-term investment approach and focus
that all or a majority on bonds we believe will provide a steady income
of the securities in a stream regardless of interim market fluctuations. We
certain market--like the do not try to predict overall market movements and
stock or bond generally do not trade for short-term purposes.
market--will decline in
value because of
economic conditions,
future expectations or
investor confidence.
------------------------- ------------------------------------------------------
Industry and security We spread each Fund's assets across different types
risk: Industry risk is of municipal bonds and among bonds representing
the risk that the value different industries and regions throughout the
of securities in a country in order to minimize the impact that a poorly
particular industry performing security would have on a Fund. We also
will decline because of follow a rigorous selection process before choosing
changing expectations securities for the portfolio.
for the performance of
that industry. As discussed under "Concentration" on page 16, where
we feel there is a limited supply of appropriate
Security risk is the investments, we may concentrate each Fund's
risk that the value of investments in just a few industries. This will
an individual security expose a Fund to greater industry and security risk.
will decline because of
changing expectations
for the performance of
that individual company
issuing the stock or
bond.
------------------------- ------------------------------------------------------
17
How we manage the Funds (continued)
------------------------- ------------------------------------------------------
Risks How we strive to manage them
------------------------- ---------------- ----------------- -------------------
Credit risk: We conduct careful credit The Fund is subject
The possibility that a analysis of individual bonds; to significant credit
bond's issuer (or an we focus on high-quality risk due to its
entity that insures the bonds and limit our holdings investment in lower
bond) will be unable to of bonds rated below quality,
make timely payments of investment grade; and we hold high-yielding bonds.
interest and principal. a number of different bonds This risk is
in the portfolio. All of this described more fully
In the case of is designed to help reduce below. We strive to
municipal bonds, credit risk. manage this risk by
issuers may be affected maintaining a number
by poor economic of different bonds
conditions in their from different
states. issuers so that if
one issuer
experiences
difficulties, it will
have a lesser effect
on the entire
portfolio.
------------------------- ------------------------------- -----------------------
Call risk: The risk We take into consideration the likelihood of
that a bond issuer will prepayment when we select bonds and, in certain
prepay the bond during environments, we may look for bonds that have
periods of low interest protection against early prepayment.
rates, forcing
investors to reinvest
their money at interest
rates that might be
lower than rates on the
called bond.
------------------------- -------------------------------------------------------
Liquidity risk: The We limit each Fund's exposure to illiquid securities
possibility that to no more than 15% of a Fund's net assets.
securities cannot be
readily sold, within
seven days, at
approximately the price
that a fund values them.
------------------------- ------------------------------- -----------------------
High-yield, high risk We limit the amount of the This is a significant
municipal bonds: portfolio which may be risk for the Delaware
Investing in so-called invested in lower quality, National High-Yield
"junk" bonds entails higher yielding bonds. Municipal Bond Fund.
the risk of principal In striving to manage
loss, which may be this risk, we hold a
greater than the risk number of different
involved in investment bonds representing a
grade bonds. High-yield variety of industries
bonds are sometimes and municipal
issued by projects, seeking to
municipalities with minimize the effect
less financial strength that any one bond may
and therefore less have on the portfolio.
ability to make
projected debt payments
on the bonds.
A protracted economic
downturn could
adversely affect the
value of outstanding
high-yield bonds and
the ability of
high-yield issuers to
repay principal and
interest.
------------------------- ------------------------------- -----------------------
18
------------------------- -------------------------------------------------------
Risks How we strive to manage them
------------------------- ---------------- ----------------- --------------------
Delaware
Delaware Tax-Free USA Delaware National
Tax-Free USA Intermediate High-Yield
Fund Fund Municipal Bond Fund
---------------------------- ----------------------------------------------------
Non-diversified funds have Each Fund is a non-diversified fund and is subject
the flexibility to invest to this risk. Nevertheless, we typically hold
as much as 50% of their securities from a variety of different issuers,
assets in as few as two representing different sectors and different types
issuers provided no single of municipal projects. We also perform extensive
issuer accounts for more credit analysis on all securities. We are
than 25% of the particularly diligent in reviewing the credit
portfolio. The remaining status of bonds that represent a larger percentage
50% of the portfolio must of portfolio assets.
be diversified so that no
more than 5% of a fund's
assets is invested in the
securities of a single
issuer. Because a
non-diversified fund may
invest its assets in fewer
issuers, the value of fund
shares may increase or
decrease more rapidly than
if a fund was fully
diversified. If a fund
were to invest a large
portion of its assets in a
single issuer, the fund
could be significantly
affected if that issuer
was unable to satisfy its
financial obligations.
---------------------------- ----------------------------------------------------
Derivatives risk: We will use derivatives for defensive purposes,
Derivatives risk is the such as to protect gains or hedge against
possibility that a fund potential losses in the portfolio without actually
may experience a selling a security, to neutralize the impact of
significant loss if its interest rate changes, to improve diversification
employs a derivatives or to earn additional income. We will generally
strategy (including a not use derivatives for reasons inconsistent with
strategy involving inverse our investment objective.
floaters, futures,
options, and swaps such as
interest rate swaps and
index swaps) related to a
security or a market index
and that security or index
moves in the opposite
direction from what the
portfolio manager had
anticipated. A
significant risk of
derivative transactions is
the creditworthiness of
the counter-party, since
the transaction depends on
the willingness and
ability of the
counterparty to fulfill
its contractual
obligations. Derivatives
also involve additional
expenses, which could
reduce any benefit or
increase any loss to a
fund from using the
strategy.
---------------------------- ----------------------------------------------------
Disclosure of portfolio holdings
A description of each Fund's policies and procedures with respect to the
disclosure of a Fund's portfolio securities is available in the Funds' SAI.
19
Who manages the Funds
Investment manager
The Funds are managed by Delaware Management Company (Manager), a series of
Delaware Management Business Trust, which is an indirect subsidiary of Delaware
Management Holdings, Inc. The Manager makes investment decisions for the Funds,
manages the Funds' business affairs and provides daily administrative services.
For these services to the Funds, the Manager was paid aggregate fees, net of
waivers, for the last fiscal year as follows:
Investment management fees
Delaware Tax-Free Delaware Tax-Free USA Delaware National High-Yield
USA Fund Intermediate Fund Municipal Bond Fund
--------------------- ------------------ ------------------------- ------------------------------
As a percentage of 0.45% 0.33% 0.43%
average daily net
assets
A discussion regarding the basis for the Boards of Trustees' approval of the
investment advisory contract is available in each Fund's annual report to
shareholders for the period ended August 31, 2006.
Portfolio managers
Joseph R. Baxter and Robert F. Collins have primary responsibility for making
day-to-day investment decisions for each Fund. Mr. Baxter became co-manager of
the Funds in January 2003. Mr. Collins assumed responsibility for the Funds on
June 25, 2004.
Joseph R. Baxter
Senior Vice President, Head of Municipal Bond Department, Senior Portfolio
Manager Mr. Baxter joined Delaware Investments in 1999. He heads the firm's
municipal bond department and is responsible for setting the department's
investment strategy. He is also a co-portfolio manager of the firm's municipal
bond funds and several client accounts. Before joining Delaware Investments, he
held investment positions with First Union, most recently as a municipal
portfolio manager with the Evergreen Funds. Mr. Baxter received a bachelor's
degree in finance and marketing from LaSalle University.
Robert F. Collins, CFA
Senior Vice President, Senior Portfolio Manager Mr. Collins joined Delaware
Investments in 2004 and is a co-portfolio manager of several of the firm's
municipal bond funds and client accounts. Prior to joining Delaware Investments,
he spent five years as a co-manager of the municipal portfolio management group
within PNC Advisors, where he oversaw the tax-exempt investments of high net
worth and institutional accounts. Before that, he headed the municipal fixed
income team at Wilmington Trust, where he managed funds and high net worth
accounts. Mr. Collins earned a bachelor's degree in economics from Ursinus
College, and he is also a former president of the Financial Analysts of
Wilmington, Delaware.
The Funds' SAI provides additional information about each portfolio manager's
compensation, other accounts managed by each portfolio manager and each
portfolio manager's ownership of Fund shares.
Manager of managers structure
The Funds and the Manager have received an exemptive order from the Securities
and Exchange Commission (SEC) to operate under a manager of managers structure
that permits the Manager, with the approval of the Boards of Trustees, to
appoint and replace sub-advisors, enter into sub-advisory agreements, and
materially amend and terminate sub-advisory agreements on behalf of the Funds
without shareholder approval (the Manager of Managers Structure). The Manager of
Managers Structure was approved by shareholders at a meeting held on March 23,
2005 (or as adjourned). Under the Manager of Manager Structure, the Manager has
ultimate responsibility, subject to oversight by the Funds' Boards, for
overseeing the Funds' sub-advisors and recommending to the Boards their hiring,
termination or replacement. The SEC order does not apply to any sub-advisor that
is affiliated with the Funds or the Manager. While the Manager does not
currently expect to use the Manager of Managers Structure with respect to the
Funds, the Manager may, in the future, recommend to the Funds' Boards the
establishment of the Manager of Managers Structure by recommending the hiring of
one or more sub-advisors to manage all or a portion of the Funds' portfolio.
The Manager of Managers Structure enables the Funds to operate with greater
efficiency and without incurring the expense and delays associated with
obtaining shareholder approvals for matters relating to sub-advisors or
sub-advisory agreements. The Manager of Managers Structure does not permit an
increase in the overall management and advisory fees payable by the Funds
without shareholder approval. Shareholders will be notified of any changes made
to sub-advisors or sub-advisory agreements within 90 days of the change.
20
Who's who?
This diagram shows the various organizations involved with managing,
administering, and servicing the Delaware Investments(R) Funds.
[GRAPHIC OMITTED: DIAGRAM SHOWING THE VARIOUS ORGANIZATIONS INVOLVED WITH
MANAGING, ADMINISTERING AND SERVICING THE DELAWARE INVESTMENTS(R) FUNDS]
Board of Trustees
Custodian
Investment Manager JPMorgan Chase Bank
Delaware Management Company 4 Chase Metrotech Center
2005 Market Street The Fund Brooklyn, NY 11245
Philadelphia, PA 19103-7094
Service agent
Distributor Delaware Service Company, Inc.
Delaware Distributors, L.P. 2005 Market Street
2005 Market Street Philadelphia, PA 19103-7094
Philadelphia, PA 19103-7094
Financial intermediary wholesaler
Portfolio managers Lincoln Financial Distributors,
(see page 20 for details) Inc.
2001 Market Street
Philadelphia, PA 19103-7055
Financial advisors
Shareholders
Board of Trustees
A mutual fund is governed by a board of trustees which has oversight
responsibility for the management of the fund's business affairs. Trustees
establish procedures and oversee and review the performance of the investment
manager, the distributor and others that perform services for the fund.
Generally, at least 40% of the board of trustees must be independent of the
fund's investment manager and distributor. However, the Funds rely on certain
exemptive rules adopted by the SEC that require their Boards of Trustees to be
comprised of a majority of such independent Trustees. These independent
Trustees, in particular, are advocates for shareholder interests.
Investment manager
An investment manager is a company responsible for selecting portfolio
investments consistent with the objective and policies stated in the mutual
fund's prospectus. The investment manager places portfolio orders with
broker/dealers and is responsible for obtaining the best overall execution of
those orders. A written contract between a mutual fund and its investment
manager specifies the services the manager performs. Most management contracts
provide for the manager to receive an annual fee based on a percentage of the
fund's average daily net assets. The manager is subject to numerous legal
restrictions, especially regarding transactions between itself and the funds it
advises.
Portfolio managers
Portfolio managers are employed by the investment manager to make investment
decisions for individual portfolios on a day-to-day basis.
Custodian
Mutual funds are legally required to protect their portfolio securities and most
funds place them with a qualified bank custodian who segregates fund securities
from other bank assets.
Distributor
Most mutual funds continuously offer new shares to the public through
distributors who are regulated as broker/dealers and are subject to National
Association of Securities Dealers (NASD) rules governing mutual fund sales
practices.
Financial intermediary wholesaler
Pursuant to a contractual arrangement with Delaware Distributors, L.P., Lincoln
Financial Distributors, Inc. (LFD) is primarily responsible for promoting the
sale of Fund shares through broker/dealers, financial advisors and other
financial intermediaries.
Service agent
Mutual fund companies employ service agents (sometimes called transfer agents)
to maintain records of shareholder accounts, calculate and disburse dividends
and capital gains and prepare and mail shareholder statements and tax
information, among other functions. Many service agents also provide customer
service to shareholders.
Financial advisors
Financial advisors provide advice to their clients -- analyzing their financial
objectives and recommending appropriate funds or other investments. Financial
advisors are associated with securities broker/dealers who have entered into
selling and/or service arrangements with the Distributor. Selling broker/dealers
and financial advisors are compensated for their services, generally through
sales commissions, 12b-1 fees and/or service fees deducted from the fund's
assets.
Shareholders
Like shareholders of other companies, mutual fund shareholders have specific
voting rights. Material changes in the terms of a fund's management contract
must be approved by a shareholder vote, and funds seeking to change fundamental
investment policies must also seek shareholder approval.
21
About your account
Investing in the Funds
You can choose from a number of share classes for each Fund. Because each share
class has a different combination of sales charges, fees, and other features,
you should consult your financial advisor to determine which class best suits
your investment goals and time frame.
Choosing a share class
Class A
o Class A shares of Delaware Tax-Free USA Fund and Delaware National
High-Yield Municipal Bond Fund have an up-front sales charge of up to
4.50% that you pay when you buy the shares. Class A shares of Delaware
Tax-Free USA Intermediate Fund have an up-front sales charge of up to
2.75%.
o If you invest $100,000 or more, your front-end sales charge will be
reduced.
o You may qualify for other reductions in sales charges and under
certain circumstances the sales charge may be waived, as described in
"How to reduce your sales charge" on page 26.
o Class A shares are also subject to an annual 12b-1 fee no greater than
0.30% (0.25% for Delaware National High-Yield Municipal Bond Fund) of
average daily net assets, which is lower than the 12b-1 fee for Class
B and Class C shares. See "Dealer Compensation" on page 25 for further
information.
o Class A shares generally are not subject to a contingent deferred
sales charge except in the limited circumstances described in the
table below.
Class A sales charges
The table below details your sales charges on purchases of Class A shares. The
offering price for Class A shares includes the front-end sales charge. The sales
charge as a percentage of the net amount invested is the maximum percentage of
the amount invested rounded to the nearest hundredth. The actual sales charge as
a percentage of the net amount invested will vary depending on the amount
invested, rounding and the then-current net asset value (NAV).
Delaware Tax-Free USA Fund
and Delaware National High- Delaware Tax-Free USA
Yield Municipal Bond Fund Intermediate Fund
--------------------------------------------------------- ----------------------------------
Sales charge Sales charge Sales charge Sales charge
as % of as % of net as % of as % of net
Amount of purchase offering price amount invested offering price amount invested
--------------------------------------------------------- ----------------------------------
Up to $99,999 4.50% 4.71% 2.75% 2.83%
--------------------------------------------------------- ----------------------------------
$100,000 - $249,999 3.50% 3.63% 2.00% 2.04%
--------------------------------------------------------- ----------------------------------
$250,000 - $499,999 2.50% 2.56% 1.00% 1.01%
--------------------------------------------------------- ----------------------------------
$500,000 - $999,999 2.00% 2.04% 1.00% 1.01%
--------------------------------------------------------- ----------------------------------
Amount over $1 million None None None None
--------------------------------------------------------- ----------------------------------
As shown above, there is no front-end sales charge when you purchase $1 million
or more of Class A shares. However, if your financial advisor is paid a
commission on your purchase, you will have to pay a limited contingent deferred
sales charge (Limited CDSC), unless a specific waiver of the charge applies, of
1.00% if you redeem Delaware Tax-Free USA Fund and Delaware National High-Yield
Municipal Bond Fund within the first year and 0.50% if you redeem shares within
the second year; and of 0.75% if you redeem shares of Delaware Tax-Free USA
Intermediate Fund within the first year. See "Dealer compensation" on page 25
for a description of the amount of dealer compensation that is paid.
22
Class B
o Class B shares have no up-front sales charge, so the full amount of
your purchase is invested in a Fund. However, you will pay a
contingent deferred sales charge if you redeem your shares within six
years after you buy them (three years for Delaware Tax-Free USA
Intermediate Fund).
o If you redeem Class B shares of Delaware Tax-Free USA Fund and
Delaware National High-Yield Municipal Bond Fund during the first year
after you buy them, the shares will be subject to a contingent
deferred sales charge of 4.00%. The contingent deferred sales charge
is 3.00% during the second year, 2.25% during the third year, 1.50%
during the fourth and fifth years, 1.00% during the sixth year and 0%
thereafter. For Delaware Tax-Free USA Intermediate Fund, the
contingent deferred sales charge is 2.00% during the first year, 1.00%
during the second and third years and 0% thereafter.
o In determining whether the contingent deferred sales charge applies to
a redemption of Class B Shares, it will be assumed that shares held
for more than six years are redeemed first, followed by shares
acquired through the reinvestment of dividends or distributions, and
finally by shares held longest during the six-year period. For further
information on how the contingent deferred sales charge is determined,
please see "Calculation of Contingent Deferred Sales Charges - Class B
and Class C" on page 24.
o Under certain circumstances the contingent deferred sales charge may
be waived; please see the SAI for further information.
o For approximately eight years (five years for Delaware Tax-Free USA
Intermediate Fund) after you buy your Class B shares, they are subject
to an annual 12b-1 fee no greater than 1.00% of average daily net
assets (of which 0.25% are service fees) paid to the distributor,
dealers or others for providing services and maintaining shareholder
accounts.
o Because of the higher 12b-1 fee, Class B shares have higher expenses
and any dividends paid on these shares are generally lower than
dividends on Class A shares.
o Approximately eight years (five years for Delaware Tax-Free USA
Intermediate Fund) after you buy them, Class B shares automatically
convert into Class A shares with a 12b-1 fee of no more than 0.30%
(0.25% for Delaware National High-Yield Municipal Bond Fund).
Conversion may occur as late as three months after, as applicable, the
eighth anniversary of purchase (fifth anniversary for Delaware
Tax-Free USA Intermediate Fund), during which time Class B's higher
12b-1 fees apply.
o You may purchase only up to $100,000 of Class B shares at any one
time.
Class C
o Class C shares have no up-front sales charge, so the full amount of
your purchase is invested in a Fund. However, you will pay a
contingent deferred sales charge of 1.00% if you redeem your shares
within 12 months after you buy them.
o In determining whether the contingent deferred sales charge applies to
a redemption of Class C Shares, it will be assumed that shares held
for more than 12 months are redeemed first, followed by shares
acquired through the reinvestment of dividends or distributions, and
finally by shares held for 12 months or less. For further information
on how the contingent deferred sales charge is determined, please see
"Calculation of Contingent Deferred Sales Charges - Class B and Class
C" on page 24.
o Under certain circumstances the contingent deferred sales charge may
be waived; please see the SAI for further information.
o Class C shares are subject to an annual 12b-1 fee no greater than
1.00% of average daily net assets (of which 0.25% are service fees)
paid to the distributor, dealers or others for providing services and
maintaining shareholder accounts.
o Because of the higher 12b-1 fee, Class C shares have higher expenses
and any dividends paid on these shares are generally lower than
dividends on Class A shares.
o Unlike Class B shares, Class C shares do not automatically convert to
another class.
o You may purchase any amount less than $1,000,000 of Class C shares at
any one time.
23
About your account (continued)
Each share class of the Funds has adopted a separate 12b-1 plan that allows it
to pay distribution fees for the sale and distribution of its shares. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
Calculation of Contingent Deferred Sales Charges - Class B and Class C
Contingent deferred sales charges (CDSC) 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 NAV at the time the shares being redeemed were
purchased or the NAV of those shares at the time of redemption. No CDSC will be
imposed on increases in NAV above the initial purchase price, nor will a CDSC be
assessed on redemptions of shares acquired through reinvestment of dividends or
capital gains distributions. For purposes of this formula, the "NAV at the time
of purchase" will be the NAV at purchase of Class B Shares or Class C Shares of
a Fund, even if those shares are later exchanged for shares of another Delaware
Investments(R) Fund. In the event of an exchange of the shares, the "NAV of such
shares at the time of redemption" will be the NAV of the shares that were
acquired in the exchange.
24
Dealer compensation
Your financial advisor that sells you shares of the Funds may be eligible to
receive the following amounts as compensation for your investment in the Funds.
These amounts are paid by the distributor to the securities dealer with whom
your financial advisor is associated.
Delaware Tax-Free USA Fund and Delaware Delaware Tax-Free USA
National High-Yield Municipal Bond Fund Intermediate Fund
--------------------------------------------------------------- ----------------------------------
Class A(1) Class B(2) Class C(3) Class A(1) Class B(2) Class C(3)
----------- ------------ ------------ ----------- ----------- ----------
Commission (%) --- 4.00% 1.00% --- 2.00% 1.00%
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
Investment up to $99,999 4.00% --- --- 2.35% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
$100,000 - $249,999 3.00% --- --- 1.75% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
$250,000 - $499,999 2.00% --- --- 0.75% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
$500,000 - $999,999 1.60% --- --- 0.75% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
$1,000,000 - $4,999,999 1.00% --- --- 0.75% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
$5,000,000 - $24,999,999 0.50% --- --- 0.50% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
$25,000,000 + 0.25% --- --- 0.25% --- ---
------------------------- ----------- ------------ ------------ ----------- ----------- ----------
12b-1 Fee to Dealer 0.30% 0.25% 1.00% 0.15% 0.15% 1.00%
(1) On sales of Class A shares, the Distributor re-allows to your securities
dealer a portion of the front-end sales charge depending upon the amount
you invested. Your securities dealer is eligible to receive up to 0.30% of
the 12b-1 fee applicable (0.25% for Delaware National High-Yield Municipal
Bond Fund) to Class A shares. However, the Distributor has contracted to
limit the maximum 12b-1 fee applicable to Class A shares of Delaware
Tax-Free USA Fund to 0.25% (0.15% for Delaware Tax-Free USA Intermediate
Fund) of average daily net assets through December 31, 2007.
(2) On sales of Class B shares, the Distributor pays your securities dealer an
up-front commission of 4.00% (2.00% for Delaware Tax-Free USA Intermediate
Fund). Your securities dealer also may be eligible to receive a 12b-1 fee
of up to 0.25% (0.15% for Delaware Tax-Free USA Intermediate Fund) from the
date of purchase. After approximately eight years (five years for Delaware
Tax-Free USA Intermediate Fund), Class B shares automatically convert into
Class A shares and dealers may then be eligible to receive the 0.30% (0.25%
for Delaware National High-Yield Municipal Bond Fund) 12b-1 fee applicable
to Class A.
(3) On sales of Class C shares, the Distributor pays your securities dealer an
up-front commission of 1.00%. The up-front commission includes an advance
of the first year's service fee of up to 0.25%. During the first 12 months,
the Distributor retains the full 1.00% 12b-1 fee to partially offset the
up-front commission and the prepaid 0.25% service fee advanced at the time
of purchase. Starting in the 13th month, your securities dealer may be
eligible to receive the full 1.00% 12b-1 fee applicable to Class C.
Payments to intermediaries
The Distributor, Lincoln Financial Distributors, Inc. and their affiliates
may pay additional compensation (at their own expense and not as an expense
of the Funds) to certain affiliated or unaffiliated brokers, dealers or
other financial intermediaries (Financial Intermediaries) in connection
with the sale or retention of fund shares and/or shareholder servicing,
including providing the Funds with "shelf space" or a higher profile with
the Financial Intermediary's consultants, sales persons and customers
(distribution assistance). The level of payments made to a qualifying
Financial Intermediary in any given year will vary. To the extent permitted
by SEC and NASD rules and other applicable laws and regulations, the
Distributor may pay or allow its affiliates to pay other promotional
incentives or payments to Financial Intermediaries.
If a mutual fund sponsor or distributor makes greater payments for
distribution assistance to your Financial Intermediary with respect to
distribution of shares of that particular mutual fund than sponsors or
distributors of other mutual funds make to your Financial Intermediary with
respect to the distribution of the shares of their mutual funds, your
Financial Intermediary and its salespersons may have a financial incentive
to favor sales of shares of the mutual fund making the higher payments over
shares of other mutual funds or over the other investment options. In
addition, depending on the arrangements in place at any particular time, a
Financial Intermediary may also have a financial incentive for recommending
a particular share class over other share classes. You should consult with
your Financial Intermediary and review carefully any disclosures provided
by such Financial Intermediary as to compensation it receives in connection
with investment products it recommends or sells to you. In certain
instances, the payments could be significant and may cause a conflict of
interest for your Financial Intermediary. Any such payments will not change
the NAV or the price of the Funds' shares.
For more information, please see the Funds' SAI.
25
About your account (continued)
How to reduce your sales charge
We offer a number of ways to reduce or eliminate the sales charge on shares.
Please refer to the SAI for detailed information and eligibility requirements.
You can also get additional information from your financial advisor. You or your
financial advisor must notify us at the time you purchase shares if you are
eligible for any of these programs. You may also need to provide information
(such as your other Delaware Investments(R) Fund holdings and the names of
qualifying family members and their holdings) to your financial advisor or the
Funds in order to qualify for a reduction in sales charges.
------------ -------------------------- ----------------------------------------
Share class
Program How it works A B C
------------ -------------------------- ------------- --------------------------
Letter Through a Letter of X Although the Letter of
of Intent Intent you agree to Intent and Rights of
invest a certain Accumulation do not apply
amount in Delaware to the purchase of Class
Investments(R) Funds B and Class C shares, you
(except money market can combine your purchase
funds with no sales of Class A shares with
charge) over a your purchase of Class B
13-month period to and Class C shares to
qualify for reduced fulfill your Letter of
front-end sales Intent or qualify for
charges. Rights of Accumulation.
------------ -------------------------- -------------
Rights You can combine your X
of holdings or purchases
Accumulation of all funds in the
Delaware Investments(R)
Funds (except money
market funds with no
sales charge), as well
as the holdings and
purchases of your
spouse and children
under 21 to qualify
for reduced front-end
sales charges.
------------ -------------------------- ------------- ------------- ------------
Reinvestment Up to 12 months after For Class For Class Not
of you redeem shares, you A, you B, your available.
Redeemed can reinvest the will not account
Shares proceeds without have to will be
paying a sales charge pay an credited
as noted to the right. additional with the
front-end contingent
sales deferred
charge. sales
charge
you
previously
paid on
the
amount
you are
reinvesting.
Your
schedule
for
contingent
deferred
sales
charges
and
conversion
to Class
A will
not start
over
again; it
will pick
up from
the point
at which
you
redeemed
your
shares.
------------ -------------------------- ------------- ------------- -------------
26
Buying Class A shares as Net Asset Value
Class A shares of a Fund may be purchased at NAV under the following
circumstances, provided that you notify the Fund in advance that the trade
qualifies for this privilege.
o Shares purchased under the Delaware Investments(R) Dividend Reinvestment
Plan and, under certain circumstances, the Exchange Privilege and the
12-Month Reinvestment Privilege.
o Purchases by: (i) current and former officers, Trustees/Directors and
employees of any Delaware Investments(R) Fund, the Manager or any of its
current affiliates and those that may in the future be created; (ii) legal
counsel to the Delaware Investments(R) Funds; and (iii) registered
representatives and employees of broker/dealers who have entered into
dealer's agreements with the Distributor. Family members (regardless of
age) of such persons at their direction, and any employee benefit plan
established by any of the foregoing entities, counsel or broker/dealers may
also purchase shares at NAV.
o Shareholders who own Class A shares of Delaware Cash Reserve Fund as a
result of a liquidation of a Delaware Investments(R) Fund may exchange into
Class A shares of another Delaware Investments(R) Fund at NAV.
o Purchases by bank employees who provide services in connection with
agreements between the bank and unaffiliated brokers or dealers concerning
sales of shares of the Delaware Investments(R) Funds.
o Purchases by certain officers, trustees and key employees of institutional
clients of the Manager or any of its affiliates.
o Purchases for the benefit of the clients of brokers, dealers and registered
investment advisors if such brokers, dealers or investment advisors have
entered into an agreement with the Distributor providing specifically for
the purchase of Class A shares in connection with special investment
products, such as wrap accounts or similar fee-based programs. Investors
may be charged a fee when effecting transactions in Class A shares through
a broker or agent that offers these special investment products.
o Purchases by financial institutions investing for the account of their
trust customers if they are not eligible to purchase shares of a Fund's
Institutional Class.
o Purchases by retirement plans that are maintained on retirement platforms
sponsored by financial intermediary firms, provided the financial
intermediary firms have entered into a Class A NAV Agreement with respect
to such retirement platforms.
o Purchases by certain legacy bank sponsored retirement plans that meet
requirements set forth in the SAI.
o Purchases by certain legacy retirement assets that meet requirements set
forth in the SAI.
o Investments made by plan level and/or participant retirement accounts that
are for the purpose of repaying a loan taken from such accounts.
o Loan repayments made to a Fund account in connection with loans originated
from accounts previously maintained by another investment firm.
27
About your account (continued)
Waivers of Contingent Deferred Sales Charges
Share Class
Category A* B C
------------------------------------------------------- --------- ----------- ----------
Redemptions in accordance with a Systematic Withdrawal X X X
Plan, provided the annual amount selected to be
withdrawn under the Plan does not exceed 12% of the
value of the account on the date that the Systematic
Withdrawal Plan was established or modified.
------------------------------------------------------- --------- ----------- ----------
Redemptions that result from the Funds' right to X X X
liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less
than the then-effective minimum account size.
----------------------------------------------------------------------------------------
For distributions from accounts established under the X X X
Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act or trust accounts, the waiver applies upon
the death of all beneficial owners.
------------------------------------------------------- --------- ----------- ----------
Redemptions by the classes of shareholders who are X Not Not
permitted to purchase shares at net asset value, available. available.
regardless of the size of the purchase. See "Buying
Class A shares at Net Asset Value" on page 27.
