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PROSPECTUS
MAY 1, 1996
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DELAWARE GROUP
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PREMIUM FUND, INC.
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INTERNATIONAL EQUITY SERIES
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1818 Market Street
Philadelphia, PA 19103
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TABLE OF CONTENTS
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Cover Page
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Financial Highlights
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Investment Objective and Policies
Introduction
Investment Strategy
Other Considerations
Special Risk Factors
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Purchase and Redemption
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Dividends and Distributions
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Taxes
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Calculation of Offering Price and Net Asset Value Per Share
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Management of the Fund
Performance Information
Distribution and Service
Expenses
Description of Fund Shares
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This Prospectus describes the International Equity Series (the
"Series") of Delaware Group Premium Fund, Inc. (the "Fund"). The Series'
objective is to achieve long-term growth without undue risk to principal. The
Series seeks to achieve this objective by investing primarily in equity
securities of foreign issuers that provide the potential for capital
appreciation and income. This Series has the same objective and investment
discipline as a separate Delaware Group fund, the International Equity Series of
Delaware Group Global & International Funds, Inc. in that it invests in a broad
range of equity securities of foreign issuers, including common stocks,
preferred stocks, convertible securities and warrants consistent with the
Series' objective.
The shares of the Fund are sold only to separate accounts of life
insurance companies ("life companies"). The separate accounts are used in
conjunction with variable annuity contracts and variable life insurance policies
("variable contracts"). The separate accounts invest in shares of the Series in
accordance with allocation instructions received from contract owners. Although
the Series will constantly strive to attain its objective, there can be no
assurance that it will be attained.
This Prospectus describes the International Equity Series and sets
forth information that you should read and consider before you invest. Please
retain it for future reference. Part B of the Fund's registration statement,
dated May 1, 1996, as it may be amended from time to time, contains additional
information about the Series and has been filed with the Securities Exchange
Commission. Part B is incorporated by reference into this Prospectus and is
available, without charge, by writing to Delaware Distributors, L.P. (the
"Distributor") at the above address or by calling 1-800-441-7468. The Series'
financial statements appear in the Fund's Annual Report, which will accompany
any response to requests for Part B.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL FUNDS
CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE FUND ARE
NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY CREDIT UNION,
ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. SHARES OF THE FUND ARE NOT BANK
OR CREDIT UNION DEPOSITS.
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FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delaware Group Premium Fund, Inc.-International Equity Series and have been
audited by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes, and the report of
Ernst & Young LLP covering such financial information and highlights, all of
which are incorporated by reference into Part B. Further information about the
Series' performance is contained in the Fund's Annual Report to shareholders. A
copy of the Fund's Annual Report (including the report of Ernst & Young LLP) may
be obtain from the Fund upon request at no charge.
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<CAPTION>
International Equity Series
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10/29/92(1)
Year Ended through
12/31/95 12/31/94 12/31/93 12/31/92
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Net Asset Value, Beginning of Period....................... $11.8400 $11.6200 $10.0300 $10.0000
Income From Investment Operations
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Net Investment Income...................................... 0.4194 0.2198 0.0523 0.0153
Net Gains (Losses) on Securities
(both realized and unrealized)................... 1.1906 0.0802 1.5477 0.0147
Total From Investment Operations 1.6100 0.3000 1.6000 0.0300
Less Distributions
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Dividends (from net investment income)..................... (0.2400) (0.0700) (0.0100) none
Distributions (from capital gains) ........................ (0.0900) (0.0100) none none
Returns of Capital......................................... none none none none
Total Distributions.................................... (0.3300) (0.0800) (0.0100) none
Net Asset Value, End of Period............................. $13.1200 $11.8400 $11.6200 $10.0300
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Total Return(2)............................................ 13.98%(3) 2.57%(3) 15.97%(3) 1.73%(3)
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Ratios/Supplemental Data
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Net Assets, End of Period (000's omitted) $81,548 $57,649 $16,664 $177
Ratio of Expenses to Average Net Assets.................. 0.80% 0.80% 0.80% (4)
Ratio of Expenses to Average Net Assets
prior to Expense Limitation.......................... 0.89% 1.01% 1.85% (4)
Ratio of Net Investment Income to Average Net Assets 3.69% 2.63% 1.85% (4)
Ratio of Net Investment Income to Average Net Assets
prior to Expense Limitation.......................... 3.60% 2.42% 0.80% (4)
Portfolio Turnover Rate.................................. 19% 13% 9% (4)
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(1) Date of initial public offering; total return has been annualized.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in Expenses under
Management of the Fund.
(4) The ratios of expenses and net investment income to average net assets and
portfolio turnover have been omitted as management believes that such
ratios are not meaningful due to the limited net assets of this Series.
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INVESTMENT OBJECTIVE AND POLICIES
INTRODUCTION
The Fund, a corporation organized in Maryland on February 19, 1987, is
a diversified, open-end management investment company offering multiple Series
of shares. This Prospectus offers shares of the International Equity Series.
The Series' investment objective is a fundamental policy and cannot be
changed without approval by the holders of a "majority" of the Series'
outstanding shares, as defined in the Investment Company Act of 1940 ("1940
Act"). Although the Series will constantly strive to attain its objective, there
can be no assurance that it will be attained. In addition to the objective and
investment techniques described under Investment Strategy below, see Other
Considerations for other techniques available to the Series in pursuit of its
objective. Part B provides more information on the Series' investment policies
and restrictions.
The objective of the Series is to achieve long-term growth without
undue risk to principal. The Series seeks to achieve this objective by investing
primarily in securities that provide the potential for capital appreciation and
income. The Series is an international fund. As such, it may invest in
securities issued in any currency and may hold foreign currency. Under normal
circumstances, at least 65% of the Series' assets will be invested in the
securities of issuers organized or having a majority of their assets in or
deriving a majority of their operating income in at least three different
countries outside of the United States. Securities of issuers within a given
country may be denominated in the currency of another country or in
multinational currency units such as the European Currency Unit ("ECU"). The
Series will operate as a diversified fund for purposes of the 1940 Act.
The Series may be suitable for the patient investor interested in
long-term growth through investments that provide the potential for capital
appreciation and income. The investor should be willing to accept the risks
associated with investments in foreign equity securities in which the Series may
invest, as well as the special investment techniques in which the Series may
engage. Naturally, the Series cannot assure a specific rate of return or that
principal will be protected. The value of the Series' shares can be expected to
fluctuate depending upon market conditions. However, through the cautious
selection and supervision of its portfolio, the Series will strive to achieve
its objective of long-term growth. See Special Risk Factors.
INVESTMENT STRATEGY
The Series will attempt to achieve its objective by investing in a
broad range of equity securities including common stocks, preferred stocks,
convertible securities and warrants. Delaware International Advisers Ltd.
("Delaware International"), the Series' investment manager, will employ a
dividend discount analysis across country boundaries and will also use a
purchasing power parity approach to identify currencies and markets that are
overvalued or undervalued relative to the U.S. dollar.
With a dividend discount analysis, Delaware International looks at
future anticipated dividends and discounts the value of those dividends back to
what they would be worth if they were being paid today. Delaware International
uses this technique to attempt to compare the value of different investments.
With a purchasing power parity approach, Delaware International attempts to
identify the amount of goods and services that a dollar will buy in the United
States and compare that to the amount of a foreign currency required to buy the
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same amount of goods and services in another country. When the dollar buys less,
the foreign currency may be considered to be overvalued. When the dollar buys
more, the currency may be considered to be undervalued. Eventually, currencies
should trade at levels that should make it possible for the dollar to buy the
same amount of goods and services overseas as in the United States. The Series
may also invest in sponsored or unsponsored American Depository Receipts or
European Depository Receipts.
While the Series may purchase securities in any foreign country,
developed and underdeveloped, or emerging market countries, it is currently
anticipated that the countries in which the Series may invest will include, but
not be limited to, Canada, Germany, the United Kingdom, France, the Netherlands,
Belgium, Spain, Switzerland, Japan, Australia, Hong Kong, and
Singapore/Malaysia. With respect to certain countries, investments by an
investment company may only be made through investments in closed-end investment
companies that in turn are authorized to invest in the securities of such
countries. Any investment the Series may make in other investment companies is
limited in amount by the 1940 Act and would involve the indirect payment of a
portion of the expenses, including advisory fees, of such other investment
companies.
For temporary, defensive purposes, the Series may invest all or a
substantial portion of its assets in high quality debt instruments issued by
foreign governments, their agencies, instrumentalities or political
subdivisions, the U.S. Government, its agencies or instrumentalities and which
are backed by the full faith and credit of the U.S. Government, or issued by
foreign or U.S. companies. Any corporate debt obligations will be rated AA or
better by Standard & Poor's Ratings Group ("S&P"), or Aa or better by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, will be determined to be of
comparable quality by Delaware International. See Appendix A of Part B for a
description of these ratings and those of other nationally-recognized
statistical rating organizations. For example, the Series may enter the global
fixed income markets when Delaware International believes that the global equity
markets are excessively volatile or overvalued so that the Series' objective
cannot be achieved in such markets. In addition, the Series may invest in the
U.S. fixed income markets for temporary, defensive purposes when Delaware
International believes that the international equity and fixed income markets
are evidencing such excessive volatility or overvaluation. The Series may also
invest in the securities listed for defensive investing pending investment of
proceeds from new sales of Series shares and to maintain sufficient cash to meet
redemption requests.
OTHER CONSIDERATIONS
Foreign Currency Transactions
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Series will, however, from time to time, purchase or sell
foreign currencies and/or engage in forward foreign currency transactions in
order to expedite settlement of portfolio transactions and to minimize currency
value fluctuations. The Series may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (i.e., a "forward foreign currency"
contract or "forward" contract). A forward contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract, agreed upon by the parties, at a
price set at the time of the contract. The Series will convert currency on a
spot basis from time to time, and investors should be aware of the costs of
currency conversion.
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The Series may enter into forward contracts to "lock in" the price of a
security it has agreed to purchase or sell, in terms of U.S. dollars or other
currencies in which the transaction will be consummated. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the underlying
security transaction, the Series will be able to protect itself against a
possible loss resulting from an adverse change in currency exchange rates during
the period between the date the security is purchased or sold and the date on
which payment is made or received.
When Delaware International believes that the currency of a particular
country may suffer a significant decline against the U.S. dollar or against
another currency, the Series may enter into a forward foreign currency contract
to sell, for a fixed amount of U.S. dollars or other appropriate currency, the
amount of foreign currency approximating the value of some or all of the Series'
securities denominated in such foreign currency.
The Series will not enter into forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Series to deliver an amount of foreign currency in excess of the
value of the Series' securities or other assets denominated in that currency.
At the maturity of a forward contract, the Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Series may realize a gain or loss from currency
transactions.
The Series also may purchase and write put and call options on foreign
currencies (traded on U.S. and foreign exchanges or over-the-counter) for
hedging purposes to protect against declines in the U.S. dollar cost of foreign
securities held by the Series and against increases in the U.S. dollar cost of
such securities to be acquired. Call options on foreign currency written by the
Series will be covered, which means that the Series will own the underlying
foreign currency. With respect to put options on foreign currency written by the
Series, the Series will establish a segregated account with its custodian bank
consisting of cash, U.S. Government securities or other high-grade liquid debt
securities in an amount equal to the amount the Series will be required to pay
upon exercise of the put. See Special Risk Factors.
