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Prospectus
May 1, 1996
Delaware Group Premium Fund, Inc.
1818 Market Street, Philadelphia, PA 19103
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 its various separate Portfolios. Each Portfolio
("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. The investment objectives
and principal policies of the Series are described below. See Investment
objectives and policies. Although each Series will constantly strive to attain
its objective, there can be no assurance that it will be attained.
This Prospectus sets forth information that you should read and consider
before you invest. Please retain it for future reference. A Statement of
Additional Information ("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 Fund and has been filed with the Securities and Exchange
Commission. Part B is incorporated by reference into this Prospectus and is
available, without charge, by writing to Delaware Distributors, L.P. at the
above address or by calling 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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Equity/Income Series--seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Series has the same
objective and investment disciplines as the Decatur Total Return Fund of
Delaware Group Decatur Fund, Inc., a separate Delaware Group fund, in that it
invests generally, but not exclusively, in common stocks and income-producing
securities convertible into common stocks, consistent with the Series'
objective.
Emerging Growth Series--seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging and
other growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. This Series has
the same objective and investment disciplines as Delaware Group Trend Fund,
Inc., a separate Delaware Group fund.
Global Bond Series--seeks current income consistent with preservation of
principal by investing primarily in fixed income securities that may also
provide the potential for capital appreciation. This Series is a global fund, as
such, at least 65% of the Series' assets will be invested in fixed income
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, one of which may be the United States. This Series has the same
objective and investment disciplines as the Global Bond Series of Delaware Group
Global & International Funds, Inc., a separate Delaware Group fund.
PLEASE NOTE: AS OF THE DATE OF THIS PROSPECTUS, THE GLOBAL BOND SERIES IS
NOT YET AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR INVESTMENT DEALER
FOR CURRENT INFORMATION ABOUT THE SERIES' AVAILABILITY.
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Table of contents
<S> <C>
Cover page................................................................................................
Summary information.......................................................................................
Financial highlights......................................................................................
Investment objectives and policies........................................................................
Introduction.......................................................................................
Equity/Income Series...............................................................................
Emerging Growth Series.............................................................................
Global Bond Series.................................................................................
Other considerations...............................................................................
Purchase and redemption...................................................................................
Dividends and distributions...............................................................................
Taxes.....................................................................................................
Calculation of offering price and net asset value per share...............................................
Management of the Fund....................................................................................
Performance information............................................................................
Distribution and service...........................................................................
Expenses...........................................................................................
Description of Fund shares.........................................................................
</TABLE>
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Summary information
Capitalization
The Fund has a present authorized capitalization of five hundred million
shares of capital stock with a $.01 par value per share, with fifty million
shares allocated to each of the Fund's Series. See Description of Fund shares
under Management of the Fund.
Investment managers
Delaware Management Company, Inc. ("Delaware Management") furnishes
investment management services to the Equity/Income and Emerging Growth Series,
subject to the supervision and direction of the Fund's Board of Directors. Under
the Investment Management Agreement between Delaware Management and these
Series, the annual compensation paid to Delaware Management is equal to,
respectively, .60% and .75% of the average daily net assets of the Series, less,
in the case of the Equity/Income Series, a proportionate share of all directors'
fees paid to the unaffiliated directors of the Fund. Delaware Management has
elected voluntarily to waive its management fee and to reimburse the respective
Series to the extent necessary to maintain a limit on the total operating
expenses of each Series for a limited period. See Management of the Fund.
Delaware International Advisers Ltd. ("Delaware International") furnishes
investment management services to the Global Bond Series, subject to the
supervision and direction of the Fund's Board of Directors. Under the Investment
Management Agreement between the Series and Delaware International, the annual
compensation paid to Delaware International is equal to .75% of the Series'
average daily net assets. Delaware International has elected voluntarily to
waive its management fee and to reimburse the Global Bond Series to the extent
necessary to maintain a limit on the total operating expenses of this Series for
a limited period. See Management of the Fund.
Investment objectives and policies
Each Series has a different investment objective and seeks to achieve its
objective by pursuing different investment strategies. See Cover page of this
Prospectus and Investment objectives and policies.
Open-end investment company
The Fund, which was organized as a Maryland corporation in 1987, is an
open-end registered management investment company. With the exception of the
Global Bond Series, each Series operates as a diversified fund as defined by the
Investment Company Act of 1940 (the "1940 Act"). The Global Bond Series operates
as a nondiversified fund as defined by the 1940 Act.
Purchase and redemption
Shares of the Series are sold only to separate accounts of life insurance
companies. Purchases and redemptions are made at the net asset value calculated
after receipt of the purchase or redemption order. None of the Series nor
Delaware Distributors, L.P. (the "Distributor"), assesses a charge for purchases
or redemptions. See Purchase and redemption.
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Special considerations and risk factors
Prospective investors should consider a number of factors depending upon
the Series in which they propose to invest:
1. The Global Bond Series will invest at least 65% of its assets in fixed
income 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, one of which may be the United States. The Equity/Income and Emerging
Growth Series may also invest a portion of their assets in securities of such
issuers and companies. Investing in securities of non-United States companies
which are generally denominated in foreign currencies, and utilization of
forward foreign currency exchange contracts in connection with transactions in
such securities involve certain considerations comprising both risk and
opportunity not typically associated with investing in the securities of United
States companies and issuers. See Foreign securities and foreign currency
transactions and Special risk considerations under Other considerations.
2. Each Series has the right to engage in certain options transactions
for hedging purposes to counterbalance portfolio volatility. The Series do not
engage in such activities for speculative purposes, but there are certain risks
associated with the use of options which a prospective investor should consider.
See Options under Other considerations.
3. The Emerging Growth and Global Bond Series also may engage in certain
hedging transactions involving futures contracts and options on such contracts,
and in connection with such activities will maintain certain collateral in
special accounts established by futures commission merchants in the care of the
Fund's custodian bank. While the Series do not engage in such transactions for
speculative purposes, there are risks which result from the use of these
instruments which an investor should consider. The Fund is not registered as a
commodity pool operator nor is Delaware International or Delaware Management
registered as a commodities trading adviser in reliance upon various exemptive
rules. See Futures contracts and options on futures contracts under Other
considerations.
4. The Global Bond Series may invest in interest rate swaps for hedging
purposes which could subject the Series to increased risks. See Interest rate
swaps under Global Bond Series - Investment strategy and Special risk
considerations under Other considerations.
5. While the Global Bond Series intends to seek to qualify as a
"diversified" investment company under provisions of Subchapter M of the
Internal Revenue Code, as amended (the "Code"), the Series will not be
diversified under the 1940 Act. Thus, while at least 50% of the Series' total
assets will be represented by cash, cash items, and other securities limited in
respect of any one issuer to an amount not greater than 5% of the Series' total
assets, it will not satisfy the 1940 Act requirement in this respect, which
applies that test to 75% of the Series' assets. A nondiversified portfolio is
believed to be subject to greater risk because adverse effects on the
portfolio's security holdings may affect a larger portion of the overall assets.
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Financial highlights
The following financial highlights are derived from the financial statements of
Delaware Group Premium Fund, Inc. 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 each 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. No shares of the Global Bond Series were sold to investors
prior to the date of this Prospectus; consequently, no financial highlights are
presented for that Series.