------------------------------------------------------- --------- ----------- ----------
* The waiver for Class A shares relates to a waiver of the Limited CDSC.
Please note that you or your financial advisor will have to notify us at
the time of purchase that the trade qualifies for such waiver.
Certain sales charges may be based on historical cost. Therefore, you should
maintain any records that substantiate these costs because a Fund, its transfer
agent and financial intermediaries may not maintain this information.
Information about existing sales charges and sales charge reductions and waivers
is available free of charge in a clear and prominent format on the Delaware
Investments(R) Web site at www.delawareinvestments.com. Additional information
on sales charges can be found in the SAI.
28
How to buy shares
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Through your financial advisor
Your financial advisor can handle all the details of purchasing shares,
including opening an account. Your financial advisor may charge a separate fee
for this service.
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By mail
Complete an investment slip and mail it with your check, made payable to the
fund and class of shares you wish to purchase, to Delaware Investments, P.O. Box
219656, Kansas City, MO 64121-9656. If you are making an initial purchase by
mail, you must include a completed investment application with your check.
Please note that all purchases by mail into your account or into a new account
will not be accepted until such purchase order is received by Delaware
Investments at P.O. Box 219656, Kansas City, MO 64121-9656 for investments by
regular mail or 430 W. 7th Street, Kansas City, MO 64105 for investments by
overnight courier service. Please do not send purchase orders to 2005 Market
Street, Philadelphia, PA 19103-7094.
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By wire
Ask your bank to wire the amount you want to invest to Bank of New York, ABA
#021000018, Bank Account number 8900403748. Include your account number and the
name of the fund in which you want to invest. If you are making an initial
purchase by wire, you must first call us at 800 523-1918 so we can assign you an
account number.
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By exchange
You may exchange all or part of your investment in one or more Delaware
Investments(R) Funds for shares of other Delaware Investments(R) Funds. Please
keep in mind, however, that under most circumstances you are allowed to exchange
only between like classes of shares. To open an account by exchange, call the
Shareholder Service Center at 800 523-1918.
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Through automated shareholder services
You may purchase or exchange shares through Delaphone, our automated telephone
service, or through our Web site, www.delawareinvestments.com. For more
information about how to sign up for these services, call our Shareholder
Service Center at 800 523-1918.
29
About your account (continued)
How to buy shares (continued)
Once you have completed an application, you can generally open an account with
an initial investment of $1,000 and make additional investments at any time for
as little as $100. If you are buying shares under the Uniform Gifts to Minors
Act or the Uniform Transfers to Minors Act, or through an Automatic Investing
Plan, the minimum initial purchase is $250, and you can make additional
investments of $25 or more.
The price you pay for shares will depend on when we receive your purchase order.
If we or an authorized agent receive your order before the close of regular
trading on the New York Stock Exchange (NYSE), which is normally 4:00 p.m.
Eastern Time, you will pay that day's closing share price, which is based on a
Fund's net asset value (NAV). If your order is received after the close of
regular trading on the NYSE, you will pay the next business day's price. A
business day is any day that the NYSE is open for business (Business Day). We
reserve the right to reject any purchase order.
We determine the NAV per share for each class of each Fund at the close of
regular trading on the NYSE on each Business Day. The NAV per share for each
class of each Fund is calculated by subtracting the liabilities of each class
from its total assets and dividing the resulting number by the number of shares
outstanding for that class. We generally price securities and other assets for
which market quotations are readily available at their market value. We price
fixed-income securities on the basis of valuations provided to us by an
independent pricing service that uses methods approved by the Boards of
Trustees. We price any fixed-income securities that have a maturity of less than
60 days at amortized cost, which approximates market value. For all other
securities, we use methods approved by the Boards of Trustees that are designed
to price securities at their fair market value.
Fair valuation
When the Funds use fair value pricing, they may take into account any factors
they deem appropriate. The Funds may determine fair value based upon
developments related to a specific security, current valuations of foreign stock
indices (as reflected in U.S. futures markets) and/or U.S. sector or broader
stock market indices. The price of securities used by the Funds to calculate
their respective NAV may differ from quoted or published prices for the same
securities. Fair value pricing may involve subjective judgments and it is
possible that the fair value determined for a security is materially different
than the value that could be realized upon the sale of that security.
The Funds anticipate using fair value pricing for securities primarily traded on
U.S. exchanges only under very limited circumstances, such as the early closing
of the exchange on which a security is traded or suspension of trading in the
security. The Funds may use fair value pricing more frequently for securities
primarily traded in non-U.S. markets because, among other things, most foreign
markets close well before the Funds value their securities at 4:00 p.m. Eastern
Time. The earlier close of these foreign markets gives rise to the possibility
that significant events, including broad market moves, may have occurred in the
interim. To account for this, the Funds may frequently value many foreign equity
securities using fair value prices based on third-party vendor modeling tools to
the extent available.
Subject to the Boards' oversight, the Funds' Boards have delegated
responsibility for valuing the Funds' assets to a Pricing Committee of the
Manager, which operates under the policies and procedures approved by the
Boards, to value the Funds' assets on behalf of the Funds.
Document delivery
If you have an account in the same Delaware Investments(R) Fund as another
member of your household, we send your household one copy of the Fund's
prospectus and annual and semiannual reports to that address unless you opt
otherwise. This will help us reduce the printing and mailing expenses associated
with the Fund. We will continue to send one copy of each of these documents to
your household until you notify us that you wish to receive individual
materials. If you wish to receive individual materials, please call our
Shareholder Service Center at 800 523-1918 or your financial advisor. We will
begin sending your individual copies of these documents 30 days after receiving
your request.
30
How to redeem shares
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Through your financial advisor
Your financial advisor can handle all the details of redeeming your shares
(selling them back to a Fund). Your financial advisor may charge a separate fee
for this service.
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By mail
You may redeem your shares by mail by writing to: Delaware Investments, P.O. Box
219656, Kansas City, MO 64121-9656. All owners of the account must sign the
request. For redemptions of more than $100,000, you must include a signature
guarantee for each owner. Signature guarantees are also required when you
request redemption proceeds to be sent to an address other than the address of
record on the account.
Please note that all redemption requests from your account by mail will not be
accepted until such redemption order is received by Delaware Investments at P.O.
Box 219656, Kansas City, MO 64121-9656 for redemptions by regular mail or 430 W.
7th Street, Kansas City, MO 64105 for redemptions by overnight courier service.
Please do not send redemption requests to 2005 Market Street, Philadelphia, PA
19103-7094.
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By telephone
You may redeem up to $100,000 of your shares by telephone. You may have the
proceeds sent to you by check, or, if you redeem at least $1,000 of shares, you
may have the proceeds sent directly to your bank by wire. Bank information must
be on file before you request a wire redemption.
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By wire
You may redeem $1,000 or more of your shares and have the proceeds deposited
directly to your bank account, normally the next Business Day after we receive
your request. If you request a wire deposit, a bank wire fee may be deducted
from your proceeds. Bank information must be on file before you request a wire
redemption.
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Through automated shareholder services
You may redeem shares through Delaphone, our automated telephone service, or
through our Web site, www.delawareinvestments.com. For more information about
how to sign up for these services, call our Shareholder Service Center at 800
523-1918.
31
About your account (continued)
How to redeem shares (continued)
If you hold your shares in certificates, you must submit the certificates with
your request to sell the shares. We recommend that you send your certificates by
certified mail.
When you send us a properly completed request to redeem or exchange shares, and
we or an authorized agent receive the request before the close of regular
trading on the NYSE (normally 4:00 p.m. Eastern Time), you will receive the NAV
next determined after we receive your request. If we receive your request after
the close of regular trading on the NYSE, you will receive the NAV next
determined on the next Business Day. We will deduct any applicable contingent
deferred sales charges. You may also have to pay taxes on the proceeds from your
sale of shares. We will send you a check, normally the next Business Day, but no
later than seven days after we receive your request to sell your shares. If you
purchased your shares by check, we will wait until your check has cleared, which
can take up to 15 days, before we send your redemption proceeds.
If you are required to pay a contingent deferred sales charge when you redeem
your shares, the amount subject to the fee will be based on the shares' NAV when
you purchased them or their NAV when you redeem them, whichever is less. This
arrangement assures that you will not pay a contingent deferred sales charge on
any increase in the value of your shares. You also will not pay the charge on
any shares acquired by reinvesting dividends or capital gains. If you exchange
shares of one fund for shares of another, you do not pay a contingent deferred
sales charge at the time of the exchange. If you later redeem those shares, the
purchase price for purposes of the contingent deferred sales charge formula will
be the price you paid for the original shares, not the exchange price. The
redemption price for purposes of this formula will be the AV of the shares you
are actually redeeming.
Account minimums
If you redeem shares and your account balance falls below a Fund's required
account minimum of $1,000 ($250 for Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act accounts or accounts with automatic investing plans) for
three or more consecutive months, you will have until the end of the current
calendar quarter to raise the balance to the minimum. If your account is not at
the minimum by the required time, you will be charged a $9 fee for that quarter
and each quarter after that until your account reaches the minimum balance. If
your account does not reach the minimum balance, a Fund may redeem your account
after 60 days' written notice to you.
Special services
To help make investing with us as easy as possible, and to help you build your
investments, we offer the following special services.
Automatic Investing Plan
The Automatic Investing Plan allows you to make regular monthly or quarterly
investments directly from your checking account.
Direct Deposit
With Direct Deposit you can make additional investments through payroll
deductions, recurring government or private payments such as Social Security or
direct transfers from your bank account.
Online Account Access
Online Account Access is a password-protected area of the Delaware
Investments(R)' Web site that gives you access to your account information and
allows you to perform transactions in a secure environment.
Electronic Delivery
With Delaware eDelivery, you can receive your fund documents electronically
instead of via the U.S. mail. When you sign up for eDelivery, you can access
your account statements, shareholder reports and other fund materials online, in
a secure environment at any time, from anywhere.
Wealth Builder Option
With the Wealth Builder Option you can arrange automatic monthly exchanges
between your shares in one or more Delaware Investments(R) Funds. Wealth Builder
exchanges are subject to the same rules as regular exchanges (see below) and
require a minimum monthly exchange of $100 per fund.
32
Special services (continued)
Dividend Reinvestment Plan
Through our Dividend Reinvestment Plan, you can have your distributions
reinvested in your account or the same share class in another Delaware
Investments(R) Fund. The shares that you purchase through the Dividend
Reinvestment Plan are not subject to a front-end sales charge or to a contingent
deferred sales charge. Under most circumstances, you may reinvest dividends only
into like classes of shares.
Exchanges
You can exchange all or part of your shares, normally for shares of the same
class in another Delaware Investments(R) Fund without paying a front-end or a
contingent deferred sales charge at the time of the exchange. However, if you
exchange shares from a money market fund that does not have a sales charge you
will pay any applicable sales charge on your new shares. When exchanging Class B
and Class C shares of one fund for the same class of shares in other funds, your
new shares will be subject to the same contingent deferred sales charge as the
shares you originally purchased. The holding period for the contingent deferred
sales charge will also remain the same, with the amount of time you held your
original shares being credited toward the holding period of your new shares. You
do not pay sales charges on shares that you acquired through the reinvestment of
dividends. You may have to pay taxes on your exchange. When you exchange shares,
you are purchasing shares in another fund so you should be sure to get a copy of
the fund's prospectus and read it carefully before buying shares through an
exchange. We may refuse the purchase side of any exchange request, if in the
Manager's judgment, a Fund would be unable to invest effectively in accordance
with its investment objectives and policies or would otherwise potentially be
adversely affected.
MoneyLine(SM) On Demand Service
Through our MoneyLine(SM) On Demand Service, you or your financial advisor may
transfer money between your Fund account and your predesignated bank account by
telephone request. MoneyLine has a minimum transfer of $25 and a maximum
transfer of $50,000. Delaware Investments does not charge a fee for this
service; however, your bank may assess one.
MoneyLine Direct Deposit Service
Through our MoneyLine Direct Deposit Service you can have $25 or more in
dividends and distributions deposited directly to your bank account. Delaware
Investments does not charge a fee for this service; however, your bank may
assess one.
Systematic Withdrawal Plan
Through our Systematic Withdrawal Plan you can arrange a regular monthly or
quarterly payment from your account made to you or someone you designate. If the
value of your account is $5,000 or more, you can make withdrawals of at least
$25 monthly, or $75 quarterly. You may also have your withdrawals deposited
directly to your bank account through our MoneyLine Direct Deposit Service.
The applicable limited contingent deferred sales charge for Class A Shares and
the contingent deferred sales charge for Class B and C Shares redeemed via a
Systematic Withdrawal Plan will be waived if the annual amount withdrawn in each
year is less than 12% of the account balance on the date that the Plan is
established. If the annual amount withdrawn in any year exceeds 12% of the
account balance on the date that the Systematic Withdrawal Plan is established,
all redemptions under the Plan will be subjected to the applicable contingent
deferred sales charge, including an assessment for previously redeemed amounts
under the Plan.
33
About your account (continued)
Frequent trading of Fund shares
The Funds discourage purchases by market timers and purchase orders (including
the purchase side of exchange orders) by shareholders identified as market
timers may be rejected. The Funds' Boards of Trustees have adopted policies and
procedures designed to detect, deter and prevent trading activity detrimental to
the Funds and their shareholders, such as market timing. The Funds will consider
anyone who follows a pattern of market timing in any Delaware Investments(R)
Fund or the Optimum Fund Trust to be a market timer and may consider anyone who
has followed a similar pattern of market timing at an unaffiliated fund family
to be a market timer.
Market timing of a fund occurs when investors make consecutive, rapid,
short-term "roundtrips" - that is, purchases into a fund followed quickly by
redemptions out of that fund. A short-term roundtrip is any redemption of fund
shares within 20 Business Days of a purchase of that fund's shares. If you make
a second such short-term roundtrip in a fund within the same calendar quarter of
a previous short-term roundtrip in that fund, you may be considered a market
timer. In determining whether market timing has occurred, the Funds will
consider short-term roundtrips to include rapid purchases and sales of Fund
shares through the exchange privilege. The Funds reserve the right to consider
other trading patterns to be market timing.
Your ability to use the Funds' exchange privilege may be limited if you are
identified as a market timer. If you are identified as a market timer, we will
execute the redemption side of your exchange order but may refuse the purchase
side of your exchange order. The Funds reserve the right to restrict, reject or
cancel, without prior notice, any purchase order or exchange order for any
reason, including any purchase order or exchange order accepted by any
shareholder's financial intermediary or in any omnibus-type account.
Transactions placed in violation of the Funds' market timing policy are not
necessarily deemed accepted by the Funds and may be cancelled or revoked by the
Funds on the next Business Day following receipt by the Funds.
Redemptions will continue to be permitted in accordance with the Funds' current
Prospectus. A redemption of shares under these circumstances could be costly to
a shareholder if, for example, the shares have declined in value, the
shareholder recently paid a front-end sales charge, the shares are subject to a
contingent deferred sales charge or the sale results in adverse tax
consequences. To avoid this risk, a shareholder should carefully monitor the
purchases, sales and exchanges of Fund shares and avoid frequent trading in Fund
shares.
The Funds reserve the right to modify this policy at any time without notice,
including modifications to the Funds' monitoring procedures and the procedures
to close accounts to new purchases. Although the implementation of this policy
involves judgments that are inherently subjective and may be selectively
applied, we seek to make judgments and applications that are consistent with the
interests of the Funds' shareholders. While we will take actions designed to
detect and prevent market timing, there can be no assurance that such trading
activity will be completely eliminated. Moreover, the Funds' market timing
policy does not require a Fund to take action in response to frequent trading
activity. If a Fund elects not to take any action in response to frequent
trading, such frequent trading and market timing activity could continue.
Risks of market timing By realizing profits through short-term trading,
shareholders that engage in rapid purchases and sales or exchanges of a Fund's
shares dilute the value of shares held by long-term shareholders. Volatility
resulting from excessive purchases and sales or exchanges of Fund shares,
especially involving large dollar amounts, may disrupt efficient portfolio
management. In particular, a Fund may have difficulty implementing its long-term
investment strategies if it is forced to maintain a higher level of its assets
in cash to accommodate significant short-term trading activity. Excessive
purchases and sales or exchanges of a Fund's shares may also force a Fund to
sell portfolio securities at inopportune times to raise cash to accommodate
short-term trading activity. This could adversely affect a Fund's performance
if, for example, a Fund incurs increased brokerage costs and realization of
taxable capital gains without attaining any investment advantage.
34
Frequent trading of Fund shares (continued)
A fund that invests significantly in foreign securities may be particularly
susceptible to short-term trading strategies. This is because foreign securities
are typically traded on markets that close well before the time the fund
calculates its NAV (typically, 4:00 p.m. Eastern Time). Developments that occur
between the closing of the foreign market and the fund's NAV calculation may
affect the value of these foreign securities. The time zone differences among
international stock markets can allow a shareholder engaging in a short-term
trading strategy to exploit differences in fund share prices that are based on
closing prices of foreign securities established some time before a fund
calculates its own share price.
Any fund that invests in securities that are thinly traded, traded infrequently
or relatively illiquid has the risk that the securities prices used to calculate
the fund's NAV may not accurately reflect current market values. A shareholder
may seek to engage in short-term trading to take advantage of these pricing
differences. Funds that may be adversely affected by such arbitrage include, in
particular, funds that significantly invest in small-cap securities, technology
and other specific industry sector securities, and in certain fixed-income
securities, such as high-yield bonds, asset-backed securities or municipal
bonds.
Transaction monitoring procedures The Funds, through their transfer agent,
maintain surveillance procedures designed to detect excessive or short-term
trading in Fund shares. This monitoring process involves several factors, which
include scrutinizing transactions in fund shares for violations of the Funds'
market timing policy or other patterns of short-term or excessive trading. For
purposes of these transaction monitoring procedures, the Funds may consider
trading activity by multiple accounts under common ownership, control or
influence to be trading by a single entity. Trading activity identified by these
factors, or as a result of any other available information, will be evaluated to
determine whether such activity might constitute market timing. These procedures
may be modified from time to time to improve the detection of excessive or
short-term trading or to address other concerns. Such changes may be necessary
or appropriate, for example, to deal with issues specific to certain retirement
plans, plan exchange limits, U.S. Department of Labor regulations, certain
automated or pre-established exchange, asset allocation or dollar cost averaging
programs, or omnibus account arrangements.
Omnibus account arrangements are common forms of holding shares of the Funds,
particularly among certain brokers/dealers and other financial intermediaries,
including sponsors of retirement plans and variable insurance products. The
Funds will attempt to apply their monitoring procedures to these omnibus
accounts and to the individual participants in such accounts. In an effort to
discourage market timers in such accounts, the Funds may consider enforcement
against market timers at the participant level and at the omnibus level, up to
and including termination of the omnibus account's authorization to purchase
Fund shares.
Limitations on ability to detect and curtail market timing Shareholders seeking
to engage in market timing may employ a variety of strategies to avoid detection
and, despite the efforts of the Funds and their agents to detect market timing
in Fund shares, there is no guarantee that the Funds will be able to identify
these shareholders or curtail their trading practices. In particular, the Funds
may not be able to detect market timing attributable to a particular investor
who effects purchase, redemption and/or exchange activity in Fund shares through
omnibus accounts. The difficulty of detecting market timing may be further
compounded if these entities utilize multiple tiers or omnibus accounts.
35
About your account (continued)
Dividends, distributions and taxes
Dividends and Distributions. Each Fund has qualified to be treated as a
regulated investment company under the Internal Revenue Code (the Code). As a
regulated investment company, each Fund generally pays no federal income tax on
the income and gains it distributes to you. Each Fund expects to declare all its
net investment income, if any, on a daily basis and distribute it to
shareholders as dividends monthly. Each Fund will also distribute net realized
capital gains, if any, at least annually, typically in December. The amount of
any distribution will vary, and there is no guarantee a Fund will pay either an
income dividend or a capital gains distribution. We automatically reinvest all
dividends and any capital gains, unless you direct us to do otherwise.
Annual Statements. Every January, you will receive a statement that shows the
tax status of distributions you received the previous calendar year. New for
2006, the Funds are now required to include on your information statement,
exempt-interest dividends and the separately-identified portion that constitutes
an item of tax preference for purposes of the alternative minimum tax
(tax-exempt AMT interest). Distributions declared in December to shareholders of
record in such month but paid in January are taxable as if they were paid in
December. The Funds may reclassify income after your tax reporting statement is
mailed to you. Prior to issuing your statement, each Fund makes every effort to
search for reclassified income to reduce the number of corrected forms mailed to
shareholders. However, when necessary, a Fund will send you a corrected Form
1099-DIV to reflect reclassified information.
Avoid "Buying A Dividend." If you are a taxable investor and invest in a Fund
shortly before the record date of a capital gains distribution, the distribution
will lower the value of the Fund's shares by the amount of the distribution and,
in effect, you will receive some of your investment back in the form of a
taxable distribution.
Tax considerations. You may receive three different types of distributions from
the Fund, including exempt-interest dividends, taxable income dividends and
capital gain distributions. This is true whether you reinvest your distributions
in additional Fund shares or receive them in cash.
Exempt-interest dividends. Most Fund distributions consist of exempt-interest
dividends (dividends paid from interest earned on municipal securities). In
general, these dividends are exempt from regular federal income tax.
Exempt-interest dividends from interest earned on municipal securities of a
state, or its political subdivisions, in which you reside generally are also
exempt from that state's personal income tax. Income from municipal securities
of other states generally does not qualify as tax-free in the state in which you
reside. Because of these tax exemptions, a tax-free fund may not be a suitable
investment for retirement plans and other tax-exempt investors. Corporate
shareholders should note that these dividends may be fully taxable in states
that impose corporate franchise taxes, and they should consult with their tax
advisors about the taxability of this income before investing in a Fund.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. Each Fund may
invest a portion of its assets in private activity bonds. The income from these
bonds is a tax preference item when determining your federal alternative minimum
tax.
36
Dividends, distriution and taxes (continued)
Taxable income dividends. Each Fund may invest a portion of its assets in
securities that pay income that is not tax-exempt. A Fund also may distribute to
you any market discount and net short-term capital gains from the sale of its
portfolio securities. If you are a taxable investor, Fund distributions from
this income are taxable to you as ordinary income, and generally will not be
treated as qualified dividend income subject to reduced rates of taxation for
individuals.
Capital gain distributions. Each Fund also may realize net long-term capital
gains from the sale of its portfolio securities. Fund distributions of long-term
capital gains are taxable to you as long-term capital gains no matter how long
you have owned your shares.
Sales or exchanges of Fund shares. A sale or redemption of Fund shares is a
taxable event and, accordingly, a capital gain or loss may be recognized. For
tax purposes, an exchange of your Fund shares for shares of a different Delaware
Investments(R) Fund is the same as a sale.
Backup withholding. By law, if you do not provide a Fund with your proper
taxpayer identification number and certain required certifications, you may be
subject to backup withholding on any distributions of income, capital gains or
proceeds from the sale or redemption of your shares. A Fund also must withhold
if the IRS instructs it to do so. When withholding is required, the amount will
be 28% of any distributions or proceeds paid.
Other. Fund distributions and gains from the sale or exchange of your Fund
shares generally are subject to state and local taxes. Non-U.S. investors may be
subject to U.S. withholding or estate tax, and are subject to special U.S. tax
certification requirements.
this discussion of "Dividends, distributions and taxes" is not intended or
written to be used as tax advice. because everyone's tax situation is unique,
you should consult your tax professional about federal, state, local or foreign
tax consequences before making an investment in a Fund.
37
Financial highlights
The financial highlights tables are intended to help you understand a Fund's
financial performance. All "per share" information reflects financial results
for a single Fund share. This information for each Fund has been audited by
Ernst & Young LLP, whose report, along with each Fund's financial statements, is
included in the Funds' annual report. The Funds' annual report is available upon
request by calling 800 523-1918.
Delaware Tax-Free USA Fund Class A
Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $11.760 $11.460 $11.170 $11.280 $11.320
Income (loss) from investment
operations:
Net investment income 0.458 0.512 0.538 0.537 0.566
Net realized and unrealized
gain (loss) on investments (0.186) 0.300 0.290 (0.110) (0.040)
------- ------- ------- ------- -------
Total from investment
operations 0.272 0.812 0.828 0.427 0.526
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.462) (0.512) (0.538) (0.537) (0.566)
------- ------- ------- ------- -------
Total dividends and
distributions (0.462) (0.512) (0.538) (0.537) (0.566)
------- ------- ------- ------- -------
Net asset value, end of
period $11.570 $11.760 $11.460 $11.170 $11.280
======= ======= ======= ======= =======
Total return(1) 2.42% 7.23% 7.54% 3.84% 4.85%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $656,813 $453,982 $456,192 $460,917 $495,731
Ratio of expenses to average
net assets 0.86% 0.86% 0.87% 0.87% 0.87%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.00% 0.98% 0.93% 0.97% 0.98%
Ratio of net investment
income to average net
assets 3.97% 4.43% 4.72% 4.74% 5.08%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 3.83% 4.31% 4.66% 4.64% 4.97%
Portfolio turnover 41% 47% 32% 96% 99%
(1) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the Manager and
distributor, as applicable. Performance would have been lower had the
expense limitation not been in effect.
How to read the Financial highlights
Net investment income
Net investment income includes dividend and interest income earned from a fund's
investments; it is after expenses have been deducted.
Net realized and unrealized gain (loss) on investments
A realized gain occurs when we sell an investment at a profit, while a realized
loss occurs when we sell an investment at a loss. When an investment increases
or decreases in value but we do not sell it, we record an unrealized gain or
loss. The amount of realized gain, if any, that we pay to shareholders would be
listed under "Less dividends and distributions-Distributions from net realized
gain on investments."
Net asset value (NAV)
This is the value of a mutual fund share, calculated by dividing the net assets
by the number of shares outstanding.
Total return
This represents the rate that an investor would have earned or lost on an
investment in a fund. In calculating this figure for the financial highlights
table, we include applicable fee waivers, exclude front-end and contingent
deferred sales charges, and assume the shareholder has reinvested all dividends
and realized gains.
38
Delaware Tax-Free USA Fund Class B
Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $11.760 $11.460 $11.170 $11.280 $11.320
Income (loss) from investment
operations:
Net investment income 0.370 0.423 0.449 0.449 0.479
Net realized and unrealized
gain (loss) on investments (0.186) 0.300 0.290 (0.110) (0.040)
------- ------- ------- ------- -------
Total from investment
operations 0.184 0.723 0.739 0.339 0.439
Less dividends and
distributions from:
Net investment income (0.374) (0.423) (0.449) (0.449) (0.479)
------- ------- ------- ------- -------
Total dividends and
distributions (0.374) (0.423) (0.449) (0.449) (0.479)
------- ------- ------- ------- -------
Net asset value, end of
period $11,570 $11.760 $11.460 $11.170 $11.280
======= ======= ======= ======= =======
Total return(1) 1.63% 6.42% 6.71% 3.03% 4.04%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $22,189 $16,507 $22,396 $31,052 $37,448
Ratio of expenses to average
net assets 1.63% 1.63% 1.65% 1.65% 1.65%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.73% 1.71% 1.71% 1.75% 1.76%
Ratio of net investment
income to average net
assets 3.20% 3.66% 3.94% 3.96% 4.30%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 3.10% 3.58% 3.88% 3.86% 4.19%
Portfolio turnover 41% 47% 32% 96% 99%
Delaware Tax-Free USA Fund Class C
Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $11.760 $11.460 $11.170 $11.280 $11.320
Income (loss) from investment
operations:
Net investment income 0.370 0.423 0.449 0.449 0.479
Net realized and unrealized
gain (loss) on investments (0.186) 0.300 0.290 (0.110) (0.040)
------- ------- ------- ------- -------
Total from investment
operations 0.184 0.723 0.739 0.339 0.439
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.374) (0.423) (0.449) (0.449) (0.479)
------- ------- ------- ------- -------
Total dividends and
distributions (0.374) (0.423) (0.449) (0.449) (0.479)
------- ------- ------- ------- -------
Net asset value, end of
period $11,570 $11.760 $11.460 $11.170 $11.280
======= ======= ======= ======= =======
Total return(1) 1.63% 6.42% 6.71% 3.03% 4.04%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $15,110 $5,963 $5,784 $5,508 $5,979
Ratio of expenses to average
net assets 1.63% 1.63% 1.65% 1.65% 1.65%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.73% 1.71% 1.71% 1.75% 1.76%
Ratio of net investment
income to average net
assets 3.20% 3.66% 3.94% 3.96% 4.30%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 3.10% 3.58% 3.88% 3.86% 4.19%
Portfolio turnover 41% 47% 32% 96% 99%
Net assets
Net assets represent the total value of all the assets in a fund's portfolio,
less any liabilities, that are attributable to that class of a Fund.
Ratio of expenses to average net assets
The expense ratio is the percentage of net assets that a fund pays annually for
operating expenses and management fees. These expenses include accounting and
administration expenses, services for shareholders, and similar expenses.
Ratio of net investment income to average net assets
We determine this ratio by dividing net investment income by average net assets.
Portfolio turnover
This figure tells you the amount of trading activity in a fund's portfolio. A
turnover rate of 100% would occur if, for example, a fund bought and sold all of
the securities in its portfolio once in the course of a year or frequently
traded a single security. High turnover can result in increased transaction
costs and tax liability for investors and may affect a fund's performance.
39
Financial highlights (continued)
Delaware Tax-Free Class A
USA Intermediate Fund Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $11.610 $11.390 $11.010 $11.020 $10.890
Income (loss) from investment
operations:
Net investment income 0.408 0.410 0.419 0.435 0.462
Net realized and unrealized
gain (loss) on investments (0.140) 0.220 0.380 (0.010) 0.130
------- ------- ------- ------- -------
Total from investment
operations 0.268 0.630 0.799 0.425 0.592
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.408) (0.410) (0.419) (0.435) (0.462)
------- ------- ------- ------- -------
Total dividends and
distributions (0.408) (0.410) (0.419) (0.435) (0.462)
------- ------- ------- ------- -------
Net asset value, end of
period $11,470 $11.610 $11.390 $11.010 $11.020
======= ======= ======= ======= =======
Total return(1) 2.38% 5.63% 7.36% 3.89% 5.63%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $204,525 $120,273 $77,448 $51,479 $26,075
Ratio of expenses to average
net assets 0.75% 0.79% 0.80%(2) 0.80% 0.80%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.07% 1.11% 1.09% 1.15% 0.94%
Ratio of net investment
income to average net
assets 3.56% 3.55% 3.70% 3.85% 4.28%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 3.24% 3.23% 3.41% 3.50% 4.14%
Portfolio turnover 37% 18% 27% 130% 195%
(1) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the Manager and
distributor, as applicable. Performance would have been lower had the
expense limitation not been in effect.