When-Issued Securities
Consistent with its investment objective, the Series may invest in U.S.
Government securities and corporate debt obligations on a when-issued basis
("when-issued securities"). These securities involve commitments to buy a new
issue with settlement up to 60 days later. The average settlement date for
when-issued securities purchased by the Series is generally between 30 and 45
days. During the time between the commitment and settlement, the Series does not
accrue interest, but the market value of the bonds may fluctuate. This can
result in the Series' share value increasing or decreasing. The Series will not
ordinarily sell when-issued securities prior to settlement. If the Series
invests in securities of this type, it will maintain a segregated account to pay
for them and mark the account to market daily.
Repurchase Agreements
The Series may also use repurchase agreements which are at least 100%
collateralized by U.S. Government securities. The Series may enter into
repurchase agreements with broker/dealers or banks which are deemed creditworthy
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by Delaware International under guidelines approved by the Board of Directors. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Series) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the purchaser's holding period. The value of the securities
subject to the repurchase agreement is marked to market daily. In the event of a
bankruptcy or other default of the seller, the Series could experience delays
and expenses in liquidating the underlying securities.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Series may invest cash
balances in joint repurchase agreements in accordance with the terms of the
Order and subject to the conditions described above.
Portfolio Loan Transactions
The Series may, from time to time, lend securities (but not in excess
of 25% of its assets) from its portfolio to brokers, dealers and financial
institutions and receive collateral in cash or short-term U.S. Government
securities. While the loan is outstanding, this collateral will be maintained at
all times in an account equal to at least 100% of the current market value of
the loaned securities plus accrued interest. Such cash collateral will be
invested in short-term securities, the income from which will increase the
return of the Series.
The major risk to which the Series would be exposed on a loan
transaction is the risk that the borrower would go bankrupt at a time when the
value of the security goes up. Therefore, the Series will only enter into loan
arrangements after a review of all pertinent facts by Delaware International,
subject to overall supervision by the Board of Directors, including the
creditworthiness of the borrowing broker, dealer or institution and then only if
the consideration to be received from such loans would justify the risk.
Creditworthiness will be monitored on an ongoing basis by Delaware
International.
Borrowings
The Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Series will not borrow money in
excess of one-third of the value of its net assets. See Part B for additional
possible restrictions on borrowing. The Series has no intention of increasing
its net income through borrowing. Any borrowing will be done from a bank and, to
the extent that such borrowing exceeds 5% of the value of the Series' net
assets, asset coverage of at least 300% is required. In the event that such
asset coverage shall at any time fall below 300%, the Series shall, within three
days thereafter (not including Sunday or holidays) or such longer period as the
U.S. Securities and Exchange Commission may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage of such
borrowings shall be at least 300%. The Series will not pledge more than 15% of
its net assets, or issue senior securities as defined in the 1940 Act, except
for notes to banks. Investment securities will not be purchased while the Series
has an outstanding borrowing.
Liquidity and Rule 144A Securities
In order to assure that the Series has
sufficient liquidity, as a matter of fundamental policy, the Series may not
invest more than 10% of its net assets in illiquid assets, including restricted
securities and repurchase agreements maturing in more than seven days. However,
subject to the following paragraphs, this policy shall not limit the Series'
acquisition of securities eligible for resale without registration pursuant to
Rule 144A ("Rule 144A Securities") under the Securities Act of 1933 ("1933
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Act"). Rule 144A permits many privately placed and legally restricted securities
to be freely traded among certain institutional buyers such as the Series.
Investing in Rule 144A Securities could have the effect of increasing the level
of illiquidity of the Series to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
While maintaining oversight, the Board of Directors has delegated to
Delaware International the day-to-day functions of determining whether or not
individual Rule 144A Securities are liquid for purposes of the Series' 10%
limitation on investments in illiquid assets. The Board has instructed Delaware
International 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; (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 Delaware International determines that a Rule 144A Security which
was previously determined to be liquid, is no longer liquid and, as a result,
the Series' holdings of illiquid securities exceed the Series' 10% limit on
investment in such securities, Delaware International will determine what action
shall be taken to ensure that the Series continues to adhere to such limitation.
Options
To achieve the Series' objectives, the Series intends to use certain
hedging techniques which might not be conveniently available to individuals.
These techniques will be used at Delaware International's discretion to
protect the Series' principal value.
The Series may purchase put options, write covered call options,
purchase call options and enter into closing transactions in connection
therewith in respect of securities in which the Series may invest. In purchasing
put and call options, the premium paid by the Series, plus any transaction
costs, will reduce any benefit realized by the Series upon exercise of the
option.
A put option gives the Series the right to sell one of its securities
for an agreed price up to an agreed date. The advantage is that the Series can
be protected should the market value of the security decline. However, the
Series must pay a premium for this right, whether it exercises it or not.
A covered call option obligates the Series to sell one of its
securities for an agreed price up to an agreed date. The advantage is that the
Series receives premium income, which may offset the cost of purchasing put
options. However, the Series may lose the potential market appreciation of the
security if Delaware International's judgment is wrong and interest rates fall.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed upon date. The
advantage is that the purchaser may hedge against an increase in the price of
securities it ultimately wishes to buy.
Closing transactions essentially let the Series offset a put option or
call option prior to its exercise or expiration. If it cannot effect a closing
transaction, it may have to hold a security it would otherwise sell with a
potential decline in net asset value, or deliver a security it might want to
hold.
The Series may use both Exchange- traded and over-the-counter options.
Certain over-the-counter options may be illiquid. The Series will only invest in
such options to the extent consistent with its 10% limit on investment in
illiquid securities.
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The Series also may write and purchase call options and purchase put
options on stock indices and enter into closing transactions in connection
therewith. The Series will not engage in transactions on stock indices for
speculative purposes. Writing or purchasing a call option on stock indices is
similar to the writing or purchasing of a call option on an individual stock.
Purchasing a protective put option on stock indices is similar to the purchase
of protective puts on an individual stock. Stock indices used will include, but
will not be limited to, the S&P 100 and the S&P Over-the-Counter 250. The
ability to hedge effectively using options on stock indices will depend on the
degree to which price movements in the underlying index correlate with price
movements in the Series' portfolio securities.
Futures Contracts and Options on Futures Contracts
The Series may enter into contracts for the purchase or sale for future
delivery of securities or foreign currencies. The principal purpose of the
purchase or sale of futures contracts for the Series is to protect the Series
against the fluctuations in interest or exchange rates which otherwise might
adversely affect the value of the Series' portfolio securities or adversely
affect the prices of securities which the Series intends to purchase at a later
date without actually buying or selling such securities.
For hedging purposes, the Series may enter into futures contracts
relating to securities, securities indices or interest rates. In addition, the
Series may enter into futures transactions relating to foreign currency.
A futures contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement at a stated time
in the future for a fixed price. By its terms, a futures contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed-income securities or currency
underlying the contract are delivered by the seller and paid for by the
purchaser, or on which, in the case of securities index futures contracts and
certain interest rate and foreign currency futures contracts, the difference
between the price at which the contract was entered into and the contract's
closing value is settled between the purchaser and seller in cash. Futures
contracts differ from options in that they are bilateral agreements, with both
the purchaser and the seller equally obligated to complete the transaction. In
addition, futures contracts call for settlement only on the expiration date, and
cannot be "exercised" at any other time during their term.
The purchase or sale of a futures contract also differs from the
purchase or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with the broker as "initial margin" as a good faith deposit.
Subsequent payments to and from the broker, referred to as "variation margin,"
are made on a daily basis as the value of the index or instrument underlying the
futures contract fluctuates, making positions in the futures contract more or
less valuable, a process known as "marking to the market."
A futures contract may be purchased or sold only on an exchange, known
as a "contract market," designated by the Commodity Futures Trading Commission
for the trading of such contract, and only through a registered futures
commission merchant which is a member of such contract market. A commission must
be paid on each completed purchase and sale transaction. The contract market
clearing house guarantees the performance of each party to a futures contract,
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by in effect taking the opposite side of such contract. At any time prior to the
expiration of a futures contract, a trader may elect to close out its position
by taking an opposite position on the contract market on which the position was
entered into, subject to the availability of a secondary market, which will
operate to terminate the initial position. At that time, a final determination
of variation margin is made and any loss experienced by the trader is required
to be paid to the contract market clearing house while any profit due to the
trader must be delivered to it.
Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, U.S. Treasury
Notes, GNMA modified pass-through mortgage-backed securities, U.S. Treasury
Bills, bank certificates of deposit and commercial paper. In addition, interest
rate futures contracts include contracts on indexes of municipal securities.
Foreign currency futures contracts currently are traded on the British pound,
Canadian dollar, Japanese yen, Swiss franc, German mark and on Eurodollar
deposits.
A securities index or municipal bond index futures contract provides
for the making and acceptance of a cash settlement in much the same manner as
the settlement of an option on a securities index. The types of indexes
underlying securities index futures contracts are essentially the same as those
underlying securities index options, as described above. The index underlying a
municipal bond index futures contract is a broad based index of municipal
securities designed to reflect movements in the municipal securities market as a
whole. The index assigns weighted values to the securities included in the index
and its composition is changed periodically.
The Series may also purchase and write options on the types of futures
contracts that the Series could invest in.
A call option on a futures contract provides the holder with the right
to purchase, or enter into a "long" position in, the underlying futures
contract. A put option on a futures contract provides the holder with the right
to sell, or enter into a "short" position in, the underlying futures contract.
In both cases, the option provides for a fixed exercise price up to a stated
expiration date. Upon exercise of the option by the holder, the contract market
clearing house establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position in the
case of a put option and the writer delivers to the holder the accumulated
balance in the writer's margin account which represents the amount by which the
market price of the futures contract at exercise exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. In the event that an option written by the Fund is exercised,
the Fund will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation market deposits. In addition, the writer
of an option on a futures contract, unlike the holder, is subject to initial and
variation margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a securities index, a
security or foreign currency, becomes worthless to the holder when it expires.
Upon exercise of an option, the exchange or contract market clearing house
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assigns exercise notices on a random basis to those of its members which have
written options of the same series and with the same expiration date. A
brokerage firm receiving such notices then assigns them on a random basis to
those of its customers which have written options of the same series and
expiration date. A writer therefore has no control over whether an option will
be exercised against it, nor over the timing of such exercise.
To the extent that interest or exchange rates or securities prices move
in an unexpected direction, the Series may not achieve the anticipated benefits
of investing in futures contracts and options thereon, or may realize a loss. To
the extent that the Series purchases an option on a futures contract and fails
to exercise the option prior to the exercise date, it will suffer a loss of the
premium paid. Further, the possible lack of a secondary market could prevent the
Series from closing out its positions relating to futures.
SPECIAL RISK FACTORS
Shareholders should understand that all investments involve risk and
there can be no guarantee against loss resulting from an investment in the
Series, nor can there be any assurance that the Series' investment objective
will be attained.