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Equity/Income Series
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7/28/88(1)
Year Ended through
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $11.4800 $12.5100 $11.2200 $10.7500 $9.2400 $11.4000 $10.1600 $10.0000
Income From Investment Operations
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Net Investment Income...................... 0.4155 0.4121 0.4341 0.4155 0.4502 0.4489 0.2813 0.0934
Net Gains (Losses) on Securities
(both realized and unrealized).......... 3.5745 (0.4221) 1.2659 0.5045 1.5498 (1.9189) 1.0337 0.0666
------- ------- ------ ------ ------ ------- ------ ------
Total From Investment Operations....... 3.9900 (0.0100) 1.7000 0.9200 2.0000 (1.4700) 1.3150 0.1600
------- ------- ------ ------ ------ ------- ------ ------
Less Distributions
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Dividends (from net investment income)..... (0.4300) (0.4200) (0.4100) (0.4500) (0.4900) (0.5600) (0.0750) none
Distributions (from capital gains)......... (0.2100) (0.6000) none none none (0.1300) none none
Returns of Capital......................... none none none none none none none none
------- ------- ------ ------ ------ ------- ------ ------
Total Distributions.................... (0.6400) (1.0200) (0.4100) (0.4500) (0.4900) (0.6900) (0.0750) none
Net Asset Value, End of Period.............$14.8300 $11.4800 $12.5100 $11.2200 $10.7500 $9.2400 $11.4000 $10.1600
======== ======== ======== ======== ======== ======= ======== ========
- -----------------------------------
Total Return(2)............................ 36.12% (0.20%) 15.45%(3) 8.82%(3) 22.32% (13.31%) 13.04% 3.77%
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Ratios/Supplemental Data
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Net Assets, End of Period
(000's omitted)..........................$109,003 $72,725 $65,519 $38,278 $38,840 $29,598 $12,959 $1,873
Ratio of Expenses to Average Net Assets... 0.69% 0.71% 0.75% 0.79% 0.85% 0.96% 1.31% 2.00%
Ratio of Expenses to Average Net Assets
prior to Expense Limitation........... 0.69% 0.71% 0.76% 0.81% 0.85% 0.96% 1.31% 2.00%
Ratio of Net Investment Income to
Average Net Assets....................... 3.24% 3.63% 3.95% 3.86% 4.46% 5.80% 5.06% 6.40%
Ratio of Net Investment Income to Average
Net Assets prior to Expense Limitation... 3.24% 3.63% 3.94% 3.84% 4.46% 5.80% 5.06% 6.40%
Portfolio Turnover Rate................... 85% 91% 67% 72% 79% 34% 26% ---
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(1) Date of initial public offering; ratios and total return have 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.
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Emerging Growth Series
------------------------------------
12/27/93(1)
Year Ended through
12/31/95 12/31/94 12/31/93
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Net Asset Value, Beginning of Period.................... $10.1600 $10.2000 $10.0000
Income From Investment Operations
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Net Investment Income................................... 0.0976 0.0791 none
Net Gains (Losses) on Securities
(both realized and unrealized).................. 3.8524 (0.1191) 0.2000
-------- --------- --------
Total From Investment Operations..................... 3.9500 (0.0400) 0.2000
-------- --------- --------
Less Distributions
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Dividends (from net investment income).................. (0.0900) none none
Distributions (from capital gains)...................... none none none
Returns of Capital...................................... none none none
-------- -------- --------
Total Distributions.................................. (0.0900) none none
-------- -------- --------
Net Asset Value, End of Period.......................... $14.0200 $10.1600 $10.2000
======== ======== ========
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Total Return(2)......................................... 39.21%(3) (0.39%)(3) 2.00%(3)
- ------------
- ------------------------------------
Ratios/Supplemental Data
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Net Assets, End of Period (000's omitted) $20,510 $7,087 $204
Ratio of Expenses to Average Net Assets................. 0.80% 0.80% (4)
Ratio of Expenses to Average Net Assets
prior to Expense Limitation.......................... 0.96% 1.47% (4)
Ratio of Net Investment Income to Average Net Assets.... 1.03% 1.63% (4)
Ratio of Net Investment Income to Average Net Assets
prior to Expense Limitation............................ 0.87% 0.96% (4)
Portfolio Turnover Rate................................. 76% 59% (4)
</TABLE>
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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 objectives and policies
Introduction
The Fund, a corporation organized in Maryland on February 19, 1987, is a
diversified, open-end management investment company offering various Series of
shares. The Equity/Income Series commenced operations on July 28, 1988. The
Emerging Growth Series commenced operations on December 27, 1993. The Global
Bond Series was first publicly offered on May 1, 1996.
Each Series' investment objective is a fundamental policy and cannot be
changed without approval by the holders of a "majority" of that Series'
outstanding shares, as defined in the 1940 Act. Although each 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 below for each Series, see Other considerations for investment
techniques available to various Series of the Fund. Part B provides more
information on the Series' investment policies and restrictions.
Equity/Income Series
The objective of the Equity/Income Series is to seek to achieve long-term
growth by investing primarily in securities that provide the potential for
income and capital appreciation without undue risk to principal. The Series
seeks to provide shareholders with a current return while allowing them to
participate in the capital gains potential associated with equity investments.
Investment strategy
The Series generally invests in common stocks and income-producing
securities that are convertible into common stocks. The portfolio manager looks
for securities having a better dividend yield than the average of the Standard &
Poor's ("S&P") 500 Stock Index, as well as capital gains potential.
All available types of appropriate securities are under continuous study.
The Series may invest in all classes of securities, bonds and preferred and
common stocks in any proportion deemed prudent under existing market and
economic conditions. In seeking to obtain its objective, the Series may hold
securities for any period of time. For temporary, defensive purposes, the Series
may hold a substantial portion of its assets in cash or short-term obligations.
Income-producing convertible securities include preferred stock and
debentures that pay a stated or variable interest rate or dividend and are
convertible into common stock at an established ratio. These securities, which
are usually priced at a premium to their conversion value, may allow the Series
to receive current income while participating to some extent in any appreciation
in the underlying common stock. The value of a convertible security tends to be
affected by changes in interest rates, as well as factors affecting the market
value of the underlying common stock.
The Series may be suitable for the patient investor interested in
long-term growth. The investor should be willing to accept the risks associated
with investments in common stocks and income-producing securities, including
those that are convertible into common stocks. The Series is suitable for
investors who want a current return with the possibility of capital
appreciation. 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 through both income and capital
appreciation without undue risk to principal.
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Emerging Growth Series
Investment strategy
The objective of the Series is long-term capital appreciation. The
strategy is to invest primarily in the common stocks and securities convertible
into common stocks of emerging and other growth-oriented companies that, in the
judgment of Delaware Management, are responsive to changes within the
marketplace and have the fundamental characteristics to support growth.
The Series will seek to identify changing and dominant trends within the
economy, the political arena and our society. The Series will purchase
securities which it believes will benefit from these trends and which have the
fundamentals to exploit them. The fundamentals include managerial skills,
product development and sales and earnings.
In investing for capital appreciation, the Series may hold securities for
any period of time. The Series may invest in repurchase agreements, but will not
normally do so except to invest excess cash balances. The Series may also invest
in foreign securities.
The Series may purchase privately placed securities the resale of which is
restricted under applicable securities laws. Such securities may offer a higher
return than comparably registered securities but involve some additional risk as
they can be resold only in privately negotiated transactions, in accordance with
an exemption from the registration requirements under applicable securities laws
or after registration.
Income is not an objective of the Series. However, should the market
warrant a temporary defensive approach, the Series may also invest in cash
equivalents, and fixed income obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, as well as corporate bonds.
Although the Series will constantly strive to attain the objective of
long-term capital growth, there can be no assurance that it will be attained.
The objective of the Series may not be changed without shareholder approval.
Part B provides more information on the Series' investment policies and
restrictions.
The Series may be suitable for the patient investor interested in
long-term capital appreciation. The prices of common stock, especially those of
smaller companies, tend to fluctuate, particularly in the short-term. The
investor should be willing to accept the risks associated with investments in
growth-oriented securities, some of which may be speculative and subject the
Series to an additional risk.
Net asset value may fluctuate in response to market conditions and, as a
result, the Series is not appropriate for a short-term investor.
This Series is designed primarily for capital appreciation. Providing
current income is not an objective of the Series. Any income produced is
expected to be minimal. An investor should not consider a purchase of Series
shares as equivalent to a complete investment program.
For hedging purposes, the Series may engage in options activity and enter
into futures contracts and options on futures contracts. For a discussion on
these instruments, see Options under Other considerations and Futures contracts
and options on futures contracts under Other considerations.
Global Bond Series
The objective of the Global Bond Series is to achieve current income
consistent with the preservation of investors' principal. The Fund seeks to
achieve this objective by investing primarily in fixed income securities that
may also provide the potential for capital appreciation. The Series is a global
fund. Under normal circumstances, at least 65% of the Series' assets will be
invested in the fixed income 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, one of which may be the United
States. The Series may invest in securities issued in any currency and may hold
foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country or in multinational currency
units such as the ECU. For purposes of the 1940 Act, the Global Bond Series will
operate as a nondiversified fund.
