Prospectus May 1, 1996
(as revised January 13, 1997)
Delaware Group Premium Fund, Inc.
1818 Market Street, Philadelphia, PA 19103
Delaware Group Premium Fund, Inc. (the "fund") is a
diversified, open-end management investment company which is
intended to meet a wide range of investment objectives with its
various separate Portfolios. Each Portfolio ("series") is in
effect a separate fund issuing its own shares. The shares of the
fund are sold only to separate accounts of life insurance
companies ("life companies"). The separate accounts are used in
conjunction with variable annuity contracts and variable life
insurance policies ("variable contracts"). The separate accounts
invest in shares of the various series in accordance with
allocation instructions received from contract owners. The
investment objectives and principal policies of the series are
described below. See Investment objectives and policies.
Although each series will constantly strive to attain its
objective, there can be no assurance that it will be attained.
This Prospectus sets forth information that you should read
and consider before you invest. Please retain it for future
reference. A Statement of Additional Information ("Part B" of
the fund's registration statement), dated May 1, 1996, as it may
be amended from time to time, contains additional information
about the fund and has been filed with the Securities and
Exchange Commission. Part B is incorporated by reference into
this Prospectus and is available, without charge, by writing to
Delaware Distributors, L.P. at the above address or by calling 1-
800-523-1918. 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.
Equity/Income Series--seeks the highest possible total rate
of return by selecting issues that exhibit the potential for
capital appreciation while providing higher than average dividend
income. This series has the same objective and investment
disciplines as the Decatur Total Return Fund of Delaware Group
Decatur Fund, Inc., a separate Delaware Group fund, in that it
invests generally, but not exclusively, in common stocks and
income-producing securities convertible into common stocks,
consistent with the series' objective.
Emerging Growth Series--seeks long-term capital appreciation
by investing primarily in small-cap common stocks and convertible
securities of emerging and other growth-oriented companies.
These securities will have been judged to be responsive to
changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective.
This series has the same objective and investment disciplines as
Delaware Group Trend Fund, Inc., a separate Delaware Group fund.
Global Bond Series--seeks current income consistent with
preservation of principal by investing primarily in fixed-income
securities that may also provide the potential for capital
appreciation. This series is a global fund, as such, at least
65% of the series' assets will be invested in fixed-income
securities of issuers organized or having a majority of their
assets in or deriving a majority of their operating income in at
least three different countries, one of which may be the United
States. This series has the same objective and investment
disciplines as the Global Bond Series of Delaware Group Global &
International Funds, Inc., a separate Delaware Group fund.
PLEASE NOTE: AS OF THE DATE OF THIS PROSPECTUS, THE GLOBAL BOND
SERIES IS NOT YET AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR
INVESTMENT DEALER FOR CURRENT INFORMATION ABOUT THE SERIES'
AVAILABILITY.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE
REFERENCE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996 (AS REVISED JANUARY
13, 1997).
Table of contents
Cover page . . . . . . . . . . . . . . . . . . . . . . .
Summary information. . . . . . . . . . . . . . . . . . .
Financial highlights . . . . . . . . . . . . . . . . . .
Investment objectives and policies . . . . . . . . . . .
Introduction. . . . . . . . . . . . . . . . . . . . . .
Equity/Income Series. . . . . . . . . . . . . . . . . .
Emerging Growth Series. . . . . . . . . . . . . . . . .
Global Bond Series. . . . . . . . . . . . . . . . . . .
Other considerations. . . . . . . . . . . . . . . . . .
Purchase and redemption. . . . . . . . . . . . . . . . .
Dividends and distributions. . . . . . . . . . . . . . .
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . .
Calculation of offering price and net asset value per share. .
Management of the fund . . . . . . . . . . . . . . . . .
Performance information . . . . . . . . . . . . . . . .
Distribution and service. . . . . . . . . . . . . . . .
Expenses. . . . . . . . . . . . . . . . . . . . . . . .
Description of fund shares. . . . . . . . . . . . . . .
Summary information
Capitalization
The fund has a present authorized capitalization of five
hundred million shares of capital stock with a $.01 par value per
share, with fifty million shares allocated to each of the fund's
series. See Description of fund shares under Management of the
fund.