The Series has the right to purchase securities in any foreign country,
developed and underdeveloped, or emerging market countries. Investors should
consider carefully the substantial risks involved in investing in securities
issued by companies and governments of foreign nations. These risks are in
addition to the usual risks inherent in domestic investments. There is the
possibility of expropriation, nationalization or confiscatory taxation, taxation
of income earned in foreign nations or other taxes imposed with respect to
investments in foreign nations, foreign exchange control (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers in those
nations. In addition, in many countries there is less publicly available
information about issuers than is available in reports about companies in the
United States. Foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to United States companies. Further, the
Series may encounter difficulty or be unable to pursue legal remedies and obtain
judgments in foreign courts. Commission rates on securities transactions in
foreign countries, which are sometimes fixed rather than subject to negotiation
as in the United States, are likely to be higher. Further, the settlement period
of securities transactions in foreign markets may be longer than in domestic
markets. In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the United States. The foreign securities markets of
many of the countries in which the Series may invest may also be smaller, less
liquid, and subject to greater price volatility than those in the United States.
Compared to the United States and other developed countries,
underdeveloped countries may have relatively unstable governments, economies
based on only a few industries, and securities markets that trade a small number
of securities. Prices on these exchanges tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries. Further,
investments by foreign investors are subject to a variety of restrictions in
many underdeveloped countries. These restrictions may take the form of prior
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<PAGE>
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may invest.
Additional restrictions may be imposed at any time by these or other countries
in which the Series invests. In addition, the repatriation of both investment
income and capital from several foreign countries is restricted and controlled
under certain regulations, including, in some cases, the need for certain
governmental consents. Although these restrictions may in the future make it
undesirable to invest in underdeveloped countries, the Series' investment
manager does not believe that any current repatriation restrictions would affect
its decision to invest in such countries.
As in the case of other kinds of options, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Series could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates, although, in the event of rate movements
adverse to the Series' position, the Series may forfeit the entire amount of the
premium plus related transaction costs.
With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities involved is
generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency strategy is highly
uncertain.
It is impossible to forecast the market value of portfolio securities
at the expiration of the contract. Accordingly, it may be necessary for the
Series to purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency the Series is obligated to deliver (and if a decision
is made to sell the security and make delivery of the foreign currency).
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Series is obligated to deliver.
* * *
The Series' investment objective, the Fund's designation as an open-end
investment company, the Series' designation as a diversified fund, and its
policies concerning portfolio lending, borrowing and purchases of illiquid
securities may not be changed unless authorized by the vote of a majority of the
Series' outstanding voting securities. A "majority vote of the outstanding
voting securities" is the vote by the holders of the lesser of (a) 67% or more
of the Series' voting securities present in person or represented by proxy if
the holders of more than 50% of the outstanding voting securities of such Series
are present or represented by proxy; or b) more than 50% of the Series'
outstanding voting securities. Part B lists other more specific investment
restrictions of the Series which may not be changed without a majority
shareholder vote. A brief discussion of those factors that materially affected
the Series' performance during its most recently completed fiscal year appears
in the Series' Annual Report. The remaining investment policies are not
fundamental and may be changed by the Board of Directors of the Fund without a
shareholder vote. See Special Risk Factors.
Diversification
The Fund was established as the underlying investment for variable
contracts issued by life companies. Section 817(h) of the Internal Revenue Code
of 1986, as amended (the "Code"), imposes certain diversification standards
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on the underlying assets of variable contracts held in the Portfolios of the
Fund. The Code provides that a variable contract shall not be treated as an
annuity contract or life insurance for any period (and any subsequent period)
for which the investments are not, in accordance with regulations prescribed by
the United States Treasury Department ("Treasury Department"), adequately
diversified. Disqualification of the variable contract would result in the
imposition of federal income tax to the contract owner with respect to earnings
allocable to the contract prior to distributions under the contract (e.g.,
withdrawals). The Code contains a safe harbor provision which provides that
variable contracts meet the diversification requirements if, as of the close of
each quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than 55 percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies.
Treasury Department Regulations (Treas. Reg. Section 1.817-5) provide
that a fund will be deemed to be considered adequately diversified if (i) no
more than 55 percent of the value of the total assets of the fund is represented
by any one investment; (ii) no more than 70 percent of such value is represented
by any two investments; (iii) no more than 80 percent of such value is
represented by any three investments; and (iv) no more than 90 percent of such
value is represented by any four investments.
The Technical and Miscellaneous Revenue Act of 1988 provides that for
purposes of determining whether or not the diversification standards imposed on
the underlying assets of variable contracts by Section 817(h) of the Code have
been met, "each United States government agency or instrumentality shall be
treated as a separate issuer."
The Series will be managed in such a manner as to comply with these
diversification requirements.
Ratings
Appendix A of Part B describes the ratings of S&P, Moody's, Duff and
Phelps, Inc. and Fitch Investors Service, Inc., four of the better-known
statistical rating organizations.
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<PAGE>
PURCHASE AND REDEMPTION
Shares are sold only to separate accounts of life companies at net
asset value. (See Calculation of Offering Price and Net Asset Value Per Share.)
Redemptions will be effected by the separate accounts at the net asset value
next determined after receipt of the order to meet obligations under the
variable contracts. Contract owners do not deal directly with the Fund with
respect to the acquisition or redemption of Fund shares.
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Series will normally make payments from net investment income on a
quarterly basis. Payments from net realized securities profits, if any, normally
will be distributed following the close of the fiscal year. The Fund's fiscal
year ends on December 31.
Both dividends and distributions, if any, are automatically reinvested
in additional Series shares.
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<PAGE>
TAXES
The Fund has qualified as a regulated investment company under
Subchapter M of the Internal Revenue Code. As such, the Fund will not be subject
to federal income tax to the extent its earnings are distributed. The Fund
intends to distribute substantially all of the respective Series' net investment
income and net capital gains. Shareholders may be proportionately liable for
taxes on income and gains of the Series but shareholders not subject to tax on
their income will not be required to pay tax on amounts distributed to them, and
the Fund will inform shareholders of the amount and nature of such income or
gains.
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<PAGE>
CALCULATION OF OFFERING PRICE
AND NET ASSET VALUE PER SHARE
The offering price is the net asset value ("NAV") per share next
determined after an order is received. The offering price and NAV are computed
as of the close of regular trading on the New York Stock Exchange (ordinarily, 4
p.m., Eastern time) on days when the Exchange is open.
The Series' NAV per share is computed by adding the value of all
securities and other assets in the Series' portfolio, deducting any liabilities
of the Series (expenses and fees are accrued daily) and dividing by the number
of the Series' shares outstanding. The valuation criteria set forth below apply
equally to securities purchased in reliance upon Rule 144A of the 1933 Act. In
determining the Series' total net assets, portfolio securities listed or traded
on a national securities exchange, except for bonds, are valued at the last sale
price on the exchange upon which such securities are primarily traded.
Securities not traded on a particular day, over-the-counter securities and
government and agency securities are valued at the mean value between bid and
asked prices. Foreign securities expressed in foreign currency values will be
converted into U.S. dollar values at the mean between the currencies' bid and
offered quotations. Debt securities (other than short-term investments) are
priced at fair value by an independent pricing service using methods approved by
the Fund's Board of Directors. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value. All
other securities are valued at their fair value as determined in good faith and
in a method approved by the Fund's Board of Directors.
The Series' portfolio will be comprised primarily of foreign
securities. From time to time, those securities may be listed primarily on
foreign exchanges which trade on days when the New York Stock Exchange is closed
(such as Saturday). As a result, the net asset value of the Series may be
significantly affected by such trading on days when shareholders have no access
to the Series.
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<PAGE>
MANAGEMENT OF THE FUND
Directors
The business and affairs of the Fund are managed under the direction of
its Board of Directors. Part B contains additional information regarding the
directors and officers.
Investment Manager
Delaware International Advisers Ltd. furnishes investment management
services to the Series. Delaware International is affiliated with Delaware
Management Company, Inc. ("Delaware Management").
Delaware Management and its predecessors have been managing the funds
in the Delaware Group since 1938. On December 31, 1995, Delaware International
and its affiliate, Delaware Management, were supervising in the aggregate more
than $28 billion in assets in the various institutional (approximately
$17,606,321,000) and investment company (approximately $10,522,726,000)
accounts.
Delaware Management is an indirect, wholly-owned subsidiary of Delaware
Management Holdings, Inc. ("DMH"). Delaware International is also controlled by
DMH through several subsidiaries. On April 3, 1995, a merger between DMH and a
wholly-owned subsidiary of Lincoln National Corporation ("Lincoln National") was
completed. DMH, Delaware Management and Delaware International are now
wholly-owned subsidiaries, and subject to the ultimate control, of Lincoln
National. Lincoln National, with headquarters in Fort Wayne, Indiana, is a
diversified organization with operations in many aspects of the financial
services industry, including insurance and investment management. In connection
with the merger, a new Investment Management Agreement between the Fund on
behalf of the Series and Delaware International was executed following
shareholder approval. Delaware Management's address is One Commerce Square, 2005
Market Street, Philadelphia, PA 19103. Delaware International's address is
Veritas House, 125 Finsbury Pavement, London, England EC2A 1NQ.
Delaware International manages the International Equity Series
portfolio and implements investment decisions on behalf of the Series. For these
services, Delaware International is paid an annual fee equal to .75% of the
average daily net assets of the International Equity Series, less the Series'
proportionate share of all directors' fees paid to the unaffiliated directors of
the Fund. See Expenses for a discussion of a voluntary waiver of its management
fee undertaken by Delaware International.
The investment management fee incurred by the Series for the year ended
December 31, 1995 was 0.74% of average daily net assets. After considering the
waiver of fees by Delaware International, 0.65% of average daily net assets was
paid by the Series.
Clive A. Gillmore has primary responsibility for making day-to-day
investment decisions for the Series. He has been the senior portfolio manager
for the Series since its inception. A graduate of the University of Warwick and
having begun his career at Legal and General Investment Management, Mr. Gillmore
joined the Delaware Group in 1990 after eight years of investment experience.
His most recent position prior to joining the Delaware Group was as a Pacific
Basin equity analyst and senior portfolio manager for Hill Samuel Investment
Advisers Ltd. Mr. Gillmore completed the London Business School Investment
program.
In making investment decisions for the Series, Mr. Gillmore regularly
consults with an international equity team of seven members, three of whom
research the Pacific Basin and four of whom research the European Markets. Mr.
Gillmore also regularly consults with David G.Tilles. Mr. Tilles, who is Chief
Investment Officer for Delaware International, is a graduate of the University
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of Warwick with a BS in management sciences. Before joining the Delaware Group
in 1990, he was Chief Investment Officer of Hill Samuel Investment Advisers Ltd.
He is a member of the Institute of Investment Management & Research and the
Operational Research Society.
Portfolio Trading Practices
The Series normally will not invest for short-term trading purposes.
However, the Series may sell securities without regard to the length of time
they have been held. The degree of portfolio activity will affect brokerage
costs of the Series. Given the Series' investment objective, the annual
portfolio turnover rate is not expected to exceed 100%. Delaware International
uses its best efforts to obtain the best available price and most favorable
execution for Series portfolio transactions. Orders may be placed with brokers
or dealers who provide brokerage and research services to Delaware International
or its respective advisory clients. These services may be used by Delaware
International in servicing any of its accounts. Subject to best price and
execution, Delaware International may consider a broker/dealer's sales of
variable contracts in placing portfolio orders, and may place orders with
broker/dealers that have agreed to defray certain Series expenses such as
custodian fees. The portfolio turnover rate for the Series for the years ended
December 31, 1994 and 1995 were 13% and 19%, respectively.
PERFORMANCE INFORMATION
From time to time, the Series may quote total return performance in
advertising and other types of literature. Total return will be based on a
hypothetical $1,000 investment, reflecting the reinvestment of all distributions
at net asset value. Each presentation will include the average annual total
return for one-, five- and ten-year (or life of Series, if applicable) periods.