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<PAGE>
Investment strategy
The Series will attempt to achieve its objective by investing at least 65%
of its assets in a broad range of fixed income securities, including foreign and
U.S. Government securities and debt obligations of foreign and U.S. companies
which are generally rated A or better by S&P or Moody's Investors Service, Inc.
("Moody's"), or if unrated, are deemed to be of comparable quality by Delaware
International. The Series may also invest in zero coupon bonds and in the debt
securities of supranational entities denominated in any currency. Generally, the
value of fixed income securities moves inversely to the movement of market
interest rates. The value of the Series' portfolio securities and, thus, an
investor's shares will be affected by changes in such rates.
Zero coupon bonds are debt obligations which do not entitle the holder to
any periodic payments of interest prior to maturity or a specified date when the
securities begin paying current interest, and therefore are issued and traded at
a discount from their face amounts or par value. A supranational entity is an
entity established or financially supported by the national governments of one
or more countries to promote reconstruction or development. Examples of
supranational entities include, among others, the World Bank, the European
Economic Community, the European Coal and Steel Community, the European
Investment Bank, the Inter-Development Bank, the Export-Import Bank and the
Asian Development Bank. For increased safety, the Series currently anticipates
that a large percentage of its assets will be invested in U.S. and foreign
government securities and securities of supranational entities.
With respect to U.S. Government securities, the Series may invest only in
securities issued or guaranteed as to the payment of principal and interest by
the U.S. Government, and those of its agencies or instrumentalities which are
backed by the full faith and credit of the United States. Direct obligations of
the U.S. Government which are available for purchase by the Series include
bills, notes, bonds and other debt securities issued by the U.S. Treasury. These
obligations differ mainly in interest rates, maturities and dates of issuance.
Agencies whose obligations are backed by the full faith and credit of the United
States include the Farmers Home Administration, Federal Financing Bank and
others.
With respect to securities issued by foreign governments, their agencies,
instrumentalities or political subdivisions, the Series will generally invest in
such securities if they have been rated AAA or AA by S&P or Aaa or Aa by Moody's
or, if unrated, have been determined by Delaware International to be of
comparable quality.
From time to time, the Series may find opportunities to pursue its
objective outside of the fixed income markets, but in no event will such
investments exceed 5% of the Series' net assets.
The Series may also invest in sponsored or unsponsored American Depository
Receipts or European Depository Receipts. While the Series may purchase
securities of issuers 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, Ireland, Denmark, Portugal, Italy, Austria, Norway, Sweden,
Finland, Luxembourg, Japan and Australia. 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.
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<PAGE>
The Series may invest in restricted securities, including Rule 144A
Securities. See Liquidity and Rule 144A securities. The Series may invest no
more than 10% of the value of its net assets in illiquid securities. The Series
will not concentrate its investments in any particular industry, which means
that it will not invest 25% or more of its total assets in any one industry.
It is anticipated that the average weighted maturity of the portfolio will
be in the five-to-ten year range. If, however, Delaware International
anticipates a declining interest rate environment, the average weighted maturity
may be extended past ten years. Conversely, if Delaware International
anticipates a rising rate environment, the average weighted maturity may be
shortened to less than five years.
Interest rate swaps
In order to attempt to protect the Series' investments from interest rate
fluctuations, the Series may engage in interest rate swaps. The Series intends
to use interest rate swaps as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Series with another party of
their respective rights to receive interest, e.g., an exchange of fixed rate
payments for floating rate payments. For example, if the Series holds an
interest-paying security whose interest rate is reset once a year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset daily. Such a swap position would offset
changes in the value of the underlying security because of subsequent changes in
interest rates. This would protect the Series from a decline in the value of the
underlying security due to rising rates, but would also limit its ability to
benefit from falling interest rates.
The Series may enter into interest rate swaps on either an asset-based or
liability-based basis, depending upon whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Series receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch as
these hedging transactions are entered into for non-speculative purposes and not
for the purpose of leveraging the Series' investments, Delaware International
and the Series believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The net amount of the excess, if any, of the Series' obligations over its
entitlement with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Custodian Bank. If the Series enters
into an interest rate swap on other than a net basis, the Series would maintain
a segregated account in the full amount accrued on a daily basis of the Series'
obligations with respect to the swap. See Foreign securities and foreign
currency transactions and Special risk considerations under Other
considerations, below.
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<PAGE>
Other considerations
When-issued securities
Consistent with their respective objectives, each 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 do not
accrue interest, but the market value of the bonds may fluctuate. This can
result in a Series' share value increasing or decreasing. The Series will not
ordinarily sell when-issued securities prior to settlement. If a Series invests
in securities of this type, it will maintain a segregated account to pay for
them and mark the account to market daily.
Foreign securities and foreign currency transactions
As noted above, the Global Bond Series will invest at least 65% of its
assets in fixed income 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, one of which may be the United States. The
Equity/Income and Emerging Growth Series may invest up to 25% of its assets in
securities of issuers organized or having a majority of their assets in or
deriving a majority of their operating income outside the United States. In
connection with investments in foreign securities, a Series may, from time to
time, conduct 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 Series will engage in these foreign currency transactions in order to expedite
settlement of portfolio transactions and to minimize currency value
fluctuations. Investing in foreign securities and, in conjunction therewith,
engaging in foreign currency transactions present special considerations not
presented by investments in securities issued by United States companies. See
Special risk considerations for a discussion of these considerations.
Options
To achieve the Series' objectives, the Series intend to use certain
hedging techniques which might not be conveniently available to individuals.
These techniques will be used at the respective investment manager's
discretion to protect a Series' principal value.
The Series may purchase put options, write covered call options and enter
into closing transactions in connection therewith in respect of securities in
which they may invest. The Global Bond Series may also purchase call options and
enter into related closing transactions. 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 a 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 a 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 the
respective investment manager's judgment is wrong and interest rates fall.
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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 a 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 Equity/Income and Emerging Growth Series will use Exchange-traded
options, but reserve the right to use over-the-counter options upon written
notice to shareholders. The Global Bond Series may use both Exchange-traded and
over-the-counter options. Certain over-the-counter options may be illiquid. The
Global Bond Series will only invest in such options to the extent consistent
with its 10% limit on investments in illiquid securities.
The Emerging Growth and Global Bond Series also may write call options and
purchase put options on stock indices and enter into closing transactions in
connection therewith. The Global Bond Series also may purchase call options on
stock indices and enter into closing transactions in connection therewith. No
Series will 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
portfolio securities of, as the case may be, the Emerging Growth or Global Bond
Series.
Futures contracts and options on futures contracts
For hedging purposes, the Emerging Growth and Global Bond Series may enter
into futures contracts relating to securities, securities indices or interest
rates. In addition, the Global Bond 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."
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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, 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 Emerging Growth and Global Bond Series may also purchase and write
options on the types of futures contracts that 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.
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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
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.
Borrowings
Each 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 their net assets. See Part B for additional
possible restrictions on borrowing. The Series have no intention of increasing
their 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 their borrowings to an extent that the asset coverage of
such borrowings shall be at least 300%. Except for the Global Bond Series, no
Series will pledge more than 15% of their net assets, or issue senior securities
as defined in the 1940 Act, except for notes to banks. The Global Bond Series
will not pledge more than 10% 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.
Repurchase agreements
The Series may also use repurchase
agreements which are at least 100% collateralized by U.S. Government securities
except that the Global Bond Series may accept as collateral any securities in
which such Series may invest. Each Series may enter into repurchase agreements
with broker/dealers or banks which are deemed creditworthy by the respective
investment manager under guidelines approved by the Board of Directors. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Series) acquires ownership of a security and the seller agrees to repurchase
the security 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.
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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. Each 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
Each 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 a 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, a Series will only enter into loan arrangements
after a review of all pertinent facts by the respective investment manager,
subject to overall supervision by the Board of Directors, including the
creditworthiness of the borrowing broker, dealer or institution and then only if
the consideration to be received from such loans would justify the risk.
Creditworthiness will be monitored on an ongoing basis by the respective
investment manager.
