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(DGPF3)
PROSPECTUS
MAY 1, 1997
DELAWARE GROUP PREMIUM FUND, INC.
1818 Market Street, Philadelphia, PA 19103
Delaware Group Premium Fund, Inc. (fund) is an 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, 1997, as it may be amended from time to time, contains additional
information about the fund and has been filed with the Securities and Exchange
Commission. Part B is incorporated by reference into this Prospectus and is
available, without charge, by writing to Delaware Distributors, L.P. at the
above address or by calling 1-800-523-1918. 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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(DGPF3)
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 Decatur Total Return Fund of Delaware
Group Equity Funds II, 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 Global Bond Series of Delaware Group
Global & International Funds, Inc., a separate Delaware Group fund.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
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(DGPF3)
TABLE OF CONTENTS
Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment objectives and policies . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity/Income Series . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emerging Growth Series . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Bond Series . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . .
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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(DGPF3)
SUMMARY INFORMATION
CAPITALIZATION
The fund has a present authorized capitalization of one billion 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, 0.60% and 0.75% 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 0.75% 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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(DGPF3)
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 with or on behalf of 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 commodities trading
advisers 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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(DGPF3)
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
obtained from the fund upon request at no charge.
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DGPF3-CHT
<TABLE>
<CAPTION>
EQUITY/INCOME SERIES
--------------------------------------------------------------------------------------
7/28/88(1)
YEAR ENDED THROUGH
12/31/96 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> <C>
Net Asset Value, Beginning
of Period . . . . . . . . . . . $14.8300 $11.4800 $12.5100 $11.2200 $10.7500 $9.2400 $11.4000 $10.1600 $10.0000
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income . . . . . . 0.3771 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). . 2.3979 3.5745 (0.4221) 1.2659 0.5045 1.5498 (1.9189) 1.0337 0.0666
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations . . . . . . . . . 2.7750 3.9900 (0.0100) 1.7000 0.9200 2.0000 (1.4700) 1.3150 0.1600
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net investment
income) . . . . . . . . . . . . (0.4200) (0.4300) (0.4200) (0.4100) (0.4500) (0.4900) (0.5600) (0.0750) none
-------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions (from capital
gains) . . . . . . . . . . . . (1.2050) (0.2100) (0.6000) none none none (0.1300) none none
Returns of Capital . . . . . . . none none none none none none none none none
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Distributions . . . . . . (1.6250) (0.6400) (1.0200) (0.4100) (0.4500) (0.4900) (0.6900) (0.0750) none
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period . . . . . . . . . . . . $15.9800 $14.8300 $11.4800 $12.5100 $11.2200 $10.7500 $9.2400 $11.4000 $10.1600
======== ======== ======== ======== ======== ======== ======= ======== ========
- ---------------------------------
TOTAL RETURN(2) . . . . . . . . . 20.72% 36.12% (0.20%) 15.45%(3) 8.82%(3) 22.32% (13.31%) 13.04% 3.77%
- ---------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period
(000's omitted) . . . . . . . . $166,647 $109,003 $72,725 $65,519 $38,278 $34,840 $29,598 $12,959 $1,873
Ratio of Expenses to Average
Net Assets. . . . . . . . . . . 0.67% 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. . . . . . . . . . . 0.67% 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 . . . . . 2.66% 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. . . . . . . . . . . 2.66% 3.24% 3.63% 3.94% 3.84% 4.46% 5.80% 5.06% 6.40%
Portfolio Turnover Rate . . . . . 81% 85% 91% 67% 72% 79% 34% 26% ---
Average Commission Rate Paid. . . $0.06 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
_____________________________
(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(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.