(2) Ratios for the year ended August 31, 2004, including fees paid indirectly
in accordance with SEC rules, were 0.82%, 1.67% and 1.67% for Class A, B,
and C, respectively.
40
Delaware Tax-Free Class B
USA Intermediate Fund Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $11,610 $11.380 $11.010 $11.020 $10.890
Income (loss) from investment
operations:
Net investment income 0.311 0.313 0.323 0.340 0.371
Net realized and unrealized
gain (loss) on investments (0.150) 0.230 0.370 (0.010) 0.130
------- ------- ------- ------- -------
Total from investment
operations 0.161 0.543 0.693 0.330 0.501
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.311) (0.313) (0.323) (0.340) (0.371)
------- ------- ------- ------- -------
Total dividends and
distributions (0.311) (0.313) (0.323) (0.340) (0.371)
------- ------- ------- ------- -------
Net asset value, end of
period $11.460 $11.610 $11.380 $11.010 $11.020
======= ======= ======= ======= =======
Total return(1) 1.43% 4.83% 6.36% 3.02% 4.74%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $2,413 $3,203 $3,743 $4,538 $3,384
Ratio of expenses to average
net assets 1.60% 1.64% 1.65(2) 1.65% 1.65%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.77% 1.81% 1.79% 1.87% 1.79%
Ratio of net investment
income to average net
assets 2.71% 2.70% 2.85% 3.00% 3.43%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 2.54% 2.53% 2.71% 2.78% 3.29%
Portfolio turnover 37% 18% 27% 130% 195%
Delaware Tax-Free Class C
USA Intermediate Fund Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $11.610 $11.390 $11.010 $11.020 $10.890
Income (loss) from investment
operations:
Net investment income 0.311 0.313 0.323 0.340 0.371
Net realized and unrealized
gain (loss) on investments (0.140) 0.220 0.380 (0.010) 0.130
------- ------- ------- ------- -------
Total from investment
operations 0.171 0.533 0.703 0.330 0.501
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.311) (0.313) (0.323) (0.340) (0.371)
------- ------- ------- ------- -------
Total dividends and
distributions (0.311) (0.313) (0.323) (0.340) (0.371)
------- ------- ------- ------- -------
Net asset value, end of
period $11.470 $11.610 $11.390 $11.010 $11.020
======= ======= ======= ======= =======
Total return(1) 1.52% 4.74% 6.45% 3.02% 4.74%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $28,004 $25,125 $19,201 $10,542 $7,291
Ratio of expenses to average
net assets 1.60% 1.64% 1.65%(2) 1.65% 1.65%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.77% 1.81% 1.79% 1.87% 1.79%
Ratio of net investment
income to average net
assets 2.71% 2.70% 2.85% 3.00% 3.43%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 2.54% 2.53% 2.71% 2.78% 3.29%
Portfolio turnover 37% 18% 27% 130% 195%
41
Financial highlights (continued)
Delaware National High-Yield Class A
Municipal Bond Fund Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $10,380 $10.010 $9.730 $9.950 $10.240
Income (loss) from investment
operations:
Net investment income 0.477 0.503 0.496 0.522 0.542
Net realized and unrealized
gain (loss) on investments (0.060) 0.371 0.280 (0.219) (0.290)
------- ------- ------- ------- -------
Total from investment
operations 0.417 0.874 0.776 0.303 0.252
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.477) (0.504) (0.496) (0.523) (0.542)
------- ------- ------- ------- -------
Total dividends and
distributions (0.477) (0.504) (0.496) (0.523) (0.542)
------- ------- ------- ------- -------
Net asset value, end of
period $10,320 $10.380 $10.010 $9.730 $9.950
======= ======= ======= ======= =======
Total return(1) 4.15% 8.93% 8.13% 3.13% 2.59%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $68,663 $66,451 $56,698 $59,829 $64,259
Ratio of expenses to average
net assets 0.90% 0.93% 1.00% 0.99% 0.96%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.02% 1.01% 1.02% 1.05% 1.04%
Ratio of net investment
income to average net
assets 4.66% 4.92% 5.00% 5.30% 5.42%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 4.54% 4.84% 4.98% 5.24% 5.34%
Portfolio turnover 73% 36% 46% 64% 53%
(1) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value and does not reflect the impact of a sales
charge. Total investment return reflects waivers and payment of fees by the
Manager, as applicable. Performance would have been lower had the expense
limitation not been in effect.
42
Delaware National High-Yield Class B
Municipal Bond Fund Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $10,400 $10.030 $9.760 $9.980 $10.260
Income (loss) from investment
operations:
Net investment income 0.400 0.426 0.421 0.448 0.467
Net realized and unrealized
gain (loss) on investments (0.050) 0.371 0.270 (0.219) (0.281)
------- ------- ------- ------- -------
Total from investment
operations 0.350 0.797 0.691 0.229 0.186
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.400) (0.427) (0.421) (0.449) (0.466)
------- ------- ------- ------- -------
Total dividends and
distributions (0.400) (0.427) (0.421) (0.449) (0.466)
------- ------- ------- ------- -------
Net asset value, end of
period $10,350 $10.400 $10.030 $9.760 $9.980
======= ======= ======= ======= =======
Total return(1) 3.47% 8.10% 7.20% 2.36% 1.91%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $9,519 $13,046 $14,534 $16,499 $20,021
Ratio of expenses to average
net assets 1.65% 1.68% 1.75% 1.74% 1.71%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.77% 1.76% 1.77% 1.80% 1.79%
Ratio of net investment
income to average net
assets 3.91% 4.17% 4.25% 4.55% 4.67%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 3.79% 4.09% 4.23% 4.49% 4.59%
Portfolio turnover 73% 36% 46% 64% 53%
Delaware National High-Yield Class C
Municipal Bond Fund Year ended
8/31
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
Net asset value, beginning of
period $10.420 $10.040 $9.770 $9.990 $10.270
Income (loss) from investment
operations:
Net investment income 0.400 0.426 0.421 0.448 0.467
Net realized and unrealized
gain (loss) on investments (0.060) 0.381 0.270 (0.219) (0.281)
------- ------- ------- ------- -------
Total from investment
operations 0.340 0.807 0.691 0.229 0.186
------- ------- ------- ------- -------
Less dividends and
distributions from:
Net investment income (0.400) (0.427) (0.421) (0.449) (0.466)
------- ------- ------- ------- -------
Total dividends and
distributions (0.400) (0.427) (0.421) (0.449) (0.466)
------- ------- ------- ------- -------
Net asset value, end of
period $10,360 $10.420 $10.040 $9.770 $9.990
======= ======= ======= ======= =======
Total return(1) 3.36% 8.19% 7.19% 2.35% 1.92%
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $5,332 $5,234 $4,798 $5,318 $6,405
Ratio of expenses to average
net assets 1.65% 1.68% 1.75% 1.74% 1.71%
Ratio of expenses to average
net assets prior to expense
limitation and expenses
paid indirectly 1.77% 1.76% 1.77% 1.80% 1.79%
Ratio of net investment
income to average net
assets 3.91% 4.17% 4.25% 4.55% 4.67%
Ratio of net investment
income to average net
assets prior to expense
limitation and expenses
paid indirectly 3.79% 4.09% 4.23% 4.49% 4.59%
Portfolio turnover 73% 36% 46% 64% 53%
43
Glossary
How to use this glossary
The glossary includes definitions of investment terms, many of which are used
throughout the Prospectus. If you would like to know the meaning of an
investment term that is not explained in the text, please check the glossary.
Alternative minimum tax
A federal tax designed to ensure that individuals and corporations with large
incomes owe at least some income tax.
Amortized cost
Amortized cost is a method used to value a fixed-income security that starts
with the face value of the security and then adds or subtracts from that value
depending on whether the purchase price was greater or less than the value of
the security at maturity. The amount greater or less than the par value is
divided equally over the time remaining until maturity.
Average maturity
An average of when the individual bonds and other debt securities held in a
portfolio will mature.
Bond
A debt security, like an IOU, issued by a company, municipality or government
agency. In return for lending money to the issuer, a bond buyer generally
receives fixed periodic interest payments and repayment of the loan amount on a
specified maturity date. A bond's price changes prior to maturity and is
inversely related to current interest rates. When interest rates rise, bond
prices fall, and when interest rates fall, bond prices rise. See "Fixed-income
securities."
Bond ratings
Independent evaluations of creditworthiness, ranging from Aaa/AAA (highest
quality) to D (lowest quality). Bonds rated Baa/BBB or better are considered
investment grade. Bonds rated Ba/BB or lower are commonly known as junk bonds.
See also "Nationally recognized statistical rating organization (NRSRO)."
Capital
The amount of money you invest.
Capital appreciation
An increase in the value of an investment.
Capital gains distributions
Payments to mutual fund shareholders of profits (realized gains) from the sale
of a fund's portfolio securities. Usually paid once a year; may be either
short-term gains or long-term gains.
Commission
The fee an investor pays to a financial advisor for advice and help in buying or
selling mutual funds, stocks, bonds or other securities.
Compounding
Earnings on an investment's previous earnings.
Consumer Price Index (CPI)
Measurement of U.S. inflation; represents the price of a basket of commonly
purchased goods.
Contingent deferred sales charge (CDSC)
Fee charged by some mutual funds when shares are redeemed (sold back to the
fund) within a set number of years; an alternative method for investors to
compensate a financial advisor for advice and service, rather than an up-front
commission.
Corporate bond
A debt security issued by a corporation. See "Bond."
Depreciation
A decline in an investment's value.
Diversification
The process of spreading investments among a number of different securities,
asset classes or investment styles to reduce the risks of investing.
Dividend distribution
Payments to mutual fund shareholders of dividends passed along from the fund's
portfolio of securities.
Duration
A measurement of a fixed-income investment's price volatility. The
larger the number, the greater the likely price change for a given change in
interest rates.
Expense ratio
A mutual fund's total operating expenses, expressed as a percentage of its total
net assets. Operating expenses are the costs of running a mutual fund, including
management fees, offices, staff, equipment and expenses related to maintaining
the fund's portfolio of securities and distributing its shares. They are paid
from the fund's assets before any earnings are distributed to shareholders.
44
Financial advisor
Financial professional (e.g., broker, banker, accountant, planner or insurance
agent) who analyzes clients' finances and prepares personalized programs to meet
objectives.
Fixed-income securities
With fixed-income securities, the money you originally invested is paid back at
a pre-specified maturity date. These securities, which include government,
corporate or municipal bonds, as well as money market securities, typically pay
a fixed rate of return (often referred to as interest). See "Bond."
Inflation
The increase in the cost of goods and services over time. U.S. inflation is
frequently measured by changes in the Consumer Price
Index (CPI).
Investment goal
The objective, such as long-term capital growth or high current income, that a
mutual fund pursues.
Lehman Brothers Municipal Bond 3-15 Year Index
The Lehman Brothers Municipal Bond 3-15 Year Index provides a broad-based
measure of the performance of the U.S. tax-exempt bond market. It is an
unmanaged index of investment grade municipal bonds with maturities of 3-15
years.
Lehman Brothers Municipal Bond Index
The Lehman Brothers Municipal Bond Index is an index that includes approximately
15,000 bonds. To be included in the Index, a municipal bond must meet the
following criteria: a minimum credit rating of at least Baa; has been part of a
deal of at least $50 million; been issued within the last 5 years, and has a
maturity of at least 2 years. Bonds subject to the alternative minimum tax are
excluded. Bonds with floating or zero coupons are also excluded.
Management fee
The amount paid by a mutual fund to the investment advisor for management
services, expressed as an annual percentage of the fund's average daily net
assets.
Market capitalization
The value of a corporation determined by multiplying the current market price of
a share of common stock by the number of shares held by shareholders. A
corporation with one million shares outstanding and the market price per share
of $10 has a market capitalization of $10 million.
Maturity
The length of time until a bond issuer must repay the underlying loan principal
to bondholders.
Merrill Lynch 3-7 Year Municipal Bond Index
Merrill Lynch 3-7 Year Municipal Bond Index provides a broad-based measure of
the performance of the U.S. tax-exempt bond market. This index tracks bonds with
maturities between 3 and 7 years.
NASD
The National Association of Securities Dealers, Inc., which is responsible for
regulating the securities industry.
Nationally recognized statistical rating organization (NRSRO)
A company that assesses the credit quality of bonds, commercial paper, preferred
and common stocks and municipal short-term issues, rating the probability that
the issuer of the debt will meet the scheduled interest payments and repay the
principal. Ratings are published by such companies as Moody's Investors Service,
Inc. (Moody's), Standard & Poor's (S&P), and Fitch, Inc. (Fitch).
Net assets
The total value of all of the assets in a Fund's portfolio, less any
liabilities.
Principal
Amount of money you invest (also called capital). Also refers to a bond's
original face value, due to be repaid at maturity.
Prospectus
The official offering document that describes a mutual fund, containing
information required by the SEC, such as investment objectives, policies,
services and fees.
45
Glossary (continued)
Redeem
To cash in your shares by selling them back to the mutual fund.
Risk
Generally defined as variability of value; also credit risk, inflation risk,
currency and interest rate risk. Different investments involve different types
and degrees of risk.
Sales charge
A commission that is charged on the purchase or redemption of fund shares sold
through financial advisors. May vary with the amount invested. Typically used to
compensate financial advisors for advice and service provided.
SEC (Securities and Exchange Commission)
Federal agency established by Congress to administer the laws governing the
securities industry, including mutual fund companies.
Share classes
Different classifications of shares. Mutual fund share classes offer a variety
of sales charge choices.
Signature guarantee
Certification by a bank, brokerage firm or other financial institution that a
customer's signature is valid. Signature guarantees can be provided by members
of the STAMP program.
Standard deviation
A measure of an investment's volatility; for mutual funds, measures how much a
fund's total return has typically varied from its historical average.
Statement of Additional Information (SAI)
A document that provides more information about a fund's organization,
management, investments, policies and risks.
Total return
An investment performance measurement, expressed as a percentage, based on the
combined earnings from dividends, capital gains and change in price over a given
period.
Uniform Gifts to Minors Act and Uniform Transfers to Minors Act
Federal and state laws that provide special tax advantages and a simple way to
transfer property to a minor.
Volatility
The tendency of an investment to go up or down in value by different magnitudes.
Investments that generally go up or down in value in relatively small amounts
are considered "low volatility" investments, whereas those investments that
generally go up or down in value in relatively large amounts are considered
"high volatility" investments.
46
ADDITIONAL INFORMATION
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In the Funds' shareholder
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during the period
covered by the report. You can find more information about the Funds in the
current SAI, which we have filed electronically with the SEC and which is
legally a part of this Prospectus (it is incorporated by reference). If you want
a free copy of the SAI, the annual or semiannual report, or if you have any
questions about investing in the Funds, you can write to us at 2005 Market
Street, Philadelphia, PA 19103-7094, or call toll-free 800 523-1918. The Funds'
SAI and annual and semi-annual reports to shareholders are also available, free
of charge, through the Funds' Web site (www.delawareinvestments.com). You may
obtain additional information about the Funds from your financial advisor.
You can find reports and other information about the Funds on the EDGAR Database
on the SEC Web site (www.sec.gov). You can also get copies of this information,
after payment of a duplicating fee, by e-mailing the SEC at publicinfo@sec.gov
or by writing to the Public Reference Section of the SEC, Washington, D.C.
20549-0102. Information about the Funds, including their SAI, can be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. You can get
information on the Public Reference Room by calling the SEC at 202 551-8090.
47
Delaware
Investments(R)
A member of Lincoln Financial Group
CONTACT INFORMATION
WEB SITE
www.delawareinvestments.com
E-MAIL
service@delinvest.com
SHAREHOLDER SERVICE CENTER
800 523-1918
Call the Shareholder Service Center Monday to Friday, 8 a.m. to 7 p.m. Eastern
Time:
o For fund information, literature, price, yield and performance
figures.
o For information on existing regular investment accounts and retirement
plan accounts including wire investments, wire redemptions, telephone
redemptions and telephone exchanges.
DELAPHONE SERVICE
800 362-FUND (800 362-3863)
o For convenient access to account information or current performance
information on all Delaware Investments(R) Funds seven days a week, 24
hours a day, use this Touch-Tone(R)service.
DELAWARE FUND SYMBOLS
Delaware Tax-Free USA Fund
CUSIP NASDAQ
Class A 245909106 DMTFX
Class B 245909403 DTFCX
Class C 245909700 DUSCX
Delaware Tax-Free USA Intermediate Fund
Class A 245909304 DMUSX
Class B 245909601 DUIBX
Class C 245909882 DUICX
Delaware National High-Yield Municipal Bond Fund
Class A 928928241 CXHYX
Class B 928928233 DVNYX
Class C 928928225 DVHCX
Investment Company Act file numbers: 811-03850 and 811-07742
PO11455
PR-011[8/06]CGI 12/06 MF-06-11-084
STATEMENT OF ADDITIONAL INFORMATION
January 3, 2007
DELAWARE GROUP TAX-FREE FUND ("TAX-FREE FUND")
Delaware Tax-Free USA Fund
Delaware Tax-Free USA Intermediate Fund
VOYAGEUR MUTUAL FUNDS
Delaware National High-Yield Municipal Bond Fund
2005 Market Street, Philadelphia, PA 19103-7094
For Prospectus, Performance and Information on Existing Accounts of Class A
Shares, Class B Shares and Class C Shares: 800 523-1918
For Dealer Services (Broker/Dealers only): 800 362-7500
This Statement of Additional Information ("Part B") describes shares of
Delaware Tax-Free USA Fund ("USA Fund"), Delaware Tax-Free USA Intermediate Fund
("Intermediate Fund") and Delaware National High-Yield Municipal Bond Fund
("National High-Yield Fund") (each individually, a "Fund," and collectively, the
"Funds"), which are series of the registered investment companies indicated
above (each a "Trust" and together, the "Trusts"). Each Fund offers Class A, B
and C Shares (each individually, a "Class" and collectively, the "Fund
Classes"). All references to "shares" in this Part B refer to all classes of
shares of the Funds, except where noted. The Funds' investment adviser is
Delaware Management Company, a series of Delaware Management Business Trust (the
"Manager").
This Part B supplements the information contained in the current Prospectus
for the Funds, dated December 29, 2006, as it may be amended from time to time.
This Part B should be read in conjunction with the Prospectus. This 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 Funds' national distributor, Delaware
Distributors, L.P. (the "Distributor"), at the above address or by calling the
above phone number. The Funds' financial statements, the notes relating thereto,
the financial highlights and the report of independent registered public
accounting firm are incorporated by reference from the Annual Reports into this
Part B. The Annual Reports will accompany any request for Part B. The Annual
Reports can be obtained, without charge, by calling 800 523-1918.
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TABLE OF CONTENTS
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Page Page
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Organization and Classification 1 Purchasing Shares 31
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Investment Objectives, Restrictions
and Policies 1 Investment Plans 39
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Determining Offering Price and Net
Investment Strategies and Risks 3 Asset Value 42
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Insurance 15 Redemption and Exchange 42
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Disclosure of Portfolio Holdings
Information 17 Distributions and Taxes 48
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Management of the Trusts 18 Performance Information 57
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Investment Manager and Other Service
Providers 24 Financial Statements 57
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Portfolio Managers 27 Principal Holders 57
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Trading Practices and Brokerage 29 Appendix A - Description of Ratings 60
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Capital Structure 31
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ORGANIZATION AND CLASSIFICATION
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Organization
Delaware Group Tax-Free Fund was originally organized as a Maryland
corporation on August 17, 1983. Voyageur Mutual Funds was originally organized
as a Minnesota corporation in April 1993. Both Trusts were reorganized as
Delaware statutory trusts on November 1, 1999.
Classification
The Trusts are open-end management investment companies. Each Fund's
portfolio of assets is non-diversified as defined by the Investment Company Act
of 1940, as amended (the "1940 Act").
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INVESTMENT OBJECTIVES, RESTRICTIONS AND POLICIES
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Investment Objectives
Each Fund's investment objectives are described in the Prospectus. Each
Fund's investment objective is fundamental, and may not be changed without
shareholder approval.
Fundamental Investment Restrictions
Each Fund has adopted the following restrictions which cannot be changed
without approval by the holders of a "majority" of the Fund's outstanding
shares, which is a vote by the holders of the lesser of (i) 67% or more of the
voting securities present in person or by proxy at a meeting, if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy; or (ii) more than 50% of the outstanding voting securities. The
percentage limitations contained in the restrictions and policies set forth
herein apply at the time of purchase of securities.
Each Fund may not:
1. Make investments that will result in the concentration (as that term may
be defined in the 1940 Act, any rule or order thereunder, or SEC staff
interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does not
limit the Fund from investing in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or in tax-exempt obligations or
certificates of deposit.
2. Borrow money or issue senior securities, except as the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof, may permit.
3. Underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the Securities Act, as amended (the "1933 Act").
4. Purchase or sell real estate, unless acquired as a result of ownership
of securities or other instruments and provided that this restriction does not
prevent the Fund from investing in issuers which invest, deal or otherwise
engage in transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein.
5. Purchase or sell physical commodities, unless acquired as a result of
ownership of securities or other instruments and provided that this restriction
does not prevent the Fund from engaging in transactions involving futures
contracts and options thereon or investing in securities that are secured by
physical commodities.
1
6. Make loans, provided that this restriction does not prevent the Fund
from purchasing debt obligations, entering into repurchase agreements, loaning
its assets to broker/dealers or institutional investors and investing in loans,
including assignments and participation interests.
Non-Fundamental Investment Restriction
In addition to the fundamental policies and investment restrictions
described above, and the various general investment policies described in the
Prospectus, the Funds will be subject to the following investment restriction,
which is considered non-fundamental and may be changed by the each Fund's
respective Board of Trustees without shareholder approval: USA and Intermediate
Funds may not invest more than 10% of their respective net assets, and National
High Yield Fund may not invest more than 15% of its net assets, in securities
that they cannot sell or dispose of in the ordinary course of business within
seven days at approximately the value at which the applicable Fund has valued
the investment.
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.
In applying a Fund's policy on concentration: (i) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (ii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (iii) asset backed
securities will be classified according to the underlying assets securing such
securities.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish each Fund's
respective investment objective. The Funds are free to dispose of portfolio
securities at any time, subject to complying with the Internal Revenue Code of
1986, as amended (the "Code") and the 1940 Act, when changes in circumstances or
conditions make such a move desirable in light of each Fund's respective
investment objective. The Funds will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover. Such turnover always will be
incidental to transactions undertaken with a view to achieving each Fund's
respective investment objective.
The portfolio turnover rate tells you the amount of trading activity in a
Fund's portfolio. A turnover rate of 100% would occur, for example, if all of a
Fund's investments held at the beginning of a year were replaced by the end of
the year, or if a single investment was frequently traded. The turnover rate
also may be affected by cash requirements from redemptions and repurchases of a
Fund's shares. A high rate of portfolio turnover in any year may increase
brokerage commissions paid and could generate taxes for shareholders on realized
investment gains. In investing to achieve its investment objective, a Fund may
hold securities for any period of time.
It is generally anticipated that USA Fund's and National High-Yield Fund's
portfolio turnover rate will be less than 100% and that Intermediate Fund's
portfolio turnover may exceed 100%.
For the fiscal years ended August 31, 2005 and 2006, the Funds' portfolio
turnover rates were as follows:
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Fund 2006 2005
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USA Fund 41% 47%
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Intermediate Fund 37% 18%
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National High-Yield Fund 73% 36%
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2
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INVESTMENT STRATEGIES AND RISKS
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The Prospectus discusses the Funds' investment objectives and the
strategies followed to seek to achieve those objectives. The following
discussion supplements the description of the Funds' investment strategies and
risks that are included in the Prospectus.
Advance Refunded Bonds
Escrow secured bonds or defeased bonds are created when an issuer refunds
in advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. 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 a trustee bank to secure all future payments of principal and
interest of the advance refunded bond. Escrow secured bonds will often receive a
rating of triple A from Standard & Poor's ("S&P") and Moody's Investors Service,
Inc. ("Moody's").
Concentration Policy
National High-Yield Fund may not invest more than 25% 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 more than 25% of its total assets in
industrial development revenue bonds. In addition, it is possible that the Fund
from time to time will invest more than 25% 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, more than 25%
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, more than
25% 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, more than 25%
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.
3
Transportation Obligations. The Fund may invest, from time to time, more
than 25% of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other factors,
and several airlines are experiencing severe financial difficulties. The
revenues of issuers which derive their payments from bridge, road or tunnel toll
revenues could be adversely affected by competition from toll-free vehicular
bridges and roads and alternative modes of transportation. Such revenues could
also be adversely affected by a reduction in the availability of fuel to
motorists or significant increases in the costs thereof.
Education Obligations. The Fund may invest, from time to time, more than
25% of its total assets in obligations of issuers which are, or which govern the
operation of, schools, colleges and universities and whose revenues are derived
mainly from tuition, dormitory revenues, grants and endowments. General problems
of such issuers include the prospect of a declining percentage of the population
consisting of college aged individuals, possible inability to raise tuition and
fees sufficiently to cover increased operating costs, the uncertainty of
continued receipt of federal grants, state funding and alumni support, and
government legislation or regulations which may adversely affect the revenues or
costs of such issuers.
Industrial Revenue Obligations. The Fund may invest, from time to time,
more than 25% of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal income
taxes for certain housing, health care, utility, transportation, education and
industrial revenue bonds depends on compliance with relevant provisions of the
Code. The failure to comply with these provisions could cause the interest on
the bonds to become includable in gross income, possibly retroactively to the
date of issuance, thereby reducing the value of the bonds, subjecting
shareholders to unanticipated tax liabilities and possibly requiring the Fund to
sell the bonds at the reduced value. Furthermore, such a failure to meet these
ongoing requirements may not enable the holder to accelerate payment of the bond
or require the issuer to redeem the bond.
Forward Commitments
New issues of Municipal Obligations (as defined below) and other securities
are often purchased on a "when issued" or delayed delivery basis, with delivery
and payment for the securities normally taking place 15 to 45 days after the
date of the transaction. The payment obligation and the interest rate that will
be received on the securities are each fixed at the time the buyer enters into
the commitment. Each Fund may enter into such "forward commitments" if it holds,
and maintains until the settlement date, cash or liquid securities in an amount
sufficient to meet the purchase price. There is no percentage limitation on a
Fund's total assets which may be invested in forward commitments. Municipal
Obligations purchased on a when-issued basis and the securities held in the
4
Fund's portfolio are subject to changes in value (both generally changing in the
same way, i.e., appreciating when interest rates decline and depreciating when
interest rates rise) based upon the public's perception of the creditworthiness
of the issuer and changes, real or anticipated, in the level of interest rates.
Municipal Obligations purchased on a when-issued basis may expose the Fund to
risk because they may experience such fluctuations prior to their actual
delivery. Purchasing Municipal Obligations on a when-issued basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction itself.
Any significant commitment by a Fund to the purchase of securities on a
when-issued basis may increase the volatility of the Fund's net asset value.
Although a Fund will generally enter into forward commitments with the intention
of acquiring securities for its portfolio, it may dispose of a commitment prior
to settlement if the Fund's Manager deems it appropriate to do so. A Fund may
realize short-term profits or losses upon the sale of forward commitments.
Illiquid Securities
USA and Intermediate Funds may each invest up to 10% and National
High-Yield Fund may invest up to 15% of its net assets in illiquid securities. A
security is considered illiquid if it cannot be sold in the ordinary course of
business within seven days at approximately the price at which it is valued.
Illiquid securities may offer a higher yield than securities that are more
readily marketable, but they may not always be marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. The Fund may be restricted in its ability to sell such securities at a
time when the Manager deems it advisable to do so. In addition, in order to meet
redemption requests, the Fund may have to sell other assets, rather than such
illiquid securities, at a time that is not advantageous.
Certain securities in which a Fund may invest, including municipal lease
obligations, certain restricted securities and commercial paper issued pursuant
to the private placement exemption of Section 4(2) of the 1933 Act, historically
have been considered illiquid by the staff of the SEC. In accordance with more
recent staff positions, however, the Fund will treat such securities as liquid
and not subject to the above percentage limitation when they have been
determined to be liquid by the Fund's investment advisor subject to the
oversight of and pursuant to procedures adopted by the Fund's Board of Trustees.
Interest Rate and Index Swaps
Each Fund may invest in interest rate and index swaps to the extent
consistent with its respective investment objectives and strategies. A Fund will
invest in interest rate swaps to adjust its sensitivity to interest rates by
changing its duration, to hedge against changes in interest rates or to gain
exposure to markets in which the Fund invests. A Fund may also use index swaps
as a substitute for futures, options or forward contracts if such contracts are
not available to the Fund on favorable terms. Each Fund may invest up to an
aggregate of 20% of the Fund's net assets in futures, options and swaps as long
as each Fund's investments in these securities when aggregated with other
taxable investments and securities that are rated below investment grade (other
than National High-Yield Fund) do not exceed 20% of the Fund's total net assets.
Swaps are agreements to exchange payment streams over a period of time with
another party, called a counterparty. Each payment stream is based on a
specified rate, which could be a fixed or variable interest rate, the rate of
return on an index, or some other reference rate. The payment streams are
calculated with reference to a hypothetical principal amount, called the
notional principal or the notional amount. For example, in an interest rate swap
one party may agree to pay a fixed interest rate to a counterparty and to
receive in return variable interest rate payments from the counterparty. The
amount that each party pays is calculated by multiplying the fixed and variable
rates, respectively, by the notional amount. The payment streams may thus be
thought of as interest payments on the notional amount. The notional amount does
not actually change hands at any point in the swap transaction; it is used only
to calculate the value of the payment streams.