Liquidity and Rule 144A securities
In order to assure that each Series has
sufficient liquidity, as a matter of fundamental policy, no Series may invest
more than 10% of its net assets in illiquid assets. For the Equity/Income
Series, this policy shall extend to all restricted securities, including
securities eligible for resale without registration pursuant to Rule 144A ("Rule
144A Securities") (described below), and repurchase agreements maturing in more
than seven days. With respect to the Emerging Growth and Global Bond Series and
subject to the following paragraphs, this policy shall not limit the acquisition
of securities purchased in reliance upon Rule 144A of the Securities Act of 1933
("1933 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 a Series to the extent that qualified institutional
buyers become uninterested, for a time, in purchasing these securities.
While maintaining oversight, the Board of Directors has delegated to the
respective investment manager the day-to-day functions of determining whether or
not individual Rule 144A Securities are liquid for purposes of the 10%
limitation on investments in illiquid assets. The Board has instructed the
managers 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).
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If the respective manager determines that a Rule 144A Security which was
previously determined to be liquid is no longer liquid and, as a result, the
Emerging Growth or Global Bond Series' holdings of illiquid securities exceed
the Series' 10% limit on investment in such securities, the respective manager
will determine what action shall be taken to ensure that the Series continues to
adhere to such limitation.
Special risk considerations
Shareholders should understand that all
investments involve risk and there can be no guarantee against loss resulting
from an investment in a Series, nor can there be any assurance that the Series'
investment objective will be attained.
The Global Bond Series has the right to purchase securities in any foreign
country, developed and underdeveloped, or emerging growth 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, emerging
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 (such as the Fund) are subject to a variety of restrictions in
many emerging countries. These restrictions may take the form of prior
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 emerging countries, Delaware International does not
believe that any current repatriation restrictions would affect its decision to
invest in such countries. Countries such as those in which the Series may invest
have historically experienced and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations or currency
depreciation, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Additional factors which may
influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, its government's policy towards the
International Monetary Fund, the World Bank and other international agencies and
the political constraints to which a government debtor may be subject.
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To the extent that interest or exchange rates or securities prices move in
an unexpected direction, a 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.
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 a 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 a 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 Global Bond Series may invest in zero coupon bonds. The market prices
of zero coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do non-zero coupon securities having
similar maturities and credit quality. Current federal income tax law requires
that a holder of a taxable zero coupon security report as income each year the
portion of the original issue discount of such security that accrues that year,
even though the holder receives no cash payments of interest during the year.
The Series has qualified as a regulated investment company under the Code.
Accordingly, during periods when the Series receives no interest payments on its
zero coupon securities, it will be required, in order to maintain its desired
tax treatment, to distribute cash approximating the income attributable to such
securities. Such distribution may require the sale of portfolio securities to
meet the distribution requirements and such sales may be subject to the risk
factor discussed above.
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The use of interest rate swaps by the Global Bond Series involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If Delaware International is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Series will be less favorable than it would have
been if this investment technique were never used. Interest rate swaps do not
involve the delivery of securities or other underlying assets or principal.
Thus, if the other party to an interest rate swap defaults, the Series' risk of
loss consists of the net amount of interest payments that the Series is
contractually entitled to receive.
While the Global Bond Series intends to seek to qualify as a "diversified"
investment company under provisions of Subchapter M of the Code, it will not be
diversified for purposes of the 1940 Act. Thus, while at least 50% of such
Series' total assets will be represented by cash, cash items, and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the Series' total assets, it will not satisfy the 1940 Act requirement in
this respect, which applies that test to 75% of the Series' assets. A
nondiversified portfolio is believed to be subject to greater risk because
adverse effects on the portfolio's security holdings may affect a larger portion
of the overall assets.
* * *
Each Series' investment objective, the Fund's designation as an open-end
investment company, the Equity/Income and Emerging Growth Series' designation as
a diversified fund, and each Series' 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 a 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 a 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.
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 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.
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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."
Each Series of the Fund will be managed in such a manner as to comply with
these diversification requirements.
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.
Dividends and distributions
Dividends for the Global Bond Series are declared and paid monthly on the
first business day after the end of the month. Short-term capital gains
distributions, if any, may be paid with the dividend; otherwise, any
distributions from net realized securities profits normally will be distributed
following the close of the fiscal year. The Fund's fiscal year ends on December
31.
For the Equity/Income Series, the Fund will make payments from the Series'
net investment income quarterly. Distributions from the Series' net realized
securities profits, if any, normally will be made following the close of the
fiscal year.
For the Emerging Growth Series, the Fund will make payments from the
Series' net investment income and net realized securities profits, if any, twice
a year.
All dividends and distributions are automatically reinvested in additional
Series shares.
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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.
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 net asset value
are computed as of the close of regular trading on the New York Stock Exchange
(ordinarily, 4 p.m., Eastern time) on days when the Exchange is open.
A Series' NAV per share is computed by adding the value of all securities
and other assets in that Series' portfolio, deducting any liabilities of that
Series (expenses and fees are accrued daily) and dividing by the number of that
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 each 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 Global Bond Series' portfolio may 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 NAV of that Series may be significantly
affected by such trading on days when shareholders have no access to that
Series. To the extent other Series hold foreign securities which are so listed,
the net asset value of those Series also could be affected by trading on days
when shareholders have no access to those Series.
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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 managers
Delaware Management furnishes investment management services to the
Equity/Income and Emerging Growth Series. Delaware International, an affiliate
of Delaware Management, furnishes investment management services to the Global
Bond Series.
Delaware Management and its predecessors have been managing the funds in
the Delaware Group since 1938. On December 31, 1995, Delaware Management and its
affiliate, Delaware International, 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. Except for the
Global Bond Series which was not yet in existence, in connection with the
merger, new Investment Management Agreements between the Fund on behalf of each
Series and its investment manager were 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 Management manages the Equity/Income and Emerging Growth Series'
portfolios and makes investment decisions which are implemented by the Fund's
Trading Department. For these services, Delaware Management is paid an annual
fee equal to 3/4 of 1% of the average daily net assets of the Emerging Growth
Series and 6/10 of 1% of the Equity/Income Series' average daily net assets,
less, in the case of the Equity/Income Series, a proportionate share of all
directors' fees paid to the unaffiliated directors of the Fund. The investment
management fee incurred by the Equity/Income and Emerging Growth Series for the
year ended December 31, 1995 was 0.60% and 0.75%, respectively, of average daily
net assets. After considering the waiver of fees by Delaware Management, as
described under the caption Expenses, the investment management fee paid by the
Equity/Income and Emerging Growth Series was 0.60% and 0.58%, respectively, of
average daily net assets.
Delaware International manages the Global Bond 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 Global Bond Series. See Expenses for a discussion of a
voluntary waiver of its management fee undertaken by Delaware International. The
Global Bond Series was first offered to investors on May 1, 1996.
-22-
<PAGE>
John B. Fields has primary responsibility for making day-to-day investment
decisions for the Equity/Income Series. He has been the Senior Portfolio Manager
of this Series since 1992. Mr. Fields, who has 25 years experience in investment
management, earned a bachelor's degree and an MBA from Ohio State University.
Before joining the Delaware Group in 1992, he was Director of Domestic Equity
Risk Management at DuPont. Prior to that, he was Director of Equity Research at
Comerica Bank. Mr. Fields is a member of the Financial Analysts Society.
In making investment decisions for the Equity/Income Series, Mr. Fields
works with a team of 12 portfolio managers and analysts, each of whom
specializes in a different industry sector and makes recommendations
accordingly. Mr. Fields also regularly consults with Wayne A. Stork and Richard
G. Unruh, Jr. Mr. Stork, Chairman of Delaware Management and the Fund's Board of
Directors, is a graduate of Brown University and attended New York University's
Graduate School of Business Administration. Mr. Stork joined the Delaware Group
in 1962 and has served in various executive capacities at different times within
the Delaware organization. Mr. Unruh is a graduate of Brown University and
received his MBA from the University of Pennsylvania's Wharton School. He joined
the Delaware Group in 1982 after 19 years of investment management experience
with Kidder, Peabody & Co. Inc. Mr. Unruh was named an executive vice president
of the Fund in 1994. He is also a member of the Board of Directors of the
Manager and DMC and was named an executive vice president of DMC in 1994.