Investment managers
Delaware Management Company, Inc. ("Delaware Management")
furnishes investment management services to the Equity/Income and
Emerging Growth Series, subject to the supervision and direction
of the fund's Board of Directors. Under the Investment
Management Agreement between Delaware Management and these
series, the annual compensation paid to Delaware Management is
equal to, respectively, 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.
Special considerations and risk factors
Prospective investors should consider a number of factors
depending upon the series in which they propose to invest:
1. The Global Bond Series will invest at least 65% of its
assets in fixed-income securities of issuers organized or having
a majority of their assets in or deriving a majority of their
operating income in at least three different countries, one of
which may be the United States. The Equity/Income and Emerging
Growth Series may also invest a portion of their assets in
securities of such issuers and companies. Investing in
securities of non-United States companies which are generally
denominated in foreign currencies, and utilization of forward
foreign currency exchange contracts in connection with
transactions in such securities involve certain considerations
comprising both risk and opportunity not typically associated
with investing in the securities of United States companies and
issuers. See Foreign securities and foreign currency
transactions and Special risk considerations under Other
considerations.
2. Each series has the right to engage in certain options
transactions for hedging purposes to counterbalance portfolio
volatility. The series do not engage in such activities for
speculative purposes, but there are certain risks associated with
the use of options which a prospective investor should consider.
See Options under Other considerations.
3. The Emerging Growth and Global Bond Series also may engage
in certain hedging transactions involving futures contracts and
options on such contracts, and in connection with such activities
will maintain certain collateral in special accounts established
by futures commission merchants in the care of the fund's
custodian bank. While the series do not engage in such
transactions for speculative purposes, there are risks which
result from the use of these instruments which an investor should
consider. The fund is not registered as a commodity pool
operator nor is Delaware International or Delaware Management
registered as a commodities trading adviser in reliance upon
various exemptive rules. See Futures contracts and options on
futures contracts under Other considerations.
4. The Global Bond Series may invest in interest rate swaps
for hedging purposes which could subject the series to increased
risks. See Interest rate swaps under Global Bond Series -
Investment strategy and Special risk considerations under Other
considerations.
5. While the Global Bond Series intends to seek to qualify as
a "diversified" investment company under provisions of Subchapter
M of the Internal Revenue Code, as amended (the "Code"), the
series will not be diversified under the 1940 Act. Thus, while
at least 50% of the series' total assets will be represented by
cash, cash items, and other securities limited in respect of any
one issuer to an amount not greater than 5% of the series' total
assets, it will not satisfy the 1940 Act requirement in this
respect, which applies that test to 75% of the series' assets. A
nondiversified portfolio is believed to be subject to greater
risk because adverse effects on the portfolio's security holdings
may affect a larger portion of the overall assets.
Financial highlights
The following financial highlights through December 31, 1995 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 the Equity/Income and Emerging
Growth Series' performance is contained in the fund's Annual
Report to shareholders. A copy of the fund's Annual Report
(including the report of Ernst & Young LLP) may be obtain from
the fund upon request at no charge.
The unaudited financial information for the Equity/Income and
Emerging Growth Series shown below is derived from the unaudited
financial statements of the fund for the six-month period ended
June 30, 1996. The data should be read in conjunction with the
financial statements and related notes which are incorporated
into Part B by reference to the fund's Semi-Annual Report for the
six months ended June 30, 1996. A copy of the Semi-Annual Report
may be obtained from the fund upon request at no charge.
Unaudited financial information for the period May 2, 1996 (date
of initial public offering) through September 30, 1996 is also
provided for the Global Bond Series. The data should be read in
conjunction with the financial statements and related notes which
are included in Part B.