5
When two counterparties each wish to swap interest rate payments, they
typically each enter into a separate interest rate swap contract with a
broker/dealer intermediary, who is the counterparty in both transactions, rather
than entering into a swap contract with each other directly. The broker/dealer
intermediary enters into numerous transactions of this sort, and attempts to
manage its portfolio of swaps so as to match and offset its payment receipts and
obligations.
The typical minimum notional amount is $5 million. Variable interest rates
are usually set by reference to the London Inter-Bank Offered Rate (LIBOR) or
the rate set by the Bond Market Association (BMA). The typical maximum term of
an interest rate swap agreement ranges from one to twelve years. Index swaps
tend to be shorter term, often for one year. The portfolio managers presently
intend to purchase swaps with maturities of up to 30 years.
A Fund may also engage in index swaps, also called total return swaps. In
an index swap, a Fund may enter into a contract with a counterparty in which the
counterparty will make payments to the Fund based on the positive returns of an
index, such as a corporate bond index, in return for the Fund paying to the
counterparty a fixed or variable interest rate, as well as paying to the
counterparty any negative returns on the index. In a sense, the Fund is
purchasing exposure to an index in the amount of the notional principal in
return for making interest rate payments on the notional principal. As with
interest rate swaps, the notional principal does not actually change hands at
any point in the transaction. The counterparty, typically an investment bank,
manages its obligations to make total return payments by maintaining an
inventory of the fixed-income securities that are included in the index.
Swap transactions provide several benefits to a Fund. Interest rate swaps
may be used as a duration management tool. Duration is a measure of a bond's
interest-rate sensitivity, expressed in terms of years because it is related to
the length of time remaining on the life of a bond. In general, the longer a
bond's duration, the more sensitive the bond's price will be to changes in
interest rates. The average duration of a Fund is the weighted average of the
durations of the Fund's fixed-income securities.
If a Fund wished to shorten the duration of certain of its assets, longer
term assets could be sold and shorter term assets acquired, but these
transactions have potential tax and return differential consequences. By using
an interest rate swap, a Fund could agree to make semi-annual fixed rate
payments and receive semi-annual floating rate LIBOR or BMA payments adjusted
every six months. The duration of the floating rate payments received by the
Fund may be six months. In effect, a Fund can reduce the duration of the
notional amount invested from a longer term to six months over the life of the
swap agreement.
A Fund may also use swaps to gain exposure to specific markets. Other uses
of swaps could help permit a Fund to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against an increase in the
price of securities the Fund anticipates purchasing at a later date. Interest
rate swaps may also be considered as a substitute for interest rate futures in
many cases where the hedging horizon is longer than the maturity of the typical
futures contract, and may be considered to provide more liquidity than similar
forward contracts, particularly long-term forward contracts.
The primary risk of swap transactions is the creditworthiness of the
counterparty, since the integrity of the transaction depends on the willingness
and ability of the counterparty to maintain the agreed upon payment stream. This
risk is often referred to as counterparty risk. If there is a default by a
counterparty in a swap transaction, a Fund's potential loss is the net amount of
payments the Fund is contractually entitled to receive for one payment period
(if any - the Fund could be in a net payment position), not the entire notional
amount, which does not change hands in a swap transaction. Swaps do not involve
the delivery of securities or other underlying assets or principal as collateral
for the transaction. A Fund will have contractual remedies pursuant to the swap
agreement but, as with any contractual remedy, there is no guarantee that the
Fund would be successful in pursuing them -- the counterparty may be judgment
proof due to insolvency, for example. A Fund thus assumes the risk that it will
be delayed or prevented from obtaining payments owed to it. The standard
industry swap agreements do, however, permit a Fund to terminate a swap
agreement (and thus avoid making additional payments) in the event that a
counterparty fails to make a timely payment to the Fund.
6
In response to this counterparty risk, several securities firms have
established separately capitalized subsidiaries that have a higher credit
rating, permitting them to enter into swap transactions as a dealer. A Fund will
not be permitted to enter into any swap transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the actual
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or is determined to be of equivalent credit quality by the Manager.
In addition, the Manager will closely monitor the ongoing creditworthiness of
swap counterparties in order to minimize the risk of swaps.
In addition to counterparty risk, the use of swaps also involves risks
similar to those associated with ordinary portfolio security transactions. If
the portfolio manager is incorrect in his or her forecast of market values or
interest rates, the investment performance of a Fund which has entered into a
swap transaction could be less favorable than it would have been if this
investment technique were not used. It is important to note, however, that there
is no upper limit on the amount a Fund might theoretically be required to pay in
a swap transaction.
The extent to which a Fund may invest in a swap, as measured by the
notional amount, will be subject to the same limitations as the eligible
investments to which the purchased reference rate relates.
Each Fund will, consistent with industry practice, segregate and
mark-to-market daily cash or other liquid assets having an aggregate market
value at least equal to the net amount of the excess, if any, of the Fund's
payment obligations over its entitled payments with respect to each swap
contract. To the extent that a Fund is obligated by a swap to pay a fixed or
variable interest rate, the Fund may segregate securities that are expected to
generate income sufficient to meet the Fund's net payment obligations.
Interest rate swaps may be considered liquid securities because they can be
sold back to the counterparty/dealer relatively quickly at a determinable price.
Most index swaps, on the other hand, are considered to be illiquid because the
counterparty/dealer will typically not unwind an index swap prior to its
termination (and, not surprisingly, index swaps tend to have much shorter
terms). Each Fund will consider the liquidity of each interest rate swap on an
individual basis and treat all index swaps as subject to the limitation on
illiquid investments. For purposes of calculating any percentage limitations,
each Fund will refer to the notional amount of the swap.
Interest rate swaps will be priced using market prices. Index swaps will be
priced using fair value pricing. The income provided by a swap should be
qualifying income for purposes of Subchapter M of the Code. Swaps should not
otherwise result in any significant diversification or valuation issues under
Subchapter M.
Inverse Floaters
Each Fund may invest in inverse floaters. Each Fund may invest up to 25% of
each Fund's respective net assets in inverse floaters when the underlying bond
is tax-exempt. Otherwise, each Fund's investments in taxable instruments and
securities rated below investment grade (other than National High-Yield Fund),
including inverse floaters on taxable bonds, are limited to 20% of the Fund's
respective net assets. Inverse floaters are instruments with floating or
variable interest rates that move in the opposite direction to short-term
interest rates or interest rate indices.
Certain expenses of an inverse floater program will be deemed to be
expenses of a Fund where the Fund has transferred its own municipal bonds to the
trust that issues the inverse floater. To the extent that income from the
inverse floater offsets these expenses, the additional income will have a
positive effect on a Fund's performance. Conversely, to the extent that these
expenses exceed income earned from the trust collateral, the shortfall will have
a negative effect on performance. Typically, the Funds invest in inverse
floaters that permit the holder of the inverse floater to terminate the program
in the event the fees and interest expense exceed income earned by the municipal
bonds held by the trust. Inverse floaters may be more volatile than other
tax-exempt investments.
Municipal Leases
A portion of each Fund's assets may be invested in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs
function much like installment purchase agreements and are widely used by state
and local governments to finance the purchase of property. The lease format is
generally not subject to constitutional limitations on the issuance of state
debt, and COPs enable a governmental issuer to increase government liabilities
beyond constitutional debt limits. A principal distinguishing feature separating
COPs from municipal debt is the lease, which contains a "non-appropriation" or
"abatement" clause. This clause provides that, although the municipality will
use its best efforts to make lease payments, it may terminate the lease without
penalty if its appropriating body does not allocate the necessary funds. The
Funds intend to invest only in COPs
7
rated within the four highest rating categories of Moody's, S&P or Fitch In.
("Fitch"), or in unrated COPs believed to be of comparable quality.
Municipal Obligations
As used in this Part B, the term "Municipal Obligations" refers to debt
obligations issued by or on behalf of a state or territory or its agencies,
instrumentalities, municipalities and political subdivisions. With respect to
National High-Yield Fund only, the term "Municipal Obligations" also includes
Derivative Municipal Obligations as defined below.
Municipal Obligations are primarily debt obligations issued to obtain funds
for various public purposes such as constructing public facilities and making
loans to public institutions. The two principal classifications of Municipal
Obligations are general obligation bonds and revenue bonds. General obligation
bonds are generally secured by the full faith and credit of an issuer possessing
general taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or revenue source.
Revenue bonds are payable only from the revenues derived from a particular
source or facility, such as a tax on particular property or revenues derived
from, for example, a municipal water or sewer utility or an airport. Municipal
Obligations that benefit private parties in a manner different than members of
the public generally (so-called private activity bonds or industrial development
bonds) are in most cases revenue bonds, which may be payable solely from
specific revenues of the project to be financed. The credit quality of private
activity bonds is usually directly related to the creditworthiness of the user
of the facilities (or the creditworthiness of a third-party guarantor or other
credit enhancement participant, if any).
The Code limits the amount of new "private purpose" bonds that each state
can issue and subjects interest income from these bonds to the federal
alternative minimum tax. "Private purpose" bonds are issues whose proceeds are
used to finance certain non-government activities, and could include some types
of industrial revenue bonds such as privately-owned sports and convention
facilities. The tax-exempt status of certain bonds also depends on the issuer's
compliance with specific requirements after the bonds are issued.
Within these principal classifications of Municipal Obligations, there is a
variety of types of municipal securities. Certain Municipal Obligations may
carry variable or floating rates of interest whereby the rate of interest is not
fixed but varies with changes in specified market rates or indexes, such as a
bank prime rate or a tax-exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Municipal Obligations are zero coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
Municipal Obligations also include state or municipal leases and
participation interests therein. A Fund may invest in these types of obligations
without limitation. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered potentially illiquid by the
staff of the Securities and Exchange Commission ("SEC"). Municipal lease
obligations held by a Fund will be treated as illiquid unless they are
determined to be liquid pursuant to guidelines established by the appropriate
Board of Trustees. Under these guidelines, a Fund's investment advisor will
consider factors including, but not limited to: (1) whether the lease can be
canceled, (2) what assurance there is that the assets represented by the lease
can be sold, (3) the municipality's general credit strength (e.g., its debt,
administrative, economic and financial characteristics), (4) the likelihood that
the municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of non-appropriation"), and (5)
the legal recourse in the event of failure to appropriate. Additionally, the
lack of an established trading market for municipal lease obligations may make
the determination of fair market value more difficult.
8
The yields on Municipal Obligations are dependent on a variety of factors,
including general money market conditions, general conditions of the municipal
bond market, size of a particular offering, maturity of the obligation and
rating of the issue. The imposition of a Fund's management fee, as well as other
operating expenses, will have the effect of reducing the yield to investors.
Each Fund may invest without limitation in short-term Municipal Obligations
or in taxable obligations on a temporary, defensive basis due to market
conditions or, with respect to taxable obligations, for liquidity purposes. Such
taxable obligations, whether purchased for liquidity purposes or on a temporary,
defensive basis, may include: obligations of the U.S. government, its agencies
or instrumentalities; other debt securities rated within the three highest
grades by either Moody's, Fitch or S&P commercial paper rated in the highest
grade by any of such rating services (Prime-1, F-1+ or A-1, respectively);
certificates of deposit and bankers' acceptances of domestic banks which have
capital, surplus and undivided profits of over $100 million; high-grade taxable
Municipal Obligations; and repurchase agreements with respect to any of the
foregoing investments. The Fund also may hold its assets in cash and in
securities of tax-exempt money market mutual funds.
Each Fund may also invest more than 25% of its assets in Municipal
Obligations relating to similar types of projects or with other similar
economic, business or political characteristics (such as bonds of housing
finance agencies or health care facilities). In addition, each Fund may invest
more than 25% of its assets in industrial development bonds or, except with
respect to National High-Yield Fund, pollution control bonds which may be backed
only by the assets and revenues of a nongovernmental issuer. A Fund will not,
however, invest more than 25% of its total assets in bonds issued for companies
in the same industry.
Derivative Municipal Obligations. National High-Yield Fund may also acquire
Derivative Municipal Obligations, which are custodial receipts or trust
certificates ("custodial receipts") underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain Municipal Obligations. The underwriter of these certificates or
receipts typically purchases and deposits the securities in an irrevocable trust
or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt or trust certificate, the Fund may be authorized to assert
its rights directly against the issuer of the underlying obligation, the Fund
could be required to assert through the custodian bank those rights as may exist
against the underlying issuer. Thus, in the event the underlying issuer fails to
pay principal and/or interest when due, the Fund may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Fund had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which the
underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to the National
High-Yield Fund and its shareholders would be reduced by the amount of taxes
paid. Furthermore, amounts paid by the trust or custodial account to the Fund
would lose their tax-exempt character and become taxable, for federal and state
purposes, in the hands of the Fund and its shareholders. However, the Fund will
only invest in custodial receipts which are accompanied by a tax opinion stating
that interest payable on the receipts is tax-exempt. If the Fund invests in
custodial receipts, it is possible that a portion of the discount at which the
Fund purchases the receipts might have to be accrued as taxable income during
the period that the Fund holds the receipts.
The principal and interest payments on the Derivative Municipal Obligations
underlying custodial receipts or trust certificates may be allocated in a number
of ways. For example, payments may be allocated such that certain custodial
receipts or trust certificates may have variable or floating interest rates and
others may be stripped securities which pay only the principal or interest due
on the underlying Municipal Obligations. National High-Yield Fund may also
invest in custodial receipts or trust certificates which are "inverse floating
obligations" (also sometimes referred to as "residual interest bonds"). These
securities pay interest rates that vary inversely to changes in the interest
rates of specified short term Municipal Obligations or an index of short-term
Municipal
9
Obligations. Thus, as market interest rates increase, the interest rates on
inverse floating obligations decrease. Conversely, as market rates decline, the
interest rates on inverse floating obligations increase. Such securities have
the effect of providing a degree of investment leverage. As a result, the market
values of inverse floating obligations will generally be more volatile than the
market values of other Municipal Obligations and investments in these types of
obligations will increase the volatility of the net asset value of shares of the
Fund.
High-Yield Municipal Obligations: National High-Yield Fund will normally
invest primarily in medium- and lower-grade Municipal Obligations rated, at the
time of investment, between BBB and B- (inclusive) by S&P, Baa and B3
(inclusive) by Moody's, or BBB and B- (inclusive) by Fitch, or Municipal
Obligations determined by the Manager to be of comparable quality.
Medium-grade Municipal Obligations are rated BBB by S&P or Fitch, Baa by
Moody's or are unrated securities determined by the Manager to be of comparable
quality.
The Fund may invest in lower-grade Municipal Obligations rated, at the time
of investment, no lower than B- by S&P or Fitch, or B3 by Moody's, or in unrated
Municipal Obligations determined by the Manager to be of comparable quality.
Municipal Obligations rated B by S&P or Fitch generally are regarded by S&P or
Fitch, on balance, as predominantly speculative with respect to capacity to pay
interest or repay principal in accordance with the terms of the obligations.
While such securities will likely have some quality and protective
characteristics, in S&P's or Fitch's view these are outweighed by large
uncertainties or major risk exposure to adverse conditions. Securities rated B
by Moody's are viewed by Moody's as generally lacking characteristics of a
desirable investment. In Moody's view, assurance of interest and principal
payments or of maintenance of other terms of such securities over any long
period of time may be small.
The Fund will not make initial investments in Municipal Obligations rated,
at the time of investment, below B- by S&P or Fitch, or below B3 by Moody's, or
in Municipal Obligations determined by the Manager to be of comparable quality.
The Fund may retain Municipal Obligations which are downgraded after investment.
There is no minimum rating with respect to securities that the Fund may hold if
downgraded after investment.
Investment in medium- and lower-grade securities involves special risks as
compared with investment in higher-grade securities, including potentially
greater sensitivity to a general economic downturn or to a significant increase
in interest rates, greater market price volatility and less liquid secondary
market trading. There can be no assurance that the Fund will achieve its
investment objective, and the Fund may not be an appropriate investment for all
investors.
At times the Manager may judge that conditions in the markets for medium-
and lower-grade Municipal Obligations make pursuing the Fund's basic investment
strategy of investing primarily in such Municipal Obligations inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade Municipal Obligations and in unrated
Municipal Obligations determined by the Manager to be of comparable quality.
Although such higher grade Municipal Obligations generally entail less credit
risk, such higher grade Municipal Obligations may have a lower yield than
medium- and lower-grade Municipal Obligations and investment in such higher
grade Municipal Obligations may result in a lower yield to Fund shareholders.
The Manager also may judge that conditions in the markets for long- and
intermediate-term Municipal Obligations in general make pursuing the Fund's
basic investment strategy inconsistent with the best interests of the Fund's
shareholders. At such times, the Fund may pursue strategies primarily designed
to reduce fluctuations in the value of the Fund's assets, including investing
the Fund's assets in high-quality, short-term Municipal Obligations and in
high-quality, short-term taxable securities.
Options and Futures To the extent indicated below, the Funds may utilize
put and call transactions and may utilize futures transactions to hedge against
market risk and facilitate portfolio management. Options and futures may be used
to attempt to protect against possible declines in the market value of a Fund's
portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), to protect the Fund's unrealized
gains
10
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio or to establish a position in the securities markets as
a temporary substitute for purchasing particular securities. The use of options
and futures is a function of market conditions. Other transactions may be used
by the Fund in the future for hedging purposes as they are developed to the
extent deemed appropriate by the appropriate Board of Trustees.
Options on Securities. Each Fund may write (i.e., sell) covered put and
call options and purchase call options on the securities in which they may
invest and on indices of securities in which they may invest, to the extent such
put and call options are available. Each Fund may also purchase put options on
indices of securities in which it may invest, to the extent such put options are
available.
Each Fund may invest up to an aggregate of 20% of the Fund's net assets in
futures, options and swaps as long as each Fund's investments in these
securities when aggregated with other taxable investments and securities rated
below investment grade (other than National High-Yield Fund) do not exceed 20%
of the Fund's total net assets.
A put option gives the buyer of such option, upon payment of a premium, the
right to deliver a specified amount of a security to the writer of the option on
or before a fixed date at a predetermined price. A call option gives the
purchaser of the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a fixed date, at
a predetermined price.
In purchasing a call option, the Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, the Fund
would be in a position to realize a gain if, during the option period, the price
of the security declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by the Fund were permitted to expire without being
sold or exercised, its premium would be lost by the Fund. The Intermediate Fund
may also purchase (i) call options to the extent that premiums paid for such
options do not exceed 2% of the Fund's total assets and (ii) put options to the
extent that premiums paid for such options do not exceed 2% of the Fund's total
assets.
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction. The Fund retains the premium received from writing a put or call
option whether or not the option is exercised.
The Funds may engage in listed options transactions on the various national
securities exchanges or in the over-the-counter market. Over-the-counter options
are purchased or written by the Fund in privately negotiated transactions. Such
options are illiquid, and it may not be possible for the Fund to dispose of an
option it has purchased or terminate its obligations under an option it has
written at a time when the Manager believes it would be advantageous to do so.
Over-the-counter options are subject to the Funds' illiquid investment
limitation.
Participation in the options market involves investment risks and
transaction costs to which a Fund would not be subject absent the use of this
strategy. If the Manager's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include: (a) dependence on
11
the Manager's ability to predict correctly movements in the direction of
interest rates and security prices; (b) imperfect correlation between the price
of options and movements in the prices of the securities being hedged; (c) the
fact that the skills needed to use these strategies are different from those
needed to select portfolio securities; (d) the possible absence of a liquid
secondary market for any particular instrument at any time; and (e) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences.
Futures Contracts and Options on Futures Contracts. The Funds may enter
into contracts for the purchase or sale for future delivery of securities or
contracts based on financial indices including any index of securities in which
the Fund may invest ("futures contracts") and may purchase and write put and
call options to buy or sell futures contracts ("options on futures contracts").
Each Fund may invest up to an aggregate of 20% of the Fund's net assets in
futures, options and swaps as long as each Fund's investments in these
securities when aggregated with other taxable investments and securities rated
below investment grade (other than National High-Yield Fund) do not exceed 20%
of the Fund's total net assets. A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. The purchaser of a
futures contract on an index agrees to take or make delivery of an amount of
cash equal to the difference between a specified dollar multiple of the value of
the index on the expiration date of the contract ("current contract value") and
the price at which the contract was originally struck. Options on futures
contracts to be written or purchased by a Fund will be traded on or subject to
the rules of the particular futures exchange designated by the Commodity Futures
Trading Commission ("CFTC"). The successful use of such instruments draws upon
the Manager's experience with respect to such instruments and usually depends
upon the Manager's ability to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of futures contracts or options on futures contracts or may
realize losses and would thus be in a worse position than if such strategies had
not been used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in the prices of
the securities hedged or used for cover will not be perfect.
A Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements. To the extent required to
comply with applicable SEC releases and staff positions, when purchasing a
futures contract or writing a put option, the Fund will maintain in a segregated
account cash or liquid securities equal to the value of such contracts, less any
margin on deposit.
Portfolio Loan Transactions
Intermediate Fund may loan up to 25% of its assets to qualified
broker/dealers or institutional investors for their use relating to short sales
or other security transactions.
It is the understanding of the Manager that the staff of the SEC permits
portfolio lending by registered investment companies if certain conditions are
met. These conditions are as follows: (1) each transaction must have 100%
collateral in the form of cash, U.S. Treasury Bills and Notes, or irrevocable
letters of credit payable by banks acceptable to the Fund from the borrower; (2)
this collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund; (3) the Fund must be able to terminate the loan after notice, at any time;
(4) the Fund must receive reasonable interest on any loan, and any dividends,
interest or other distributions on the lent securities, and any increase in the
market value of such securities; (5) the Fund may pay reasonable custodian fees
in connection with the loan; and (6) the voting rights on the lent securities
may pass to the borrower; however, if the Trustees know that a material event
will occur affecting an investment loan, they must either terminate the loan in
order to vote the proxy or enter into an alternative arrangement with the
borrower to enable the trustees to vote the proxy.
The major risk to which a Fund would be exposed on a loan transaction is
the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Funds will only enter into loan arrangements
after a review of all pertinent facts by the Manager, under the supervision of
the Board of Trustees, including the creditworthiness of the borrowing broker,
dealer or institution and then only if the consideration to be received from
such loans would justify the risk. Creditworthiness will be monitored on an
ongoing basis by the Manager.
12
The ratings of S&P, Moody's and other rating services represent their
opinion as to the quality of the money market instruments which they undertake
to rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. These ratings are the initial criteria for
selection of portfolio investments, but the Fund will further evaluate these
securities.
Private Purpose Bonds
The Code limits the amount of new "private purpose" bonds that each state
can issue and subjects interest income from these bonds to the federal
alternative minimum tax. "Private purpose" bonds are issues whose proceeds are
used to finance certain non-government activities, and could include some types
of industrial revenue bonds such as privately-owned sports and convention
facilities. The tax-exempt status of certain bonds also depends on the issuer's
compliance with specific requirements after the bonds are issued.
Each Fund intends to seek to achieve a high level of tax-exempt income.
However, if a Fund invests in newly-issued private purpose bonds, a portion of
that Fund's distributions would be subject to the federal alternative minimum
tax. National High-Yield Fund may invest up to 100% and each of the other Funds
may invest up to 20% of its assets in bonds the income from which is subject to
the federal alternative minimum tax.
Repurchase Agreements
Repurchase agreements are instruments under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities. Under a repurchase agreement, the purchaser acquires ownership
of the security but the seller agrees, at the time of sale, to repurchase it at
a mutually agreed-upon time and price. A Fund will take custody of the
collateral under repurchase agreements. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred. The resale price is in excess of the purchase price and
reflects an agreed-upon market rate unrelated to the coupon rate or maturity of
the purchased security. Such transactions afford an opportunity for a Fund to
invest temporarily available cash on a short-term basis. Generally, repurchase
agreements are of short duration, often less than one week, but on occasion for
longer periods. A Fund's risk is limited to the seller's ability to buy the
security back at the agreed-upon sum at the agreed-upon time, since the
repurchase agreement is secured by the underlying obligation. Should an issuer
of a repurchase agreement fail to repurchase the underlying security, the loss
to a Fund, if any, would be the difference between the repurchase price and the
market value of the security. In addition, should such an issuer default, the
Manager believes that, barring extraordinary circumstances, the Fund will be
entitled to sell the underlying securities or otherwise receive adequate
protection for its interest in such securities, although there could be a delay
in recovery. A Fund considers the creditworthiness of the bank or dealer from
whom it purchases repurchase agreements. A Fund will monitor such transactions
to assure that the value of the underlying securities subject to repurchase
agreements is at least equal to the repurchase price. The underlying securities
will be limited to those described above.
National High-Yield Fund may enter into repurchase agreements with respect
to not more than 10% of its total assets (taken at current value), except when
investing for defensive purposes during times of adverse market conditions.
National High-Yield Fund may enter into repurchase agreements with respect to
any securities which it may acquire consistent with its investment policies and
restrictions.
A Fund will limit its investments in repurchase agreements to those which
the Manager determines to present minimal credit risks and which are of high
quality. In addition, a Fund must have collateral of 102% of the repurchase
price, including the portion representing a Fund's yield under such agreements
which is monitored on a daily basis. Such collateral is held by a Fund's
custodian in book entry form. Such agreements may be considered loans under the
1940 Act, but a Fund considers repurchase agreements contracts for the purchase
and sale of securities, and it seeks to perfect a security interest in the
collateral securities so that it has the right to keep and dispose of the
underlying collateral in the event of default.
The funds in the Delaware Investments family (each a Delaware
Investments(R) Fund" and collectively, the "Delaware Investments(R) Funds") have
obtained an exemption from the joint-transaction prohibitions of Section
13
17(d) of the 1940 Act to allow certain funds jointly to invest cash balances.
The Funds may invest cash balances in a joint repurchase agreement in accordance
with the terms of the Order and subject generally to the conditions described
above.
Reverse Repurchase Agreements
National High-Yield Fund may engage in "reverse repurchase agreements" with
banks and securities dealers with respect to not more than 10% of its total
assets. Reverse repurchase agreements are ordinary repurchase agreements in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
the securities because it avoids certain market risks and transaction costs.
Because certain of the incidents of ownership of the security are retained by
the Fund, reverse repurchase agreements are considered a form of borrowing by
the Fund from the buyer, collateralized by the security. At the time the Fund
enters into a reverse repurchase agreement, cash or liquid securities having a
value sufficient to make payments for the securities to be repurchased will be
segregated, and will be marked to market daily and maintained throughout the
period of the obligation. Reverse repurchase agreements may be used as a means
of borrowing for investment purposes subject to the 10% limitation set forth
above. This speculative technique is referred to as leveraging. Leveraging may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by income from or
appreciation of the securities purchased. Because the Fund does not currently
intend to utilize reverse repurchase agreements in excess of 10% of total
assets, the Fund believes the risks of leveraging due to use of reverse
repurchase agreements to principal are reduced. The Manager believes that the
limited use of leverage may facilitate the Fund's ability to provide high
current income.
Rule 144A Securities
Each Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the 1933 Act, as discussed more fully below.
Rule 144A permits many privately placed and legally restricted securities
to be freely traded among certain institutional buyers such as a Fund. While
maintaining oversight, the Board of Trustees 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 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 which was previously
determined to be liquid is no longer liquid and, as a result, a Fund's holdings
of illiquid securities exceed the Fund's limit on investments in such
securities, the Manager will determine what action to take to ensure that each
Fund continues to adhere to such limitation.
14
Variable or Floating Rate Demand Notes
The Funds may purchase "floating-rate" and "variable-rate" obligations.
Variable or floating rate demand notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period (generally up to 30 days) prior
to specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily to up to six
months to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the price rate of a bank or some other
appropriate interest rate adjustment index. The Manager will decide which
variable or floating rate demand instruments a Fund will purchase in accordance
with procedures prescribed by the Board of Trustees to minimize credit risks.
Any VRDN must be of high quality as determined by the Manager and subject to
review by the Board of Trustees, with respect to both its long-term and
short-term aspects, except where credit support for the instrument is provided
even in the event of default on the underlying security, the Fund may rely only
on the high quality character of the short-term aspect of the demand instrument,
i.e., the demand feature. A VRDN which is unrated must have high quality
characteristics similar to those rated in accordance with policies and
guidelines determined by the Board of Trustees. If the quality of any VRDN falls
below the quality level required by the Board of Trustees and any applicable
rules adopted by the SEC, a Fund must dispose of the instrument within a
reasonable period of time by exercising the demand feature or by selling the
VRDN in the secondary market, whichever is believed by the Manager to be in the
best interests of the Fund and its shareholders.
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 National High-Yield 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 Manager under guidelines
established by the Fund's Board of Trustees, to be of comparable quality to
instruments that are rated high quality. A rating may be relied upon only if it
is provided by a nationally recognized statistical rating organization that is
not affiliated with the issuer or guarantor of the instruments.
Zero Coupon Bonds
The Funds may invest in zero coupon bonds. Zero coupon bonds are debt
obligations which do not entitle the holder to any periodic payments of interest
prior to maturity or a specified date when the securities begin paying current
interest, and therefore are issued and traded at a discount from their face
amounts or par value.
The market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than do
non-zero coupon securities having similar maturities and credit quality. Current
federal income tax law requires that a holder of a taxable zero coupon security
report as income each year the portion of the original issue discount of such
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Each Fund has qualified as a regulated
investment company under the Code. Accordingly, during periods when a Fund
receives no interest payments on its zero coupon securities, it will be
required, in order to maintain its desired tax treatment, to distribute cash
approximating the income attributable to such securities. Such distribution may
require the sale of portfolio securities to meet the distribution requirements
and such sales may be subject to the risk factor discussed above.