The Series may also advertise aggregate and average total return information
over additional periods of time.
Because securities' prices fluctuate, investment results of the Series
will fluctuate over time and past performance should not be considered as a
representation of future results.
DISTRIBUTION AND SERVICE
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), serves as the national distributor for
the Series' shares under a Distribution Agreement dated April 3, 1995. It bears
all of the costs of promotion and distribution.
Delaware Service Company, Inc. (the "Transfer Agent") serves as the
Fund's shareholders servicing, dividend disbursing and transfer agent under the
Amended and Restated Shareholders Services Agreement dated May 1, 1996.
The Distributor and the Transfer Agent are also indirect, wholly-owned
subsidiaries of DMH.
EXPENSES
The Series is responsible for all of its own expenses other than those
borne by Delaware International under the Investment Management Agreement and
those borne by the Distributor under the Distribution Agreement.
Delaware International had elected voluntarily to waive its fee and to
reimburse the Series to the extent necessary to limit certain expenses to .80%
of average daily net assets for the period from commencement of the public
offering for the Series through June 30, 1993. This waiver has been extended
through June 30, 1996. For the year ended December 31, 1995, the Series' ratio
of expenses to average daily net assets was 0.80%, reflecting the waiver.
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DESCRIPTION OF FUND SHARES
Shares of the Fund are sold only to
separate accounts of life companies. Currently, the shares of the Fund are sold
only to Variable Annuity Account C and Flexible Premium Variable Life Account K
of Lincoln National Life Insurance Company, Variable Accounts A and B of
American International Life Assurance Company of New York, Variable Accounts I
and II of AIG Life Insurance Company, Separate Accounts VA-K, VEL II and
Inheiritage of State Mutual Life Assurance Company of America and Separate
Accounts VA-K, VEL, VEL II and Inheiritage of SMA Life Assurance Company. In the
future, shares of the Fund may be sold to separate accounts of other affiliated
or unaffiliated life companies to fund variable contracts. The Fund's Board of
Directors will monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response thereto. An irreconcilable conflict that is not resolved
might result in the withdrawal of a substantial amount of assets, causing a
negative impact on net asset value.
The Fund was organized as a Maryland corporation on February 19, 1987.
The authorized capital stock of the Fund consists of five hundred million shares
of common stock, $.01 par value. The Series is currently allocated fifty million
shares.
The Series' shares have equal voting rights and are equal in all other
respects. Shareholders get one vote for each share held; fractional shares are
voted. The Fund will hold annual meetings as necessary for shareholder matters
to be voted under the 1940 Act or otherwise. Shareholders of the Series are
entitled to a pro-rata share of all dividends and distributions arising from an
investment in the Series.
Because of current federal securities law requirements, the Fund
expects that its life company shareholders will offer their contract owners the
opportunity to instruct them as to how Series shares allocable to their variable
contracts will be voted with respect to certain matters, such as approval of
investment advisory agreements. An insurance company will vote all Series shares
held in a separate account in the same proportion as it receives instructions
from contract owners in that separate account. Under certain circumstances,
which are described more fully in the accompanying prospectus for the separate
account which invests in the Fund, the voting instructions received from
contract owners may be disregarded.
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---------------------------
DELAWARE GROUP PREMIUM FUND
---------------------------
INTERNATIONAL EQUITY SERIES
---------------------------
---------------------------
INVESTMENT MANAGER PART B
Delaware International Advisers Ltd.
Veritas House STATEMENT OF
125 Finsbury Pavement ADDITIONAL INFORMATION
London, England EC2A 1NQ -----------------------
NATIONAL DISTRIBUTOR MAY 1, 1996
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING, DIVIDEND
DISBURSING AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank DELAWARE
4 Chase Metrotech Center GROUP
Brooklyn, NY 11245 --------
<PAGE>
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PART B--STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
- --------------------------------------------------------------------------------
DELAWARE GROUP PREMIUM FUND, INC.
- --------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Cover Page
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Investment Objective and Policies
- ------------------------------------------------------------------------------
Accounting and Tax Issues
- ------------------------------------------------------------------------------
Performance Information
- ------------------------------------------------------------------------------
Trading Practices and Brokerage
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Offering Price
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Dividends and Realized Securities Profits
Distributions
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Taxes
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Investment Management Agreement
- ------------------------------------------------------------------------------
Officers and Directors
- ------------------------------------------------------------------------------
General Information
- ------------------------------------------------------------------------------
Appendix A--Description of Ratings
- ------------------------------------------------------------------------------
Financial Statements
- ------------------------------------------------------------------------------
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Delaware Group Premium Fund, Inc. (the "Fund") is a diversified,
open-end management investment company which is intended to meet a wide range of
investment objectives with multiple separate Portfolios. Each series is in
effect a separate fund issuing its own shares.
The shares of the Fund are sold only to separate accounts of life
insurance companies ("life companies"). The separate accounts are used in
conjunction with variable annuity contracts and variable life insurance policies
("variable contracts"). The separate accounts invest in shares of the various
series in accordance with allocation instructions received from contract owners.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectus of
the International Equity Series (the "Series") of the Fund dated May 1, 1996, as
it may be amended from time to time, and describes only the Series. It should be
read in conjunction with the prospectuses for the variable contract and the
Series. Part B is not itself a Prospectus but is, in its entirety, incorporated
by reference into the Series' Prospectus. The Series' Prospectus may be obtained
by writing or calling your investment dealer or by contacting the Fund's
national distributor, Delaware Distributors, L.P. (the "Distributor"), 1818
Market Street, Philadelphia, PA 19103.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Series is long-term growth without undue
risk to principal. The Series seeks to achieve this objective by investing
primarily in securities that provide the potential for capital appreciation and
income. The Series is an international fund. As such, it may invest in
securities issued in any currency and may hold foreign currency. Under normal
circumstances, at least 65% of the Series' assets will be invested in the
securities of issuers organized or having a majority of their assets in or
deriving a majority of their operating income in at least three different
countries outside of the United States. There can be no assurance that the
objective of the Series will be realized. The Series has the same objective and
investment disciplines as, the International Equity Series of Delaware Group
Global & International Funds, Inc., a separate Delaware Group fund.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions for the Series which,
along with its investment objective, may not be amended without approval of a
majority of the outstanding voting securities of the Series, which is the lesser
of more than 50% of the outstanding voting securities or 67% of the voting
securities of the Series present at a shareholder meeting if 50% or more of the
voting securities are present in person or represented by proxy. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time of purchase of securities. The Series will not:
1. Invest more than 5% of the value of its assets in securities of any
one issuer (other than obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities). This restriction shall apply to only 75% of
the assets of the Series.
2. Purchase more than 10% of the voting securities of any company, or
invest in any company for the purpose of exercising control or management.
3. Purchase or retain securities of a company which has an officer or
director who is an officer or director of the Fund, or an officer or director of
its investment manager if such persons, each owning beneficially more than 1/2
of 1% of the shares of the company, own in the aggregate more than 5% thereof.
4. Purchase any security issued by any other investment company (except
in connection with a merger, consolidation or offer of exchange) if after such
purchase it would: (a) own more than 3% of the voting stock of such company, (b)
own securities of such company having a value in excess of 5% of the Series'
assets or (c) own securities of investment companies having an aggregate value
in excess of 10% of the Series' assets. Any such purchase shall be at the
customary brokerage commission. The limitations set forth in this restriction do
not apply to purchases by the Series of securities issued by closed-end
investment companies, all of which must be at the customary brokerage
commission.
5. Make any investment in real estate unless necessary for office space
or the protection of investments already made. (This restriction does not
preclude the Series' purchase of securities secured by real estate or interests
therein, or securities issued by companies which invest in real estate or
interests therein, including real estate investment trusts.)
6. Purchase securities on margin, make short sales of securities or
maintain a net short position (except that the Series may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities). This restriction shall not prohibit the Series from satisfying
margin requirements with respect to futures transactions.
7. Invest in interests in oil, gas or other mineral exploration or
development programs, commodities or commodities contracts. This restriction
shall not prohibit the Series from entering into futures contracts or options
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<PAGE>
thereon, to the extent that not more than 5% of its assets are required as
futures contract margin deposits and premiums on options and only to the extent
that obligations under such contracts and transactions represent not more than
20% of the Series' assets.
8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to facilitate
redemptions. The Series has no intention of increasing its net income through
borrowing. Any borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of the Series' assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the Series shall, within three days thereafter (not including
Sunday and holidays) or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount of its
borrowings to an extent that the asset coverage of such borrowings shall be at
least 300%. The Series will not pledge more than 15% of its net assets. The
Series shall not issue senior securities as defined in the Investment Company
Act of 1940 (the "1940 Act"), except for notes to banks.
9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with the Series' investment
objective and policies are considered loans and except that the Series may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for their use relating to short sales or other security transactions.
10. Invest more than 5% of the value of its total assets in securities of
companies less than three years old. Such three-year period shall include the
operation of any predecessor company or companies.
11. Invest more than 25% of its total assets in any particular industry,
except that the Series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by Standard & Poor's Ratings Group ("S&P") or
P-2 or better by Moody's Investors Service, Inc. ("Moody's").
12. Act as an underwriter of securities of other issuers, except that the
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, the Series might be deemed to
be an underwriter for the purposes of the Securities Act of 1933.
While the Series is permitted under certain circumstances to borrow
money, it does not normally do so. No investment securities will be purchased
while the Series has an outstanding borrowing. The Fund has undertaken, for so
long as required by California Regulatory Authority and so long as insurance
policy premiums or proceeds of contracts sold in California are used to purchase
Series shares, the Series will not borrow money in excess of 25% of the value of
its net assets.
FOREIGN SECURITIES
Investors should recognize that investing in securities of foreign
issuers involves certain considerations, including those set forth in the
Prospectus, which are not typically associated with investing in United States
issuers. Since the stocks of foreign companies are frequently denominated in
foreign currencies, and since the Series may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the Series will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The investment policies of the Series permit it to enter into
forward foreign currency exchange contracts and various related currency
transactions in order to hedge the Series' holdings and commitments against
changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
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There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by the Series. Payment of
such interest equalization tax, if imposed, would reduce the Series' rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Series by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non-equity options are
generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts the Series may make or enter into
will be subject to the special currency rules described above.
FOREIGN CURRENCY TRANSACTIONS
In connection with the Series' investment in foreign securities, the
Series may purchase or sell currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of portfolio transactions and to
minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. The Series will account for
forward contracts by marking to market each day at daily exchange rates.
When the Series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of the Series' assets
denominated in such foreign currency, the Series' custodian bank or subcustodian
will place cash or liquid high grade debt securities in a separate account of
the Series in an amount not less than the value of the Series' total assets
committed to the consummation of such forward contracts. If the additional cash
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or securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Series' commitments with respect to
such contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures Contracts--As noted in the Prospectus, the Series may enter into
futures contracts relating to securities, securities indices or interest rates.
In addition, the Series may enter into foreign currency futures contracts.