<TABLE>
<CAPTION>
EQUITY/INCOME SERIES
Unaudited
1/1/96
through Year Ended
6/30/96(1) 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.8300 $11.4800 $12.5100 $11.2200 $10.7500
Income From Investment Operations
Net Investment Income 0.1987 0.4155 0.4121 0.4341 0.4155
Net Gains (Losses) on Securities
both realized and unrealized) 0.7763 3.5745 (0.4221) 1.2659 0.5045
------ ------ ------ ------ ------
Total From Investment Operations 0.9750 3.9900 (0.0100) 1.7000 0.9200
------ ------ ------- ------ ------
Less Distributions
Dividends (from net investment income) (0.2200) (0.4300) (0.4200) (0.4100) (0.4500)
Distributions (from capital gains) (1.2050) (0.2100) (0.6000) none none
Returns of Capital none none none none none
---- ---- ---- ---- ----
Total Distributions (1.4250) (0.6400) (1.0200) (0.4100) (0.4500)
-------- ------- ------- ------- -------
Net Asset Value, End of Period $14.3800 $14.8300 $11.4800 $12.5100 $11.2200
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total Return(3) 7.15% 36.12% (0.20%) 15.45%(4) 8.82%(4)
- --------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (000's omitted) $122,647 $109,003 $72,725 $65,519 $38,278
Ratio of Expenses to Average Net Assets 0.67% 0.69% 0.71% 0.75% 0.79%
Ratio of Expenses to Average Net Assets
prior to Expense Limitation 0.67% 0.69% 0.71% 0.76% 0.81%
Ratio of Net Investment Income to Average Net Assets 2.86% 3.24% 3.63% 3.95% 3.86%
Ratio of Net Investment Income to Average Net Assets
prior to Expense Limitation 2.86% 3.24% 3.63% 3.94% 3.84%
Portfolio Turnover Rate 102% 85% 91% 67% 72%
Average Commission Rate Paid $0.0600 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EQUITY/INCOME SERIES
Year Ended
7/28/88(2)
through
12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.2400 $11.4000 $10.1600 $10.0000
Income From Investment Operations
Net Investment Income 0.4502 0.4489 0.2813 0.0934
Net Gains (Losses) on Securities
(both realized and unrealized) 1.5498 (1.9189) 1.0337 0.0666
------ ------- ------ ------
Total From Investment Operations 2.0000 (1.4700) 1.3150 0.1600
------ ------- ------ ------
Less Distributions
Dividends (from net investment income) (0.4900) (0.5600) (0.0750) none
Distributions (from capital gains) none (0.1300) none none
Returns of Capital none none none none
---- ---- ---- ----
Total Distributions (0.4900) (0.6900) (0.0750) none
-------- -------- ------- ----
Net Asset Value, End of Period $10.7500 $9.2400 $11.4000 $10.1600
-------- ------ ------- -------
-------- ------ ------- -------
Total Return(3) 22.32% (13.31%) 13.04% 3.77%
- --------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (000's omitted) $38,840 $29,598 $12,959 $1,873
Ratio of Expenses to Average Net Assets 0.85% 0.96% 1.31% 2.00%
Ratio of Expenses to Average Net Assets
prior to Expense Limitation 0.85% 0.96% 1.31% 2.00%
Ratio of Net Investment Income to Average Net Assets 4.46% 5.80% 5.06% 6.40%
Ratio of Net Investment Income to Average Net Assets
prior to Expense Limitation 4.46% 5.80% 5.06% 6.40%
Portfolio Turnover Rate 79% 34% 26% ---
Average Commission Rate Paid N/A N/A N/A N/A
</TABLE>
(1) Ratios have been annualized but total return has not been
annualized.
(2) 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.
(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.
<TABLE>
<CAPTION>
EMERGING GROWTH SERIES GLOBAL BOND SERIES
Unaudited Unaudited
1/1/96 12/27/93(2) 5/2/96(6)
through Year Ended through through
6/30/96(1)12/31/95 12/31/94 12/31/93 9/30/96
<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 0.0200 0.0976 0.0791 none 0.1977
Net Gains (Losses) on Securities
(both realized and unrealized) 2.0000 3.8524 (0.1191) 0.2000 0.4723
------ ------ ------- ------ ------
Total From Investment Operations 2.0200 3.9500 (0.0400) 0.2000 0.6700
------ ------ ------- ------ ------
Less Distributions
Dividends (from net investment income) (0.0900) (0.0900) none none (0.1200)
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 (0.1200)
------- -------- ---- ---- --------
Net Asset Value, End of Period $15.1500 $14.0200 $10.1600 $10.2000 $10.5500
------- -------- ------- -------- --------
------- -------- ------- -------- --------
Total Return(3) 15.57%(4) 39.21%(4) (0.39%)(4)2.00%(4) 6.73%(4)
- --------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period
(000's omitted) $32,803 $20,510 $7,087 $204 $5,430
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 0.96% 0.96% 1.47% (5) 1.26%
Ratio of Net Investment Income
to Average Net Assets 0.33% 1.03% 1.63% (5) 5.54%
Ratio of Net Investment Income
to Average Net Assets
prior to Expense Limitation 0.17% 0.87% 0.96% (5) 5.08%
Portfolio Turnover Rate 115% 76% 59% (5) 38%
Average Commission Rate Paid $0.0522 N/A N/A N/A N/A
</TABLE>
(1) Ratios have been annualized but total return has not been
annualized.