<PAGE> 8
DGPF3-CHT
<TABLE>
<CAPTION>
EMERGING GROWTH SERIES GLOBAL BOND SERIES
--------------------------------------------------- ------------------
12/27/93(1) 5/2/96(2)
YEAR ENDED THROUGH THROUGH
12/31/96 12/31/95 12/31/94 12/31/93 12/31/96
-------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period . . $14.0200 $10.1600 $10.2000 $10.0000 $10.0000
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income . . . . . . . . . . 0.0500 0.0976 0.0791 none 0.3390
Net Gains (Losses) on Securities
(both realized and unrealized) . 1.3800 3.8524 (0.1191) 0.2000 0.8310
------ ------ -------- -------- --------
Total From Investment Operations . . . 1.4300 3.9500 (0.0400) 0.2000 1.1700
------ ------ -------- -------- --------
LESS DISTRIBUTIONS
- ------------------
Dividends (from net investment income) . (0.0900) (0.0900) none none (0.2100)
Distributions (from capital gains) . . . (0.8000) none none none none
Returns of Capital . . . . . . . . . . . none none none none none
---- ---- ---- ---- ----
Total Distributions . . . . . . . . . (0.8900) (0.0900) none none (0.2100)
-------- -------- ---- ---- --------
Net Asset Value, End of Period . . . . . $14.5600 $14.0200 $10.1600 $10.2000 $10.9600
======== ======== ======== ======== ========
- -------------------------------------
TOTAL RETURN(3) . . . . . . . . . . . . . 11.00%(4) 39.21%(4) (0.39%)(4) 2.00%(4) 11.79%(4)
- ---------------
- ---------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (000's omitted). . . . $56,423 $20,510 $ 7,087 $204 $9,471
Ratio of Expenses to Average Net Assets . . . . 0.80% 0.80% 0.80% (5) 0.80%
Ratio of Expenses to Average Net Assets
prior to Expense Limitation . . . . . . . . . 0.92% 0.96% 1.47% (5) 1.19%
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . . . 0.56% 1.03% 1.63% (5) 6.51%
Ratio of Net Investment Income to Average Net
Assets prior to Expense Limitation . . . . . . 0.44% 0.87% 0.96% (5) 6.12%
Portfolio Turnover Rate . . . . . . . . . . . . 112% 76% 59% (5) 56%
Average Commission Rate Paid . . . . . . . . . . $ 0.06 N/A N/A N/A N/A
</TABLE>
_____________________________
(1) Date of initial public offering; total return has not been annualized.
Total return for this short of a time period may not be representative
of longer term results.
(2) Date of initial public offering; ratios have been annualized but total
return has not been annualized. Total return for this short of a time
period may not be representative of longer term results.
(3) 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.
(4) Total return reflects the expense limitation referenced in Expenses
under Management of the Fund.
(5) 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.
<PAGE> 9
(DGPF3)
INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION
The fund, a corporation organized in Maryland on February 19, 1987, is an
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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(DGPF3)
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 and Futures contracts and options on futures
contracts under Other considerations.
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(DGPF3)
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.
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. See Zero coupon
bonds and Pay-in-kind bonds under Other considerations. 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.
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(DGPF3)
The series may also invest in sponsored or unsponsored American
Depositary Receipts or European Depositary 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.
The series may invest in restricted securities, including Rule 144A
Securities. See Liquidity and Rule 144A securities under Other considerations.
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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(DGPF3)
PURCHASE AND REDEMPTION
Shares are sold only to separate accounts of life companies at net asset
value. (See Calculation of offering price and net asset value per share.)
Redemptions will be effected by the separate accounts at the net asset value
next determined after receipt of the order to meet obligations under the
variable contracts. Contract owners do not deal directly with the fund with
respect to the acquisition or redemption of fund shares.
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(DGPF3)
DIVIDENDS AND DISTRIBUTIONS
Dividends for the Global Bond Series are declared and paid monthly on the
last business day of every 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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(DGPF3)
TAXES
The fund has qualified as a regulated investment company under Subchapter
M of the Internal Revenue Code. As such, the fund will not be subject to
federal income tax to the extent its earnings are distributed. The fund
intends to distribute substantially all of the respective series' net
investment income and net capital gains. Shareholders may be proportionately
liable for taxes on income and gains of the series but shareholders not subject
to tax on their income will not be required to pay tax on amounts distributed
to them, and the fund will inform shareholders of the amount and nature of such
income or gains.
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(DGPF3)
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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(DGPF3)
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, 1996, Delaware Management and
its affiliates within the Delaware Group, including Delaware International,
were supervising in the aggregate more than $31 billion in assets in the
various institutional or separately managed (approximately $20,047,798,000) and
investment company (approximately $11,881,459,000) 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 indirect, wholly owned subsidiaries, and subject to the ultimate
control, of Lincoln National. Lincoln National, with headquarters in Fort
Wayne, Indiana, is a diversified organization with operations in many aspects
of the financial services industry, including insurance and investment
management. 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 0.75% of the average daily net assets of the Emerging Growth
Series and 0.60% 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
fiscal year ended December 31, 1996 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 0.62%,
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 0.75% of the average
daily net assets of the Global Bond Series. The investment management fee
incurred by the Global Bond Series for the period May 2, 1996 (date of initial
public offering) through December 31, 1996 was 0.75% (annualized) of average
daily net assets. After considering the waiver of fees by Delaware
International, as described under the caption Expenses, the investment
management fee paid by the Global Bond Series was 0.36% (annualized) of average
daily net assets.
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(DGPF3)
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 Delaware Management and Delaware International
was named an Executive Vice President of Delaware Management in 1994.