--------------------------------------------------------------------------------
INSURANCE
--------------------------------------------------------------------------------
The Manager anticipates that substantially all of the insured Municipal
Obligations in the Funds' investment portfolios will be covered by either
Primary Insurance or Secondary Market Insurance. Both Primary Insurance and
Secondary Market Insurance are non-cancelable and continue in force so long as
the insured security is outstanding and the respective insurer remains in
business. Premiums for Portfolio Insurance, if any, would be
15
paid from a Fund's assets and would reduce the current yield on its investment
portfolio by the amount of such premiums.
Because Portfolio Insurance coverage terminates upon the sale of an insured
security from a Fund's portfolio, such insurance does not have an effect on the
resale value of the security. Therefore, unless a Fund elects to purchase
Secondary Market Insurance with respect to such securities or such securities
are already covered by Primary Insurance, it generally will retain any such
securities insured by Portfolio Insurance which are in default or in significant
risk of default, and will place a value on the insurance equal to the difference
between the market value of the defaulted security and the market value of
similar securities which are not in default.
The Funds are permitted to obtain Portfolio Insurance from insurers that
have obtained a claims-paying ability rating of "AAA" from S&P or Fitch or "Aaa"
(or a short-term rating of "MIG-1") from Moody's, or including AMBAC Indemnity
Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA"),
Financial Guaranty Insurance Company ("FGIC"), Financial Security Assurance,
Inc. ("FSA"), XL Capital Assurance, Inc. ("XLCA") and CIFG.
A Moody's insurance claims-paying ability rating is an opinion of the
ability of an insurance company to repay punctually senior policyholder
obligations and claims. An insurer with an insurance claims-paying ability
rating of Aaa is adjudged by Moody's to be of the best quality. In the opinion
of Moody's, the policy obligations of an insurance company with an insurance
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position. An S&P insurance claims-paying ability rating is
an assessment of an operating insurance company's financial capacity to meet
obligations under an insurance policy in accordance with its terms. An insurer
with an insurance claims-paying ability rating of AAA has the highest rating
assigned by S&P. The capacity of an insurer so rated to honor insurance
contracts is adjudged by S&P to be extremely strong and highly likely to remain
so over a long period of time. A Fitch Insurer Financial Strength ("IFS") rating
provides an assessment of the financial strength of an insurance company and its
capacity to meet senior obligations to policyholders and contract holders on a
timely basis. Insurers that are assigned a AAA IFS rating by Fitch are viewed as
possessing exceptionally strong capacity to meet policyholder and contract
obligations. For such companies, risk factors are minimal and the impact of any
adverse business and economic factors are expected to be extremely small.
An insurance claims-paying ability rating by Moody's, S&P, or Fitch does
not constitute an opinion on any specific insurance contract in that such an
opinion can only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet non-policy
obligations (i.e., debt contracts).
The assignment of ratings by Moody's, S&P, or Fitch to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of insurance claims-paying ability
ratings. The likelihood of a timely flow of funds from the insurer to the
trustee for the bondholders is a likely element in the rating determination for
such debt issues.
As of the date of this Part B, each of AMBAC, MBIA, FGIC, FSA, XLCA, and
CIFG has insurance claims-paying ability ratings of Aaa from Moody's, AAA from
S&P, and AAA from Fitch.
AMBAC has received a letter ruling from the Internal Revenue Service which
holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Funds, under policy provisions substantially
identical to those contained in its municipal bond insurance policy, will be
excludable from federal gross income under Section 103(a) of the Code.
None of AMBAC, MBIA, FGIC, FSA, XLCA, or CIFG or any associate thereof, has
any material business relationship, direct or indirect, with the Funds.
16
--------------------------------------------------------------------------------
DISCLOSURE OF PORTFOLIO HOLDINGS INFORMATION
--------------------------------------------------------------------------------
Each Fund has adopted a policy generally prohibiting the disclosure of
portfolio holdings information to any person until after 30 calendar days have
passed. A list of each Fund's portfolio holdings monthly, with a 30 day lag, is
posted on the Funds' Web site, www.delawareinvestments.com. In addition, on a 10
day lag, we also make available a month-end summary listing of the number of
each Fund's securities, country and asset allocations, and top ten securities
and sectors by percentage of holdings for each Fund. This information is
available publicly to any and all shareholders free of charge once posted on the
Web site by calling 800 523-1918.
Other entities, including institutional investors and intermediaries that
distribute the Funds' shares, are generally treated similarly and are not
provided with the Funds' portfolio holdings in advance of when they are
generally available to the public.
Third-party service providers and affiliated persons of the Funds are
provided with the Funds' portfolio holdings only to the extent necessary to
perform services under agreements relating to the Funds. In accordance with the
policy, third-party service providers who receive non-public portfolio holdings
information on an ongoing basis are: the Manager's affiliates, the Funds'
independent registered public accounting firm, the Funds' custodian, the Funds'
legal counsel, the Funds' financial printer and the Funds' proxy voting service
(Institutional Shareholder Services). These entities are obligated to keep such
information confidential.
Third-party rating and ranking organizations and consultants who have
signed agreements ("Non-Disclosure Agreements") with the Funds or the Manager
may receive portfolio holdings information more quickly than the 30 day lag. The
Non-Disclosure Agreements require that the receiving entity hold the information
in the strictest confidence and prohibit the receiving entity from disclosing
the information or trading on the information (either in Fund shares or in
shares of the Funds' portfolio securities). In addition, the receiving party
must agree to provide copies of any research or reports generated using the
portfolio holdings information in order to allow for monitoring of use of the
information. Neither the Funds, the Manager nor any affiliate receive any
compensation or consideration with respect to these agreements.
To protect the shareholders' interest and to avoid conflicts of interest,
Non-Disclosure Agreements must be approved by a member of the Manager's Legal
Department and Compliance Department and any deviation in the use of the
portfolio holdings information by the receiving party must be approved in
writing by the Funds' Chief Compliance Officer prior to such use.
Each Trust's Board of Trustees will be notified of any substantial change to
the foregoing procedures. Each Board of Trustees also receives an annual report
from the Funds' Chief Compliance Officer which, among other things, addresses
the operation of the Funds' procedures concerning the disclosure of portfolio
holdings information.
17
--------------------------------------------------------------------------------
MANAGEMENT OF THE TRUSTS
--------------------------------------------------------------------------------
Officers and Trustees
The business and affairs of the Trusts are managed under the direction of
their Board of Trustees. Certain officers and Trustees of the Trusts hold
identical positions in each of the other Delaware Investments(R) Funds. As of
December 5, 2006, the Trusts' officers and Trustees owned less than 1% of the
outstanding shares of each Class of each Fund. The Trusts' Trustees and
principal officers are noted below along with their ages and their business
experience for the past five years. The Trustees serve for indefinite terms
until their resignation, death or removal.
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Number of
Portfolios in Other
Fund Complex Directorships
Position(s) Principal Overseen by Held by Trustee/
Name, Address Held with the Length of Occupation(s) Trustee or Director or
and Birthdate Trusts Time Served During Past 5 Years Officer Officer
--------------------------------------------------------------------------------------------------------------
Interested Trustee
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Patrick P. Chairman, Chairman and Mr. Coyne has 83 None
Coyne(2) President, Trustee since served in various
2005 Market Street Chief August 16, 2006 executive
Philadelphia, PA Executive capacities at
19103 Officer and President and different times
Trustee Chief at Delaware
April 14, 1963 Executive Investments(1)
Officer since
August 1, 2006
--------------------------------------------------------------------------------------------------------------
Independent Trustees
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Thomas L. Bennett Trustee 1 Year Private Investor 83 None
2005 Market Street -
Philadelphia, PA (March 2004 -
19103 Present)
October 4, 1947 Investment
Manager -
Morgan Stanley &
Co.
(January 1984 -
March 2004)
-------------------- --------------- ---------------- ------------------- ------------------ ------------------
John A. Fry Trustee 5 Years President - 83 Director -
2005 Market Street Franklin & Community Health
Philadelphia, PA Marshall College Systems
19103 (June 2002 -
Present)
May 28, 1960
Executive Vice
President -
University of
Pennsylvania
(April 1995 -
June 2002)
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Anthony D. Knerr Trustee 13 Years Founder/Managing 83 None
2005 Market Street Director -
Philadelphia, PA Anthony Knerr &
19103 Associates
(Strategic
December 7, 1938 Consulting)
(1990 - Present)
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Lucinda S. Trustee 1 Year Chief Investment 83 None
Landreth Officer -
2005 Market Street Assurant, Inc.
Philadelphia, PA (Insurance)
19103 (2002 - 2004)
June 24, 1947
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Ann R. Leven Trustee 17 Years Treasurer/Chief 83 Director and
2005 Market Street Fiscal Officer -- Audit Committee
Philadelphia, PA National Gallery Chairperson -
19103 of Art Andy Warhol
(1994 - 1999) Foundation
November 1, 1940
Director and
Audit Committee
Member -
Systemax Inc.
18
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Thomas F. Madison Trustee Since May 1999 President/Chief 83 Director -
2005 Market Street Executive Officer Banner Health
Philadelphia, PA - MLM Partners,
19103 Inc. Director -
(Small Business CenterPoint
February 25, 1936 Investing & Energy
Consulting)
(January 1993 - Director and
Present) Audit Committee
Member -
Digital River
Inc.
Director and
Audit Committee
Member -
Rimage
Corporation
Director -
Valmont
Industries, Inc.
------------------- --------------- ---------------- ------------------- ------------------ ------------------
Janet L. Yeomans Trustee 7 Years Vice President 83 None
2005 Market Street (January 2003 -
Philadelphia, PA Present)
19103 and Treasurer
(January 2006 -
July 31, 1948 Present)
3M Corporation
Ms. Yeomans has
held various
management
positions at 3M
Corporation since
1983.
------------------- --------------- ---------------- ------------------- ------------------ ------------------
J. Richard Zecher Trustee 1 Year Founder - 83 Director and
2005 Market Street Investor Analytics Audit Committee
Philadelphia, PA (Risk Management) Member -
19103 (May 1999 - Investor
Present) Analytics
July 3, 1940
Director and
Audit Committee
Member -
Oxigene, Inc.
------------------- --------------- ---------------- ------------------- ------------------ ------------------
19
Number of
Portfolios in Other Directorships
Position (s) Principal Fund Complex Held by Trustee/
Name, Address Held with the Length of Occupation(s) During Overseen by Director or
and Birthdate Trusts Time Served Past 5 Years Trustee or Officer Officer
-------------------- --------------- --------------- ---------------------- ------------------- -----------------
Officers
-------------------- --------------- --------------- ---------------------- ------------------- -----------------
David F. Connor Vice Vice Mr. Connor has 83 None(3)
2005 Market Street President, President served as Vice
Philadelphia, PA Deputy since President and Deputy
19103 General September 21, General Counsel at
Counsel and 2000 and Delaware Investments
December 2, 1963 Secretary Secretary since 2000
since October
25, 2005
-------------------- --------------- --------------- ---------------------- ------------------- -----------------
David P. O'Connor Senior Vice Senior Vice Mr. O'Connor has 83 None(3)
2005 Market Street President, President, served in various
Philadelphia, PA General General executive and legal
19103 Counsel and Counsel and capacities at
Chief Legal Chief Legal different times at
February 21, 1966 Officer Officer since Delaware Investments
October 25,
2005
--------------------- --------------- --------------- ---------------------- ------------------- -----------------
John J. O'Connor Senior Vice Treasurer Mr. O'Connor has 83 None(3)
2005 Market Street President and since served in various
Philadelphia, PA Treasurer February 17, executive capacities
19103 2005 at different times
at Delaware
June 16, 1957 Investments
-------------------- --------------- --------------- ---------------------- ------------------- -----------------
Richard Salus Chief Chief Mr. Salus has served 83 None(3)
2005 Market Street Financial Financial in various executive
Philadelphia, PA Officer Officer since capacities at
19103 November 1, different times at
2006 Delaware Investments
October 4, 1963
-----------------------------------------------------------------------------------------------------------------
(1) Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Trusts' Manager,
principal underwriter and transfer agent.
(2) Mr. Coyne is considered to be an "Interested Trustee" because he is an
executive officer of the Trusts' Manager.
(3) Messrs. Connor, David P. O'Connor, John J. O'Connor and Salus also
serve in similar capacities for the six portfolios of the Optimum Fund
Trust, which have the same Manager, principal underwriter and transfer
agent as the Trusts. Mr. John J. O'Connor also serves in a similar
capacity for Lincoln Variable Insurance Products Trust, which has the
same investment manager as the Trusts.
-----------------------------------------------------------------------------------------------------------------
Following is additional information regarding investment professionals
affiliated with the Trusts.
------------------------------ ------------------------ --------------------------- ----------------------
Name, Address and Position Held Principal Occupation(s)
Birthdate with the Funds Length of Time Served During Past 5 Years
-------------------------- ---------------------------- --------------------------- ----------------------
Joseph R. Baxter Senior Vice President/Head 7 Years During the past five
2005 Market Street of Municipal Bond years, Mr. Baxter
Philadelphia, PA 19103 Investments has served in
various capacities
July 31, 1958 at different times
at Delaware
Investments.
-------------------------- ---------------------------- --------------------------- ----------------------
Robert F. Collins Vice President/Senior 2 Years Prior to June 25,
2005 Market Street Portfolio Manager 2004, Mr. Collins
Philadelphia, PA 19103 had served in
various capacities
May 26, 1956 as a Vice President,
Director of
Portfolio Management
of the Municipal
Investment Group at
PNC Advisors.
-------------------------- ---------------------------- --------------------------- ----------------------
20
The following table shows each Trustee's ownership of each Fund's shares,
if any, and of all Delaware Investments(R) Funds as of December 31, 2005.
---------------------- ------------------------------- ------------------------------------------------
Aggregate Dollar Range of Equity Securities in
Dollar Range of Equity All Registered Investment Companies Overseen
Name Securities in the Funds by Trustee in Family of Investment Companies
---------------------- ------------------------------- ------------------------------------------------
Thomas L. Bennett None None
---------------------- ------------------------------- ------------------------------------------------
Patrick P. Coyne None Over $100,000
---------------------- ------------------------------- ------------------------------------------------
John A. Fry(1) None Over $100,000
---------------------- ------------------------------- ------------------------------------------------
Anthony D. Knerr None $10,001 - $50,000
---------------------- ------------------------------- ------------------------------------------------
Lucinda S. Landreth None $1 - $10,000
---------------------- ------------------------------- ------------------------------------------------
Ann R. Leven None Over $100,000
---------------------- ------------------------------- ------------------------------------------------
Thomas F. Madison None $10,001 - $50,000
---------------------- ------------------------------- ------------------------------------------------
Janet L. Yeomans None $50,001 - $100,000
---------------------- ------------------------------- ------------------------------------------------
J. Richard Zecher None None
---------------------- ------------------------------- ------------------------------------------------
(1) As of December 31, 2005, John A. Fry held assets in a 529 Plan
account. Under the terms of the Plan, a portion of the assets held in
the Plan may be invested in the Funds. Mr. Fry held no shares of the
Funds outside of the Plan as of December 31, 2005.
The following table describes the aggregate compensation received by the
Trustees from each Trust and the total compensation received from all Delaware
Investments(R) Funds for which he or she serves as a Trustee or Director for the
fiscal years ended July 31, 2006 and August 31, 2006 and an estimate of annual
benefits to be received upon retirement under the Delaware Group Retirement Plan
for Trustees/Directors as of July 31, 2006 and August 31, 2006. Only the
Trustees of a Trust who are not "interested persons" as defined by the 1940 Act
(the "Independent Trustees") receive compensation from the Funds.
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Total
Compensation from the Investment
Aggregate Aggregate Companies in
Compensation Compensation from Pension or Retirement Estimated Annual Delaware
from Tax-Free Voyageur Benefits Accrued as Benefits Upon Investments(R)
Trustee(4) Funds Mutual Funds Part of Fund Expenses Retirement Complex(2)
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Thomas L. Bennett $4,939 $2,431 None $80,000 $155,833
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
John A. Fry $5,077 $2,512 None $80,000 $160,558
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Anthony D. Knerr $4,723 $2,338 None $80,000 $149,433
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Lucinda S. Landreth $4,723 $2,338 None $80,000 $149,433
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Ann R. Leven $5,785 $2,872 None $80,000 $183,567
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Thomas F. Madison $5,418 $2,673 None $80,000 $171,250
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
Janet L. Yeomans $4,939 $2,431 None $80,000 $155,833
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
J. Richard Zecher $4,863 $2,392 None $80,000 $153,333
--------------------- ----------------- -------------------- ------------------------ ------------------- ------------------
21
(1) Under the terms of the Delaware Investments Retirement Plan for
Trustees/Directors, each disinterested Trustee/Director who, at the
time of his or her retirement from the Boards, has attained the age of
70 and served on the Boards for at least five continuous years, is
entitled to receive payments from each investment company in the
Delaware Investments(R) family for which he or she serves as
Trustee/Director for a period equal to the lesser of the number of
years that such person served as a Trustee/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
Trustees/Directors of each investment company at the time of such
person's retirement. If an eligible Trustee/Director retired as of
August 31, 2006, he or she would be entitled to annual payments
totaling the amounts noted above, in the aggregate, from all of the
investment companies in the Delaware Investments(R) family for which
he or she serves as a Trustee/Director, based on the number of
investment companies in the Delaware Investments(R) family as of that
date.
(2) Each Independent Trustee/Director currently receives a total annual
retainer fee of $84,000 for serving as a Trustee/ Director for all 30
investment companies in the Delaware Investments(R) family, plus
$5,000 for each Board Meeting attended. The following compensation is
in the aggregate from all investment companies in the complex. Members
of the Audit Committee, Nominating Committee and Investments Committee
receive additional compensation of $2,500 for each meeting. Members of
the Corporate Governance Committee receive additional compensation of
$1,700 for each meeting. In addition, the chairpersons of the Audit
and Nominating and Corporate Governance Committees each receive an
annual retainer of $15,000. The chairperson of the Investments
Committee receives an additional retainer of $10,000. The
Lead/Coordinating Trustee/Director of the Delaware Investments(R)
Funds receives an additional retainer of $35,000.
Each Board of Trustees has the following committees:
Audit Committee: This committee monitors accounting and financial reporting
policies and practices, and internal controls for the Trust. It also oversees
the quality and objectivity of the Trust's financial statements and the
independent audit thereof, and acts as a liaison between the Trust's independent
registered public accounting firm and the full Board of Trustees. The Trust's
Audit Committee consists of the following four Independent Trustees: Thomas F.
Madison, Chairman; Thomas L. Bennett; Jan L. Yeomans; and J. Richard Zecher. The
Audit Committee held seven meetings during the Trust's last fiscal year.
Nominating and Corporate Governance Committee: This committee recommends
Board members, fills vacancies and considers the qualifications of Board
members. The committee also monitors the performance of counsel for the
Independent Trustees. The committee will consider shareholder recommendations
for nomination to the Board of Trustees only in the event that there is a
vacancy on the Board. Shareholders who wish to submit recommendations for
nominations to the Board to fill a vacancy must submit their recommendations in
writing to the Nominating and Corporate Governance Committee, c/o Delaware
Investments(R) Funds at 2005 Market Street, Philadelphia, Pennsylvania 19103.
Shareholders should include appropriate information on the background and
qualifications of any person recommended (e.g., a resume), as well as the
candidate's contact information and a written consent from the candidate to
serve if nominated and elected. Shareholder recommendations for nominations to
the Board will be accepted on an ongoing basis and such recommendations will be
kept on file for consideration when there is a vacancy on the Board. The
committee consists of the following four Independent Trustees: John A. Fry,
Chairman; Anthony D. Knerr; Lucinda S. Landreth; and Ann R. Leven (ex-officio).
The committee held five meetings during the Trust's last fiscal year.
Independent Trustee Committee: This committee develops and recommends to
the Board a set of corporate governance principles and oversees the evaluation
of the Board, its committees and its activities. The committee is comprised of
all of the Trust's Independent Trustees. The Independent Trustee Committee held
four meetings during the Trust's last fiscal year.
Investments Committee: The primary purposes of the Investments Committee
are to: (i) assist the Board at its request in its oversight of the investment
advisory services provided to the Funds by the Manager as well as any
sub-advisers; (ii) review all proposed advisory and sub-advisory agreements for
new Funds or proposed amendments to
22
existing agreements and to recommend what action the full Board and the
independent directors/trustees take regarding the approval of all such proposed
arrangements; and (iii) review from time to time reports supplied by the Manager
regarding investment performance and expenses and suggest changes to such
reports. The Investments Committee consists of the following four Independent
Trustees: Thomas L. Bennett, Chairman; Lucinda S. Landreth, Jan L. Yeomans; and
J. Richard Zecher. The Investments Committee was established on October 25,
2006. The Investments Committee did not meet during the Trust's last fiscal
year.
Code of Ethics
The Trusts, the Manager, the Distributor and Lincoln Financial
Distributors, Inc. (the Funds' financial intermediary wholesaler) have adopted
Codes of Ethics in compliance with the requirements of Rule 17j-1 under the 1940
Act, which govern personal securities transactions. Under the Codes of Ethics,
persons subject to the Codes are permitted to engage in personal securities
transactions, including securities that may be purchased or held by the Funds,
subject to the requirements set forth in Rule 17j-1 under the 1940 Act and
certain other procedures set forth in the applicable Code of Ethics. The Codes
of Ethics are on public file with, and are available from, the SEC.
Proxy Voting Policy
The Funds have formally delegated to the Manager the ability to make all
proxy voting decisions in relation to portfolio securities held by the Funds. If
and when proxies need to be voted on behalf of the Funds, the Manager will vote
such proxies pursuant to its Proxy Voting Policies and Procedures (the
"Procedures"). The Manager has established a Proxy Voting Committee (the
"Committee") which is responsible for overseeing the Manager's proxy voting
process for the Funds. One of the main responsibilities of the Committee is to
review and approve the Procedures to ensure that the Procedures are designed to
allow the Manager to vote proxies in a manner consistent with the goal of voting
in the best interests of the Funds.
In order to facilitate the actual process of voting proxies, the Manager
has contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of the Funds and other clients of the Manager and vote
proxies generally in accordance with the Procedures. The Committee is
responsible for overseeing ISS's proxy voting activities. If a proxy has been
voted for the Funds, ISS will create a record of the vote. By no later than
August 31 of each year, information (if any) regarding how the Manager voted
proxies relating to each Fund's portfolio securities during the most recently
completed 12-month period ended June 30 is available without charge: (i) through
the Funds' website at www.delawareinvestments.com; and (ii) on the SEC's website
at www.sec.gov.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, the
Manager will normally vote against management's position when it runs counter to
its specific Proxy Voting Guidelines (the "Guidelines"), and the Manager will
also vote against management's recommendation when it believes that such
position is not in the best interests of the Funds.
As stated above, the Procedures also list specific Guidelines on how to
vote proxies on behalf of the Funds. Some examples of the Guidelines are as
follows: (i) generally vote for shareholder proposals asking that a majority or
more of directors be independent; (ii) generally vote against proposals to
require a supermajority shareholder vote; (iii) votes on mergers and
acquisitions should be considered on a case-by-case basis, determining whether
the transaction enhances shareholder value; (iv) generally vote against
proposals to create a new class of common stock with superior voting rights; (v)
generally vote re-incorporation proposals on a case-by-case basis; (vi) votes
with respect to equity-based compensation plans are generally determined on a
case-by-case basis; and (vii) generally vote for proposals requesting reports on
the level of greenhouse gas emissions from a company's operations and products.
Because the Funds have delegated proxy voting to the Manager, the Funds are
not expected to encounter any conflict of interest issues regarding proxy voting
and therefore do not have procedures regarding this matter. However, the Manager
does have a section in its Procedures that addresses the possibility of
conflicts of interest. Most proxies which the Manager receives on behalf of the
Funds are voted by ISS in accordance with the Procedures. Because almost all
23
Fund proxies are voted by ISS pursuant to the pre-determined Procedures, it
normally will not be necessary for the Manager to make an actual determination
of how to vote a particular proxy, thereby largely eliminating conflicts of
interest for the Manager during the proxy voting process. In the very limited
instances where the Manager is considering voting a proxy contrary to ISS's
recommendation, the Committee will first assess the issue to see if there is any
possible conflict of interest involving the Manager or affiliated persons of the
Manager. If a member of the Committee has actual knowledge of a conflict of
interest, the Committee will normally use another independent third party to do
additional research on the particular proxy issue in order to make a
recommendation to the Committee on how to vote the proxy in the best interests
of the Funds. The Committee will then review the proxy voting materials and
recommendation provided by ISS and the independent third party to determine how
to vote the issue in a manner which the Committee believes is consistent with
the Procedures and in the best interests of the Funds.
--------------------------------------------------------------------------------
INVESTMENT MANAGER AND OTHER SERVICE PROVIDERS
--------------------------------------------------------------------------------
Investment Manager
The Manager, located at 2005 Market Street, Philadelphia, PA 19103-7094,
furnishes investment management services to the Funds, subject to the
supervision and direction of each Trust's Board of Trustees. The Manager also
provides investment management services to all of the other Delaware
Investments(R) Funds. Affiliates of the Manager also manage other investment
accounts. While investment decisions for the Funds are made independently from
those of the other funds and accounts, investment decisions for such other funds
and accounts may be made at the same time as investment decisions for the Funds.
The Manager pays the salaries of all Trustees, officers and employees who are
affiliated with both the Manager and the Trusts.
As of September 30, 2006, the Manager and its affiliates within Delaware
Investments were managing in the aggregate in excess of $150 billion in assets
in various institutional or separately managed, investment company and insurance
accounts. The Manager is a series of Delaware Management Business Trust, which
is an indirect subsidiary of Delaware Management Holdings, Inc. ("DMH"). DMH is
an indirect subsidiary, and subject to the ultimate control, of Lincoln National
Corporation ("Lincoln"). Lincoln, with headquarters in Philadelphia,
Pennsylvania, is a diversified organization with operations in many aspects of
the financial services industry, including insurance and investment management.
Delaware Investments is the marketing name for DMH and its subsidiaries.
Each Fund's Investment Management Agreement is dated November 1, 1999 and
was approved by the initial shareholder on that date. Each Agreement had an
initial term of two years and may be renewed each year only so long as such
renewal and continuance are specifically approved at least annually by the Board
of Trustees or by vote of a majority of the outstanding voting securities of the
affected Fund, and only if the terms and the renewal thereof have been approved
by vote of a majority of the Trustees of each Fund who are not parties thereto
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. Each Agreement is terminable without
penalty on 60 days' notice by the Trustees of each Fund or by the Manager. Each
Agreement will terminate automatically in the event of its assignment.
Under each Fund's Investment Management Agreement, each Fund pays the
Manager a monthly investment advisory fee equivalent on an annual basis, to the
rates set forth below.
--------------------------- ----------------------------------------
Intermediate Fund 0.50% on the first $500 million;
0.475% on the next $500 million;
0.45% on the next $1.5 billion;
0.425% on assets in excess of $2.5
billion
--------------------------- ----------------------------------------
USA Fund 0.55% on the first $500 million;
National High-Yield Fund 0.50% on the next $500 million;
0.45% on the next $1.5 billion;
0.425% on assets in excess of $2.5 billion
--------------------------- ----------------------------------------
24
During the past three fiscal years, the Funds paid the following investment
management fees:
--------------------- --------------------- --------------------- ---------------------
August 31, 2006 August 31, 2005 August 31, 2004
--------------------- --------------------- --------------------- ---------------------
USA Fund $2,935,497 earned $2,621,345 earned $2,714,203 earned
$2,416,927 paid $2,246,041 paid $2,442,229 paid
$518,570 waived $375,304 waived $271,974 waived
--------------------- --------------------- --------------------- ---------------------
Intermediate Fund $925,399 earned $593,617 earned $454,402 earned
$610,829 paid $388,697 paid $325,211 paid
$314,570 waived $204,920 waived $129,191 waived
--------------------- --------------------- --------------------- ---------------------
National High-Yield $460,384 earned $440,612 earned $443,964 earned
Fund $362,114 paid $378,755 paid $429,108 paid
$98,270 waived $61,857 waived $14,856 waived
--------------------- --------------------- --------------------- ---------------------
Except for those expenses borne by the Manager under the Investment
Management Agreements and the Distributor under the Distribution Agreements, the
Funds are responsible for all of their own expenses. Among others, these include
the investment management fees; transfer and dividend disbursing agent fees and
costs; custodian expenses; federal and state securities registration fees; proxy
costs; and the costs of preparing prospectuses and reports sent to shareholders.
Distributor
The Distributor, Delaware Distributors, L.P., located at 2005 Market
Street, Philadelphia, PA 19103-7094, serves as the national distributor of each
Trust's shares under a Distribution Agreement dated May 15, 2003. The
Distributor is an affiliate of the Manager and bears all of the costs of
promotion and distribution, except for payments by the Fund Classes under their
respective Rule 12b-1 Plans. The Distributor is an indirect subsidiary of DMH,
and, therefore, of Lincoln. The Distributor has agreed to use its best efforts
to sell shares of the Funds. See the Prospectus for information on how to
invest. Shares of the Funds are offered on a continuous basis by the Distributor
and may be purchased through authorized investment dealers or directly by
contacting the Distributor or the Trusts. The Distributor also serves as
national distributor for the other Delaware Investments(R) Funds. The Board of
Trustees annually reviews fees paid to the Distributor.