(Unless otherwise specified, interest rate futures contracts, securities and
securities index futures contracts and foreign currency futures contracts are
collectively referred to as "futures contracts.") Such investment strategies
will be used as a hedge and not for speculation.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect the Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, the
Series may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When the Series in not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be closed
out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on
the Series' current or intended investments in fixed income securities. For
example, if the Series owned long-term bonds and interest rates were expected to
increase, the Series might sell interest rate futures contracts. Such a sale
would have much the same effect as selling some of the long-term bonds in the
Series' portfolio. However, since the futures market is more liquid than the
cash market, the use of interest rate futures contracts as a hedging technique
allows the Series to hedge its interest rate risk without having to sell its
portfolio securities. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Series' interest
rate futures contracts would be expected to increase at approximately the same
rate, thereby keeping the net asset value of the Series from declining as much
as it otherwise would have. On the other hand, if interest rates were expected
to decline, interest rate futures contracts could be purchased to hedge in
anticipation of subsequent purchases of long-term bonds at higher prices.
Because the fluctuations in the value of the interest rate futures contracts
should be similar to those of long-term bonds, the Series could protect itself
against the effects of the anticipated rise in the value of long-term bonds
without actually buying them until necessary cash became available or the market
had stabilized. At that time, the interest rate futures contracts could be
liquidated and the Series' cash reserve could then be used to buy long-term
bonds on the cash market.
As noted in the Prospectus, the Series may purchase and sell foreign
currency futures contracts for hedging purposes to attempt to protect its
current or intended investments from fluctuations in currency exchange rates.
Such fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities in the
currencies in which they are denominated remains constant. The Series may sell
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futures contracts on a foreign currency, for example, when it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar. In the event such decline occurs, the resulting
adverse effect on the value of foreign-denominated securities may be offset, in
whole or in part, by gains on the futures contacts. However, if the value of the
foreign currency increases relative to the dollar, the Series' loss on the
foreign currency futures contract may or may not be offset by an increase in the
value of the securities because a decline in the price of the security stated in
terms of the foreign currency may be greater than the increase in the value as a
result of the change in exchange rates.
Conversely, the Series could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When the Series purchases futures contracts under such
circumstances, however, and the price of securities to be acquired instead
declines as a result of appreciation of the dollar, the Series will sustain
losses on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The Series may also engage in currency "cross hedging" when, in the
opinion of the Series' investment manager, Delaware International Advisers Ltd.
("Delaware International"), the historical relationship among foreign currencies
suggests that the Series may achieve protection against fluctuations in currency
exchange rates similar to that described above at a reduced cost through the use
of a futures contract relating to a currency other than the U.S. dollar or the
currency in which the foreign security is denominated. Such "cross hedging" is
subject to the same risks as those described above with respect to an
unanticipated increase or decline in the value of the subject currency relative
to the dollar.
Options on Futures Contracts--As noted in the Prospectus, the Series may
purchase and write options on the types of futures contracts the Series could
invest in.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities in the Series' portfolio. If
the futures price at expiration of the option is below the exercise price, the
Series will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the Series'
portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the futures contract. If
the futures price at expiration of the put option is higher than the exercise
price, the Series will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities which
the Series intends to purchase. If a put or call option the Series has written
is exercised, the Series will incur a loss which will be reduced by the amount
of the premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value of its
options on futures positions, the Series' losses from exercised options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The Series may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a result
of a projected marketwide decline or changes in interest or exchange rates, the
Series could, in lieu of selling futures contracts, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
part, by a profit on the option. If the market decline does not occur, the
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Series will suffer a loss equal to the price of the put. Where it is projected
that the value of securities to be acquired by the Series will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Series could purchase call options on futures contracts, rather than
purchasing the underlying futures contracts. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Series will suffer a loss equal to
the price of the call, but the securities which the Series intends to purchase
may be less expensive.
OPTIONS ON FOREIGN CURRENCIES
The Series may purchase and write options on foreign currencies for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, will be utilized. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Series may purchase put
options on the foreign currency. If the value of the currency does decline, the
Series will have the right to sell such currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movement in exchange rates. As in the case of other types of options,
however, the benefit to the Series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Series could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types of
hedging purposes. For example, where the Series anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution in the value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against the
anticipated increase in the dollar cost of securities to be acquired, the Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series to hedge such
increased costs up to the value of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Series would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Series also may be required to forego all or
a portion of the benefit which might otherwise have been obtained from favorable
movements in exchange rates.
The Series intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the Series is "covered" if the
Series owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
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account by the Series' custodian bank) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Series has a call on the same foreign currency and in the same principle amount
as the call written where the exercise price of the call held (a) is equal to
less than the exercise price of the call written, or (b) is greater than the
exercise price of the call written if the difference is maintained by the Series
in cash, U.S. Government securities or other high-grade liquid debt securities
in a segregated account with its custodian bank.
With respect to writing put options, at the time the put is written, the
Series will establish a segregated account with its custodian bank consisting of
cash, U.S. Government securities or other high-grade liquid debt securities in
an amount equal in value to the amount the Series will be required to pay upon
exercise of the put. The account will be maintained until the put is exercised,
has expired, or the Series has purchased a closing put of the same series as the
one previously written.
REPURCHASE AGREEMENTS
The Series may, from time to time, enter into repurchase transactions.
Repurchase agreements are instruments under which securities are purchased from
a bank or securities dealer with an agreement by the seller to repurchase the
securities. Under a repurchase agreement, the purchaser acquires ownership of
the security but the seller agrees, at the time of sale, to repurchase it at a
mutually agreed-upon time and price. The Series will take custody of the
collateral under repurchase agreements. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred. The resale price is in excess of the purchase price and
reflects an agreed-upon market rate unrelated to the coupon rate or maturity of
the purchase security. Such transactions afford an opportunity for the Series to
invest temporarily available cash. The Series' risk is limited to the seller's
ability to buy the security back at the agreed-upon sum at the agreed-upon time,
since the repurchase agreement is secured by the underlying obligation. Should
such an issuer default, the investment manager believes that, barring
extraordinary circumstances, the Series will be entitled to sell the underlying
securities or otherwise receive adequate protection for its interest in such
securities, although there could be a delay in recovery. The Series considers
the creditworthiness of the bank or dealer from whom it purchases repurchase
agreements. The Series 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.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the Investment Company Act of
1940 to allow the Delaware Group funds jointly to invest cash balances. The
Series may invest cash balances in a joint repurchase agreement in accordance
with the terms of the Order and subject generally to the conditions described
above.
PORTFOLIO LOAN TRANSACTIONS
The Series may loan up to 25% of its assets to qualified broker/dealers
or institutional investors for their use relating to short sales or other
security transactions. It is the understanding of Delaware International that
the staff of the Securities and Exchange Commission 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, short-term U.S. Government securities, 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
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increase, the borrower must furnish additional collateral to the Series; 3) the
Series must be able to terminate the loan after notice, at any time; 4) the
Series 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 Series 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 directors of the Fund 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 directors to vote the proxy.
The major risk to which the Series would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Series will only enter into loan arrangements
after a review of all pertinent facts by Delaware International, under the
supervision of the Board of Directors, including the creditworthiness of the
borrowing broker, dealer or institution and then only if the consideration to be
received from such loans would justify the risk. Creditworthiness will be
monitored on an ongoing basis by Delaware International.
OPTIONS
The Series may write and purchase call options and purchase put options
on a covered basis only and may enter into closing transactions with respect to
such options transactions. The Series will not engage in option transactions for
speculative purposes.
The Series may invest in options that are Exchange listed and traded
over-the-counter. The Series will enter into an option position only if there
appears to be a liquid market for such options. However, there can be no
assurances that a liquid secondary market will be maintained. Thus, it may not
be possible to close option positions and this may have an adverse impact on the
Series' ability to effectively hedge its securities.
A. Covered Call Writing--The Series may write covered call options from
time to time on such portion of its portfolio, without limit, as Delaware
International determines is appropriate in seeking to obtain the Series'
investment objective. A call option gives the purchaser of such option the right
to buy, and the writer, in this case the Series, has the obligation to sell the
underlying security at the exercise price during the option period. The
advantage to the Series of writing covered calls is that the Series receives a
premium which is additional income. However, if the security rises in value, the
Series may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to such options, the Series may enter into closing purchase
transactions. A closing purchase transaction is one in which the Series, when
obligated as a writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether the
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net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part by a decline in the market value of the underlying security.
If a call option expires unexercised, the Series will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Series will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price of
an underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
A Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Series will normally have expiration dates between one
and nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
B. Purchasing Put Options--The Series may invest up to 2% of its total
assets in the purchase of put options. The Series will, at all times during
which it holds a put option, own the security covered by such option.
A put option purchased by the Series gives it the right to sell one of
its securities for an agreed price up to an agreed date. The Series intends to
purchase put options in order to protect against a decline in market value of
the underlying security below the exercise price less the premium paid for the
option ("protective puts"). The ability to purchase put options will allow the
Series to protect unrealized gain in an appreciated security in its portfolio
without actually selling the security. If the security does not drop in value,
the Series will lose the value of the premium paid. The Series may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option. Such sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions. A
closing sale transaction is one in which the Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
C. Purchasing Call Options--The Series may purchase call options to the
extent that premiums paid by the Series do not aggregate more than 2% of the
Series' total assets. When the Series purchases a call option, in return for a
premium paid by the Series to the writer of the option, the Series obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
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exercise price. The advantage of purchasing call options is that the Series may
alter portfolio characteristics and modify portfolio maturities without
incurring the cost associated with portfolio transactions.
The Series may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased. The
Series will realize a profit from a closing sale transaction if the price
received on the transaction is more than the premium paid to purchase the
original call option; the Series will realize a loss from a closing sale
transaction if the price received on the transaction is less than the premium
paid to purchase the original call option.
Although the Series will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on an
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the result that the Series would have
to exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any value
to the Series.
D. Options on Stock Indices--The Series also may write call options and
purchase put options on certain stock indices and enter into closing
transactions in connection therewith. A stock index assigns relative values to
the common stocks included in the index with the index fluctuating with changes
in the market values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss to the Series on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, the Series may offset positions in stock index
options prior to expiration by entering into a closing transaction on an
Exchange or may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
so included. Some stock index options are based on a broad market index such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on stock indices are currently
traded on the following Exchanges among others: The Chicago Board Options
Exchange, New York Stock Exchange and American Stock Exchange.
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The Series' ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the Series' portfolio securities. Since the Series' portfolio will
not duplicate the components of an index, the correlation will not be exact.
Consequently, the Series bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an Exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on the Series' ability to effectively
hedge its securities. The Series will enter into an option position only if
there appears to be a liquid secondary market for such options.
The Series will not engage in transactions in options on stock indices
for speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets.
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ACCOUNTING AND TAX ISSUES
When the Series writes a call, or purchases a put option, an amount equal
to the premium received or paid by it is included in the Series' assets and
liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently "marked to
market" to reflect the current market value of the option written. The current
market value of a written option is the last sale price on the principal
Exchange on which such option is traded or, in the absence of a sale, the mean
between the last bid and asked prices. If an option which the Series has written
expires on its stipulated expiration date, the Series recognizes a capital gain.
If the Series enters into a closing purchase transaction with respect to an
option which the Series has written, the Series realizes a gain (or loss if the
cost of the closing transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is extinguished. If a call option which
the Series has written is exercised, the Series realizes a capital gain or loss
from the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received.