Gerald S. Frey has primary responsibility for making day-to-day
investment decisions for the Emerging Growth Series. Mr. Frey has been Vice
President/Senior Portfolio Manager of the series since March 1997 and was
Co-Manager from June 1996 to March 1997. Mr. Frey has 20 years' experience in
the money management business and holds a BA in Economics from Bloomsburg
University and attended Wilkes College and New York University. Prior to
joining the Delaware Group in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York.
In making investment decisions for the series, Mr. Frey regularly
consults with Wayne A. Stork, Marshall T. Bassett, William H. Miller, Judith R.
Finger, John A. Heffern and Lori Wachs. Marshall T. Bassett, Vice President,
joined Delaware in 1997. In his most recent position, he served as Vice
President in Morgan Stanley Asset Management's Emerging Growth Group, where he
analyzed small growth companies. Prior to that, he was a trust officer at
Sovran Bank and Trust Company. He received his bachelor's degree and MBA from
Duke University. Mr. Miller is a Vice President/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. Ms. Finger is a Vice President/Assistant Portfolio
Manager. She joined the Delaware Group in 1995 from the New York-based Fred
Alger Management, where she was an equity analyst for three years. Prior to
that, she held positions with Chemical Bank and Dun & Bradstreet, in mergers
and acquisitions. She earned her BA in Finance from the University of
Pennsylvania and her MBA in Finance & Accounting from the University of
Chicago. John A. Heffern, Vice President, holds a bachelor's degree and an MBA
from the University of North Carolina at Chapel Hill. He joined Delaware in
1997. Previously, he was a Senior Vice President, Equity Research at NatWest
Securities Corporation's Specialty Finance Services unit. Prior to that, he
was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons. Ms.
Wachs is an Assistant Vice President. She joined the Delaware Group in 1992
from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental studies.
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(DGPF3)
Ian G. Sims and Christopher Moth have 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. Mr. Moth
became Co-Manager of the Series in January 1997. 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.
In making investment decisions for the Global Bond Series, Mr. Sims and
Mr. Moth regularly consult with Hywel Morgan. 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.
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 fiscal years ended December 31, 1995 and 1996 were as follows:
Equity/Income Series -- 85% and 81%, respectively, and Emerging Growth Series
- -- 76% and 112%, respectively. The annualized portfolio turnover rate for the
Global Bond Series for the period May 2, 1996 (date of initial public offering)
through December 31, 1996 was 56%.
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 shares of funds in
the Delaware Group of funds in placing portfolio orders, and may place orders
with broker/dealers that have agreed to defray certain expenses of such funds,
such as custodian fees.
PERFORMANCE INFORMATION
From time to time, the fund may quote 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.
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(DGPF3)
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.
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, 1997. The
Transfer Agent also provides accounting services to the fund pursuant to the
terms of a separate Fund Accounting Agreement. The directors of the fund
annually review service fees paid to the Transfer Agent.
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 elected
voluntarily to waive its fee and pay the expenses of this series to the extent
that the series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, do not exceed 0.80% 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, 1997. For the fiscal
year ended December 31, 1996, the Equity/Income Series' ratio of expenses to
average daily net assets was 0.67%.
In connection with the Emerging Growth Series, Delaware Management
elected voluntarily to waive its fee and pay the expenses of the series to the
extent that the series' annual operating expenses, exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, do not exceed 0.80%
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, 1997. For the year ended December 31, 1996, the Emerging
Growth Series' ratio of expenses to average daily net assets was 0.80%,
reflecting the waiver and payment described in the paragraph.
With respect to the Global Bond Series, Delaware International elected
voluntarily to waive its fee and pay the expenses of the series to the extent
that the series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, do not exceed 0.80% of
average daily net assets
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(DGPF3)
for the period from commencement of the public offering through June 30, 1996.
This waiver has been extended through June 30, 1997. The ratio of expenses to
average daily net assets is expected to equal 0.80% of average daily net assets
for the Global Bond Series, reflecting the waiver of fees.
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.
The fund was organized as a Maryland corporation on February 19, 1987.
The authorized capital stock of the fund consists of one billion 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.
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(DGPF3)
OTHER CONSIDERATIONS
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES
Consistent with their respective objectives, each series may invest in
U.S. government securities and corporate debt obligations on a when-issued or
delayed delivery basis. Such transactions involve commitments to buy a new
issue with settlement up to 60 days later. The average settlement date for
when-issued or delayed delivery 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 or delayed delivery 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.
Purchasing 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.
Writing 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
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(DGPF3)
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 or stock prices rise.
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
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(DGPF3)
equivalents, which varies but may be as low as 5% or less of the value of the
contract, must be deposited with or on behalf of the broker as "initial margin"
as a good faith deposit. Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index
or instrument underlying the futures contract fluctuates, making positions in
the futures contract more or less valuable, a process known as "marking to the
market."