During the Funds' last three fiscal years, the Distributor received net
commissions from each Fund on behalf of their respective Class A Shares, after
re-allowances to dealers, as follows:
--------------------------------------------------------------------------------
USA Fund Class A Shares
------------------ -------------------- --------------------- ------------------
Amount of Total Amounts
Underwriting Re-allowed To Net Commission
Fiscal Year Ended Commission Dealers to Distributor
------------------ -------------------- --------------------- ------------------
8/31/06 $201,058 $174,636 $26,422
8/31/05 280,431 240,716 39,715
8/31/04 214,241 186,232 28,009
------------------ -------------------- --------------------- ------------------
--------------------------------------------------------------------------------
Intermediate Fund Class A Shares
----------------- -------------------- ------------------ ----------------------
Amount of Total Amounts
Fiscal Year Underwriting Re-allowed to Net Commission
Ended Commission Dealers to Distributor
----------------- -------------------- ------------------ ----------------------
8/31/06 $131,155 $109,146 $21,969
8/31/05 158,227 130,683 27,544
8/31/04 122,559 105,504 17,055
----------------- -------------------- ------------------ ----------------------
25
--------------------------------------------------------------------------------
National High-Yield Fund Class A Shares
------------- ------------------- --------------------- ------------------------
Amount of Total Amounts
Fiscal Year Underwriting Re-allowed to Net Commission
Ended Commission Dealers to Distributor
------------- ------------------- --------------------- ------------------------
8/31/06 $112,219 $97,306 $14,913
8/31/05 97,958 83,979 13,979
8/31/04 79,210 71,431 7,779
------------- ------------------- --------------------- ------------------------
During the Funds' last three fiscal years, the Distributor received, in the
aggregate, Limited CDSC payments with respect to Class A Shares of the Funds as
follows:
----------------------------------------------------------------------------
Limited CDSC Payments for Class A Shares
---------------------- -------------- ------------------ -------------------
National
Fiscal Year Ended USA Fund Intermediate Fund High-Yield Fund
---------------------- -------------- ------------------ -------------------
8/31/06 $155 $16 $83
8/31/05 0 0 0
8/31/04 0 0 0
---------------------- -------------- ------------------ -------------------
During the Funds' last three fiscal years, the Distributor received CDSC
payments with respect to Class B Shares as follows:
---------------------------------------------------------------------------
CDSC Payments for Class B Shares
------------------- ---------------- ----------------- --------------------
National
Fiscal Year Ended USA Fund Intermediate Fund High-Yield Fund
------------------- ---------------- ----------------- --------------------
8/31/06 $17,217 $2,061 $9,040
8/31/05 8,849 3,715 9,403
8/31/04 36,198 14,272 36,434
------------------- ---------------- ----------------- --------------------
During the Funds' last three fiscal years, the Distributor received, in the
aggregate, CDSC payments with respect to Class C Shares of each Fund as follows:
----------------------------------------------------------------
CDSC Payments for Class C Shares
------------ -------------- --------------- --------------------
Fiscal Year
Ended USA Fund Intermediate Fund High-Yield Fund
------------ ------------ ---------------- -----------------
8/31/06 $2,419 $1,780 $670
8/31/05 1,176 1,841 984
8/31/04 782 3,281 166
------------ ------------ ---------------- -----------------
Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of the Manager,
serves as the Funds' financial intermediary wholesaler pursuant to a Third
Amended and Restated Financial Intermediary Distribution Agreement (the
"Financial Intermediary Agreement") with the Distributor effective as of January
1, 2006. LFD is primarily responsible for promoting the sale of the Fund shares
through broker/dealers, financial advisors and other financial intermediaries
(collectively, "Financial Intermediaries"). The address of LFD is 2001 Market
Street, Philadelphia, PA 19103-7055. Effective January 1, 2007, the Distributor
shall pay LFD for the actual expenses incurred by LFD in performing its duties
under the Financial Intermediary Agreement as determined by the Distributor's
monthly review of information retrieved from Lincoln Financial Group's
applicable expense management system. Based on this review, the Distributor may
request that LFD provide additional information describing its expenses in
detail reasonably acceptable to the Distributor. Additionally, the parties shall
agree from time to time to a mechanism to monitor LFD's expenses. The fees
associated with LFD's services to the Funds are borne exclusively by the
Distributor and not by the Funds.
26
Transfer Agent
Delaware Service Company, Inc., which is an affiliate of the Manager and
which is located at 2005 Market Street, Philadelphia, PA 19103-7094, serves as
the Funds' shareholder servicing, dividend disbursing and transfer agent ( the
"Transfer Agent") pursuant to a Shareholders Services Agreement dated April 19,
2001. The Transfer Agent is an indirect subsidiary of DMH and, therefore, of
Lincoln. The Transfer Agent also acts as shareholder servicing, dividend
disbursing and transfer agent for other Delaware Investments(R)Funds. The
Transfer Agent is paid a fee by the Funds for providing these services
consisting of an annual per account charge of $22.85 for each open and closed
account on its records and each account held on a sub-accounting system
maintained by firms that hold accounts on an omnibus basis.
These charges are assessed monthly on a pro rata basis and determined by
using the number of shareholder and retirement accounts maintained as of the
last calendar day of each month. Compensation is fixed each year and approved by
each Fund's Board of Trustees, including a majority of the Independent Trustees.
Each 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 each Fund. For purposes of pricing, each 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.
Fund Accountants
Delaware Services Company, Inc. also provides accounting services to the
Funds pursuant to a separate Fund Accounting Agreement. Those services include
performing all functions related to calculating the Funds' net asset value
("NAV") and providing all financial reporting services, regulatory compliance
testing and other related accounting services. For its services, Delaware
Services Company, Inc. is paid a fee based on total assets of all of the
Delaware Investments(R) Funds for which it provides such accounting services.
Such fee is equal to 0.04% multiplied by the total amount of assets in the
complex for which Delaware Services Company, Inc. furnishes accounting services.
The fees are charged to each Fund and the other Delaware Investments(R) Funds on
an aggregate pro rata basis.
Custodian
JPMorgan Chase Bank ("JPMorgan"), 4 Chase Metrotech Center, Brooklyn NY
11245, is custodian of USA and Intermediate Funds' securities and cash. Mellon
Bank, N.A. ("Mellon"), One Mellon Center, Pittsburgh, PA 15258, is custodian of
National High-Yield Fund. As custodians for the Funds, JPMorgan and Mellon
maintain a separate account or accounts for each respective Fund; receive, hold
and release portfolio securities on account of each Fund; makes receipts and
disbursements of money on behalf of each respective Fund; and collect and
receive income and other payments and distributions on account of each
respective Fund's portfolio securities.
Legal Counsel
Stradley Ronon Stevens & Young, LLP serves as the Funds' legal counsel.
--------------------------------------------------------------------------------
PORTFOLIO MANAGERS
--------------------------------------------------------------------------------
Other Accounts Managed
The following chart lists certain information about types of other accounts
for which the portfolio managers are primarily responsible as of August 31,
2006.
27
---------------------------- ------------- ------------------- --------------------- -------------------
No. of Accounts Total Assets
with in Accounts
No. of Total Assets Performance-Based with Performance-
Name Accounts Managed Fees Based Fees
---------------------------- ------------- ------------------- --------------------- -------------------
JOSEPH R. BAXTER
---------------------------- ------------- ------------------- --------------------- -------------------
Registered Investment 19 $3.6 billion -- --
Companies
---------------------------- ------------- ------------------- --------------------- -------------------
Other Pooled Investment
Vehicles -- -- -- --
---------------------------- ------------- ------------------- --------------------- -------------------
Other Accounts 28 $1.46 billion -- --
----------------------------- ------------- ------------------- ----------------------------------------
ROBERT F. COLLINS
---------------------------- ------------- ------------------- --------------------- -------------------
Registered Investment
Companies 19 $3.6 billion -- --
---------------------------- ------------- ------------------- --------------------- -------------------
Other Pooled Investment
Vehicles -- -- -- --
---------------------------- ------------- ------------------- --------------------- -------------------
Other Accounts 28 $1.46 billion -- --
---------------------------- ------------- ------------------- --------------------- -------------------
Description of Material Conflicts of Interest
Individual portfolio managers may perform investment management services
for other accounts similar to those provided to the Funds and the investment
action for each account and Fund may differ. For example, an account or Fund may
be selling a security, while another account or Fund may be purchasing or
holding the same security. As a result, transactions executed for one account
may adversely affect the value of securities held by another account.
Additionally, the management of multiple accounts and Funds may give rise to
potential conflicts of interest, as a portfolio manager must allocate time and
effort to multiple accounts and Funds. A portfolio manager may discover an
investment opportunity that may be suitable for more than one account or Fund.
The investment opportunity may be limited, however, so that all accounts for
which the investment would be suitable may not be able to participate. The
Manager has adopted procedures designed to allocate investments fairly across
multiple accounts.
A portfolio manager's management of personal accounts also may present
certain conflicts of interest. While the Manager's Code of Ethics is designed to
address these potential conflicts, there is no guarantee that it will do so.
Compensation Structure
Each portfolio's manager's compensation consists of the following:
Base Salary. Each named portfolio manager receives a fixed base salary.
Salaries are determined by a comparison to industry data prepared by third
parties to ensure that portfolio manager salaries are in line with salaries paid
at peer investment advisory firms.
Bonus. Each portfolio manager is eligible to receive an annual cash bonus,
which is based on quantitative and qualitative factors. There is one pool for
bonus payments for the fixed income department. The amount of the pool for bonus
payments is first determined by mathematical equation based on all assets
managed (including investment companies, insurance product-related accounts and
other separate accounts), management fees and related expenses (including fund
waiver expenses) for registered investment companies, pooled vehicles, and
managed separate accounts. Generally, 80% of the bonus is quantitatively
determined. For more senior portfolio managers, a higher percentage of the bonus
is quantitatively determined. For investment companies, each manager is
compensated according the Fund's Lipper peer group percentile ranking on a
one-year and three-year basis, equally weighted. For managed separate accounts
the portfolio managers are compensated according to the composite percentile
ranking against the Frank Russell and Callan Associates databases on a one-year
and three-year basis, with three-year performance more heavily weighted. There
is no objective award for a fund that falls below the 50th percentile over the
three-year period. There is a sliding scale for investment companies that are
ranked above the 50th percentile. The remaining 20% portion of the bonus is
discretionary as determined by Delaware Investments and takes into account
subjective and objective factors, as determined by senior management.
28
Deferred Compensation. Each named portfolio manager is eligible to
participate in the Lincoln National Corporation Executive Deferred Compensation
Plan, which is available to all employees whose income exceeds a designated
threshold. The Plan is a non-qualified unfunded deferred compensation plan that
permits participating employees to defer the receipt of a portion of their cash
compensation.
Stock Option Incentive Plan/Equity Compensation Plan: Portfolio managers
may be awarded options to purchase common shares of Delaware Investments U.S.,
Inc. pursuant to the terms the Delaware Investments U.S., Inc. Stock Option Plan
(non-statutory or "non-qualified" stock options). In addition, certain managers
may be awarded restricted stock units, or "performance shares," in Lincoln.
Delaware Investments U.S., Inc., is an indirect subsidiary of DMH and,
therefore, of Lincoln.
The Delaware Investments U.S., Inc. Stock Option Plan was established in
2001 in order to provide certain investment personnel of the Manager with a more
direct means of participating in the growth of the investment manager. Under the
terms of the plan, stock options typically vest in 25% increments on a four-year
schedule and expire ten years after issuance. Options are awarded from time to
time by the investment manager in its full discretion. Option awards may be
based in part on seniority. The fair market value of the shares is normally
determined as of each June 30 and December 31. Shares issued upon the exercise
of such options must be held for six months and one day, after which time the
shareholder may put them back to the issuer or the shares may be called back
from the shareholder.
Portfolio managers who do not participate in the Delaware Investments U.S.,
Inc. Stock Option Plan are eligible to participate in Lincoln's Long-Term
Incentive Plan, which is designed to provide a long-term incentive to officers
of Lincoln. Under the plan, a specified number of performance shares are
allocated to each unit and are awarded to participants in the discretion of
their managers in accordance with recommended targets related to the number of
employees in a unit that may receive an award and the number of shares to be
awarded. The performance shares have a three year vesting schedule and, at the
end of the three years, the actual number of shares distributed to those who
received awards may be equal to, greater than or less than the amount of the
award based on Lincoln's achievement of certain performance goals relative to a
pre-determined peer group.
Other Compensation: Portfolio managers may also participate in benefit
plans and programs available generally to all employees.
Ownership of Securities
As of August 31, 2006, Joseph R. Baxter owned 2,215.933 shares of USA Fund
and 2,227.551 shares of Intermediate Fund.
--------------------------------------------------------------------------------
TRADING PRACTICES AND BROKERAGE
--------------------------------------------------------------------------------
The Manager selects broker/dealers to execute transactions on behalf of the
Funds for the purchase or sale of portfolio securities on the basis of its
judgment of their professional capability to provide the service. The primary
consideration in selecting broker/dealers is to seek those broker/dealers who
will provide best execution for the Funds. Best execution refers to many
factors, including the price paid or received for a security, the commission
charged, the promptness and reliability of execution, the confidentiality and
placement accorded the order and other factors affecting the overall benefit
obtained by the account on the transaction. Some trades are made on a net basis
where the Funds either buy securities directly from the dealer or sell them to
the dealer. In these instances, there is no direct commission charged but there
is a spread (the difference between the buy and sell price) which is the
equivalent of a commission. When a commission is paid, the Funds pay reasonable
brokerage commission rates based upon the professional knowledge of the
Manager's trading department as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, a Fund pays
a minimal share transaction cost when the transaction presents no difficulty.
Trades
29
generally are made on a net basis where a Fund either buys or sells the
securities directly from or to a broker, dealer or bank. In these instances,
there is no direct commission charged but there is a spread (the difference
between the ask and bid price) which is the equivalent of a commission.
During the fiscal years ended August 31, 2004, 2005 and 2006, no brokerage
commissions were paid by the Funds.
The Manager may allocate out of all commission business generated by all of
the funds and accounts under its management, brokerage business to
broker/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, as amended, and the
Funds' 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 directed to broker/dealers who provide
such brokerage and research services may result in the Funds paying higher
commissions, the Manager 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 that generate commissions or their equivalent are
allocated to broker/dealers who provide daily portfolio pricing services to each
Fund and to other Delaware Investments(R) Funds. Subject to best execution,
commissions allocated to brokers providing such pricing services may or may not
be generated by the funds receiving the pricing service.
During the fiscal year ended August 31, 2006, the Funds did not engage in
any portfolio transactions resulting in brokerage commissions directed to
brokers for brokerage and research services.
As of August 31, 2006, the Funds did not hold any securities of their
regular broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or such
broker/dealers' parents.
The Manager may place a combined order for two or more accounts or funds
engaged in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
execution. Transactions involving commingled orders are allocated in a manner
deemed equitable to each account or fund. When a combined order is executed in a
series of transactions at different prices, each account participating in the
order may be allocated an average price obtained from the executing broker. It
is believed that the ability of the accounts to participate in volume
transactions will generally be beneficial to the accounts and funds. Although it
is recognized that, in some cases, the joint execution of orders could adversely
affect the price or volume of the security that a particular account or fund may
obtain, it is the opinion of the Manager and each Trust's Board of Trustees that
the advantages of combined orders outweigh the possible disadvantages of
separate transactions.
30
Consistent with the National Association of Securities Dealers, Inc. (the
"NASD"), and subject to seeking best execution, the Manager may place orders
with broker/dealers that have agreed to defray certain Fund expenses such as
custodian fees.
--------------------------------------------------------------------------------
CAPITAL STRUCTURE
--------------------------------------------------------------------------------
Capitalization
Each Trust currently has authorized, and allocated to each Class of each
Fund, an unlimited number of shares of beneficial interest with no par value
allocated to each Class of each Fund. All shares are, when issued in accordance
with each Trust's registration statement (as amended), governing instruments and
applicable law, fully paid and non-assessable. Shares do not have preemptive
rights. All shares of a Fund represent an undivided proportionate interest in
the assets of such Fund. As a general matter, shareholders of Fund Classes may
vote only on matters affecting their respective Class, including the Fund
Classes' Rule 12b-1 Plans that relate to the Class of shares that they hold.
However, each Fund's Class B Shares may vote on any proposal to increase
materially the fees to be paid by such Fund under the Rule 12b-1 Plan relating
to its Class A Shares. Except for the foregoing, each share Class has the same
voting and other rights and preferences as the other Classes of a Fund. General
expenses of each Fund will be allocated on a pro-rata basis to the classes
according to asset size, except that expenses of the Fund Classes' Rule 12b-1
Plans will be allocated solely to those classes.
Non-cumulative Voting
Each Trust's shares have non-cumulative voting rights, which means that the
holders of more than 50% of the shares of such Trust voting for the election of
Trustees can elect all of the Trustees if they choose to do so, and, in such
event, the holders of the remaining shares will not be able to elect any
Trustees.
--------------------------------------------------------------------------------
PURCHASING SHARES
--------------------------------------------------------------------------------
General Information
Shares of the Funds are offered on a continuous basis by the Distributor
and may be purchased through authorized investment dealers or directly by
contacting the Distributor or the applicable Trust. Each Trust reserves the
right to suspend sales of Fund shares, and reject any order for the purchase of
Fund shares if in the opinion of management such rejection is in the Fund's best
interest. 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 investment minimums
for Class A Shares will be waived for purchases by officers, Trustees and
employees of any Delaware Investments(R) Fund, the Manager or any of the
Manager's affiliates if the purchases are made pursuant to a payroll deduction
program. Shares purchased pursuant to the Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act and shares purchased in connection with an Automatic
Investing Plan are subject to a minimum initial purchase of $250 and a minimum
subsequent purchase of $25.
Each purchase of Class B Shares is subject to a maximum purchase limitation
of $100,000. For Class C Shares, each purchase must be in an amount that is less
than $1,000,000. See "Investment Plans" for purchase limitations applicable to
retirement plans. The Trust will reject any purchase order for more than
$100,000 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. In doing so, 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 Rule 12b-1 Plan
expenses than Class B Shares and Class C Shares and generally are not subject to
a contingent deferred sales charge ("CDSC").
31
Selling dealers have the responsibility of transmitting orders promptly.
Each Fund reserves the right to reject any order for the purchase of its shares
if in the opinion of management such rejection is in such Fund's best interest.
If a purchase is canceled because your check is returned unpaid, you are
responsible for any loss incurred. A Fund can redeem shares from your account(s)
to reimburse itself for any loss, and you may be restricted from making future
purchases in any Delaware Investments(R) Funds. Each Fund reserves the right to
reject purchase orders paid by third-party checks or checks that are not drawn
on a domestic branch of a United States financial institution. If a check drawn
on a foreign financial institution is accepted, you may be subject to additional
bank charges for clearance and currency conversion.
Each Fund also reserves the right, following shareholder notification, to
charge a service fee on accounts that, as a result of redemption, have remained
below the minimum stated account balance for a period of three or more
consecutive months. Holders of such accounts may be notified of their
insufficient account balance and advised that they have until the end of the
current calendar quarter to raise their balance to the stated minimum. If the
account has not reached the minimum balance requirement by that time, the Fund
will charge a $9 fee for that quarter and each subsequent calendar quarter until
the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
Selling dealers are responsible for transmitting orders promptly. If a
purchase is canceled because your check is returned unpaid, you are responsible
for any loss incurred. Each Fund can redeem shares from your account(s) to
reimburse itself for any loss, and you may be restricted from making future
purchases in any Delaware Investments(R)Fund. Each Fund reserves the right to
reject purchase orders paid by third-party checks or checks that are not drawn
on a domestic branch of a United States financial institution. If a check drawn
on a foreign financial institution is accepted, you may be subject to additional
bank charges for clearance and currency conversion.
Each Fund also reserves the right, following shareholder notification, to
charge a service fee on non-retirement accounts that, as a result of redemption,
have remained below the minimum stated account balance for a period of three or
more consecutive months. Holders of such accounts may be notified of their
insufficient account balance and advised that they have until the end of the
current calendar quarter to raise their balance to the stated minimum. If the
account has not reached the minimum balance requirement by that time, the Funds
may charge a $9 fee for that quarter and each subsequent calendar quarter until
the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
The NASD has adopted amendments to its Conduct Rules, relating to
investment company sales charges. The Trust and the Distributor intend to
operate in compliance with these rules.
Certificates representing shares purchased are not ordinarily issued.
Certificates were previously issued for Class A Shares of the Funds. 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
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 will be
permitted to obtain a certificate in certain limited circumstances that are
approved by an appropriate officer of the Funds. No charge is assessed by a
Trust for any certificate issued. The Funds do not intend to issue replacement
certificates for lost or stolen certificates, except in certain limited
circumstances that are approved by an appropriate officer of the Funds. In those
circumstances, a shareholder may be subject to fees for replacement of a lost or
stolen certificate, under certain conditions,
32
including the cost of obtaining a bond covering the lost or stolen certificate.
Please contact the applicable Trust 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 - Class A, Class B and Class C Shares
The alternative purchase arrangements of Class A Shares, Class B Shares and
Class C Shares permit investors to choose the method of purchasing shares that
is most suitable for their needs given the amount of their purchase, the length
of time they expect to hold their shares and other relevant circumstances.
Investors should determine whether, given their particular circumstances, it is
more advantageous to purchase Class A Shares and incur a front-end sales charge
and annual Rule 12b-1 Plan expenses of up to a maximum of 0.30% of the average
daily net assets of Class A Shares of USA and Intermediate Funds and a maximum
of 0.25% of the average daily net assets of Class A Shares of National
High-Yield Fund, or to purchase either Class B or Class C Shares and have the
entire initial purchase amount invested in each Fund with the investment
thereafter subject to a CDSC and annual Rule 12b-1 Plan expenses. Class B Shares
are subject to a CDSC if the shares are redeemed within six years of purchase,
and Class C Shares are subject to a CDSC if the shares are redeemed within 12
months of purchase. Class B and Class C Shares are each subject to annual Rule
12b-1 Plan expenses of up to a maximum of 1.00% (0.25% of which are service fees
to be paid to the Distributor, dealers or others for providing personal service
and/or maintaining shareholder accounts) of average daily net assets of the
respective Class. Class B Shares will automatically convert to Class A Shares at
the end of approximately eight years after purchase and, thereafter, be subject
to annual Rule 12b-1 Plan expenses of up to a maximum of 0.25% of average daily
net assets of such shares. Unlike Class B Shares, Class C Shares do not convert
to another Class.
The higher Rule 12b-1 Plan expenses on Class B Shares and Class C Shares
will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money. In addition, the effect of any return earned on such additional money
will diminish over time. In comparing Class B Shares to Class C Shares,
investors should also consider the duration of the annual Rule 12b-1 Plan
expenses to which each of the Classes is subject and the desirability of an
automatic conversion feature, which is available only for Class B Shares.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Funds, the Distributor and others will be paid, in the
case of Class A Shares, from the proceeds of the front-end sales charge and Rule
12b-1 Plan fees, in the case of Class B Shares and Class C Shares, from the
proceeds of the Rule 12b-1 Plan fees and, if applicable, the CDSC incurred upon
redemption. Financial advisors may receive different compensation for selling
Class A Shares, Class B Shares and Class C Shares. Investors should understand
that the purpose and function of the respective Rule 12b-1 Plans and the CDSCs
applicable to Class B Shares and Class C Shares are the same as those of the
12b-1 Plan and the front-end sales charge applicable to Class A Shares in that
such fees and charges are used to finance the distribution of the respective
Classes. See "Plans under Rule 12b-1 for the Fund Classes" below.
Dividends, if any, paid on Class A Shares, Class B and Class C Shares will
be calculated in the same manner, at the same time and on the same day and will
be in the same amount, except that the amount of Rule 12b-1 Plan expenses
relating to Class A Shares, Class B Shares and Class C Shares will be borne
exclusively by such shares. See "Determining Offering Price and Net Asset Value"
below.
Class A Shares: Purchases of $100,000 or more of Class A Shares at the
offering price carry reduced front-end sales charges as shown in the table in
the Fund Classes' Prospectus, and may include a series of purchases over a
13-month period under a Letter of Intention signed by the purchaser. See
"Special Purchase Features - Class A Shares" below for more information on ways
in which investors can avail themselves of reduced front-end sales charges and
other purchase features.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may re-allow to dealers up to the full amount of the front-end sales
charge. In addition, certain dealers who enter into an agreement to provide
extra training and information on Delaware
33
Investments products and services and who increase sales of Delaware
Investments(R) Funds may receive an additional commission of up to 0.15% of the
offering price in connection with sales of Class A Shares. Such dealers must
meet certain requirements in terms of organization and distribution capabilities
and their ability to increase sales. The Distributor should be contacted for
further information on these requirements as well as the basis and circumstances
upon which the additional commission will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws. Dealers
who receive 90% or more of the sales charge may be deemed to be underwriters
under the 1933 Act.
Dealer's Commission
As described in the Fund Classes' 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 advisors through whom such purchases are effected.
In determining a financial advisor's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Investments(R) Funds
as to which a Limited CDSC applies (see "Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value" under
"Redemption and Exchange" below) may be aggregated with those of the Class A
Shares of the applicable Fund. Financial advisors also may be eligible for a
dealer's commission in connection with certain purchases made under a Letter of
Intention or pursuant to an investor's Right of Accumulation. Financial advisors
should contact the Distributor concerning the applicability and calculation of
the dealer's commission in the case of combined purchases.
An exchange from other Delaware Investments(R) Funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Deferred Sales Charge Alternative -- Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class B Shares of USA and National High-Yield
Funds at the time of purchase from its own assets in an amount equal to no more
than 4.00% of the dollar amount purchased. Such payments for Class B Shares of
Intermediate Fund are currently in an amount equal to no more than 2.00%. In
addition, from time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may pay additional compensation to dealers or brokers for selling
Class B Shares at the time of purchase.
Proceeds from the CDSC and the annual Rule 12b-1 Plan fees, if any, are
paid to the Distributor and others for providing distribution and related
services, and bearing related expenses, in connection with the sale of Class B
Shares. These payments support the compensation paid to dealers or brokers for
selling Class B Shares. Payments to the Distributor and others under the Class B
Rule 12b-1 Plan may be in an amount equal to no more than 1.00% annually. The
combination of the CDSC and the proceeds of the 12b-1 Plan fees makes it
possible for a Fund to sell Class B Shares without deducting a front-end sales
charge at the time of purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class B Shares
described in this Part B, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for Class B Shares acquired as a result of the
exchange. See "Redemption and Exchange" below.
Automatic Conversion of Class B Shares
Class B Shares of USA and National High-Yield Funds, other than shares
acquired through reinvestment of dividends, held for eight years after purchase
are eligible for automatic conversion into Class A Shares. Class B Shares of
Intermediate Fund, other than shares acquired through reinvestment of dividends,
held for five years after purchase are eligible for automatic conversion into
Class A Shares. Conversions of Class B Shares into Class A Shares will occur
only four times in any calendar year, on the 18th business day or next business
day of March, June, September and December
34
(each, a "Conversion Date"). If, as applicable, the eighth or fifth anniversary
after a purchase of Class B Shares falls on a Conversion Date, an investor's
Class B Shares will be converted on that date. If such anniversary occurs
between Conversion Dates, an investor's Class B Shares will be converted on the
next Conversion Date after the anniversary. Consequently, if a shareholder's
anniversary falls on the day after a Conversion Date, that shareholder will have
to hold Class B Shares for as long as three additional months after, as
applicable, the eighth or fifth anniversary of purchase before the shares will
automatically convert into Class A Shares. Investors are reminded that the Class
A Shares into which Class B Shares will convert are subject to ongoing annual
12b-1 Plan expenses to the maximum limits noted above.
Class B Shares of a fund acquired through a reinvestment of dividends will
convert to the corresponding Class A Shares of that fund (or, in the case of
Delaware Group Cash Reserve, the Delaware Cash Reserve Fund Consultant Class)
pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute tax-free
exchanges for federal income tax purposes. You should consult your tax adviser
regarding the state and local tax consequences of the conversion of Class B
Shares to Class A Shares, or any other conversion or exchange of shares.
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at NAV without a front-end sales charge
and, as a result, the full amount of the investor's purchase payment will be
invested in Fund shares. The Distributor currently compensates dealers or
brokers for selling Class C Shares at the time of purchase from its own assets
in an amount equal to no more than 1.00% of the dollar amount purchased. As
discussed below, Class C Shares are subject to annual Rule 12b-1 Plan expenses
and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C Rule 12b-1 Plan
may be in an amount equal to no more than 1.00% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class C Shares as
described in this Part B. See "Redemption and Exchange" below.
Plans Under Rule 12b-1
Pursuant to Rule 12b-1 under the 1940 Act, each Trust has adopted a plan
for each of the Fund Classes (the "Plans"). Each Plan permits the relevant Fund
to pay for certain distribution, promotional and related expenses involved in
the marketing of only the class of shares to which the Plan applies.
The Plans permit the Funds, pursuant to their Distribution Agreement, to
pay out of the assets of the Fund Classes 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, holding special promotions
for specified periods of time and paying distribution and maintenance fees to
brokers, dealers and others. In connection with the promotion of shares of the
Fund Classes, the Distributor may, from time to time, pay to participate in
dealer-sponsored seminars and conferences, and reimburse dealers for expenses
incurred in connection with pre-approved seminars, conferences and advertising.
The Distributor may pay or allow additional promotional incentives to dealers as
part of pre-approved sales contests and/or to dealers who provide extra training
and information concerning the Fund Classes and increase sales of the Fund
Classes.
In addition, each Fund may make payments out of the assets of the Fund
Classes' Shares directly to other unaffiliated parties, such as banks, who
either aid in the distribution of shares, or provide services to, such classes.
35
Effective June 1, 1992, Delaware Group Tax-Free Fund's Board of Trustees
has determined that the annual fee, payable on a monthly basis, under the
separate Plans relating to USA Fund Class A Shares will be equal to the sum of:
(i) the amount obtained by multiplying 0.30% by the average daily net assets
represented by Class A Shares of the Fund that were acquired by shareholders on
or after June 1, 1992; and (ii) the amount obtained by multiplying 0.10% by the
average daily net assets represented by Class A Shares of the Fund that were
acquired before June 1, 1992. While this is the method for calculating the 12b-1
expenses to be paid by the USA Fund Class A Shares, the fee is a Class A Shares'
expense so that all shareholders of Class A Shares of the Fund regardless of
when they purchased their shares will bear 12b-1 expenses at the same rate. As
Class A Shares of the Fund are sold on or after June 1, 1992, the initial rate
of at least 0.10% will increase over time. Thus, as the proportion of Class A
Shares purchased on or after June 1, 1992 to Class A Shares outstanding prior to
June 1, 1992 increases, the expenses attributable to payments under the Plans
will also increase (but will not exceed 0.30% of average daily net assets).