Edward N. Antoian has primary responsibility for making day-to-day
investment decisions for the Emerging Growth Series. He has been the Series'
senior portfolio manager since its inception. A graduate of The State University
of New York at Albany with an MBA in Finance from the University of
Pennsylvania's Wharton School, Mr. Antoian began his career with Price
Waterhouse. Prior to joining the Delaware Group in June 1984, he worked in the
Institutional Equity Department of E.F. Hutton in Philadelphia. A Chartered
Financial Analyst, Mr. Antoian is a member of the Philadelphia Finance
Association and the Philadelphia Securities Association.
In making investment decisions for the Emerging Growth Series, Mr. Antoian
regularly consults with Wayne A. Stork, William H. Miller and other members of
the Delaware Group's equity department. Mr. Miller is an Assistant Portfolio
Manager. He holds a BA in Economics from Trinity College. Prior to joining the
Delaware Group in 1995, he worked as a technology analyst for Janney Montgomery
Scott in Philadelphia and he has also served as an institutional salesman for
Rutherford Brown & Catherwood.
Ian G. Sims has primary responsibility for making day-to-day investment
decisions for the Global Bond Series. He has been the senior portfolio manager
for this Series since its inception. Mr. Sims is a graduate of the University of
Newcastle-Upon-Tyne. He joined Delaware International in 1990 as a senior
international fixed income and currency manager. Mr. Sims began his investment
career with the Standard Life Assurance Co., and subsequently moved to the Royal
Bank of Canada Investment Management International Company, where he was an
international fixed income manager. Prior to joining Delaware International, he
was a senior fixed income and currency portfolio manager with Hill Samuel
Investment Advisers Ltd.
In making investment decisions for the Global Bond Series, Mr. Sims
regularly consults with Hywel Morgan and Christopher A. Moth. Mr. Morgan was
educated at the University of Wales and was subsequently an Economics Lecturer
at Dundee University. Prior to joining Delaware International, he was Associate
Director of the international fixed income department and head of the credit
review committee at Hill Samuel Investment Management responsible for over $500
million in multi-currency fixed interest accounts. His prior experience included
working as an economic adviser for Credit Suisse and the Economic Intelligence
Unit. Mr. Morgan started his business career as a Corporate Economist &
Strategist at Ford of Europe and Esso Petroleum. Mr. Moth is a graduate of The
City University London. Mr. Moth joined Delaware in 1992. He previously worked
at the Guardian Royal Exchange in an actuarial capacity where he was responsible
for technical analysis, quantitative models and projections. Mr. Moth has been
awarded the certificate in Finance & Investment from the Institute of Actuaries
in London.
-23-
<PAGE>
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 respective Series' investment objectives, the
annual portfolio turnover rates are not expected to exceed 100% for the
Equity/Income and Global Bond Series, but may exceed 100% for the Emerging
Growth Series.
The portfolio turnover rates for the Equity/Income and Emerging Growth
Series for the years ended December 31, 1994 and 1995 were as follows:
Equity/Income Series -- 91% and 85%, respectively, and Emerging Growth Series --
59% and 76%, respectively.
Best efforts are used to obtain the best available price and most
favorable execution for portfolio transactions. Orders may be placed with
brokers or dealers who provide brokerage and research services to the respective
investment manager or their respective advisory clients. These services may be
used by the respective investment manager in servicing any of their respective
accounts. Subject to best price and execution, the respective investment manager
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.
Performance information
From time to time, the Fund may quote each Series' 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 Fund may also advertise aggregate and average total
return information concerning the Series over additional periods of time.
From time to time, the Fund may also quote the Global Bond Series' yield
or total return performance in advertising and other types of literature. The
current yield for the Series will be calculated by dividing the annualized net
investment income earned by the Series during a recent 30-day period by the
maximum offering price per share on the last day of the period. The yield
formula provides for semi-annual compounding which assumes that net investment
income is earned and reinvested at a constant rate and annualized at the end of
a six-month period.
Because securities' prices fluctuate, investment results of the Series
will fluctuate and past performance should not be considered as a representation
of future results.
-24-
<PAGE>
Distribution and service
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), serves as the Fund's national
distributor under Distribution Agreements dated April 3, 1995 for the
Equity/Income and Emerging Growth Series. The Global Bond Series' Distribution
Agreement is dated as of May 1, 1996. The Distributor bears all of the costs of
promotion and distribution.
Delaware Service Company, Inc. (the "Transfer Agent") is the shareholder
servicing, dividend disbursing and transfer agent for each Series under the
Amended and Restated Shareholders Services Agreement dated May 1, 1996.
The Distributor and the Transfer Agent are indirect, wholly-owned
subsidiaries of DMH.
Expenses
Each Series is responsible for all of its own expenses other than those
borne by the respective investment manager under the Investment Management
Agreements and those borne by the Distributor under the Distribution Agreements.
With respect to the Equity/Income Series, Delaware Management had elected
voluntarily to waive its fee and reimburse this Series to the extent necessary
to limit certain expenses of the Series to 8/10 of 1% of the Series' average
daily net assets for the period July 1, 1992 through June 30, 1993. This waiver
has been extended through June 30, 1996. For the year ended December 31, 1995,
the Equity/Income Series' ratio of expenses to average daily net assets was
0.69%.
In connection with the Emerging Growth Series, Delaware Management had
elected voluntarily to waive its fee and to reimburse the Series to the extent
necessary to limit certain expenses to 8/10 of 1% of average daily net assets
for the period from commencement of the public offering for the Series through
June 30, 1994. This waiver has been extended through June 30, 1996. For the year
ended December 31, 1995, the Emerging Growth Series' ratio of expenses to
average daily net assets was 0.80%, reflecting the waiver of fees.
With respect to the Global Bond Series, Delaware International has elected
voluntarily to waive its fee and to reimburse the Series to the extent necessary
to limit certain expenses to 8/10 of 1% of average daily net assets for the
period from commencement of the public offering through June 30, 1996.
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 First Allmerica Financial
Life Insurance Company and Separate Accounts VA-K, VEL, VEL II and Inheiritage
of Allmerica Financial Life Insurance and Annuity 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.
As a "series" type of mutual fund, the Fund issues separate classes or
series of stock. Additional series may be established in the future. An interest
in the Fund is limited to the assets of the particular Series in which shares
are held, and shareholders of each Series are entitled to a pro-rata share of
all dividends and distributions arising from an investment in such Series.
-25-
<PAGE>
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. Each of the Series is currently allocated fifty
million shares. The Fund may establish additional series and may allocate its
shares either to such new classes or to any of the existing Series.
Each Series' shares have equal voting rights and are equal in all other
respects. Each Series will vote separately on any matter which affects only that
Series. 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. Shares of each Series will have a
priority over shares of any other Series of the Fund in the assets and income of
that 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 prospectuses for the separate
accounts which invest in the Fund, the voting instructions received from
contract owners may be disregarded.
<PAGE>
INVESTMENT MANAGERS ----------------------------------
Delaware Management Company, Inc.
One Commerce Square Delaware Group
Philadelphia, PA 19103
Delaware International Advisers Ltd. ----------------------------------
Veritas House
125 Finsbury Pavement Premium Fund, Inc.
London, England EC2A 1NQ
NATIONAL DISTRIBUTOR ----------------------------------
Delaware Distributors, L.P.