A futures contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the Commodity Futures Trading Commission for
the trading of such contract, and only through a registered futures commission
merchant which is a member of such contract market. A commission must be paid
on each completed purchase and sale transaction. The contract market clearing
house guarantees the performance of each party to a futures contract, 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 a series is exercised, the
series 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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(DGPF3)
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.
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
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(DGPF3)
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).
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.
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(DGPF3)
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 series) 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.
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.
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(DGPF3)
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.
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
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(DGPF3)
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.
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.
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(SAI-DGPF3/PART B)
PART B--STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
DELAWARE GROUP
PREMIUM FUND, INC.
1818 Market Street
Philadelphia, PA 19103
TABLE OF CONTENTS
Cover page
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
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(SAI-DGPF3/PART B)
Delaware Group Premium Fund, Inc. ("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, 1997, 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 series'
national distributor, Delaware Distributors, L.P. (the "Distributor"), 1818
Market Street, Philadelphia, PA 19103.
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(SAI-DGPF3/PART B)
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
Decatur Total Return Fund of Delaware Group Equity Funds II, 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 Global
Bond Series of Delaware Group Global & International Funds, Inc., a
separate Delaware Group fund.
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(SAI-DGPF3/PART B)
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 Emerging Growth Series and to only 50% of the assets of 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.
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 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
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(SAI-DGPF3/PART B)
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 Global Bond Series. In addition, although not considered a fundamental
policy, 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 restrictions of such series 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.
While such 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 EMERGING GROWTH AND GLOBAL BOND SERIES
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS--As noted in the Prospectus, each of Emerging Growth and
Global Bond Series may enter into futures contracts relating to securities,
securities indices or interest rates. In addition, Global Bond Series may
enter into foreign currency futures contracts. (Unless otherwise specified,
interest rate futures contracts, securities and
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(SAI-DGPF3/PART B)
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, 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. 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.
Conversely, 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
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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 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 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.
OPTIONS ON FOREIGN CURRENCIES
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.
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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.
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
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(SAI-DGPF3/PART B)
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.
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
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(SAI-DGPF3/PART B)
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.
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,
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(SAI-DGPF3/PART B)
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. 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 Global Bond Series may also
invest in options that are traded over-the-counter. 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.
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
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(SAI-DGPF3/PART B)
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--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.
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
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(SAI-DGPF3/PART B)
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--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, 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.
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
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(SAI-DGPF3/PART B)
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.
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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(SAI-DGPF3/PART B)
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 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 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
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<PAGE> 45
(SAI-DGPF3/PART B)
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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<PAGE> 46
(SAI-DGPF3/PART B)
PERFORMANCE INFORMATION
Contract owners and prospective investors will be interested in learning
from time to time the current yield of 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 Global Bond Series
are declared monthly 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 Global Bond Series, as shown
below, is the average annual total return quotations through December 31, 1996.
Global Bond Series commenced operations May 2, 1996. Securities prices
fluctuated during the periods covered and past results should not be considered
as representative of future performance.
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<PAGE> 47
(SAI-DGPF3/PART B)
AVERAGE ANNUAL TOTAL RETURN(1)
<TABLE>
<CAPTION>
EQUITY/INCOME EMERGING GROWTH
<S> <C> <C> <C>
1 year 1 year
ended ended
12/31/96 20.72% 12/31/96 11.00%
3 years 3 years
ended ended
12/31/96 17.93% 12/31/96 15.46%
5 years Period
ended 12/27/93(2)
12/31/96 15.55% through
12/31/96 16.14%
Period
7/28/88(2)
through
12/31/96 11.53%
</TABLE>
(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 0.80%. In the absence of such voluntary waiver, performance would
have been affected negatively.
(2) Date of initial public offering.
Global Bond Series may also quote its current yield, calculated as
described below, in advertisements and investor communications.
The yield computation for 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 [ (--------- +1) --1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends;
d = the maximum offering price per share on the last day of the
period.
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(SAI-DGPF3/PART B)
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.
Investors should note that income earned and dividends paid by 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. 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.
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<PAGE> 49
(SAI-DGPF3/PART B)
Comparative information on the Consumer Price Index and representative
mutual fund indices maintained by CDA Technologies, Inc. may also be used. The
Consumer Price Index, as prepared by the U.S. Bureau of Labor Statistics, is
the most commonly used measure of inflation. It indicates the cost
fluctuations of a representative group of consumer goods. It does not
represent a return from an investment. CDA Technologies, Inc. is a performance
evaluation service that maintains a statistical database of performance, as
reported by a diverse universe of independently-managed mutual funds.