(2) 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.
(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.
(6) 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.
Investment objectives and policies
Introduction
The fund, a corporation organized in Maryland on
February 19, 1987, is a diversified, open-end management investment
company offering various series of shares. The Equity/Income Series
commenced operations on July 28, 1988. The Emerging Growth Series
commenced operations on December 27, 1993. The Global Bond Series
was first publicly offered on May 1, 1996.
Each series' investment objective is a fundamental policy and
cannot be changed without approval by the holders of a "majority" of
that series' outstanding shares, as defined in the 1940 Act.
Although each series will constantly strive to attain its objective,
there can be no assurance that it will be attained. In addition to
the objective and investment techniques described below for each
series, see Other considerations for investment techniques available
to various series of the fund. Part B provides more information on
the series' investment policies and restrictions.
Equity/Income Series
The objective of the Equity/Income Series is to seek to achieve
long-term growth by investing primarily in securities that provide
the potential for income and capital appreciation without undue risk
to principal. The series seeks to provide shareholders with a
current return while allowing them to participate in the capital
gains potential associated with equity investments.
Investment strategy
The series generally invests in common stocks and income-
producing securities that are convertible into common stocks. The
portfolio manager looks for securities having a better dividend yield
than the average of the Standard & Poor's ("S&P") 500 Stock Index, as
well as capital gains potential.
All available types of appropriate securities are under
continuous study. The series may invest in all classes of
securities, bonds and preferred and common stocks in any proportion
deemed prudent under existing market and economic conditions. In
seeking to obtain its objective, the series may hold securities for
any period of time. For temporary, defensive purposes, the series
may hold a substantial portion of its assets in cash or short-term
obligations.
Income-producing convertible securities include preferred stock
and debentures that pay a stated or variable interest rate or
dividend and are convertible into common stock at an established
ratio. These securities, which are usually priced at a premium to
their conversion value, may allow the series to receive current
income while participating to some extent in any appreciation in the
underlying common stock. The value of a convertible security tends
to be affected by changes in interest rates, as well as factors
affecting the market value of the underlying common stock.
The series may be suitable for the patient investor interested in
long-term growth. The investor should be willing to accept the risks
associated with investments in common stocks and income-producing
securities, including those that are convertible into common stocks.
The series is suitable for investors who want a current return with
the possibility of capital appreciation. Naturally, the series
cannot assure a specific rate of return or that principal will be
protected. The value of the series' shares can be expected to
fluctuate depending upon market conditions. However, through the
cautious selection and supervision of its portfolio, the series will
strive to achieve its objective of long-term growth through both
income and capital appreciation without undue risk to principal.
Emerging Growth Series
Investment strategy
The objective of the series is long-term capital appreciation.
The strategy is to invest primarily in the common stocks and
securities convertible into common stocks of emerging and other
growth-oriented companies that, in the judgment of Delaware
Management, are responsive to changes within the marketplace and have
the fundamental characteristics to support growth.
The series will seek to identify changing and dominant trends
within the economy, the political arena and our society. The series
will purchase securities which it believes will benefit from these
trends and which have the fundamentals to exploit them. The
fundamentals include managerial skills, product development and sales
and earnings.
In investing for capital appreciation, the series may hold
securities for any period of time. The series may invest in
repurchase agreements, but will not normally do so except to invest
excess cash balances. The series may also invest in foreign
securities.
The series may purchase privately placed securities the resale of
which is restricted under applicable securities laws. Such
securities may offer a higher return than comparably registered
securities but involve some additional risk as they can be resold
only in privately negotiated transactions, in accordance with an
exemption from the registration requirements under applicable
securities laws or after registration.
Income is not an objective of the series. However, should the
market warrant a temporary defensive approach, the series may also
invest in cash equivalents, and fixed-income obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
as well as corporate bonds.
Although the series will constantly strive to attain the
objective of long-term capital growth, there can be no assurance that
it will be attained. The objective of the series may not be changed
without shareholder approval. Part B provides more information on
the series' investment policies and restrictions.