The premium paid by the Series for the purchase of a put option is
recorded in the Series' assets and liabilities as an investment and subsequently
adjusted daily to the current market value of the option. For example, if the
current market value of the option exceeds the premium paid, the excess would be
unrealized appreciation and, conversely, if the premium exceeds the current
market value, such excess would be unrealized depreciation. The current market
value of a purchased option is the last sale price on the principal Exchange on
which such option is traded or, in the absence of a sale, the mean between the
last bid and asked prices. If an option which the Series has purchased expires
on the stipulated expiration date, the Series realizes a short-term or long-term
capital loss for federal income tax purposes in the amount of the cost of the
option. If the Series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
Options on Certain Stock Indices. Accounting for options on certain stock
indices will be in accordance with generally accepted accounting principles. The
amount of any realized gain or loss on closing out such a position will result
in a realized gain or loss for tax purposes. Such options held by the Series at
the end of each fiscal year will be required to be "marked to market" for
federal income tax purposes. Sixty percent of any net gain or loss recognized on
such deemed sales or on any actual sales will be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.
Other Tax Requirements--The Series has qualified, and intends to continue
to qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. The Series must meet several requirements to
achieve or maintain its status as a regulated investment company. Among these
requirements are that at least 90% of the Series' investment company taxable
income be derived from dividends, interest, payment with respect to securities
loans and gains from the sale or disposition of securities; that at the close of
each quarter of its taxable year at least 50% of the value of the Series' assets
consists of cash and cash items, government securities, securities of other
regulated investment companies and, subject to certain diversification
requirements, other securities; and that less than 30% of the Series' gross
income be derived from sales of securities held for less than three months.
The requirement that not more than 30% of the Series' gross income be
derived from gains from the sale or other disposition of securities held for
less than three months may restrict the Series in its ability to write covered
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call options on securities which it has held less than three months, to write
options which expire in less than three months, to sell securities which have
been held less than three months and to effect closing purchase transactions
with respect to options which have been written less than three months prior to
such transactions. Consequently, in order to avoid realizing a gain within the
three-month period, the Series may be required to defer the closing out of a
contract beyond the time when it might otherwise be advantageous to do so. The
Series may also be restricted in the sale of purchased put options and the
purchase of put options for the purpose of hedging underlying securities because
of the application of the short sale holding period rules with respect to such
underlying securities.
The straddle rules of Section 1092 may apply. Generally, the straddle
rules provide that a loss on a position of a straddle may be recognized only to
the extent it exceeds the unrecognized gain at year-end in other positions of
the straddle. Losses which are deferred to the extent of unrecognized gains will
be carried over to the succeeding taxable year subject to the same general
limitations.
-15-
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may state the Series' total return in
advertisements and other types of literature. Any statements of total return
performance data will be accompanied by information on the Series' average
annual total rate of return over the most recent one-, five- and ten-year
periods. The Fund may also advertise aggregate and average total return
information of the Series over additional periods of time. Advertisements of
performance of the underlying Series, if any, will be accompanied by a statement
of performance of the separate account.
The Series' average annual total rate of return is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order
of $1,000;
T = average annual total return;
n = number of years;
ERV = redeemable value of the hypothetical $1,000 purchase at the
end of the period.
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes all distributions are
reinvested at net asset value.
The performance of the Series, as shown below, is the average annual
total return quotations through December 31, 1995. Securities prices fluctuated
during the periods covered and past results should not be considered as
representative of
future performance.
Average Annual Total Return*
Period
1 year 3 years 10/29/92**
ended ended through
12/31/95 12/31/95 12/31/95
13.98% 10.68% 10.17%
* Delaware International elected to waive voluntarily the portion of its
annual compensation under its Investment Management Agreement to limit the
operating expenses of the Series to .80%. In the absence of such voluntary
waiver, performance would have been affected negatively.
** Date of initial public offering.
Comparative Information
From time to time, performance of the Series may be compared to various
industry indices.
The Fund may quote the Series' actual total return performance, dividend
results and other performance information in advertising and other types of
literature and may compare that information to, or may separately illustrate
similar information reported by the Standard and Poor's 500 Stock Index and the
Dow Jones Industrial Average and other unmanaged indices. The Standard & Poor's
500 Stock Index and the Dow Jones Industrial Average are industry-accepted
unmanaged indices of generally-conservative securities used for measuring
general market performance. The total return performance reported will reflect
the reinvestment of all distributions on a quarterly basis and market price
fluctuations. The indices do not take into account any sales charges or other
fees. In seeking the Series' investment objective, the Series' portfolio may
include common stocks considered by Delaware International to be more aggressive
than those tracked by these indices.
-16-
<PAGE>
The Series' total return performance will be computed by adding all
reinvested income and realized securities profits distributions plus the change
in net asset value during a specific period and dividing by the offering price
at the beginning of the period. It will also reflect the maximum sales charge
paid, if any, for the illustrated investment amount, but not any income taxes
payable by shareholders on the reinvested distributions included in the
calculation. Because security prices fluctuate, past performance should not be
considered as a representation of the results which may be realized from an
investment in the Series in the future.
The Fund may also state the Series' total return performance in the form
of an average annual return. The average annual return figure will be computed
by taking the sum of the Series' annual return, then dividing that figure by the
number of years in the overall period indicated. The computation will reflect
the impact of the maximum sales charge paid, if any, on the illustrated
investment amount against the first year's return.
From time to time, the Fund may quote actual total return performance for
the Series in advertising and other types of literature compared to indices or
averages of alternative financial products available to prospective investors.
For example, the performance comparisons may include the average return of
various bank instruments, some of which may carry certain return guarantees
offered by leading banks and thrifts as monitored by Bank Rate Monitor, and
those of generally-accepted corporate bond and government security price indices
of various durations prepared by Lehman Brothers and Salomon Brothers, Inc.
These indices are not managed for any investment goal.
Comparative information on the Consumer Price Index and representative
mutual fund indices maintained by CDA Technologies, Inc. may also be used. The
Consumer Price Index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return from an
investment. CDA Technologies, Inc. is a performance evaluation service that
maintains a statistical database of performance, as reported by a diverse
universe of independently-managed mutual funds.
Statistical and performance information and various indices compiled and
maintained by organizations such as the following may also be used in preparing
exhibits comparing certain industry trends and competitive mutual fund
performance to comparable Series activity and performance and in illustrating
general financial planning principles. From time to time, certain mutual fund
performance ranking information, calculated and provided by these organizations,
may also be used in the promotion of sales in the Fund. Any indices used are not
managed for any investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and Morningstar,
Inc. are performance evaluation services that maintain statistical
performance databases, as reported by a diverse universe of
independently- managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety of
historical data including total return, capital appreciation and income
on the stock market as well as other investment asset classes, and
inflation. With their permission, this information will be used primarily
for comparative purposes and to illustrate general financial planning
principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed income price and return information.
-17-
<PAGE>
Compustat Industrial Databases, a service of Standard & Poor's, may also
be used in preparing performance and historical stock and bond market
exhibits. This firm maintains fundamental databases that provide
financial, statistical and market information covering more than 7,000
industrial and non-industrial companies.
Russell Indexes is an investment analysis service that provides both
current and historical stock performance information, focusing on the
business fundamentals of those firms issuing the security.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as
well as unmanaged indices compiled and maintained by these firms, will be
used in preparing comparative illustrations.
Morgan Stanley Capital International is a statistical and research firm
that maintains a statistical database of international securities. This
firm also compiles and maintains a number of unmanaged indices of
international securities. These indices are designed to measure the
performance of the stock markets of the USA, Europe, Canada, Mexico,
Australia and the Far East, and that of international industry groups.
FT-Actuaries World Indices are jointly compiled by The Financial Times,
Ltd.; Goldman, Sachs & Co.; and Wood Mackenzie & Co., Ltd. in conjunction
with the Institute of Actuaries and the Faculty of Actuaries. Indices
maintained by this group primarily focus on compiling statistical
information on international financial markets and industry sectors,
stock and bond issues and certain fundamental information about the
companies issuing the securities. Statistical information on
international currencies is also maintained.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. As well, current industry rate and yield
information on all industry available fixed income securities, as reported
weekly by The Bond Buyer, may be used in preparing comparative illustrations.
The following table is an example, for purposes of illustration only, of
cumulative total return performance for the Series through December 31, 1995.
For these purposes, the calculations assume the reinvestment of any realized
profits distributions and income dividends paid during the indicated periods.
Cumulative Total Return*
3 months
ended
12/31/95 2.82%
6 months
ended
12/31/95 8.80%
9 months
ended
12/31/95 10.35%
1 year
ended
12/31/95 13.98%
3 years
ended
12/31/95 35.58%
Period
10/29/92**
through
12/31/95 35.99%
* Delaware International elected to waive voluntarily the portion of its
annual compensation under its Investment Management Agreement to limit the
operating expenses of the Series to .80%. In the absence of such voluntary
waiver, performance would have been affected negatively.
** Date of initial public offering.
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<PAGE>
Because every investor's goals and risk threshold are different, certain
advertising and other related literature may provide general information about
investment alternatives and scenarios that will allow investors to assess their
personal goals. This information will include general material about investing
as well as materials reinforcing various industry-accepted principles of prudent
and responsible personal financial planning. One typical way of addressing these
issues is to compare an individual's goals and the length of time the individual
has to attain these goals to his or her risk threshold. In addition, information
may be provided discussing Delaware International's overriding investment
philosophy and how that philosophy affects the Series', and other Delaware Group
funds', investment disciplines employed in meeting their objectives.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick the
highs and the lows. By using a strategy known as dollar-cost averaging, you
schedule your investments ahead of time. If you invest a set amount on a regular
basis, that money will always buy more shares when the price is low and fewer
when the price is high. You can choose to invest at any regular interval--for
example, monthly or quarterly--as long as you stick to your regular schedule.
Dollar-cost averaging looks simple and it is, but there are important things to
remember. Dollar-cost averaging works best over longer time periods, and it
doesn't guarantee a profit or protect against losses in declining markets. If
you need to sell your investment when prices are low, you may not realize a
profit no matter what investment strategy you utilize. That's why dollar-cost
averaging can make sense for long-term goals. Since the potential success of a
dollar-cost averaging program depends on continuous investing, even through
periods of fluctuating prices, you should consider your dollar-cost averaging
program a long-term commitment and invest an amount you can afford and probably
won't need to withdraw.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $5.00 20
Month 4 $100 $10.00 10
- -----------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to represent
the actual performance of the Series.
-19-
<PAGE>
THE POWER OF COMPOUNDING
As part of your Variable Annuity contract, any earnings from your
investment selection are automatically reinvested to purchase additional shares
of the Series. This gives your investment yet another opportunity to grow. It's
called the Power of Compounding and the following charts illustrate just how
powerful that can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000 investment
compounded quarterly for 10 years:
6% 8% 10% 12%
Rate of Rate of Rate of Rate of
Return Return Return Return
1 Year $10,614 $10,824 $11,038 $11,255
2 Years $11,265 $11,717 $12,184 $12,668
3 Years $11,956 $12,682 $13,449 $14,258
4 Years $12,690 $13,728 $14,845 $16,047
5 Years $13,468 $14,859 $16,386 $18,061
6 Years $14,295 $16,084 $18,087 $20,328
7 Years $15,172 $17,410 $19,965 $22,879
8 Years $16,103 $18,845 $22,038 $25,751
9 Years $17,091 $20,399 $24,326 $28,983
10 Years $18,140 $22,080 $26,851 $32,620
These figures are calculated assuming a fixed constant investment return
and assume no fluctuation in the value of principal. These figures, which do not
reflect payment of applicable taxes, are not intended to be a projection of
investment results and do not reflect the actual performance of the Series.