Statistical and performance information and various indices compiled and
maintained by organizations such as the following may also be used in preparing
exhibits comparing certain industry trends and competitive mutual fund
performance to comparable series activity and performance and in illustrating
general financial planning principles. From time to time, certain mutual fund
performance ranking information, calculated and provided by these
organizations, may also be used in the promotion of sales in the fund. Any
indices used are not managed for any investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe of
independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety
of historical data including total return, capital appreciation and
income on the stock market as well as other investment asset classes,
and inflation. With their permission, this information will be used
primarily for comparative purposes and to illustrate general financial
planning principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed-income price and return information.
Compustat Industrial Databases, a service of Standard & Poor's, may also
be used in preparing performance and historical stock and bond market
exhibits. This firm maintains fundamental databases that provide
financial, statistical and market information covering more than 7,000
industrial and non-industrial companies.
Russell Indexes is an investment analysis service that provides both
current and historical stock performance information, focusing on the
business fundamentals of those firms issuing the security.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information,
as well as unmanaged indices compiled and maintained by these firms,
will be used in preparing comparative illustrations. In addition, the
performance of multiple indices compiled and maintained by these firms
may be combined to create a blended performance result for comparative
performances. Generally, the indices selected will be representative of
the types of securities in which the series may invest and the
assumptions that were used in calculating the blended performance will
be described.
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.
-20-
<PAGE> 50
(SAI-DGPF3/PART B)
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.
-21-
<PAGE> 51
(SAI-DGPF3/PART B)
The following table is an example, for purposes of illustration only, of
cumulative total return performance for the each series through December 31,
1996. For these purposes, the calculations assume the reinvestment of any
realized securities profits distributions and income dividends paid during the
indicated periods.
CUMULATIVE TOTAL RETURN(1)
<TABLE>
<CAPTION>
EQUITY/INCOME EMERGING GROWTH GLOBAL BOND
<S> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 7.81% 12/31/96 (2.09%) 12/31/96 4.75%
6 months 6 months 6 months
ended ended ended
12/31/96 12.67% 12/31/96 (3.96%) 12/31/96 9.92%
Period
9 months 9 months 5/2/96(3)
ended ended through
12/31/96 14.90% 12/31/96 8.34% 12/31/96 11.79%
1 year 1 year
ended ended
12/31/96 20.72% 12/31/96 11.00%
3 years 3 years
ended ended
12/31/96 63.99% 12/31/96 53.91%
Period
5 years 12/27/93(2)
ended through
12/31/96 106.04% 12/31/96 56.99%
Period
7/28/88(2)
through
12/31/96 150.90%
</TABLE>
(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 0.80%. In the absence of such voluntary waiver, performance would
have been affected negatively.
(2) Date of initial public offering.
(3) Date of initial public offering; total return for this short of a time
period may not be representative of longer term results.
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<PAGE> 52
(SAI-DGPF3/PART B)
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.
<TABLE>
<CAPTION>
NUMBER
INVESTMENT PRICE PER OF SHARES
AMOUNT SHARE PURCHASED
<S> <C> <C> <C>
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
</TABLE>
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.
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<PAGE> 53
(SAI-DGPF3/PART B)
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:
<TABLE>
<CAPTION>
6% 8% 10% 12%
RATE OF RATE OF RATE OF RATE OF
RETURN RETURN RETURN RETURN
<S> <C> <C> <C> <C>
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
</TABLE>
Results of various assumed fixed rates of return on a $10,000 investment
compounded quarterly for 10 years:
<TABLE>
<CAPTION>
6% 8% 10% 12%
RATE OF RATE OF RATE OF RATE OF
RETURN RETURN RETURN RETURN
<S> <C> <C> <C> <C>
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
</TABLE>
These figures are calculated assuming a fixed constant investment return
and assume no fluctuation in the value of principal. These figures, which do
not reflect payment of 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> 54
(SAI-DGPF3/PART B)
TRADING PRACTICES AND BROKERAGE
The fund or, in the case of 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 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 fiscal years ended December 31, 1994, 1995 and 1996 the
aggregate dollar amounts of brokerage commissions were paid by the series noted
below:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Equity/Income Series $217,957 $255,600 $302,434
Emerging Growth Series $4,127 $18,776 $80,172
</TABLE>
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 fiscal year ended December 31, 1996, portfolio transactions
of the series in the amounts listed below, resulting in brokerage commissions
in the amounts listed below were directed to brokers for brokerage and research
services provided:
<TABLE>
<CAPTION>
Portfolio Brokerage
Transactions Commissions
Amounts Amounts
<S> <C> <C>
Equity/Income Series $58,489,274 $76,723
Emerging Growth Series $8,190,096 $23,697
</TABLE>
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
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(SAI-DGPF3/PART B)
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.