While this describes the current basis for calculating the fees which will be
payable under the Plans with respect to USA Fund Class A Shares, such Plans
permit a full 0.30% on all Class A Shares' assets to be paid at any time
following appropriate Board approval. The Distributors' fee limitations for the
USA Fund Class A Shares apply only to shares acquired on or after June 1, 1992
in calculating the blended rated.
All of the distribution expenses incurred by the Distributor and others,
such as broker/dealers, in excess of the amount paid on behalf of the Fund
Classes would be borne by such persons without any reimbursement from such Fund
Classes. Subject to seeking best execution, a Fund may, from time to time, buy
or sell portfolio securities from or to firms which receive payments under the
Plans.
From time to time, the Distributor may pay additional amounts from its own
resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreements, as amended, have all been
approved by each Trust's Board of Trustees, including a majority of the
Independent Trustees who have no direct or indirect financial interest in the
Plans and the Distribution Agreements, by a 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 each Trust's Board of Trustees in the same manner as
specified above.
Each year, each Trust's Board of Trustees must determine whether
continuation of the Plans is in the best interest of shareholders of the Fund
Classes and that there is a reasonable likelihood of each Plan providing a
benefit to its respective Fund Class. The Plans and the Distribution Agreements,
as amended, may be terminated with respect to a Fund Class at any time without
penalty by a majority of Independent Trustees who have no direct or indirect
financial interest in the Plans and the Distribution Agreements, or by a
majority vote of the relevant Fund Class' outstanding voting securities. Any
amendment materially increasing the percentage payable under the Plans must
likewise be approved by a majority vote of the relevant Fund Class' outstanding
voting securities, as well as by a majority vote of Independent Trustees who
have no direct or indirect financial interest in the Plans or Distribution
Agreements. With respect to the Funds' Class A Plans, any material increase in
the maximum percentage payable thereunder must also be approved by a majority of
the outstanding voting securities of the Funds' respective Class B Shares. Also,
any other material amendment to the Plans must be approved by a majority vote of
the Trustees, including a majority of Independent Trustees who have no direct or
indirect financial interest in the Plans or Distribution Agreements. In
addition, in order for the Plans to remain effective, the selection and
nomination of Independent Trustees must be effected by the Trustees who are
Independent Trustees and who have no direct or indirect financial interest in
the Plans or Distribution Agreements. Persons authorized to make payments under
the Plans must provide written reports at least quarterly to each Board of
Trustees for their review.
For the fiscal year ended August 31, 2006, Rule 12b-1 Plan payments from
the Fund Classes of each Fund are shown below. Such amounts were used for the
following purposes:
36
------------------------------------ -----------------------------------
USA Fund
------------------------------------ ------------------------------------
Class A Class B Class C
------------------------------------ ------------ ----------- ----------
Advertising -- -- $158
------------------------------------ ------------ ----------- ----------
Annual/Semiannual Reports $4,000 $205 --
------------------------------------ ------------ ----------- ----------
Broker Trails $1,151,931 $38,194 $62,185
------------------------------------ ------------ ----------- ----------
Broker Sales Charges -- $80,925 $20,698
------------------------------------ ------------ ----------- ----------
Interest on Broker Sales Charges -- $17,458 $43
------------------------------------ ------------ ----------- ----------
Commissions to Wholesalers $7,274 -- --
------------------------------------ ------------ ----------- ----------
Promotional-Other $10,115 $174 --
------------------------------------ ------------ ----------- ----------
Prospectus Printing $16,057 $9 --
------------------------------------ ------------ ----------- ----------
Wholesaler Expenses $11,203 $6,614 --
------------------------------------ ------------ ----------- ----------
Total $1,200,580 $143,579 $83,084
------------------------------------ ------------ ----------- ----------
------------------------------------ -----------------------------------
Intermediate Fund
------------------------------------ -----------------------------------
Class A Class B Class C
------------------------------------ ------------ ----------- ----------
Advertising -- -- --
------------------------------------ ------------ ----------- ----------
Annual/Semiannual Reports $295 $217 $421
------------------------------------ ------------ ----------- ----------
Broker Trails $235,362 $3,895 $200,154
------------------------------------ ------------ ----------- ----------
Broker Sales Charges -- $8,018 $80,399
------------------------------------ ------------ ----------- ----------
Interest on Broker Sales Charges -- $687 $5,931
------------------------------------ ------------ ----------- ----------
Commissions to Wholesalers $1,404 -- $2,962
------------------------------------ ------------ ----------- ----------
Promotional-Other $269 $213 --
------------------------------------ ------------ ----------- ----------
Prospectus Printing $145 $166 $427
------------------------------------ ------------ ----------- ----------
Wholesaler Expenses -- $2,743 $1,573
------------------------------------ ------------ ----------- ----------
Total $237,475 $15,939 $291,867
------------------------------------ ------------ ----------- ----------
------------------------------------ ----------------------------------
National High-Yield Fund
------------------------------------ ----------------------------------
Class A Class B Class C
------------------------------------ ----------- --------- -----------
Advertising -- -- $114
------------------------------------ ----------- --------- -----------
Annual/Semiannual Reports $476 $181 $215
------------------------------------ ----------- --------- -----------
Broker Trails $163,972 $28,501 $41,273
------------------------------------ ----------- --------- -----------
Broker Sales Charges -- $69,859 $14,758
------------------------------------ ----------- --------- ------------
Interest on Broker Sales Charges -- $6,070 $41,273
------------------------------------ ----------- --------- -----------
Commissions to Wholesalers -- -- --
------------------------------------ ----------- --------- -----------
Promotional-Other $910 $446 $120
------------------------------------ ----------- --------- -----------
Prospectus Printing $1,364 $99 $128
------------------------------------ ----------- --------- -----------
Wholesaler Expenses $1,162 $6,018 $2,092
------------------------------------ ----------- --------- ------------
Total $168,470 $111,174 $58,700
------------------------------------ ----------- --------- ------------
Other Payments to Dealers -- Class A Shares, Class B Shares and Class C Shares
The Distributor, LFD and their affiliates may pay compensation at their own
expense and not as an expense of the Funds, to affiliated or unaffiliated
brokers, dealers or other financial intermediaries ("Financial Intermediaries")
in connection with the sale or retention of Fund shares and/or shareholder
servicing ("distribution assistance"). For example, the Distributor may pay
additional compensation to Financial Intermediaries for various purposes,
including, but not limited to, promoting the sale of Fund shares, maintaining
share balances and/or for sub-accounting, administrative or shareholder
processing services, marketing and educational support and ticket charges. Such
payments are in addition to any distribution fees, service fees and/or transfer
agency fees that may be payable by the Funds. The additional payments may be
based on factors, including level of sales (based on gross or net sales or some
specified minimum sales or some other similar criteria related to sales of the
Funds and/or some or all other Delaware Investments(R) Funds), amount of assets
invested by the Financial Intermediary's customers (which could include current
or aged assets of the Funds and/or some or all other Delaware Investments(R)
Funds), the Funds' advisory fees, some other agreed upon amount, or other
measures as determined from time to time by the Distributor.
A significant purpose of these payments is to increase sales of the Funds'
shares. The Funds' Manager or its affiliates may benefit from the Distributor's
or LFD's payment of compensation to Financial Intermediaries through increased
fees resulting from additional assets acquired through the sale of Fund shares
through such Financial Intermediaries.
Special Purchase Features -- Class A Shares
Letter of Intention: The reduced front-end sales charges described above
with respect to Class A Shares are also applicable to the aggregate amount of
purchases made by any such purchaser within a 13-month period pursuant to a
written Letter of Intention provided by the Distributor and signed by the
purchaser, and not legally binding on the signer or the Trust which provides for
the holding in escrow by the Transfer Agent, of 5% of the total amount of Class
A Shares
37
intended to be purchased until such purchase is completed within the 13-month
period. Until January 1, 2007, a letter of intention may be dated to include
shares purchased up to 90 days prior to the date the Letter of Intention is
signed; effective January 1, 2007, the Funds will no longer accept retroactive
letters of intention. 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 values (at offering price at the level designated in their Letter of
Intention) of all their shares of the Funds and of any class of any of the other
Delaware Investments(R) Funds previously purchased and still held as of the date
of their Letter of Intention toward the completion of such Letter, except as
described below. Those purchasers cannot include shares that did not carry a
front-end sales charge, CDSC or Limited CDSC, unless the purchaser acquired
those shares through an exchange from a Delaware Investments(R) Fund that did
carry a front-end sales charge, CDSC or Limited CDSC. For purposes of satisfying
an investor's obligation under a Letter of Intention, Class B Shares and Class C
Shares of the Funds and the corresponding classes of shares of other Delaware
Investments(R) Funds which offer such shares may be aggregated with Class A
Shares of the Funds and the corresponding class of shares of the other Delaware
Investments(R) Funds.
Employers offering a Delaware Investments retirement plan may also complete
a Letter of Intention to obtain a reduced front-end sales charge on investments
of Class A Shares made by the plan. The aggregate investment level of the Letter
of Intention will be determined and accepted by the Transfer Agent at the point
of plan establishment. The level and any reduction in front-end sales charge
will be based on actual plan participation and the projected investments in
Delaware Investments(R) Funds that are offered with a front-end sales charge,
CDSC or Limited CDSC for a 13-month period. The Transfer Agent reserves the
right to adjust the signed Letter of Intention based on this acceptance
criteria. The 13-month period will begin on the date this Letter of Intention is
accepted by the Transfer Agent. If actual investments exceed the anticipated
level and equal an amount that would qualify the plan for further discounts, any
front-end sales charges will be automatically adjusted. In the event this Letter
of Intention is not fulfilled within the 13-month period, the plan level will be
adjusted (without completing another Letter of Intention) and the employer will
be billed for the difference in front-end sales charges due, based on the plan's
assets under management at that time. Employers may also include the value (at
offering price at the level designated in their Letter of Intention) of all
their shares intended for purchase that are offered with a front-end sales
charge, CDSC or Limited CDSC of any class. Class B Shares and Class C Shares of
the Funds and other Delaware Investments(R) Funds which offer corresponding
classes of shares may also be aggregated for this purpose.
Combined Purchases Privilege: When you determine the availability of the
reduced front-end sales charges on Class A Shares, you can include, subject to
the exceptions described below, the total amount of any Class of shares you own
of a Fund and all other Delaware Investments(R) Funds. In addition, if you are
an investment advisory client of the Manager's affiliates you may include assets
held in a stable value account in the total amount. However, you cannot include
mutual fund shares that do not carry a front-end sales charge, CDSC or Limited
CDSC, unless you acquired those shares through an exchange from a Delaware
Investments(R) Fund that did carry a front-end sales charge, CDSC or Limited
CDSC.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation: In determining the availability of the reduced
front-end sales charge on Class A Shares, purchasers may also combine any
subsequent purchases of Class A Shares, Class B Shares and Class C Shares, as
well as shares of any other class of any of the other Delaware Investments(R)
Funds which offer such classes (except shares of any Delaware Investments(R)
Fund which do not carry a front-end sales charge, CDSC or Limited CDSC). If, for
example, any such purchaser has previously purchased and still holds Class A
Shares of a Fund and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $10,000 at
offering price of
38
additional shares of Class A Shares of the Fund, the charge applicable to the
$10,000 purchase would currently be 4.75%. For the purpose of this calculation,
the shares presently held shall be valued at the public offering price that
would have been in effect had the shares been purchased simultaneously with the
current purchase. Investors should refer to the table of sales charges for Class
A Shares in the Fund Classes' Prospectus to determine the applicability of the
Right of Accumulation to their particular circumstances.
12-Month Reinvestment Privilege: Holders of Class A Shares and Class B
Shares of the Funds who redeem such shares have one year from the date of
redemption to reinvest all or part of their redemption proceeds in the same
Class of the Funds or in the same Class of any of the other Delaware
Investments(R) Funds. In the case of Class A Shares, the reinvestment will not
be assessed a front-end sales charge and in the case of Class B Shares, the
amount of the CDSC previously charged on the redemption will be reimbursed by
the Distributor. The reinvestment will be subject to applicable eligibility and
minimum purchase requirements and must be in states where shares of such other
funds may be sold. This reinvestment privilege does not extend to Class A Shares
where the redemption of the shares triggered the payment of a Limited CDSC.
Persons investing redemption proceeds from direct investments in the Delaware
Investments(R) Funds, offered without a front-end sales charge will be required
to pay the applicable sales charge when purchasing Class A Shares. The
reinvestment privilege does not extend to a redemption of Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
NAV next determined after receipt of remittance. In the case of Class B Shares,
the time that the previous investment was held will be included in determining
any applicable CDSC due upon redemptions as well as the automatic conversion
into Class A Shares.
A redemption and reinvestment of Class B Shares could have income tax
consequences. Shareholders will receive from the Distributor the amount of the
CDSC paid at the time of redemption as part of the reinvested shares, which may
be treated as a capital gain to the shareholder for tax purposes. It is
recommended that a tax advisor be consulted with respect to such transactions.
Any reinvestment directed to a Delaware Investments(R) Fund in which the
investor does not then have an account will be treated like all other initial
purchases of such Fund's shares. Consequently, an investor should obtain and
read carefully the prospectus for the Delaware Investments(R) Fund in which the
investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the Delaware Investments(R)
Fund, including charges and expenses.
Investors should consult their financial advisors or the Transfer Agent,
which also serves as the Funds' shareholder servicing agent, about the
applicability of the Class A Limited CDSC in connection with the features
described above.
--------------------------------------------------------------------------------
INVESTMENT PLANS
--------------------------------------------------------------------------------
Reinvestment Plan/Open Account
Unless otherwise designated by shareholders in writing, dividends from net
investment income and distributions from realized securities profits, if any,
will be automatically reinvested in additional shares of the respective Fund
Class in which an investor has an account (based on the NAV in effect on the
reinvestment date) and will be credited to the shareholder's account on that
date. A confirmation of each dividend payment from net investment income and of
distributions from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the next 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 to the specific Fund in which
39
shares are being purchased. Such purchases, which must meet the minimum
subsequent purchase requirements set forth in the Prospectus and this Part B,
are made for Class A Shares at the public offering price, and for Class B Shares
and Class C Shares at the NAV, 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(R) Funds
Subject to applicable eligibility and minimum initial purchase requirements
and the limitations set forth below, holders of Fund Classes may automatically
reinvest dividends and/or distributions in any of the other Delaware
Investments(R) Funds, including the Funds, in states where their shares may be
sold. Such investments will be at NAV 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 the
fund's shares. Consequently, an investor should obtain and read carefully the
prospectus for the fund in which the investment is intended to be made before
investing or sending money. The prospectus contains more complete information
about the fund, including charges and expenses.
Subject to the following limitations, dividends and/or distributions from
other Delaware Investments(R) Funds may be invested in shares of the Funds,
provided an account has been established. Dividends from Class A Shares may not
be directed to Class B Shares or Class C Shares. Dividends from Class B Shares
may only be directed to other Class B Shares and dividends from Class C Shares
may only be directed to other Class C Shares.
Investing by Exchange
If you have an investment in another Delaware Investments(R) Fund, you may
write and authorize an exchange of part or all of your investment into shares of
the Funds. If you wish to open an account by exchange, call the Shareholder
Service Center for more information. All exchanges are subject to the
eligibility and minimum purchase requirements and any additional limitations set
forth in the Funds' Prospectus. See "Redemption and Exchange" below for more
complete information concerning your exchange privileges.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan: Investors may arrange for the Funds to accept
for investment in Class A Shares, Class B Shares or Class C Shares, through an
agent bank, pre-authorized 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 the possibility and
inconvenience of 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 or quarterly payments directly from their checking account for deposit
into their Fund account. This type of investment will be handled in either of
the following ways: (i) if the shareholder's bank is a member of the National
Automated Clearing House Association ("NACHA"), the amount of the periodic
investment will be electronically deducted from his or her checking account by
Electronic Fund Transfer ("EFT") and such checking account will reflect a debit
although no check is required to initiate the transaction; or (ii) if the
shareholder's bank is not a member of NACHA, deductions will be made by
pre-authorized 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.
Minimum Initial/Subsequent Investments by Electronic Fund Transfer: 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.
40
Payments to the Funds 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 Funds 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 Funds.
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 Funds will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact the Trust for proper
instructions.
MoneyLine(SM) On Demand
You or your investment dealer may request purchases of Fund shares by phone
using MoneyLine(SM) On Demand. When you authorize the Funds to accept such
requests from you or your investment dealer, funds will be withdrawn from (for
share purchases) your pre-designated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine(SM) On Demand transactions.
It may take up to four business days for the transactions to be completed.
You can initiate this service by completing an Account Services form. If your
name and address are not identical to the name and address on your Fund account,
you must have your signature guaranteed. The Funds do not charge a fee for this
service; however, your bank may charge a fee.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the Fund
Classes through regular liquidations of shares in their accounts in other
Delaware Investments(R) Funds. Shareholders of the Fund Classes may elect to
invest in one or more of the other Delaware Investments(R) Funds through the
Wealth Builder Option. If in connection with the election of the Wealth Builder
Option, you wish to open a new account to receive the automatic investment, such
new account must meet the minimum initial purchase requirements described in the
prospectus of the fund that you select. All investments under this option are
exchanges and are therefore subject to the same conditions and limitations as
other exchanges noted above.
Under this automatic exchange program, shareholders can authorize regular
monthly investments (minimum of $100 per fund) to be liquidated from their
account and invested automatically into other Delaware Investments(R) Funds,
subject to the conditions and limitations set forth in the Fund Classes'
Prospectus. The investment will be made on the 20th day of each month (or, if
the fund selected is not open that day, the next business day) at the public
offering price or NAV, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. 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
The Funds previously offered the Asset Planner asset allocation service.
This service is no longer offered for the Funds. Please call the Shareholder
Service Center at 800 523-1918 if you have any questions regarding this service.
41
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
--------------------------------------------------------------------------------
Orders for purchases and redemptions of Class A Shares are effected at the
offering price next calculated after receipt of the order by the Funds, their
agent or certain other authorized persons. Orders for purchases and redemptions
of Class B Shares and Class C Shares are effected at the NAV per share next
calculated after receipt of the order by the Funds, their agent or certain other
authorized persons. See "Distributor" under "Investment Advisor and Other
Service Providers" above. Selling dealers are responsible for transmitting
orders promptly.
The offering price for Class A Shares consists of the NAV per share plus
any applicable sales charges. Offering price and NAV are computed as of the
close of regular trading on the New York Stock Exchange (the "NYSE"), which is
normally 4 p.m., Eastern time, on days when the NYSE is open for business. The
NYSE is scheduled to be open Monday through Friday throughout the year except
for days when the following holidays are observed: New Year's Day, Martin Luther
King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas. When the NYSE is closed, the Funds
will generally be closed, pricing calculations will not be made and purchase and
redemption orders will not be processed.
The NAV per share for each share class of each Fund is calculated by
subtracting the liabilities of each class from its total assets and dividing the
resulting number by the number of shares outstanding for that class. In
determining each Fund's total net assets, U.S. government and other debt
securities are valued at the mean between the last reported bid and asked
prices. Options are valued at the last reported sales price or, if no sales are
reported, at the mean between bid and asked prices. Short-term investments
having remaining maturities of 60 days or less are valued at amortized cost,
which approximates market value. Non-exchange traded options are valued at fair
value using a mathematical model. For all other securities and for securities
whose closing prices are not readily available, we use methods approved by the
Board of Trustees that are designed to price securities at their fair market
value.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
that Fund. The NAVs of all outstanding shares of each Class of a Fund will be
computed on a pro-rata basis for each outstanding share based on the
proportionate participation in that Fund represented by the value of shares of
that Class. All income earned and expenses incurred by a Fund, will be borne on
a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in that Fund represented by the value of shares of such Classes,
while the Fund Classes will bear the Rule 12b-1 Plan expenses payable under
their respective Plans. Due to the specific distribution expenses and other
costs that will be allocable to each Class, the NAV of each Class of a Fund will
vary.
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REDEMPTION AND EXCHANGE
--------------------------------------------------------------------------------
General Information
You can redeem or exchange your shares in a number of different ways that
are described below. Your shares will be redeemed or exchanged at a price based
on the NAV next determined after a Fund receives your request in good order,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
For example, redemption or exchange requests received in good order after the
time the offering price and NAV of shares are determined will be processed on
the next business day. See the Funds' Prospectus. A shareholder submitting a
redemption request may indicate that he or she wishes to receive redemption
proceeds of a specific dollar amount. In the case of such a request, and in the
case of certain redemptions from retirement plan accounts, a Fund will redeem
the number of shares necessary to deduct the applicable CDSC in the case of
Class B and Class C Shares, and, if applicable, the Limited CDSC in the case of
Class A Shares and tender to the shareholder the requested amount, assuming the
shareholder holds enough shares in his or her account for the redemption to be
processed in this manner. Otherwise, the amount tendered to the shareholder upon
redemption will be reduced by the amount of the applicable CDSC or Limited CDSC.
Redemption
42
proceeds will be distributed promptly, as described below, but not later than
seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order," you
must provide your account number, account registration, and the total number of
shares or dollar amount of the transaction. For exchange requests, you must also
provide the name of the fund in which you want to invest the proceeds. Exchange
instructions and redemption requests must be signed by the record owner(s)
exactly as the shares are registered. You may request a redemption or an
exchange by calling the Shareholder Service Center at 800 523-1918. Each Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
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 NAV
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 NAV are determined on such day. The
selling dealer has the responsibility of transmitting orders to the Distributor
promptly. Such repurchase is then settled as an ordinary transaction with the
broker/dealer (who may make a charge to the shareholder for this service)
delivering the shares repurchased.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order by either Fund or certain other authorized persons (see
"Distributor" under "Investment Manager and Other Service Providers"); 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.
The Funds will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Funds will honor redemption requests as to shares for which a check
was tendered as payment, but the Funds will not mail or wire the proceeds until
it is reasonably satisfied that the purchase check has cleared, which may take
up to 15 days from the purchase date. You can avoid this potential delay if you
purchase shares by wiring Federal Funds. Each Fund reserves the right to reject
a written or telephone redemption request or delay payment of redemption
proceeds if there has been a recent change to the shareholder's address of
record.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for insufficient funds or for any other reason, the
Funds 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 Funds or to the Distributor.
In case of a suspension of the determination of the NAV because the NYSE 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 Funds of securities
owned by them are not reasonably practical, or they are not reasonably practical
for the Funds fairly to value their assets, or in the event that the SEC has
provided for such suspension for the protection of shareholders, the Funds 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 NAV 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" above. Subsequent sale by an investor receiving a
distribution in kind could result in the payment of brokerage commissions.
However, each Trust has elected to be governed by Rule 18f-1 under the 1940 Act
pursuant to which each Fund is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1.00% of the NAV of such Fund during any 90-day period
for any one shareholder.
43
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
Certain redemptions of Class A Shares purchased at NAV may result in the
imposition of a Limited CDSC. See "Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value" below. Class B and
Class C Shares are subject to CDSCs as described under "Contingent Deferred
Sales Charge - Class B Shares and Class C Shares" under "Purchasing Shares"
above and in the Fund Classes' 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 Fund Classes, there may be a bank wiring cost,
neither the Funds nor the Distributor charge a fee for redemptions or
repurchases, but such fees could be charged at any time in the future.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of other Delaware Investments(R) Funds (in each
case, "New Shares") in a permitted exchange will not be subject to a CDSC that
might otherwise be due upon redemption of the Original Shares. However, such
shareholders will continue to be subject to the CDSC and any CDSC assessed upon
redemption of the New Shares will be charged by the Fund from which the Original
Shares were exchanged. In the case of Class B Shares, shareholders will also
continue to be subject to the automatic conversion schedule of the Original
Shares as described in this Part B. In an exchange of Class B Shares, a Fund's
CDSC schedule may be higher than the CDSC schedule relating to the New Shares
acquired as a result of the exchange. For purposes of computing the CDSC that
may be payable upon a disposition of the New Shares, the period of time that an
investor held the Original Shares is added to the period of time that an
investor held the New Shares. With respect to Class B Shares, the automatic
conversion schedule of the Original Shares may be longer than that of the New
Shares. Consequently, an investment in New Shares by exchange may subject an
investor to the higher Rule 12b-1 fees applicable to a Fund's Class B Shares for
a longer period of time than if the investment in New Shares were made directly.
Holders of Class A Shares of the Funds may exchange all or part of their
shares for shares of other Delaware Investments(R) Funds, including other Class
A Shares, but may not exchange their Class A Shares for Class B Shares, Class C
Shares or Class R Shares of the Funds or of any other Delaware Investments(R)
Fund. Holders of Class B Shares of a Fund are permitted to exchange all or part
of their Class B Shares only into Class B Shares of other Delaware
Investments(R) Fund. Similarly, holders of Class C Shares of the Funds are
permitted to exchange all or part of their Class C Shares only into Class C
Shares of any other Delaware Investments(R) Fund. Class B Shares of a Fund and
Class C Shares of the Funds acquired by exchange will continue to carry the CDSC
and, in the case of Class B Shares, the automatic conversion schedule of the
fund from which the exchange is made. The holding period of Class B Shares of a
Fund acquired by exchange will be added to that of the shares that were
exchanged for purposes of determining the time of the automatic conversion into
Class A Shares of the Funds. Holders of Class R Shares of the Funds are
permitted to exchange all or part of their Class R Shares only into Class R
Shares of other Delaware Investments(R) Funds or, if Class R Shares are not
available for a particular fund, into the Class A Shares of such Fund.
Permissible exchanges into Class A Shares of the Funds will be made without
a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares will be made without the imposition of a CDSC by the
Delaware Investments(R) Fund from which the exchange is being made at the time
of the exchange.
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if a Fund receives
or anticipates simultaneous orders affecting significant portions of the Fund's
assets.
44
The Funds discourage purchases by market timers and purchase orders
(including the purchase side of exchange orders) by shareholders identified as
market timers may be rejected. The Funds will consider anyone who follows a
pattern of market timing in any Delaware Investments(R) Fund to be a market
timer.
Market timing of a Delaware Investments(R)Fund occurs when investors make
consecutive rapid short-term "roundtrips," or in other words, purchases into a
Delaware Investments (R)Fund followed quickly by redemptions out of that Fund. A
short-term roundtrip is any redemption of Fund shares within 20 business days of
a purchase of that Fund's shares. If you make a second such short-term roundtrip
in a Delaware Investments(R) Fund within the same calendar quarter of a previous
short-term roundtrip in that Fund, you may be considered a market timer. The
purchase and sale of Fund shares through the use of the exchange privilege are
also included in determining whether market timing has occurred. The Funds also
reserve the right to consider other trading patterns as market timing.
Your ability to use the Funds' exchange privilege may be limited if you are
identified as a market timer. If you are identified as a market timer, we will
execute the redemption side of your exchange order but may refuse the purchase
side of your exchange order.
Small Accounts
Before a Fund involuntarily redeems shares from an account that, under the
circumstances noted in the Prospectus, has remained below the minimum amount
described in 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 required minimum and will be allowed 60 days from the
date of notice to make an additional investment to meet the required minimum.
Any redemption in an inactive account established with a minimum investment may
trigger mandatory redemption. No CDSC or Limited CDSC will apply to the
redemptions described in this paragraph.
Written Redemption
You can write to the Funds at P.O. Box 219656, Kansas City, MO 64121-9656
to redeem some or all of your shares. The request must be signed by all owners
of the account or your investment dealer of record. For redemptions of more than
$100,000, or when the proceeds are not sent to the shareholder(s) at the address
of record, the Funds require a signature by all owners of the account and a
signature guarantee for each owner. A signature guarantee can be obtained from a
commercial bank, a trust company or a member of a Securities Transfer
Association Medallion Program ("STAMP"). Each Fund reserves the right to reject
a signature guarantee supplied by an eligible institution based on its
creditworthiness. The Funds may require further documentation from corporations,
executors, retirement plans, administrators, trustees or guardians.
Payment is normally mailed the next business day after receipt of your
redemption request. If your Class A Shares or Institutional Class Shares are in
certificate form, the certificate(s) must accompany your request and also be in
good order. Certificates generally are no longer issued for Class A Shares.
Certificates are not issued for Class B Shares or Class C Shares.
Written Exchange
You may also write to the Funds (at P.O. Box 219656, Kansas City, MO
64121-9656) to request an exchange of any or all of your shares into another
Delaware Investments(R) Fund, subject to the same conditions and limitations as
other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you hold your Class A Shares in certificate form, you may redeem or
exchange only by written request and you must return your certificates.
Telephone Redemption: Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are automatically
provided unless you notify the Funds in which you have your account in
45
writing that you do not wish to have such services available with respect to
your account. Each Fund reserves the right to modify, terminate or suspend these
procedures upon 60 days' written notice to shareholders. It may be difficult to
reach the Funds by telephone during periods when market or economic conditions
lead to an unusually large volume of telephone requests.
The Funds and their Transfer Agent are not 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 Funds will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by the
Fund Classes are generally tape recorded, and a written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, you are acknowledging prior
receipt of a prospectus for the fund into which your shares are being exchanged.
Telephone Redemption--Check to Your Address of Record: The Telephone
Redemption feature is a quick and easy method to redeem shares. You or your
investment dealer of record can have redemption proceeds of $100,000 or less
mailed to you at your address of record. Checks will be payable to the
shareholder(s) of record. Payment is normally mailed the next business day after
receipt of the redemption request. This service is only available to individual,
joint and individual fiduciary-type accounts.
Telephone Redemption--Proceeds to Your Bank: Redemption proceeds of $1,000
or more can be transferred to your pre-designated bank account by wire or by
check. You should authorize this service when you open your account. If you
change your pre-designated bank account, you must complete an Authorization Form
and have your signature guaranteed. For your protection, your authorization must
be on file. If you request a wire, your funds will normally be sent the next
business day. If the proceeds are wired to the shareholder's account at a bank
which is not a member of the Federal Reserve System, there could be a delay in
the crediting of the funds to the shareholder's bank account. A bank wire fee
may be deducted from Fund Class redemption proceeds. If you ask for a check, it
will normally be mailed the next business day after receipt of your redemption
request to your pre-designated bank account. There are no separate fees for this
redemption method, but mailing a check may delay the time it takes to have your
redemption proceeds credited to your pre-designated bank account. Simply call
the Shareholder Service Center prior to the time the offering price and NAV are
determined, as noted above.