-20-
<PAGE>
TRADING PRACTICES AND BROKERAGE
Delaware International selects brokers or dealers to execute transactions
on behalf of the Series for the purchase or sale of portfolio securities on the
basis of its judgment of their professional capability to provide the service.
The primary consideration is to have banks, brokers or dealers execute
transactions at best price and execution. Best price and execution refers to
many factors, including the price paid or received for a security, the
commission charged, the promptness and reliability of execution, the
confidentiality and placement accorded the order and other factors affecting the
overall benefit obtained by the account on the transaction. The Fund pays
reasonably competitive brokerage commission rates based upon the professional
knowledge of Delaware International, as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, the Fund
pays a minimal share transaction cost when the transaction presents no
difficulty. Some trades are made on a net basis where the Fund either buys the
securities directly from the dealer or sells them to the dealer. In these
instances, there is no direct commission charged, but there is a spread (the
difference between the buy and sell price) which is in the equivalent of a
commission.
During the years ended December 31, 1993, 1994 and 1995, the aggregate
dollar amounts of brokerage commissions paid by the Series were $29,430,
$167,836 and $86,131, respectively.
Delaware International may allocate out of all commission business
generated by all of the funds and accounts under its management, brokerage
business to brokers or dealers who provide brokerage and research services.
These services include advice, either directly or through publications or
writings, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing of analyses and reports
concerning issuers; securities or industries; providing information on economic
factors and trends; assisting in determining portfolio strategy; providing
computer software and hardware used in security analyses; and providing
portfolio performance evaluation and technical market analyses. Such services
are used by Delaware International in connection with its investment
decision-making process with respect to one or more funds and accounts managed
by it, and may not be used, or used exclusively, with respect to the fund or
account generating the brokerage.
During the year ended December 31, 1995, portfolio transactions in the
amount of $6,705,049, resulting in brokerage commissions of $17,005, were
directed to brokers for brokerage and research services provided.
As provided in the Securities Exchange Act of 1934 and the Series'
Investment Management Agreement, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the Fund 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
Delaware International which constitute in some part brokerage and research
services used by Delaware International in connection with its investment
decision-making process and constitute in some part services it uses in
connection with administrative or other functions not related to its investment
decision-making process. In such cases, Delaware International will make a good
faith allocation of brokerage and research services and will pay out of its own
-21-
<PAGE>
resources for services it uses in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the Fund and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
Delaware International may place a combined order for two or more
accounts or funds engaged in the purchase or sale of the same security if, in
its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or fund. When
a combined order is executed in a series of transactions at different prices,
each account participating in the order may be allocated an average price
obtained from the executing broker. It is believed that the ability of the
accounts to participate in volume transactions will generally be beneficial to
the accounts and funds. Although it is recognized that, in some cases, the joint
execution of orders could adversely affect the price or volume of the security
that a particular account or fund may obtain, it is the opinion of Delaware
International and the Fund's Board of Directors that the advantages of combined
orders outweigh the possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Fund may place orders with broker/dealers that have agreed to defray certain
Series expenses such as custodian fees, and may, at the request of the
Distributor, give consideration to sales of the variable contracts as a factor
in the selection of brokers and dealers to execute Series portfolio
transactions.
Portfolio Turnover
The rate of portfolio turnover will not be a limiting factor when
portfolio changes are deemed appropriate for the Series. Given the Series'
investment objective, the Fund anticipates that the annual rate of portfolio
turnover will not generally exceed 100% for the Series. It is possible that in
any particular year market conditions or other factors might result in portfolio
activity at a greater rate than anticipated. The portfolio turnover rate of the
Series is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value of
the portfolio securities owned by the Series during the particular fiscal year,
exclusive of securities whose maturities at the time of acquisition are one year
or less.
The degree of portfolio activity may affect brokerage costs incurred by
the Series. A turnover rate of 100% would occur, for example, if all the
investments in the Series' portfolio at the beginning of the year were replaced
by the end of the year. In investing to achieve its objective, the Series may
hold securities for any period of time. Portfolio turnover will also be
increased if the Series writes a large number of call options which are
subsequently exercised. The turnover rate also may be affected by cash
requirements from redemptions and repurchases of Series' shares. The portfolio
turnover rate for the years ended December 31, 1994 and 1995 were 13% and 19%.
-22-
<PAGE>
OFFERING PRICE
The offering price of shares is the net asset value per share next to be
determined after an order is received. The purchase of shares becomes effective
at the close of business on the day on which the investment is received from the
life company and after any dividend is declared. Dividends, if any, begin to
accrue on the next business day. There is no sales charge.
The purchase will be effected at the net asset value next computed after
the receipt of Federal Funds provided they are received by the close of regular
trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on
days when the Exchange is open. The New York Stock Exchange is scheduled to be
open Monday through Friday throughout the year except for New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. When the New York Stock Exchange is closed, the Fund
will generally be closed, pricing calculations will not be made and purchase and
redemption orders will not be processed. In the event of changes in Securities
and Exchange Commission requirements or the Fund's change in time of closing,
the Fund reserves the right to price at a different time, to price more often
than once daily or to make the offering price effective at a different time.
An example showing how to calculate the net asset value per share is
included in the Series' financial statements which are incorporated by reference
into this Part B.
The net asset value per share is computed by adding the value of all
securities and other assets in the Series' portfolio, deducting any liabilities
of the Series and dividing by the number of the Series' shares outstanding.
Expenses and fees are accrued daily. The Prospectus describes how securities are
valued.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by the Series of securities owned by it is not reasonably
practical, or it is not reasonably practical for the Series fairly to value its
assets, or in the event that the Securities and Exchange Commission has provided
for such suspension for the protection of shareholders, the Fund may postpone
payment or suspend the right of redemption or repurchase. In such case, the
shareholder may withdraw a request for redemption or leave it standing as a
request for redemption at the net asset value determined next after the
suspension has been terminated.
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<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
The Series normally will make payments from its net investment income on
a quarterly basis. Payments from the Series' net realized securities profits, if
any, normally will be made following the close of the fiscal year. All dividends
and distributions are automatically reinvested.
-24-
<PAGE>
TAXES
The Fund has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue Code, as
amended. As such, the Fund will not be subject to federal income tax to the
extent its earnings are distributed.
Each Series of the Fund is treated as a single tax entity, and any
capital gains and losses for each Series are calculated separately. It is each
Series' policy to pay out substantially all net investment income and net
realized gains to relieve the Fund of federal income tax liability on that
portion of its income paid to shareholders under the Internal Revenue Code.
Each Series has no fixed policy with regard to distributions of realized
securities profits when such realized securities profits may be offset by
capital losses carried forward. Presently, however, each Series intends to
offset realized securities profits to the extent of the capital losses carried
forward.
-25-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
Delaware International, Veritas House, 125 Finsbury Pavement, London,
England EC2A 1NQ, furnishes investment management services to the Series. Such
services are provided subject to the supervision and direction of the Fund's
Board of Directors. Delaware International is affiliated with Delaware
Management Company, Inc.("Delaware Management").
Delaware Management and its predecessors have been managing the funds in
the Delaware Group since 1938. The aggregate assets of these funds on December
31, 1995 were approximately $10,522,726,000. Investment advisory services are
also provided to institutional accounts with assets on December 31, 1995 of
approximately $17,606,321,000.
The Investment Management Agreement between the Fund on behalf of the
International Equity Series and Delaware International, dated April 3, 1995, was
approved by shareholders on March 29, 1995, and will remain in effect for an
initial period of two years. The Agreement may be renewed only if such renewal
and continuance is specifically approved at least annually by the Board of
Directors or by vote of a majority of the outstanding voting securities of the
Series, and only if the terms and the renewal thereof have been approved by the
vote of a majority of the directors of the 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. The Agreement is terminable without penalty
on 60 days' notice by the directors of the Fund or by Delaware International.
The Agreement will terminate automatically in the event of an assignment.
Delaware International manages the Series' investments. The annual
compensation paid by the Series is equal to 3/4 of 1% of its average daily net
assets, less the Series' proportionate share of all directors' fees paid to the
unaffiliated directors of the Fund. On December 31, 1995, the total net assets
of the Series were $81,548,039. For the year ended December 31, 1993, the
investment management fee earned relating to the Series amounted to $32,209 and
no amount was paid by the Series due to the waiver of fees described below. For
the year ended December 31, 1994 and 1995, the investment management fees
relating to the Series amounted to $294,997 and $525,376, respectively, of which
$209,618 and $457,751, respectively, were paid after consideration of the waiver
described below.
Except for those borne by Delaware International under the Investment
Management Agreement and the Distributor under the Distribution Agreement, the
Series is responsible for all of its own expenses. Among others, these include
the Series' proportionate share of rent and certain other administrative
expenses; the investment management fees; transfer and dividend disbursing agent
fees and costs; custodian expenses; federal securities registration fees; proxy
costs; and the costs of preparing prospectuses and reports sent to shareholders.
Delaware International has voluntarily elected to waive its fee and reimburse
the Series to the extent the Series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses exceed .80%
for the period from the commencement of the Series' operations through December
31, 1993. This waiver has been extended through June 30, 1996. The ratio of
expenses to average daily net assets for the Series for the year ended December
31, 1995 was 0.80%, reflecting the waiver described above.
Distribution and Service
Delaware Distributors, L.P. (which formerly conducted business as
Delaware Distributors, Inc.), located at 1818 Market Street, Philadelphia, PA
19103, serves as the national distributor of the Series' shares under a
Distribution Agreement dated April 3, 1995. It is an affiliate of Delaware
-26-
<PAGE>
Management and Delaware International and bears all of the costs of promotion
and distribution. Prior to January 3, 1995, Delaware Distributors, Inc. ("DDI")
served as the national distributor of the Series' shares. On that date, Delaware
Distributors, L.P., a newly formed limited partnership, succeeded to the
business of DDI. All officers and employees of DDI became officers and employees
of Delaware Distributors, L.P. DDI is the corporate general partner of Delaware
Distributors, L.P. and both DDI and Delaware Distributors, L.P. are indirect,
wholly-owned subsidiaries of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of Delaware Management and Delaware International located at 1818 Market Street,
Philadelphia, PA 19103, serves as the Fund's shareholder servicing, dividend
disbursing and transfer agent for the Series pursuant to the Amended and
Restated Shareholders Services Agreement dated May 1, 1996. The Transfer Agent
is also an indirect, wholly-owned subsidiary of Delaware Management Holdings,
Inc.
-27-
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of the Fund are managed under the direction of
its Board of Directors.
Certain officers and directors of the Fund hold identical positions in
each of the other funds in the Delaware Group.
DMH Corp., Delaware Management Company, Inc., Delaware Distributors,
L.P., Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Delaware International Holdings Ltd., Founders
Holdings, Inc., Delaware International Advisers Ltd., Delaware Investment
Counselors, Inc. and Delaware Investment & Retirement Services, Inc. are direct
or indirect, wholly-owned subsidiaries of Delaware Management Holdings, Inc.
("DMH"). On April 3, 1995, a merger between DMH and a wholly-owned subsidiary of
Lincoln National Corporation ("Lincoln National") was completed. In connection
with the merger, a new Investment Management Agreement between the Fund on
behalf of the Series and Delaware International was executed following
shareholder approval. DMH, Delaware Management and Delaware International are
now wholly-owned subsidiaries, and subject to the ultimate control of, Lincoln
National. Lincoln National, with headquarters in Fort Wayne, Indiana, is a
diversified organization with operations in many aspects of the financial
services industry, including insurance and investment management.