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 expenses of the funds in Delaware Group of funds, such as custodian
fees, and may, at the request of the Distributor, give consideration to sales
of such funds shares as a factor in the selection of brokers and dealers to
execute 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 Equity/Income and Global
Bond Series, and may exceed 100% for 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
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<PAGE> 56
(SAI-DGPF3/PART B)
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 Equity/Income and Emerging Growth
Series for the fiscal years ended December 31, 1995 and 1996 were as follows:
Equity/Income Series -- 85% and 81%, respectively; and Emerging Growth Series
- -- 76% and 112%, respectively. The annualized portfolio turnover rate for
Global Bond Series for the period May 2, 1996 (date of initial public offering)
through December 31, 1996 was 56%.
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<PAGE> 57
(SAI-DGPF3/PART B)
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.
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(SAI-DGPF3/PART B)
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Dividends for Global Bond Series are declared and paid monthly on the
last business day of every month.
For Equity/Income Series, the fund will make payments from the series'
net investment income quarterly.
For 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.
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<PAGE> 59
(SAI-DGPF3/PART B)
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.
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(SAI-DGPF3/PART B)
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 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 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. On December 31, 1996, Delaware Management
and its affiliates within the Delaware Group, including Delaware International,
were managing in the aggregate more than $31 billion in assets in the various
institutional or separately managed (approximately $20,047,798,000) and
investment company (approximately $11,881,459,000) accounts.
The Investment Management Agreements for each series, except 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 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 Emerging Growth and Global Bond Series
is equal to 0.75% of its average daily net assets and by Equity/Income Series
is equal to 0.60% of average daily net assets, less, in the case of
Equity/Income Series, the series' proportionate share of all directors' fees
paid to the unaffiliated directors of the fund.
On December 31, 1996, the total net assets of Equity/Income Series
were $166,646,577, of Emerging Growth Series were $56,423,493 and of Global
Bond Series were $9,470,818.
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.
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(SAI-DGPF3/PART B)
Investment management fees were incurred with respect to the series
noted below for the last three fiscal years.
<TABLE>
<CAPTION>
SERIES DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
- ------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Equity/Income Series $765,301 paid $528,481 paid $422,361 paid
Emerging Growth Series $247,520 earned $92,985 earned $25,229 earned
$205,501 paid $72,359 paid $2,545 paid
$42,019 waived $20,626 waived $22,684 waived
Global Bond Series* $26,503 earned N/A N/A
$12,597 paid
$13,906 waived
</TABLE>
*Commenced operations on May 2, 1996.
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 Equity/Income and Emerging Growth Series for the
year ended December 31, 1996 were 0.67% and 0.80%, respectively. The expense
ratio of Emerging Growth Series reflect the waiver of fees described below.
The ratio of expenses to average daily net assets for Global Bond Series is
expected to equal 0.80%, reflecting the waiver of fees described below.
In connection with 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 0.80% of average daily net
assets for the period from July 1, 1992 through June 30, 1993. This waiver has
been extended through June 30, 1997. In connection with 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 0.80% of average daily net assets. This waiver
has been extended through June 30, 1997. Similarly, Delaware International has
voluntarily elected to waive its fee and reimburse Global Bond Series to the
extent the series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses exceed 0.80% for the period
from the commencement of the series' operations through June 30, 1996. This
waiver has been extended through June 30, 1997.
DISTRIBUTION AND SERVICE
Delaware Distributors, L.P. (which formerly conducted business as
Delaware Distributors, Inc.), located at 1818 Market Street, Philadelphia, PA
19103, serves as the fund's national distributor under Distribution Agreements
dated as of April 3, 1995 for Equity/Income and Emerging Growth Series. Global
Bond Series' Distribution Agreement is dated as of May 1, 1996. The
Distributor 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 Equity/Income and Emerging Growth Series'
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<PAGE> 62
(SAI-DGPF3/PART B)
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, 1997. The Transfer
Agent also provides accounting services to the series pursuant to the terms of
a separate Fund Accounting Agreement. Delaware Service Company, Inc. is also
an indirect, wholly owned subsidiary of Delaware Management Holdings, Inc.
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(SAI-DGPF3/PART B)
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 Capital
Management, Inc. and Delaware Investment & Retirement Services, Inc. are direct
or indirect, wholly owned subsidiaries of Delaware Management Holdings, Inc.
("DMH"). On April 3, 1995, a merger between DMH and a wholly owned subsidiary
of Lincoln National Corporation ("Lincoln National") was completed. In
connection with the merger, new Investment Management Agreements between the
fund on behalf of Equity/Income Series and Emerging Growth Series and Delaware
Management were executed following shareholder approval. DMH, Delaware
Management and Delaware International are now indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National.
Lincoln National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services
industry, including insurance and investment management.