Telephone Exchange: The Telephone Exchange feature is a convenient and
efficient way to adjust your investment holdings as your liquidity requirements
and investment objectives change. You or your investment dealer of record can
exchange your shares into other Delaware Investments(R) Funds under the same
registration, subject to the same conditions and limitations as other exchanges
noted above. As with the written exchange service, telephone exchanges are
subject to the requirements of the Funds, as described above. Telephone
exchanges may be subject to limitations as to amounts or frequency.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
Delaware Investments(R) Funds. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and each Fund reserve the right
to record exchange instructions received by telephone and to reject exchange
requests at any time in the future.
MoneyLine(SM) On Demand
You or your investment dealer may request redemptions of Fund Class shares
by phone using MoneyLine(SM) On Demand. When you authorize the Funds to accept
such requests from you or your investment dealer, funds will be deposited to
(for share redemptions) your pre-designated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine(SM) On Demand transactions. For
more information, see "MoneyLine(SM) On Demand" under "Investment Plans" above.
46
Systematic Withdrawal Plans
Shareholders of the Fund Classes who own or purchase $5,000 or more of
shares at the offering price, or NAV, as applicable, for which certificates have
not been issued may establish a Systematic Withdrawal Plan for monthly
withdrawals of $25 or more, or quarterly withdrawals of $75 or more, although
the Funds do not recommend any specific amount of withdrawal. This is
particularly useful to shareholders living on fixed incomes, since it can
provide them with a stable supplemental amount. This $5,000 minimum does not
apply for the investments made through qualified retirement plans. Shares
purchased with the initial investment and through reinvestment of cash dividends
and realized securities profits distributions will be credited to the
shareholder's account and sufficient full and fractional shares will be redeemed
at the NAV calculated on the third business day preceding the mailing date.
Checks are dated either the 1st or the 15th of the month, as selected by
the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at NAV. This plan is not recommended for all
investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital, and the share
balance may in time be depleted, particularly in a declining market.
Shareholders should not purchase additional shares while participating in a
Systematic Withdrawal Plan.
The sale of shares for withdrawal payments constitutes a taxable event and
a shareholder may incur a capital gain or loss for federal income tax purposes.
This gain or loss may be long-term or short-term depending on the holding period
for the specific shares liquidated. Premature withdrawals from retirement plans
may have adverse tax consequences.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in the Funds must be terminated
before a Systematic Withdrawal Plan with respect to such shares can take effect,
except if the shareholder is a participant in a retirement plan offering
Delaware Investments(R) Funds or is investing in Delaware Investments(R) Funds
which do not carry a sales charge. Redemptions of Class A Shares pursuant to a
Systematic Withdrawal Plan may be subject to a Limited CDSC if the purchase was
made at NAV and a dealer's commission has been paid on that purchase. The
applicable Limited CDSC for Class A Shares and CDSC for Class B and C Shares
redeemed via a Systematic Withdrawal Plan will be waived if the annual amount
withdrawn in each year is less than 12% of the account balance on the date that
the Plan is established. If the annual amount withdrawn in any year exceeds 12%
of the account balance on the date that the Systematic Withdrawal Plan is
established, all redemptions under the Plan will be subjected to the applicable
CDSC, including an assessment for previously redeemed amounts under the Plan.
Whether a waiver of the CDSC is available or not, the first shares to be
redeemed for each Systematic Withdrawal Plan payment will be those not subject
to a CDSC because they have either satisfied the required holding period or were
acquired through the reinvestment of distributions. See the Fund Classes'
Prospectus for more information about the waiver of CDSCs.
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. Each 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.
Systematic Withdrawal Plan payments are normally made by check. In the
alternative, you may elect to have your payments transferred from your Fund
account to your pre-designated bank account through the MoneyLine(SM) Direct
Deposit Service. Your funds will normally be credited to your bank account up to
four business days after the payment date. There are no separate fees for this
redemption method. It may take up to four business days for the transactions to
be completed. You can initiate this service by completing an Account Services
form. If your name and address are not
47
identical to the name and address on your Fund account, you must have your
signature guaranteed. The Funds do not charge a fee for this service; however,
your bank may charge a fee. This service is not available for retirement plans.
Shareholders should consult with their financial advisors to determine
whether a Systematic Withdrawal Plan would be suitable for them.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000, a Limited CDSC will be imposed on certain
redemptions of Class A Shares (or shares into which such Class A Shares are
exchanged) according to the following schedule: (i) 1.00% if shares are redeemed
during the first year after the purchase; and (ii) 0.50% if such shares are
redeemed during the second year after the purchase, if such purchases were made
at NAV and triggered the payment by the Distributor of the dealer's commission
described above in "Dealer's Commission" under "Purchasing Shares."
The Limited CDSC will be paid to the Distributor and will be assessed on an
amount equal to the lesser of: (i) the NAV at the time of purchase of the Class
A Shares being redeemed or (ii) the NAV of such Class A Shares at the time of
redemption. For purposes of this formula, the "NAV at the time of purchase" will
be the NAV at purchase of the Class A Shares even if those shares are later
exchanged for shares of another Delaware Investments(R) Fund and, in the event
of an exchange of Class A Shares, the "NAV of such shares at the time of
redemption" will be the NAV of the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than two years will not be
subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Investments(R) Fund will not trigger the imposition of the
Limited CDSC at the time of such exchange. The period a shareholder owns shares
into which Class A Shares are exchanged will count towards satisfying the
two-year holding period. The Limited CDSC is assessed if such two year period is
not satisfied irrespective of whether the redemption triggering its payment is
of Class A Shares of the Funds or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed that
shares not subject to the Limited CDSC are the first redeemed followed by other
shares held for the longest period of time. The Limited CDSC will not be imposed
upon shares representing reinvested dividends or capital gains distributions, or
upon amounts representing share appreciation.
Waivers of Contingent Deferred Sales Charges
Please see the Fund Classes' Prospectus for instances in which the Limited
CDSC applicable to Class A Shares and the CDSCs applicable to Class B and C
Shares may be waived.
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DISTRIBUTIONS AND TAXES
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DISTRIBUTIONS
Each Fund will normally declare all its net investment income, if any, on a
daily basis and distribute, as dividends, monthly. Net investment income earned
on days when the Funds are not open will be declared as a dividend on the next
business day. Any net realized capital gains will be distributed once each year,
and may be distributed more frequently, if necessary, to reduce or eliminate
excise or income taxes on the Fund. Such distributions will be reinvested in
shares, unless the shareholder elects to receive them in cash. Shareholders will
receive a quarterly statement showing a Class's dividends paid and all the
transactions made during the period.
48
Payment by check of cash dividends will ordinarily be mailed within three
business days after the payable date. In determining daily dividends, the amount
of net investment income for each Fund will be determined at the time the
offering price and net asset value are determined (see Determining Offering
Price and Net Asset Value) and shall include investment income accrued by the
respective Fund, less the estimated expenses of that Fund incurred since the
last determination of net asset value. Gross investment income consists
principally of interest accrued and, where applicable, net pro-rata amortization
of premiums and discounts since the last determination. The dividend declared,
as noted above, will be deducted immediately before the net asset value
calculation is made.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if a Fund is given prior notice of Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying such Fund's credit policies, the purchase will start earning
dividends on the date the wire is received. Investors desiring to guarantee wire
payments must have an acceptable financial condition and credit history in the
sole discretion of that Fund. The Funds reserve the right to terminate this
option at any time. Purchases by check earn dividends upon conversion to Federal
Funds, normally one business day after receipt.
Dividend distributions are automatically reinvested in additional shares of
the paying Fund at net asset value on the ex-dividend date, unless an election
to receive dividends in cash has been made. Dividend payments of $1.00 or less
will be automatically reinvested, notwithstanding a shareholder's election to
receive dividends in cash. If such a shareholder's dividends increase to greater
than $1.00, the shareholder would have to file a new election in order to begin
receiving dividends in cash again. If a shareholder redeems an entire account,
all dividends accrued to the time of the withdrawal will be paid by separate
check at the end of that particular monthly dividend period, consistent with the
payment and mailing schedule described above.
If you elect to take your dividends and distributions in cash and such
dividends and distributions are in an amount of $25 or more, you may choose the
MoneyLineSM Direct Deposit Service and have such payments transferred from your
Fund account to your predesignated bank account. This service is not available
for certain retirement plans. It may take up to four business days for the
transactions to be completed. You can initiate either service by completing an
Account Services form. If your name and address on your designated bank account
are not identical to the name and address on your Fund account, you must have
your signature guaranteed. The Funds do not charge a fee for any MoneyLineSM
Service; however, your bank may charge a fee. Please call the Shareholder
Service Center for additional information about these services.
Any check in payment of dividends or other distributions which cannot be
delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. A Fund may deduct from a shareholder's account the costs of
such Fund's effort to locate a shareholder if a shareholder's mail is returned
by the United States Post Office or such Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Each Fund calculates income dividends and capital gain distributions the
same way for each class. The amount of any income dividends per share will
differ, however, generally due to any differences in the distribution and
service (Rule 12b-1) fees applicable to the classes. Each Class will share
proportionately in the
49
investment income and expenses of its respective Fund, except that Class A
Shares, Class B Shares and Class C Shares alone will incur distribution fees
under their respective 12b-1 Plan.
TAXES
Distributions of Net Investment Income - in general.
Each Fund receives income generally in the form of interest on its
investments. This income, less expenses incurred in the operation of a Fund,
constitutes the Fund's net investment income from which dividends, consisting
generally of either exempt-interest or taxable income, may be paid to you.
Exempt-Interest Dividends.
By meeting certain requirements of the Code, each Fund qualifies to pay
exempt-interest dividends to shareholders. These dividends are derived from
interest income exempt from regular federal income tax, and are not subject to
regular federal income tax when they are paid to shareholders. Exempt-interest
dividends that are excluded from federal taxable income, may still be subject to
federal alternative minimum tax. See the discussion below under the heading,
"Alternative Minimum Tax."
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
Dividends from Taxable Income.
Each Fund may earn taxable income from many sources, including income from
temporary investments, discount from stripped obligations or their coupons,
income from securities loans or other taxable transactions, and ordinary income
from the sale of market discount bonds. If you are a taxable investor, any
distributions by a Fund from such income will be taxable to you as ordinary
income, whether you receive them in cash or in additional shares.
Capital Gain Distributions.
A Fund may derive capital gain and loss in connection with sales or other
dispositions of its portfolio securities. Distributions derived from the excess
of net short-term capital gain over net long-term capital loss will be taxable
to you as ordinary income. Distributions paid from the excess of net long-term
capital gain over net short-term capital gain will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in a
Fund. Any net short-term or long-term capital gain realized by a Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Returns of Capital.
If a Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in a Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold. Any return of capital in excess of your
basis, however, is taxable as a capital gain.
50
Information on the Amount and Tax Character of Distributions.
The Funds will inform you of the amount and character of your distributions
at the time they are paid, and will advise you of the tax status of such
distributions for federal income tax purposes shortly after the close of each
calendar year, including the portion of the distributions that on average are
comprised of exempt-interest income, taxable income and the portion of
exempt-interest income that is a tax preference item when determining the
alternative minimum tax. If you have not held Fund shares for a full year, a
Fund may designate and distribute to you, as exempt-interest income, taxable
income, or capital gains, and in the case of non-U.S. shareholders, a Fund may
further designate and distribute as interest-related dividends and short-term
capital gain dividends, a percentage of income that may not be equal to the
actual amount of this type of income earned during the period of your investment
in the Fund. Taxable distributions declared by a Fund in December to
shareholders of record in such month, but paid in January, are taxable to you as
if they were paid in December.
Election to be Taxed as a Regulated Investment Company.
Each Fund has elected, or intends to elect, to be treated as a regulated
investment company under Subchapter M of Code, and intends to so qualify during
the current fiscal year. As a regulated investment company, a Fund generally
pays no federal income tax on the income and gain it distributes to you. The
Board of Trustees reserves the right not to distribute a Fund's net long-term
capital gain or not to maintain the qualification of a Fund as a regulated
investment company if it determines such a course of action to be beneficial to
shareholders. If net long-term capital gain is retained, a Fund would be taxed
on the gain, and shareholders would be notified that they are entitled to a
credit or refund for the tax paid by the Fund. If a Fund fails to qualify as a
regulated investment company, the Fund would be subject to federal, and possibly
state, corporate taxes on its taxable income and gains, and distributions to you
will be taxed as dividend income to the extent of such Fund's earnings and
profits.
In order to qualify as a regulated investment company for federal income
tax purposes, each Fund must meet certain specific requirements, including:
(i) A Fund must maintain a diversified portfolio of securities, wherein no
security, including the securities of a qualified publicly traded partnership
(other than U.S. government securities and securities of other regulated
investment companies) can exceed 25% of the Fund's total assets, and, with
respect to 50% of the Fund's total assets, no investment (other than cash and
cash items, U.S. government securities and securities of other regulated
investment companies) can exceed 5% of the Fund's total assets or 10% of the
outstanding voting securities of the issuer;
(ii) A Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities, or
currencies, and net income derived from an interest in a qualified publicly
traded partnership; and
(iii) A Fund must distribute to its shareholders at least 90% of its
investment company taxable income and net tax-exempt income for each of its
fiscal years.
Excise Tax Distribution Requirements.
As a regulated investment company, each Fund is required to distribute its
income and gains on a calendar year basis, regardless of the Fund's fiscal year
end as follows:
51
Required distributions. To avoid federal excise taxes, the Code requires a
Fund to distribute to you by December 31 of each year, at a minimum, the
following amounts: 98% of its taxable ordinary income earned during the calendar
year; 98% of its capital gain net income earned during the twelve-month period
ending October 31; and 100% of any undistributed amounts from the prior year.
The Funds intend to declare and pay these distributions in December (or to pay
them in January, in which case you must treat them as received in December) but
can give no assurances that its distributions will be sufficient to eliminate
all taxes.
Post October losses. Because the periods for measuring a regulated
investment company's income are different for excise and income tax purposes
special rules are required to protect the amount of earnings and profits needed
to support excise tax distributions. For instance, if a regulated investment
company that uses October 31st as the measurement period for paying out capital
gain net income realizes a net capital loss after October 31 and before the
close of its taxable year, the fund likely would have insufficient earnings and
profits for that taxable year to support the dividend treatment of its required
distributions for that calendar year. Accordingly, a Fund is permitted to elect
to treat net capital losses realized between November 1 and its fiscal year end
("post-October loss") as occurring on the first day of the following tax year.
Sales or Exchanges of Fund shares.
Sales, exchanges, and redemptions (including redemptions in kind) of Fund
shares are taxable transactions for federal and state income tax purposes. If
you redeem your Fund shares, the Internal Revenue Service requires you to report
any gain or loss on your redemption. If you held your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss, and will be
long-term or short-term, generally depending on how long you have held your
shares.
Sales at a loss within six months of purchase. If you sell or exchange Fund
shares that you owned for six months or less:
o any loss incurred is disallowed to the extent of any exempt-interest
dividends paid to you on your shares, and
o any remaining loss is treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by a Fund.
Wash sales. All or a portion of any loss that you realize on a redemption
of your Fund shares will be disallowed to the extent that you buy other shares
in the Fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares.
Deferral of basis - Class A Shares only. In reporting gain or loss on the
sale of your Fund shares, you may be required to adjust your basis in the shares
you sell under the following circumstances:
IF:
o In your original purchase of Fund shares, you received a reinvestment
right (the right to reinvest your sales proceeds at a reduced or with
no sales charge), and
52
o You sell some or all of your original shares within 90 days of their
purchase, and
o You reinvest the sales proceeds in the Fund or in another Fund of the
Trust, and the sales charge that would otherwise apply is reduced or
eliminated;
THEN: In reporting any gain or loss on your sale, all or a portion of the
sales charge that you paid for your original shares is excluded from your tax
basis in the shares sold and added to your tax basis in the new shares.
Conversion of Class B Shares into Class A Shares. The automatic conversion
of Class B Shares into Class A Shares at the end of approximately eight years
after purchase will be tax-free for federal income tax purposes. Shareholders
should consult their tax advisers regarding the state and local tax consequences
of the conversion of Class B Shares into Class A Shares, or any other conversion
or exchange of shares.
U.S. Government Obligations.
Income earned on certain U.S. government obligations is exempt from state
and local personal income taxes if earned directly by you. States also grant
tax-free status to dividends paid to you from interest earned on direct
obligations of the U.S. government, subject in some states to minimum investment
or reporting requirements that must be met by a Fund. Income on investments by a
Fund in certain other obligations, such as repurchase agreements, collateralized
by U.S. government obligations commercial paper and federal agency-backed
obligations (e.g., Government National Mortgage Association ("GNMA") or Federal
National Mortgage Association ("FNMA") obligations), generally does not qualify
for tax-free treatment. The rules on exclusion of this income are different for
corporations.
Qualified Dividend Income for Individuals.
Because each Fund's income is derived primarily from interest rather than
dividends, none of its distributions are expected to be qualified dividend
income eligible for taxation by individuals at long-term capital gain rates.
Dividends-Received Deduction for Corporations.
Because each Fund's income is derived primarily from interest rather than
dividends, none of its distributions are expected to qualify for the corporate
dividends-received deduction.
Alternative Minimum Tax.
Interest on certain private activity bonds, while exempt from regular
federal income tax, is a preference item for shareholders when determining their
federal alternative minimum tax. Private activity bond interest could subject
shareholders to or increase their liability under federal alternative minimum
taxes, depending on their personal or corporate tax position. If shareholders
are a person defined in the Code as a "substantial user" (or person related to a
user) of a facility financed by private activity bonds, shareholders should
consult with their tax advisor before buying shares of a Fund.
Treatment of Interest on Debt Incurred to Hold Fund Shares.
Interest on debt that shareholders incur to buy or hold Fund shares may not
be deductible for federal income tax purposes. Indebtedness may be allocated to
shares of a Fund even though not directly traceable to the purchase of such
shares.
53
Loss of Status of Securities as Tax-Exempt.
Failure of the issuer of a tax-exempt security to comply with certain legal
or contractual requirements relating to the security could cause interest on the
security, as well as Fund distributions derived from this interest, to become
taxable, perhaps retroactively to the date the security was issued. In such a
case, a Fund may be required to report to the IRS and send to shareholders
amended Forms 1099 for a prior taxable year in order to report additional
taxable income. This, in turn, could require shareholders to file amended
federal and state income tax returns for such prior year to report and pay tax
and interest on their pro rata share of the additional amount of taxable income.
Investment in Complex Securities.
Each Fund may invest in securities issued or purchased at a discount, such
as zero coupon, step-up or payment-in-kind ("PIK") bonds, that could require it
to accrue and distribute income not yet received. In order to generate
sufficient cash to make these distributions, a Fund could be required to sell
securities in its portfolio that it otherwise might have continued to hold.
These rules could affect the amount, timing and/or tax character of income
distributed to you by the Fund. A Fund may invest in other complex securities
that could be subject to numerous special and complex tax rules.
Derivatives. The Intermediate and National High-Yield Funds are permitted
to invest in certain option transactions. If a Fund makes these investments, it
could be required to mark-to-market these contracts and realize any unrealized
gains and losses at its fiscal year end even though it continues to hold the
contracts. Under these rules, gains or losses on the contracts generally would
be treated as 60% long-term and 40% short-term gains or losses. In determining
its net income for excise tax purposes, a Fund also would be required to
mark-to-market these contracts annually as of October 31 (for capital gain net
income) and to realize and distribute any resulting income and gains.
Short sales. Certain hedging transactions that may be engaged in by a Fund
(such as short sales "against the box") may be subject to special tax treatment
as "constructive sales" if the Fund holds certain "appreciated financial
positions" defined generally as any interest (including a futures or forward
contract, short sale or option) with respect to stock, certain debt instruments,
or partnership interests if there would be a gain were such interest sold,
assigned, or otherwise terminated at its fair market value. Upon entering into a
constructive sales transaction with respect to an appreciated financial
position, the Fund will generally be deemed to have constructively sold such
appreciated financial position and will recognize gain as if such position were
sold, assigned, or otherwise terminated at its fair market value on the date of
such constructive sale (and will take into account any gain for the taxable year
which includes such date).
Tax straddles. A Fund's investment in options, futures, or forwards
contracts in connection with certain hedging transactions could cause it to hold
offsetting positions in securities. If the Fund's risk of loss with respect to
specific securities in its portfolio is substantially diminished by the fact
that it holds other securities, the Fund could be deemed to have entered into a
tax "straddle" or to hold a "successor position" that would require any loss
realized by it to be deferred for tax purposes.
Investments in securities of uncertain tax character. Each Fund may invest
in securities the U.S. Federal income tax treatment of which may not be clear or
may be subject to recharacterization by the IRS. To the extent the tax treatment
of such securities or the income from such securities differs from the tax
treatment expected by a Fund, it could affect the timing or character of income
recognized by the Fund, requiring the
54
Fund to purchase or sell securities, or otherwise change its portfolio, in order
to comply with the tax rules applicable to regulated investment companies under
the Code.
Backup Withholding.
By law, a Fund must withhold a portion of your taxable dividends and sales
proceeds unless you:
o provide your correct social security or taxpayer identification
number,
o certify that this number is correct,
o certify that you are not subject to backup withholding, and
o certify that you are a U.S. person (including a U.S. resident alien).
A Fund also must withhold if the IRS instructs it to do so. When
withholding is required, the amount will be 28% of any dividends or proceeds
paid. The special U.S. tax certification requirements applicable to non-U.S.
shareholders are described under the Non-U.S. Investors heading below.
Non-U.S. Investors.
Non-U.S. investors may be subject to U.S. withholding and estate tax and
are subject to special U.S. tax certification requirements. Non-U.S. investors
should consult their tax advisors about the applicability of U.S. tax
withholding and the use of the appropriate forms to certify their status.
In general. The United States imposes a flat 30% withholding tax (or a
withholding tax at a lower treaty rate) on U.S. source dividends, including on
income dividends paid to you by a Fund, subject to certain exemptions for
dividends designated as exempt-interest dividends, capital gain dividends,
short-term capital gain dividends and interest-related dividends as described
below. However, notwithstanding such exemptions from U.S. withholding at the
source, any dividends and distributions of income and capital gains, including
the proceeds from the sale of your Fund shares, will be subject to backup
withholding at a rate of 28% if you fail to properly certify that you are not a
U.S. person.
Exempt-interest dividends. In general, exempt-interest dividends are not
subject to U.S. withholding tax.
Capital gain dividends & short-term capital gain dividends. In general,
capital gain dividends paid by a Fund from either long-term or short-term
capital gains (other than gain realized on disposition of U.S. real property
interests) are not subject to U.S. withholding tax unless you are a nonresident
alien individual present in the United States for a period or periods
aggregating 183 days or more during the taxable year.
Interest-related dividends. Interest-related dividends paid by a Fund from
qualified interest income are not subject to U.S. withholding tax. "Qualified
interest income" includes, in general, U.S. source (1) bank deposit interest,
(2) short-term original discount and (3) interest (including original issue
discount, market discount, or acquisition discount) on an obligation which is in
registered form, unless it is earned on an obligation issued by a corporation or
partnership in which a Fund is a 10-percent shareholder or is contingent
interest, and (4) any interest-related dividend from another regulated
investment company. On any payment date, the amount of an income dividend that
is designated by a Fund as an interest-related dividend may be more or less than
the amount that is so qualified. This is because the designation is based on an
estimate of the Fund's qualified interest income for its entire fiscal year,
which can only be determined with exactness at fiscal year end. As a
consequence, a Fund may over withhold a small amount of U.S. tax from a dividend
payment. In
55
this case, the non-U.S. investor's only recourse may be to either forgo recovery
of the excess withholding, or to file a United States nonresident income tax
return to recover the excess withholding.
Further limitations on tax reporting for interest-related dividends and
short-term capital gain dividends for non-U.S. investors. It may not be
practical in every case for a Fund to designate, and the Funds reserve the right
in these cases to not designate, small amounts of interest-related or short-term
capital gain dividends. Additionally, a Fund's designation of interest-related
or short-term capital gain dividends may not be passed through to shareholders
by intermediaries who have assumed tax reporting responsibilities for this
income in managed or omnibus accounts due to systems limitations or operational
constraints.
Other income and effectively connected income. Ordinary dividends paid by a
Fund to non-U.S. investors on the income earned on portfolio investments in (i)
the stock of domestic and foreign corporations, and (ii) the debt of foreign
issuers continue to be subject to U.S. withholding tax. If you hold your Fund
shares in connection with a U.S. trade or business, your income and gains will
be considered effectively connected income and taxed in the U.S. on a net basis,
in which case you may be required to file a nonresident U.S. income tax return.
U.S. estate tax. An individual who, at the time of death, is a Non-U.S.
shareholder will nevertheless be subject to U.S. federal estate tax with respect
to shares at the graduated rates applicable to U.S. citizens and residents,
unless a treaty exception applies. In the absence of a treaty, there is a
$13,000 statutory estate tax credit. A partial exemption from U.S estate tax may
apply to stock in a Fund held by the estate of a nonresident decedent. The
amount treated as exempt is based upon the proportion of the assets held by the
Fund at the end of the quarter immediately preceding the decedent's death that
are debt obligations, deposits, or other property that would generally be
treated as situated outside the United States if held directly by the estate.
Transfers by gift of shares of a Fund by a non-U.S. shareholder who is a
nonresident alien individual will not be subject to U.S. federal gift tax. The
tax consequences to a non-U.S. shareholder entitled to claim the benefits of an
applicable tax treaty may be different from those described herein. Non-U.S.
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign tax.
Sunsetting of provisions. The provisions dealing with interest-related
dividends and short-term capital gain dividends that are discussed above are
scheduled to sunset for Fund taxable years beginning after December 31, 2007.
The provisions creating a partial exemption from U.S. estate tax are scheduled
to sunset on December 31, 2007. Unless these rules are extended or made
permanent before the sunset provisions become effective, non-U.S. investors will
again be subject to nonresident withholding taxes on any ordinary dividends
(including short-term capital gain dividends) that they receive, and will no
longer be eligible for a reduction in their U.S. estate tax.
U.S. tax certification rules. Special U.S. tax certification requirements
apply to non-U.S. shareholders both to avoid U.S. back up withholding imposed at
a rate of 28% and to obtain the benefits of any treaty between the United States
and the shareholder's country of residence. In general, a non-U.S. shareholder
must provide a Form W-8 BEN (or other applicable Form W-8) to establish that you
are not a U.S. person, to claim that you are the beneficial owner of the income
and, if applicable, to claim a reduced rate of, or exemption from, withholding
as a resident of a country with which the United States has an income tax
treaty. A Form W-8 BEN provided without a U.S. taxpayer identification number
will remain in effect for a period beginning on the date
56
signed and ending on the last day of the third succeeding calendar year unless
an earlier change of circumstances makes the information on the form incorrect.
Certain State Tax Consequences of Investing in each of the Funds
For a discussion regarding certain state tax consequences of investing in
each of the Funds, please see the section entitled "Dividends, distributions and
taxes" in the Prospectus.
This discussion of "DISTRIBUTIONS" and "TAXES" is not intended or written
to be used as tax advice and does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. You should consult your own tax advisor regarding your
particular circumstances before making an investment in the Fund.
--------------------------------------------------------------------------------
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
To obtain the Funds' most current performance information, please call 800
523-1918 or visit www.delawareinvestments.com.
Performance quotations represent the Funds' past performance and should not
be considered as representative of future results. The Funds will calculate
their performance in accordance with the requirements of the rules and
regulations under the 1940 Act, or any other applicable U.S. securities law, as
they may be revised from time to time by the SEC.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Ernst & Young LLP serves as the independent registered public accounting
firm for the Funds and, in its capacity as such, audits the annual financial
statements of each of the Funds. Each Fund's Statement of Net Assets, Statement
of Operations, Statement of Changes in Net Assets, Financial Highlights and
Notes to Financial Statements, as well as the report of Ernst & Young LLP, the
Funds' independent registered public accounting firm, for the fiscal year ended
August 31, 2006, are included in the Funds' Annual Report to shareholders. The
financial statements, the notes relating thereto, the financial highlights and
the report of Ernst & Young LLP, listed above are incorporated by reference from
the Annual Report in this Part B.
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PRINCIPAL HOLDERS
--------------------------------------------------------------------------------
As of December 7, 2006, management believes the following shareholders held
of record 5% or more of the outstanding shares of each class of each Fund.
Management does not have knowledge of beneficial owners.
---------------------- ------------------------------------ -------------
Fund/Class Name and Address of Account Percentage
---------------------- ------------------------------------ -------------
USA Fund Citigroup Global Markets, Inc.
Class A shares Attn: Peter Booth, 7th Floor
333 W. 34th Street
New York, NY 10001 5.64%
---------------------- ------------------------------------ -------------
USA Fund MLPF&S FBO its Customers
Class B shares Attn Fund Administration
4800 Deer Lake Dr. E., 2nd Floor
Jacksonville, FL 32246 11.15%
---------------------- ------------------------------------ -------------
57
---------------------- ------------------------------------ -------------
Fund/Class Name and Address of Account Percentage
---------------------- ------------------------------------ -------------
Citigroup Global Markets, Inc.
Attn: Peter Booth, 7th Floor
333 W. 34th Street
New York, NY 10001 9.28%
---------------------- ------------------------------------ -------------
USA Fund MLPF&S FBO its Customers
Class C shares Attn: Fund Administration
4800 Deer Lake Dr. E., 2nd Floor
Jacksonville, FL 32246 28.91%
---------------------- ------------------------------------ -------------
Citigroup Global Markets, Inc.
Attn: Peter Booth, 7th Floor
333 W. 34th Street
New York, NY 