1818 Market Street Part B
Philadelphia, PA 19103
SHAREHOLDER SERVICING, Statement of
DIVIDEND DISBURSING Additional Information
AND TRANSFER AGENT
Delaware Service Company, Inc. ----------------------------------
1818 Market Street
Philadelphia, PA 19103 May 1, 1996
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP Delaware
One Commerce Square Group
Philadelphia, PA 19103 =========
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 Chase Metrotech Center
Brooklyn, NY 11245
<PAGE>
- -------------------------------------------------------------------------------
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 objectives and policies
- -------------------------------------------------------------------------------
Accounting and tax issues
- -------------------------------------------------------------------------------
Performance information
- -------------------------------------------------------------------------------
Trading practices and brokerage
- -------------------------------------------------------------------------------
Offering price
- -------------------------------------------------------------------------------
Dividends and realized securities
profits distributions
- -------------------------------------------------------------------------------
Taxes
- -------------------------------------------------------------------------------
Investment management agreements
- -------------------------------------------------------------------------------
Officers and directors
- -------------------------------------------------------------------------------
General information
- -------------------------------------------------------------------------------
Appendix A--Description of ratings
- -------------------------------------------------------------------------------
Appendix B
- -------------------------------------------------------------------------------
Financial statements
- -------------------------------------------------------------------------------
-1-
<PAGE>
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 its separate Portfolios ("Series"). 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 Fund dated May 1, 1996, as it may be amended from time to time. It should be
read in conjunction with the prospectuses for the variable contracts and the
Fund. Part B is not itself a prospectus but is, in its entirety, incorporated by
reference into the Fund's Prospectus. The Fund's Prospectus may be obtained by
writing or calling your investment dealer or by contacting the Fund's national
distributor, Delaware Distributors, L.P. (the "Distributor"), 1818 Market
Street, Philadelphia, PA 19103.
-2-
<PAGE>
Investment objectives and policies
The investment objectives of the Series are below. There can be no
assurance that the objectives of any Series will be realized.
Equity/Income Series seeks the highest possible total rate of
return by selecting issues that exhibit the potential for capital
appreciation while providing higher than average dividend income.
This Series has the same objective and investment disciplines as
the Decatur Total Return Fund of Delaware Group Decatur Fund, Inc.,
a separate Delaware Group fund, in that it invests generally, but
not exclusively, in common stocks and income-producing securities
convertible into common stocks, consistent with the Series'
objective.
Emerging Growth Series seeks long-term capital appreciation by
investing primarily in small-cap common stocks and convertible
securities of emerging and other growth-oriented companies. These
securities will have been judged to be responsive to changes in the
market place and to have fundamental characteristics to support
growth. Income is not an objective. This Series has the same
objective and investment disciplines as Delaware Group Trend Fund,
Inc., a separate Delaware Group fund.
Global Bond Series seeks current income consistent with
preservation of principal by investing primarily in fixed income
securities that may also provide the potential for capital
appreciation. This Series is a global fund, as such, at least 65%
of the Series' assets will be invested in fixed income 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, one of which may be the United States. This
Series has the same objective and investment disciplines as the
Global Bond Series of Delaware Group Global & International Funds,
Inc., a separate Delaware Group fund.
Investment restrictions
The Fund has the following restrictions for each Series which may not be
amended without approval of a majority of the outstanding voting securities of
the affected Series, which is the lesser of more than 50% of the outstanding
voting securities or 67% of the voting securities of the affected 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. Each 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 Emerging Growth Series and to only 50% of the assets of the
Global Bond 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 a Series'
assets or (c) own securities of investment companies having an aggregate value
in excess of 10% of a Series' assets. Any such purchase shall be at the
customary brokerage commission.
-3-
<PAGE>
5. Make any investment in real estate unless necessary for office space
or the protection of investments already made. (This restriction does not
preclude a 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 a 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 Emerging Growth Series from entering into futures
contracts or options 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 have no intention of increasing their 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 a 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%. A Series will not pledge more than 15% of its net assets. A 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 each Series' investment
objective and policies are considered loans and except that each 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 a 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 a
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, a Series might be deemed to be
an underwriter for the purposes of the Securities Act of 1933.
Investment restrictions 2, 3, 7 and 10 above are nonfundamental
policies of the Global Bond Series. In addition, although not considered a
fundamental policy, the Global Bond Series will not invest more than 10% of its
net assets in repurchase agreements maturing in more than seven days and other
illiquid assets. Securities of foreign issuers which are not listed on a
recognized domestic or foreign exchange or for which a bona fide market does not
exist at the time of purchase or subsequent valuation are included in the
category of illiquid assets.
In addition, the following investment restriction may be changed by the
Board of Directors:
Each Series will not invest in warrants valued at lower of cost or
market exceeding 5% of a Series' net assets. Included within that amount, but
not to exceed 2% of a Series' net assets, may be warrants not listed on the New
York Stock Exchange or American Stock Exchange.
-4-
<PAGE>
While the Series are permitted under certain circumstances to borrow
money, they do not normally do so. No investment securities will be purchased
while a 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
Fund shares, each Series will not borrow money in excess of 25% of the value of
its net assets.
Additional information on the Emerging Growth
and Global Bond Series
Futures contracts and options on futures
contracts
Futures contracts--As noted in the Prospectus, each of the Emerging Growth and
Global Bond Series may enter into futures contracts relating to securities,
securities indices or interest rates. In addition, the Global Bond 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 a Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, a
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 a Series is 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 a
Series' current or intended investments in fixed income securities. For example,
if a Series owned long-term bonds and interest rates were expected to increase,
that 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 that 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
a 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 that Series' interest rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the net asset value of that 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, a Series could protect itself
against the effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became available or the
market had stabilized. At that time, the interest rate futures contracts could
be liquidated and that Series' cash reserve could then be used to buy long-term
bonds on the cash market.
As noted in the Prospectus, the Global Bond 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 Global Bond
Series may sell futures contracts on a foreign currency, for example, when the
Series 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
contracts. 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 value as a result of the change in exchange rates.
-5-
<PAGE>
Conversely, the Global Bond 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 Global Bond 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, each of the Emerging
Growth and Global Bond Series may purchase and write options on the types of
futures contracts that 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, a 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, a 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 a 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, a 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, a 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 in part, by a profit on the option. If the market decline does not
occur, the 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 a Series will increase
prior to acquisition, due to a market advance or changes in interest or exchange
rates, a 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.
-6-
<PAGE>
Options on foreign currencies
The Global Bond 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
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.
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<PAGE>
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
Each 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 managers believe 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 consider 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. Each
Series of the Fund may invest cash balances in a joint repurchase agreement in
accordance with the terms of the Order and subject generally to the conditions
described above.
Portfolio loan transactions
Each 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 the Series' respective investment manager
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 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; 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 a 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, a Series will only enter into loan arrangements
after a review of all pertinent facts by the Series' respective investment
manager, 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 the Series' respective
investment manager.
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Foreign securities
To the extent the Series are authorized and intend to invest in 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 certain of the Series permit them 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.
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 a Series. Payment of
such interest equalization tax, if imposed, would reduce such 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 a Series may make or enter into will
be subject to the special currency rules described above.
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<PAGE>
Foreign currency transactions
In connection with a Series' investment in foreign securities, a 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. A Series will account for
forward contracts by marking to market each day at daily exchange rates.
When a 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 that 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 such Series' total assets
committed to the consummation of such forward contracts. If the additional cash
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.
Options
Each Series may write call options and purchase put options on a
covered basis only. The Global Bond Series may also purchase call options. The
Series also may enter into closing transactions with respect to such options
transactions. No Series will engage in option transactions for speculative
purposes.
To the extent authorized to engage in option transactions, the Series
may invest in options that are Exchange listed and the Global Bond Series may
also invest in options that are traded over-the-counter. The Equity/Income and
Emerging Growth Series reserve the right to invest in over-the-counter options
upon written notice to their shareholders. 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 assurance 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 a Series' ability to effectively hedge its securities.
A. Covered call writing--A Series may write covered call options from
time to time on such portion of its portfolio, without limit, as the respective
investment manager 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 a 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
net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part by a decline in the market value of the underlying security.
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<PAGE>
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--A 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 intend 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 a
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. A 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 a 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 Global Bond Series may purchase call
options to the extent that premiums paid by the Series do not aggregate more
than 2% of the Series' total assets. When the Series purchases a call option, in
return for a premium paid by the Series to the writer of the option, the Series
obtains the right to buy the security underlying the option at a specified
exercise price at any time during the term of the option. The writer of the call
option, who receives the premium upon writing the option, has the obligation,
upon exercise of the option, to deliver the underlying security against payment
of the exercise price. The advantage 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.
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<PAGE>
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 Emerging Growth and Global Bond 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 Emerging Growth and Global Bond 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.
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 bear 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.