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 (59)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of the fund, 32 other investment companies in the Delaware
Group, Delaware Management Holdings, Inc., DMH Corp., Delaware
International Holdings Ltd. and Founders Holdings, Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
_____________________________
*Director affiliated with the fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
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(SAI-DGPF3/PART B)
RICHARD G. UNRUH, JR. (57)
Executive Vice President of the fund and each of the other 32
investment companies in the Delaware Group.
Executive Vice President and Director of Delaware Management Company,
Inc.
Senior Vice President of Delaware Management Holdings, Inc. and
Delaware Capital Management, Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
PAUL E. SUCKOW (49)
Executive Vice President/Chief Investment Officer, Fixed Income of the
fund, each of the other 32 investment companies in the
Delaware Group and Delaware Management Company, Inc.
Executive Vice President/Chief Investment Officer, Fixed Income and
Director of Founders Holdings, Inc.
Senior Vice President/Chief Investment Officer, Fixed Income of
Delaware Management Holdings, Inc.
Senior Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed- income portfolio
manager for the Delaware Group.
WALTER P. BABICH (69)
Director and/or Trustee of the fund and each of the other 32
investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
ANTHONY D. KNERR (58)
Director and/or Trustee of the fund and each of the other 32
investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and
Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
ANN R. LEVEN (56)
Director and/or Trustee of the fund and each of the other 32
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer of
the Smithsonian Institution, Washington, DC, and from 1975 to
1992, she was Adjunct Professor of Columbia Business School.
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<PAGE> 65
(SAI-DGPF3/PART B)
THOMAS F. MADISON (61)
Director and/or Trustee of the fund and 32 other investment companies
in the Delaware Group.
President and CEO, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
* JEFFREY J. NICK (44)
Director and/or Trustee of the fund and 32 other investment companies
in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
W. THACHER LONGSTRETH (76)
Director and/or Trustee of the fund and each of the other 32
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
CHARLES E. PECK (71)
Director and/or Trustee of the fund and each of the other 32
investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer
of The Ryland Group, Inc., Columbia, MD.
_____________________________
*Director affiliated with the fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
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(SAI-DGPF3/PART B)
DAVID K. DOWNES (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of the fund, each of the other 32 investment companies
in the Delaware Group
Executive Vice President, Chief Operating Officer and Chief Financial
Officer of Delaware Management Company, Inc.
Chairman and Director of Delaware Management Trust Company.
Chairman and Director of Delaware Investment & Retirement Services,
Inc.
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of Delaware Management Holdings, Inc.
Executive Vice President/Chief Operating Officer/Chief Financial
Officer and Director of DMH Corp., Delaware Distributors, Inc.
and Founders Holdings, Inc.
President/Chief Executive Officer/Chief Financial Officer and Director
of Delaware Service Company, Inc.
Executive Vice President/Chief Operating Officer/Chief Financial
Officer and Director of Delaware International Holdings Ltd.
Executive Vice President/Chief Financial Officer/Chief Operating
Officer of Delaware Capital Management, Inc.
Senior Vice President/Chief Administrative Officer/ Chief Financial
Officer of Delaware Distributors, L.P.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer of
Equitable Capital Management Corporation, New York, from December 1985
through August 1992, Executive Vice President from December 1985
through March 1992, and Vice Chairman from March 1992 through August
1992.
GEORGE M. CHAMBERLAIN, JR. (50)
Senior Vice President and Secretary of the fund, each of the other 32
investment companies in the Delaware Group, Delaware
Management Holdings, Inc. and Delaware Distributors, L.P.
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., Founders Holdings, Inc., Delaware Investment &
Retirement Services, Inc. and Delaware Capital Management, Inc.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
GERALD S. FREY (51)
Vice President/Senior Portfolio Manager of the fund, of eight other
investment companies in the Delaware Group and of Delaware
Management Company, Inc.
Before joining the Delaware Group in 1996, Mr. Frey was a Senior
Director with Morgan Grenfell Capital Management, New York, NY
from 1986 to 1995.
JOHN B. FIELDS (51)
Vice President/Senior Portfolio Manager of the fund, of seven other
equity investment companies in the Delaware Group, Delaware
Management Company, Inc. and Delaware Capital Management, Inc.
Before joining the Delaware Group in 1992, Mr. Fields served as a
director of domestic equity risk management for DuPont,
Wilmington, DE.
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(SAI-DGPF3/PART B)
JOSEPH H. HASTINGS (47)
Vice President/Corporate Controller of the fund, each of the other 32
investment companies in the Delaware Group, Delaware
Management Company, Inc., Delaware Management Holdings, Inc.,
DMH Corp., Delaware Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware Capital
Management, Inc., Founders Holdings, Inc. and Delaware
International Holdings Ltd.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
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 (34)
Vice President/Treasurer of the fund, each of the other 32 investment
companies in the Delaware Group, Delaware Management Company, Inc.,
Delaware Distributors, Inc., Delaware Distributors, L.P., Delaware
Service Company, Inc. and Founders Holdings, Inc.
Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a Vice
President for CS First Boston Investment Management, New York, NY from
1993 to 1994 and an Assistant Vice President for Equitable Capital
Management Corporation, New York, NY from 1987 to 1993.
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(SAI-DGPF3/PART B)
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, 1996 and an estimate of annual benefits to be received
upon retirement under the Delaware Group Retirement Plan for Directors/Trustees
as of December 31, 1996.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
BENEFITS ANNUAL COMPENSATION
AGGREGATE ACCRUED BENEFITS FROM ALL 18
COMPENSATION AS PART OF UPON DELAWARE
NAME FROM FUND FUND EXPENSES RETIREMENT* GROUP FUNDS
<S> <C> <C> <C> <C>
W. Thacher Longstreth $2,150 None $30,000 $43,948
Ann R. Leven $2,514 None $30,000 $52,033
Walter P. Babich $2,475 None $30,000 $51,075
Anthony D. Knerr $2,475 None $30,000 $51,075
Charles E. Peck $2,317 None $30,000 $47,243
</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, 1996, he or she would be entitled to annual
payments totaling $30,000, in the aggregate, from all of the funds in
the Delaware Group, based on the number of funds in the Delaware Group
as of that date.
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(SAI-DGPF3/PART B)
GENERAL INFORMATION
Delaware Management is the investment manager for Equity/Income and
Emerging Growth Series. Delaware International is the investment manager for
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. The Transfer Agent also
provides accounting services to the series. Those services include performing
all functions related to calculating each series' net asset value and providing
all financial reporting services, regulatory compliance testing and other
related accounting services. For its services, the Transfer Agent is paid a
fee based on total assets of all funds in the Delaware Group for which it
provides such accounting services. Such fee is equal to 0.25% multiplied by
the total amount of assets in the complex for which the Transfer Agent
furnishes accounting services, where such aggregate complex assets are $10
billion or less, and 0.20% of assets if such aggregate complex assets exceed
$10 billion. The fees are charged to each fund, including the series, on an
aggregate pro-rata basis. The asset-based fee payable to the Transfer Agent is
subject to a minimum fee calculated by determining the total number of
investment portfolios and associated classes.
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.
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(SAI-DGPF3/PART B)
The initial public offering date for Equity/Income Series was July 28,
1988. Emerging Growth Series commenced operations on December 27, 1993. The
initial public offering date for Global Bond Series was May 1, 1996.
CAPITALIZATION
The fund has a present authorized capitalization of one billion 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.
NONCUMULATIVE VOTING
SERIES SHARES HAVE NONCUMULATIVE VOTING RIGHTS WHICH MEANS THAT THE
HOLDERS OF MORE THAN 50% OF THE SHARES OF THE FUND VOTING FOR THE ELECTION OF
DIRECTORS CAN ELECT ALL THE DIRECTORS IF THEY CHOOSE TO DO SO, AND, IN SUCH
EVENT, THE HOLDERS OF THE REMAINING SHARES WILL NOT BE ABLE TO ELECT ANY
DIRECTORS.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the Securities and Exchange
Commission ("SEC"). Shareholders may obtain a copy of the Registration
Statement by contacting the SEC in Washington, DC.
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(SAI-DGPF3/PART B)
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
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(SAI-DGPF3/PART B)
grade obligations, and in the majority of instances differ from AAA issues only
in a small degree; A--strong ability to pay interest and repay principal
although more susceptible to changes in circumstances; BBB--regarded as having
an adequate capacity to pay interest and repay principal; BB, B, CCC,
CC--regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions; C--reserved for income bonds on
which no interest is being paid; D--in default, and payment of interest and/or
repayment of principal is in arrears.
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(SAI-DGPF3/PART B)
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.
The above chart illustrates the path traditionally followed by
companies that successfully survive the growth sequence.
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(SAI-DGPF3/PART B)
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 Assets and Liabilities, 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, 1996 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.
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(SAI-DGPF3/PART B)
-------------------------
DELAWARE GROUP
-------------------------
PREMIUM FUND, INC.
-------------------------
INVESTMENT MANAGERS
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
Delaware International Advisers Ltd.
Veritas House
125 Finsbury Pavement
London, England EC2A 1NQ
NATIONAL DISTRIBUTOR PART B
Delaware Distributors, L.P.
1818 Market Street STATEMENT OF
Philadelphia, PA 19103 ADDITIONAL INFORMATION
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING, ACCOUNTING MAY 1, 1997
SERVICES AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245 DELAWARE
GROUP
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