The series may be suitable for the patient investor interested in
long-term capital appreciation. The prices of common stock,
especially those of smaller companies, tend to fluctuate,
particularly in the short-term. The investor should be willing to
accept the risks associated with investments in growth-oriented
securities, some of which may be speculative and subject the series
to an additional risk.
Net asset value may fluctuate in response to market conditions
and, as a result, the series is not appropriate for a short-term
investor.
This series is designed primarily for capital appreciation.
Providing current income is not an objective of the series. Any
income produced is expected to be minimal. An investor should not
consider a purchase of series shares as equivalent to a complete
investment program.
For hedging purposes, the series may engage in options activity
and enter into futures contracts and options on futures contracts.
For a discussion on these instruments, see Options under Other
considerations and Futures contracts and options on futures contracts
under Other considerations.
Global Bond Series
The objective of the Global Bond Series is to achieve current
income consistent with the preservation of investors' principal. The
fund seeks to achieve this objective by investing primarily in fixed-
income securities that may also provide the potential for capital
appreciation. The series is a global fund. Under normal
circumstances, at least 65% of the series' assets will be invested in
the fixed-income securities of issuers organized or having a majority
of their assets in or deriving a majority of their operating income
in at least three different countries, one of which may be the United
States. The series may invest in securities issued in any currency
and may hold foreign currency. Securities of issuers within a given
country may be denominated in the currency of another country or in
multinational currency units such as the ECU. For purposes of the
1940 Act, the Global Bond Series will operate as a nondiversified
fund.
Investment strategy
The series will attempt to achieve its objective by investing at
least 65% of its assets in a broad range of fixed-income securities,
including foreign and U.S. government securities and debt obligations
of foreign and U.S. companies which are generally rated A or better
by S&P or Moody's Investors Service, Inc. ("Moody's"), or if unrated,
are deemed to be of comparable quality by Delaware International.
The series may also invest in zero coupon bonds and in the debt
securities of supranational entities denominated in any currency.
Generally, the value of fixed-income securities moves inversely to
the movement of market interest rates. The value of the series'
portfolio securities and, thus, an investor's shares will be affected
by changes in such rates.
Zero coupon bonds are debt obligations which do not entitle the
holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest, and
therefore are issued and traded at a discount from their face amounts
or par value. A supranational entity is an entity established or
financially supported by the national governments of one or more
countries to promote reconstruction or development. Examples of
supranational entities include, among others, the World Bank, the
European Economic Community, the European Coal and Steel Community,
the European Investment Bank, the Inter-Development Bank, the Export-
Import Bank and the Asian Development Bank. For increased safety,
the series currently anticipates that a large percentage of its
assets will be invested in U.S. and foreign government securities and
securities of supranational entities.
With respect to U.S. government securities, the series may invest
only in securities issued or guaranteed as to the payment of
principal and interest by the U.S. government, and those of its
agencies or instrumentalities which are backed by the full faith and
credit of the United States. Direct obligations of the U.S.
government which are available for purchase by the series include
bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These obligations differ mainly in interest rates,
maturities and dates of issuance. Agencies whose obligations are
backed by the full faith and credit of the United States include the
Farmers Home Administration, Federal Financing Bank and others.
With respect to securities issued by foreign governments, their
agencies, instrumentalities or political subdivisions, the series
will generally invest in such securities if they have been rated AAA
or AA by S&P or Aaa or Aa by Moody's or, if unrated, have been
determined by Delaware International to be of comparable quality.
From time to time, the series may find opportunities to pursue
its objective outside of the fixed-income markets, but in no event
will such investments exceed 5% of the series' net assets.
The series may also invest in sponsored or unsponsored American
Depository Receipts or European Depository Receipts. While the
series may purchase securities of issuers in any foreign country,
developed and underdeveloped, or emerging market countries, it is
currently anticipated that the countries in which the series may
invest will include, but not be limited to, Canada, Germany, the
United Kingdom, France, the Netherlands, Belgium, Spain, Switzerland,
Ireland, Denmark, Portugal, Italy, Austria, Norway, Sweden, Finland,
Luxembourg, Japan and Australia. With respect to certain countries,
investments by an investment company may only be made through
investments in closed-end investment companies that in turn are
authorized to invest in the securities of such countries. Any
investment the series may make in other investment companies is
limited in amount by the 1940 Act and would involve the indirect
payment of a portion of the expenses, including advisory fees, of
such other investment companies.