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<PAGE>
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 Emerging Growth and Global Bond 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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<PAGE>
Accounting and tax issues
When a 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 a Series has written
expires on its stipulated expiration date, a Series recognizes a capital gain.
If a Series enters into a closing purchase transaction with respect to an option
which a Series has written, a 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 a
Series has written is exercised, a 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 a 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 a Series has purchased expires on
the stipulated expiration date, a 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 a 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 Emerging Growth or Global Bond 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--Each 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. A 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 each 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 each Series' assets consist 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 each Series' gross income be derived from sales of securities held for less
than three months.
The requirement that not more than 30% of each Series' gross income be
derived from gains from the sale or other disposition of securities held for
less than three months may restrict a Series in its ability to write covered
call options on securities which it has held less than three months, to write
options which expire in less than three months, to sell securities which have
been held less than three months and to effect closing purchase transactions
with respect to options which have been written less than three months prior to
such transactions. Consequently, in order to avoid realizing a gain within the
three-month period, a Series may be required to defer the closing out of a
contract beyond the time when it might otherwise be advantageous to do so. A
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.
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Performance information
Contract owners and prospective investors will be interested in
learning from time to time the current yield of the Global Bond Series.
Advertisements of performance of the underlying Series, if any, will be
accompanied by a statement of performance of the separate account. As explained
under Dividends and realized securities profits distributions, dividends for the
Global Bond Series are declared daily from net investment income. Yield will
fluctuate as income earned fluctuates.
From time to time, the Fund may state each 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. Each Series may also advertise aggregate and average total return
information over additional periods of time.
Each 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 each Series, other than the Global Bond Series, as
shown below, is the average annual total return quotations through December 31,
1995. As of the date of this Part B, the Global Bond Series had not yet begun
investment operations. Securities prices fluctuated during the periods covered
and past results should not be considered as representative of future
performance.
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<PAGE>
Average Annual Total Return(1)
Equity/ Emerging
Income Growth
1 year 1 year
ended ended
12/31/95 36.12% 12/31/95 39.21%
Period
3 years 12/27/93(2)
ended through
12/31/95 16.18% 12/31/95 18.79%
5 years
ended
12/31/95 15.86%
Period
7/28/88(2)
through
12/31/95 10.35%
(1) The respective investment manager elected to waive voluntarily the
portion of its annual compensation under its Investment Management
Agreement with each Series to limit operating expenses of the Series to
.80%. In the absence of such voluntary waiver, performance would have
been affected negatively.
(2) Date of initial public offering.
The Global Bond Series may also quote its current yield, calculated as
described below, in advertisements and investor communications.
The yield computation for the Global Bond Series is determined by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and annualizing
the resulting figure, according to the following formula:
a - b
-----
6
YIELD = 2[( cd + 1)- 1]
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends;
d = the maximum offering price per share on the last day of the
period.
The above formula will be used in calculating quotations of yield, based
on specific 30-day periods identified in advertising by the Series.
Yield quotations are based on the offering price determined by the
Series' net asset value on the last day of the period and will fluctuate
depending on the period covered.
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<PAGE>
Investors should note that income earned and dividends paid by the Global
Bond Series will also vary depending upon fluctuations in interest rates and
performance of the Series' portfolio. The net asset value of the Series may
change. The Global Bond Series invests in longer-term securities that fluctuate
in value and do so in a manner inversely correlated with changing interest
rates. The Series' net asset value will tend to rise when interest rates fall.
Conversely, the Series' net asset value will tend to fall as interest rates
rise. Normally, fluctuations in interest rates have a greater effect on the
prices of longer-term bonds. The value of the securities held in the Series will
vary from day to day and investors should consider the volatility of the Series'
net asset value as well as their yields before making a decision to invest.
Comparative information
From time to time, performance of each Series in the Fund may be compared
to various industry indices.
The Fund may quote actual total return performance, dividend results and
other performance information in advertising and other types of literature of
those Series that invest primarily in equity securities 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 a particular
investment objective, a Series' portfolio may include common stocks considered
by the respective investment manager to be more aggressive than those tracked by
these indices.
Each 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.
Each Series may also state 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 particular 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 and/or yield
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.
-17-
<PAGE>
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.
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 nonindustrial 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.
-18-
<PAGE>
The following table is an example, for purposes of illustration only, of
cumulative total return performance for the each Series, other than the Global
Bond Series, through December 31, 1995. For these purposes, the calculations
assume the reinvestment of any realized securities profits distributions and
income dividends paid during the indicated periods.
Cumulative Total Return(1)
Equity/ Emerging
Income Growth
3 months 3 months
ended ended
12/31/95 6.17% 12/31/95 3.47%
6 months 6 months
ended ended
12/31/95 14.80% 12/31/95 17.91%
9 months 9 months
ended ended
12/31/95 22.84% 12/31/95 31.15%
1 year 1 year
ended ended
12/31/95 36.12% 12/31/95 39.21%
Period
3 years 12/27/93(2)
ended through
12/31/95 56.83% 12/31/95 41.44%
5 years
ended
12/31/95 108.77%
Period
7/28/88(2)
through
12/31/95 107.84%
(1) The respective investment manager elected to waive voluntarily the
portion of its annual compensation under its Investment Management
Agreement with each Series to limit operating expenses of the Series to
.80%. In the absence of such voluntary waiver, performance would have
been affected negatively.
(2) 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 the respective investment manager'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 a Series.
-20-
<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 a 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 monthly for 10 years:
6% 8% 10% 12%
Rate of Rate of Rate of Rate of
Return Return Return Return
1 Year $10,617 $10,830 $11,047 $11,268
2 Years $11,272 $11,729 $12,204 $12,697
3 Years $11,967 $12,702 $13,482 $14,308
4 Years $12,705 $13,757 $14,894 $16,122
5 Years $13,488 $14,898 $16,453 $18,167
6 Years $14,320 $16,135 $18,176 $20,471
7 Years $15,203 $17,474 $20,079 $23,067
8 Years $16,141 $18,924 $22,182 $25,993
9 Years $17,137 $20,495 $24,504 $29,290
10 Years $18,194 $22,196 $27,070 $33,004
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 results of any of
the Series.
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<PAGE>
Trading practices and brokerage
The Fund or, in the case of the Global Bond Series, Delaware
International, selects banks, 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 its trading department or, in the case of the Global Bond Series,
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 Equity/Income Series were
$133,337, $217,957 and $255,600, respectively. During the years ended December
31, 1994 and 1995, the aggregate dollar amounts of brokerage commissions paid by
the Emerging Growth Series were $4,127 and $18,776, respectively.
The respective investment manager may allocate out of all commission
business generated by all of the funds and accounts under management by the
respective investment manager, brokerage business to brokers or dealers who
provide brokerage and research services. These services include advice, either
directly or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; furnishing of
analyses and reports concerning issuers; securities or industries; providing
information on economic factors and trends; assisting in determining portfolio
strategy; providing computer software and hardware used in security analyses;
and providing portfolio performance evaluation and technical market analyses.
Such services are used by the respective investment manager in connection with
its investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
During the year ended December 31, 1995, portfolio transactions of the
Equity/Income and Emerging Growth Series in the amounts of $44,360,225 and
$3,257,292, respectively, resulting in brokerage commissions of $63,705 and
$12,260, respectively, were directed to brokers for brokerage and research
services provided.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreements, 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
the respective investment manager which constitute in some part brokerage and
research services used by the respective investment manager in connection with
its investment decision-making process and constitute in some part services used
by the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In such cases,
the respective investment manager will make a good faith allocation of brokerage
and research services and will pay out of its own resources for services used by
the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the Fund and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
-22-
<PAGE>
The respective investment manager may place a combined order for two or
more accounts or funds engaged in the purchase or sale of the same security if,
in its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or fund. When
a combined order is executed in a series of transactions at different prices,
each account participating in the order may be allocated an average price
obtained from the executing broker. It is believed that the ability of the
accounts to participate in volume transactions will generally be beneficial to
the accounts and funds. Although it is recognized that, in some cases, the joint
execution of orders could adversely affect the price or volume of the security
that a particular account or fund may obtain, it is the opinion of the
respective investment manager 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 which 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 each Series. Given the respective
Series' investment objectives, the Fund anticipates that the annual rates of
portfolio turnover will not generally exceed 100% for the Equity/Income and
Global Bond Series, and may exceed 100% for the Emerging Growth 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 each 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
each Series. A turnover rate of 100% would occur, for example, if all the
investments in a Series' portfolio at the beginning of the year were replaced by
the end of the year. In investing to achieve their respective objective, a
Series may hold securities for any period of time. Portfolio turnover will also
be increased if a 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 rates for the Equity/Income and Emerging Growth
Series for the years ended December 31, 1994 and 1995 were as follows:
Equity/Income Series -- 91% and 85%, respectively; and Emerging Growth Series --
59% and 76%, respectively.