Directors and principal officers of the Fund are noted below along with
their ages and their business experience for the past five years. Unless
otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
*Wayne A. Stork (58)
Chairman, President, Chief Executive Officer, Director and/or Trustee of
the Fund, 15 other funds in the Delaware Group (which excludes
Delaware Pooled Trust, Inc.), Delaware Management Holdings, Inc.,
DMH Corp., Delaware International Holdings Ltd. and Founders
Holdings, Inc.
Chairman and Director of Delaware Pooled Trust, Inc., Delaware Investment
Counselors, Inc. and Delaware Investment & Retirement Services,
Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware International
Advisers Ltd.
Director of Delaware Distributors, Inc. and Delaware Service Company,
Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware organization.
- ----------
*Director affiliated with the investment manager of the Fund and considered an
"interested person" as defined in the Investment Company Act of 1940.
-28-
<PAGE>
Winthrop S. Jessup (50)
Executive Vice President of the Fund and 15 other funds in the Delaware
Group (which excludes Delaware Pooled Trust, Inc.) and Delaware
Management Holdings, Inc.
President and Chief Executive Officer of Delaware Pooled Trust, Inc.
President and Director of Delaware Investment Counselors, Inc.
Executive Vice President and Director of DMH Corp., Delaware Management
Company, Inc., Delaware International Holdings Ltd. and Founders
Holdings, Inc.
Vice Chairman and Director of Delaware Distributors, Inc.
Vice Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc., Delaware International
Advisers Ltd., Delaware Management Trust Company and Delaware
Investment & Retirement Services, Inc.
During the past five years, Mr. Jessup has served in various executive
capacities at different times within the Delaware organization.
Richard G. Unruh, Jr. (56)
Executive Vice President of the Fund and each of the other 16 funds in
the Delaware Group.
Executive Vice President and Director of Delaware Management Company,
Inc.
Senior Vice President of Delaware Management Holdings, Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware organization.
Walter P. Babich (68)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and from
1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (57)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and
Treasurer of Columbia University, New York. From 1987 to 1989, he
was also a lecturer in English at the University. In addition, Mr.
Knerr was Chairman of The Publishing Group, Inc., New York, from
1988 to 1990. Mr. Knerr founded The Publishing Group, Inc. in 1988.
Ann R. Leven (55)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer of
the Smithsonian Institution, Washington, DC, and from 1975 to 1992,
she was Adjunct Professor of Columbia Business School.
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<PAGE>
W. Thacher Longstreth (75)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Charles E. Peck (70)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of
The Ryland Group, Inc., Columbia, MD.
David K. Downes (56)
Senior Vice President/Chief Administrative Officer/Chief Financial
Officer of the Fund, each of the other 16 funds in the Delaware
Group and Delaware Management Company, Inc.
Chairman and Director of Delaware Management Trust Company.
Chief Executive Officer and Director of Delaware Investment & Retirement
Services, Inc.
Senior Vice President/Chief Administrative Officer/Chief Financial
Officer/Treasurer of Delaware Management Holdings, Inc.
Senior Vice President/Chief Financial Officer/Treasurer and Director of
DMH Corp.
Senior Vice President/Chief Administrative Officer and Director of
Delaware Distributors, Inc.
Senior Vice President/Chief Administrative Officer of Delaware
Distributors, L.P.
Senior Vice President/Chief Administrative Officer/Chief Financial
Officer and Director of Delaware Service Company, Inc.
Chief Financial Officer and Director of Delaware International Holdings
Ltd.
Senior Vice President/Chief Financial Officer/Treasurer of Delaware
Investment Counselors, Inc.
Senior Vice President/Chief Financial Officer and Director of Founders
Holdings, Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer of
Equitable Capital Management Corporation, New York, from December
1985 through August 1992, Executive Vice President from December
1985 through March 1992, and Vice Chairman from March 1992 through
August 1992.
George M. Chamberlain, Jr. (49)
Senior Vice President and Secretary of the Fund, each of the other 16
funds in the Delaware Group, Delaware Management Holdings, Inc.,
Delaware Distributors, L.P. and Delaware Investment Counselors,
Inc.
Executive Vice President, Secretary and Director of Delaware Management
Trust Company.
Senior Vice President, Secretary and Director of DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, Inc., Delaware
Service Company, Inc., Delaware Investment & Retirement Services,
Inc. and Founders Holdings, Inc.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware organization.
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<PAGE>
Joseph H. Hastings (46)
Vice President/Corporate Controller of the Fund, each of the other 16
funds in the Delaware Group, Delaware Management Holdings, Inc.,
DMH Corp., Delaware Management Company, Inc., Delaware
Distributors, L.P., Delaware Distributors, Inc., Delaware Service
Company, Inc., Delaware Investment Counselors, Inc., Founders
Holdings, Inc. and Delaware International Holdings Ltd.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief
Financial Officer for Prudential Residential Services, L.P., New
York, NY from 1989 to 1992. Prior to that, Mr. Hastings served as
Controller and Treasurer for Fine Homes International, L.P.,
Stamford, CT from 1987 to 1989.
Michael P. Bishof (33)
Vice President/Treasurer of the Fund, each of the other 16 funds in the
Delaware Group, Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Distributors, L.P., Delaware Service
Company, Inc. and Founders Holdings, Inc.
Assistant Treasurer of Founders CBO Corporation.
Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a Vice
President for CS First Boston Investment Management, New York, NY
from 1993 to 1994 and an Assistant Vice President for Equitable
Capital Management Corporation, New York, NY from 1987 to 1993.
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<PAGE>
The following is a compensation table listing for each director entitled
to receive compensation, the aggregate compensation received from the Fund and
the total compensation received from all Delaware Group funds for the year ended
December 31, 1995 and an estimate of annual benefits to be received upon
retirement under the Delaware Group Retirement Plan for Directors/Trustees as of
December 31, 1995.
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued Benefits from all 17
Compensation as Part of Upon Delaware
Name from Fund Fund Expenses Retirement* Group Funds
<S> <C> <C> <C> <C>
W. Thacher Longstreth $2,336 None $18,100 $61,324
Ann R. Leven $2,475 None $18,100 $66,324
Walter P. Babich $2,345 None $18,100 $64,188
Anthony D. Knerr $2,447 None $18,100 $65,324
Charles E. Peck $2,178 None $18,100 $58,188
</TABLE>
* Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his or
her retirement from the Board, has attained the age of 70 years and served
on the Board for at least five continuous years, is entitled to receive
payments from each fund in the Delaware Group for a period equal to the
lesser of the number of years that such person served as a director or the
remainder of such person's life. The amount of such payments will be equal,
on an annual basis, to the amount of the annual retainer that is paid to
directors of each fund at the time of such person's retirement. If an
eligible director retired as of December 31, 1995, he or she would be
entitled to annual payments totaling $18,100, in the aggregate, from all of
the funds in the Delaware Group, based on the number of funds in the
Delaware Group as of that date.
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<PAGE>
GENERAL INFORMATION
Delaware International is the investment manager for the Series and
several other funds in the Delaware Group. Delaware Management, its affiliate,
manages the other funds in the Delaware Group. Delaware Management, through a
separate division, also manages private investment accounts. While investment
decisions for the Series 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 Series.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to Delaware Management, Delaware International or their affiliates, are
permitted to engage in personal securities transactions subject to the
exceptions set forth in Rule 17j-1 and the following general restrictions and
procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions may only be closed-out at a profit after a 60-day holding
period has elapsed; and (5) the Compliance Officer must be informed periodically
of all securities transactions and duplicate copies of brokerage confirmations
and account statements must be supplied to the Compliance Officer.
Delaware Distributors, L.P. acts as the national distributor for the
Series and for all of the other mutual funds in the Delaware Group.
In addition, Delaware Service Company, Inc., an affiliate of Delaware
Management, acts as shareholder servicing, dividend disbursing and transfer
agent for the Fund and for the other mutual funds in the Delaware Group.
Compensation is fixed each year and approved by the Board of Directors,
including a majority of the disinterested directors.
Delaware Management and its affiliates own the name "Delaware Group."
Under certain circumstances, including the termination of the Fund's advisory
relationship with Delaware Management or its distribution relationship with
Delaware Distributors, Inc., Delaware Management and its affiliates could cause
the Fund to delete the words "Delaware Group" from the Fund's name.
The legality of the issuance of the shares offered hereby, registered
pursuant to Rule 24f-2 under the 1940 Act, has been passed upon for the Fund by
Messrs. Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania.
The Series commenced operations on October 29, 1992.
Capitalization
The Fund has a present authorized capitalization of five hundred million
shares of capital stock with a $.01 par value per share. The Board of Directors
has allocated fifty million shares to the Series. While all shares have equal
voting rights on matters affecting the entire Fund, the Series would vote
separately on any matter which affects only that Series, such as investment
objective and policy or action to dissolve the Series, and as otherwise
prescribed by the 1940 Act. Shares of the Series have a priority in that Series'
assets, and in gains on and income from the portfolio of that Series. Shares
have no preemptive rights, are fully transferable and, when issued, are fully
paid and nonassessable. All shares participate equally in dividends, and upon
liquidation would share equally.
Noncumulative Voting
Series shares have noncumulative voting rights which means that the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all the directors if they choose to do so, and, in such
event, the holders of the remaining shares will not be able to elect any
directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the Securities and Exchange
Commission ("SEC"). Shareholders may obtain a copy of the Registration Statement
by contacting the SEC in Washington, DC.
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<PAGE>
APPENDIX A--DESCRIPTION OF RATINGS
Commercial Paper
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from Duff and Phelps, Inc.'s description of its two highest
ratings: Category 1--Top Grade: Duff 1-Plus--Highest certainty of timely
payment. Short- term liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations. Duff 1--Very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are minor. Duff 1-Minus-- High
certainty of timely payment. Liquidity factors are strong and supported by good
fundamental protection factors. Risk factors are very small. Category 2--Good
Grade: Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds' needs may enlarge total
financing requirements, access to capital markets is good.
Risk factors are small.
Excerpts from Fitch Investor Service, Inc.'s description of its two
highest ratings: F-1--Highest grade commercial paper assigned this rating is
regarded as having the strongest degree of assurance for timely payment.
F-2--Very good grade issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than the strongest issues.
Bonds
Excerpts from Moody's description of its bond ratings: Aaa--judged to be
the best quality. They carry the smallest degree of investment risk; Aa--judged
to be of high quality by all standards; A--possess favorable attributes and are
considered "upper medium" grade obligations; Baa--considered as medium grade
obligations. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; Ba--judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class; B--generally lack characteristics
of the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; Caa--are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest; Ca--represent
obligations which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings; C--the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
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<PAGE>
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for the Series and
the Fund and, in its capacity as such, audits the financial statements of the
Series contained in the Fund's Annual Report. The Series' Statement of Net
Assets, Statement of Operations, Statement of Changes in Net Assets and Notes to
Financial Statements, as well as the report of Ernst & Young LLP, independent
auditor, for the year ended December 31, 1995, are included in the Series'
Annual Report to shareholders. The financial statements and the report of Ernst
& Young LLP listed above are incorporated by reference from the Annual Report
into this Part B.
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