The series may invest in restricted securities, including Rule
144A Securities. See Liquidity and Rule 144A securities. The series
may invest no more than 10% of the value of its net assets in
illiquid securities. The series will not concentrate its investments
in any particular industry, which means that it will not invest 25%
or more of its total assets in any one industry.
It is anticipated that the average weighted maturity of the
portfolio will be in the five-to-ten year range. If, however,
Delaware International anticipates a declining interest rate
environment, the average weighted maturity may be extended past ten
years. Conversely, if Delaware International anticipates a rising
rate environment, the average weighted maturity may be shortened to
less than five years.
Interest rate swaps
In order to attempt to protect the series' investments from
interest rate fluctuations, the series may engage in interest rate
swaps. The series intends to use interest rate swaps as a hedge and
not as a speculative investment. Interest rate swaps involve the
exchange by the series with another party of their respective rights
to receive interest, e.g., an exchange of fixed rate payments for
floating rate payments. For example, if the series holds an
interest-paying security whose interest rate is reset once a year, it
may swap the right to receive interest at this fixed rate for the
right to receive interest at a rate that is reset daily. Such a swap
position would offset changes in the value of the underlying security
because of subsequent changes in interest rates. This would protect
the series from a decline in the value of the underlying security due
to rising rates, but would also limit its ability to benefit from
falling interest rates.
The series may enter into interest rate swaps on either an asset-
based or liability-based basis, depending upon whether it is hedging
its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted
out, with the series receiving or paying, as the case may be, only
the net amount of the two payments. Inasmuch as these hedging
transactions are entered into for non-speculative purposes and not
for the purpose of leveraging the series' investments, Delaware
International and the series believe such obligations do not
constitute senior securities and, accordingly, will not treat them as
being subject to its borrowing restrictions. The net amount of the
excess, if any, of the series' obligations over its entitlement with
respect to each interest rate swap will be accrued on a daily basis
and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated account by the Custodian Bank. If the
series enters into an interest rate swap on other than a net basis,
the series would maintain a segregated account in the full amount
accrued on a daily basis of the series' obligations with respect to
the swap. See Foreign securities and foreign currency transactions
and Special risk considerations under Other considerations, below.
Other considerations
When-issued securities
Consistent with their respective objectives, each series may
invest in U.S. government securities and corporate debt obligations
on a when-issued basis ("when-issued securities"). These securities
involve commitments to buy a new issue with settlement up to 60 days
later. The average settlement date for when-issued securities
purchased by the series is generally between 30 and 45 days. During
the time between the commitment and settlement, the series do not
accrue interest, but the market value of the bonds may fluctuate.
This can result in a series' share value increasing or decreasing.
The series will not ordinarily sell when-issued securities prior to
settlement. If a series invests in securities of this type, it will
maintain a segregated account to pay for them and mark the account to
market daily.
Foreign securities and foreign currency transactions
As noted above, the Global Bond Series will invest at least 65%
of its assets in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of their
operating income in at least three different countries, one of which
may be the United States. The Equity/Income and Emerging Growth
Series may invest up to 25% of its assets in securities of issuers
organized or having a majority of their assets in or deriving a
majority of their operating income outside the United States. In
connection with investments in foreign securities, a series may, from
time to time, conduct foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market or through entering into contracts to
purchase or sell foreign currencies at a future date (i.e., a
"forward foreign currency" contract or "forward" contract). A series
will engage in these foreign currency transactions in order to
expedite settlement of portfolio transactions and to minimize
currency value fluctuations. Investing in foreign securities and, in
conjunction therewith, engaging in foreign currency transactions
present special considerations not presented by investments in
securities issued by United States companies. See Special risk
considerations for a discussion of these considerations.
Options
To achieve the series' objectives, the series intend to use
certain hedging techniques which might not be conveniently available
to individuals.
These techniques will be used at the respective investment
manager's discretion to protect a series' principal value.
The series may purchase put options, write covered call options
and enter into closing transactions in connection therewith in
respect of securities in which they may invest. The Global Bond
Series may also purchase call options and enter into related closing
transactions. In purchasing put and call options, the premium paid
by the series, plus any transaction costs, will reduce any benefit
realized by the series upon exercise of the option.
A put option gives a series the right to sell one of its
securities for an agreed price up to an agreed date. The advantage
is that the series can be protected should the market value of the
security decline. However, the series must pay a premium for this
right, whether it exercises it or not.