-23-
<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 such 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 a Series' portfolio, deducting any liabilities of
that Series and dividing by the number of that 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 a Series of securities owned by it is not reasonably
practical, or it is not reasonably practical for a 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 next determined after the
suspension has been terminated.
-24-
<PAGE>
Dividends and realized securities profits
distributions
Dividends for the Global Bond Series are declared and paid monthly on the
first business day after the end of the month.
For the Equity/Income Series, the Fund will make payments from the
Series' net investment income quarterly.
For the Emerging Growth Series, the Fund will make payments from the
Series' net investment income and net realized securities profits, if any, twice
a year.
Short-term capital gains distributions, if any, may be paid with the
dividend; otherwise, any distributions from net realized securities profits
normally will be distributed following the close of the fiscal year.
All dividends and distributions are automatically reinvested.
-25-
<PAGE>
Taxes
Each 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. 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.
-26-
<PAGE>
Investment management agreements
Delaware Management Company, Inc. ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to the Equity/Income and Emerging Growth Series.
Delaware International Advisers Ltd. ("Delaware International"), located at
Veritas House, 125 Finsbury Pavement, London, England EC2A 1NQ, furnishes
investment management services to the Global Bond 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.
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 Agreements for each Series, except the Global
Bond Series, are dated April 3, 1995 and were approved by shareholders on March
29, 1995 and will remain in effect for an initial period of two years. The
Investment Management Agreement for the Global Bond Series is dated May 1, 1996
and was approved by the initial shareholder on May 1, 1996 and will remain in
effect for an initial period of two years. The Agreements may be renewed only if
such renewal and continuance are specifically approved at least annually by the
Board of Directors or by vote of a majority of the outstanding voting securities
of the 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 Agreements are terminable
without penalty on 60 days' notice by the directors of the Fund or by the
respective investment manager. The Agreements will terminate automatically in
the event of their assignments.
The annual compensation paid by the Emerging Growth and Global Bond
Series is equal to 3/4 of 1% of its average daily net assets and by the
Equity/Income Series is equal to 6/10 of 1% of average daily net assets, less,
in the case of the Equity/Income Series, 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 Equity/Income Series
were $109,003,456 and of the Emerging Growth Series were $20,509,664. The Global
Bond Series did not publicly offer its shares prior to May 1, 1996.
The respective investment manager makes all investment decisions for the
Series to which it provides investment management services. In addition,
Delaware Management pays the salaries of all directors, officers and employees
who are affiliated with both it and the Fund. For the year ended December 31,
1993, the investment management fees incurred by the Equity/Income Series
amounted to $302,835 of which $298,117 was paid after consideration of the
waiver described below. For the years ended December 31, 1994 and 1995,
investment management fees paid by the Equity/Income Series amounted to $422,361
and $528,481, respectively. For the years ended December 31, 1994 and 1995,
investment management fees incurred by the Emerging Growth Series amounted to
$25,229 and $92,985, respectively, and $2,545 and $72,359, respectively, were
paid due to the waiver of fees described below.
Except for those expenses borne by the respective investment manager
under the Investment Management Agreements and the Distributor under the
Distribution Agreements, each 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. The ratios of expenses to average daily net assets
for the Equity/Income and Emerging Growth Series for the year ended December 31,
1995 were 0.69% and 0.80%, respectively. The expense ratio of the Emerging
Growth Series reflect the waiver of fees described below.
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<PAGE>
In connection with the Equity/Income Series, Delaware Management elected
voluntarily to waive its fee and reimburse this Series to the extent the Series'
annual operating expenses, exclusive of taxes, interest, brokerage commissions
and extraordinary expenses, exceed .80% of average daily net assets for the
period from July 1, 1992 through June 30, 1993. This waiver has been extended
through June 30, 1996. In connection with the Emerging Growth Series, Delaware
Management has elected voluntarily to waive its fee and reimburse the Series for
the period from the commencement of the Series' operations through June 30, 1994
to the extent that the Series' annual operating expenses, exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, exceed .80% of
average daily net assets. This waiver has been extended through June 30, 1996.
Similarly, Delaware International has voluntarily elected to waive its fee and
reimburse the Global Bond 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 June 30, 1996.
Distribution and service
Delaware Distributors, L.P. (which formerly conducted business as
Delaware Distributors, Inc.), located at 1818 Market Street, Philadelphia, PA
19103, is the national distributor under Distribution Agreements dated April 3,
1995 for the Equity/Income and Emerging Growth Series. The Global Bond Series'
Distribution Agreement is dated May 1, 1996. It is an affiliate of Delaware
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.
Delaware Service Company, Inc., another affiliate of Delaware Management
and Delaware International, is 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. Delaware Service
Company, Inc. is also an indirect, wholly-owned subsidiary of Delaware
Management Holdings, Inc.
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<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, new Investment Management Agreements between the
Fund on behalf of all of the Series, except Global Bond Series, and, as
relevant, Delaware Management and Delaware International, were 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.
-29-
<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.
-31-
<PAGE>
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.
Edward N. Antoian (40)
Vice President/Senior Portfolio Manager of the Fund, of seven other
equity funds in the Delaware Group and of Delaware Management
Company, Inc.
During the past five years, Mr. Antoian has served in such capacities
within the Delaware organization.
John B. Fields (50)
Vice President/Senior Portfolio Manager of the Fund, of seven other
equity funds in the Delaware Group and of Delaware Management
Company, Inc.
Before joining the Delaware Group in 1992, Mr. Fields served as a
director of domestic equity risk management for DuPont, Wilmington,
DE.
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.
-32-
<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.
-33-
<PAGE>
General information
Delaware Management is the investment manager for the Equity/Income and
Emerging Growth Series. Delaware International is the investment manager for the
Global Bond Series. Delaware Management or its affiliate, Delaware
International, manages the other funds in the Delaware Group. Delaware
Management, through a separate division, also manages private investment
accounts. While investment decisions for each 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 national distributor for the Fund
and for 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, L.P., 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 initial public offering date for the Equity/Income Series was July
28, 1988. The Emerging Growth Series commenced operations on December 27, 1993.
The initial public offering date for the Global Bond Series was May 1, 1996.
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 each Series. While all shares
have equal voting rights on matters affecting the entire Fund, each 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 each 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.
-34-
<PAGE>
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.
-35-
<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 Investors 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.
-36-
<PAGE>
Appendix B
The company life cycle
Traditional business theory contends that a typical company progresses
through basically four stages of development, keyed closely to a firm's sales.
1. Emerging Growth--a period of experimentation in which the company
builds awareness of a new product or firm.
2. Accelerated Development--a period of rapid growth with potentially
high profitability and acceptance of the product.
3. Maturing Phase--a period of diminished real growth due to dependence
on replacement or sustained product demand.
4. Cyclical Stage--a period in which a company faces a potential
saturation of demand for its product. At this point, a firm either diversifies
or becomes obsolete.
Hypothetical corporate life cycle
Hypothetical Corporate Life Cycle Chart shows in a line illustration,
the stages that a typical company would go through, beginning with the emerging
state where sales growth continues at a steep pace to the mature phase where
growth levels off to the cyclical stage where sales show more definitive highs
and lows.
INSERT CHART
The above chart illustrates the path traditionally followed by
companies that successfully survive the growth sequence.
-37-
<PAGE>
Financial statements
Ernst & Young LLP serves as the independent auditor for each Series of
the Fund and, in its capacity as such, audits the financial statements of each
Series contained in the Fund's Annual Report. The Series' Statements of Net
Assets, Statements of Operations, Statements 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 Fund's 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.