A covered call option obligates a series to sell one of its
securities for an agreed price up to an agreed date. The advantage
is that the series receives premium income, which may offset the cost
of purchasing put options. However, the series may lose the
potential market appreciation of the security if the respective
investment manager's judgment is wrong and interest rates fall.
A call option enables the purchaser, in return for the premium
paid, to purchase securities from the writer of the option at an
agreed upon date. The advantage is that the purchaser may hedge
against an increase in the price of securities it ultimately wishes
to buy.
Closing transactions essentially let a series offset a put option
or call option prior to its exercise or expiration. If it cannot
effect a closing transaction, it may have to hold a security it would
otherwise sell with a potential decline in net asset value, or
deliver a security it might want to hold.
The Equity/Income and Emerging Growth Series will use Exchange-
traded options, but reserve the right to use over-the-counter options
upon written notice to shareholders. The Global Bond Series may use
both Exchange-traded and over-the-counter options. Certain over-the-
counter options may be illiquid. The Global Bond Series will only
invest in such options to the extent consistent with its 10% limit on
investments in illiquid securities.
The Emerging Growth and Global Bond Series also may write call
options and purchase put options on stock indices and enter into
closing transactions in connection therewith. The Global Bond Series
also may purchase call options on stock indices and enter into
closing transactions in connection therewith. No series will engage
in transactions on stock indices for speculative purposes. Writing
or purchasing a call option on stock indices is similar to the
writing or purchasing of a call option on an individual stock.
Purchasing a protective put option on stock indices is similar to the
purchase of protective puts on an individual stock. Stock indices
used will include, but will not be limited to, the S&P 100 and the
S&P Over-the-Counter 250. The ability to hedge effectively using
options on stock indices will depend on the degree to which price
movements in the underlying index correlate with price movements in
the portfolio securities of, as the case may be, the Emerging Growth
or Global Bond Series.
Futures contracts and options on futures contracts
For hedging purposes, the Emerging Growth and Global Bond Series
may enter into futures contracts relating to securities, securities
indices or interest rates. In addition, the Global Bond Series may
enter into futures transactions relating to foreign currency.
A futures contract is a bilateral agreement providing for the
purchase and sale of a specified type and amount of a financial
instrument or foreign currency, or for the making and acceptance of a
cash settlement at a stated time in the future for a fixed price. By
its terms, a futures contract provides for a specified settlement
date on which, in the case of the majority of interest rate and
foreign currency futures contracts, the fixed-income securities or
currency underlying the contract are delivered by the seller and paid
for by the purchaser, or on which, in the case of securities index
futures contracts and certain interest rate and foreign currency
futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled
between the purchaser and seller in cash. Futures contracts differ
from options in that they are bilateral agreements, with both the
purchaser and the seller equally obligated to complete the
transaction. In addition, futures contracts call for settlement only
on the expiration date, and cannot be "exercised" at any other time
during their term.
The purchase or sale of a futures contract also differs from the
purchase or sale of a security or the purchase of an option in that
no purchase price is paid or received. Instead, an amount of cash or
cash equivalents, which varies but may be as low as 5% or less of the
value of the contract, must be deposited with the broker as "initial
margin" as a good faith deposit. Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis
as the value of the index or instrument underlying the futures
contract fluctuates, making positions in the futures contract more or
less valuable, a process known as "marking to the market."
A futures contract may be purchased or sold only on an exchange,
known as a "contract market," designated by the Commodity Futures
Trading Commission for the trading of such contract, and only through
a registered futures commission merchant which is a member of such
contract market. A commission must be paid on each completed
purchase and sale transaction. The contract market clearing house
guarantees the performance of each party to a futures contract, by in
effect taking the opposite side of such contract. At any time prior
to the expiration of a futures contract, a trader may elect to close
out its position by taking an opposite position on the contract
market on which the position was entered into, subject to the
availability of a secondary market, which will operate to terminate
the initial position. At that time, a final determination of
variation margin is made and any loss experienced by the trader is
required to be paid to the contract market clearing house while any
profit due to the trader must be delivered to it.
Interest rate futures contracts currently are traded on a variety
of fixed-income securities, including long-term U.S. Treasury Bonds,
U.S. Treasury Notes, GNMA modified pass-through mortgage-backed
securities, U.S. Treasury Bills, bank certificates of deposit and
commercial paper. In addition, interest rate futures contracts
include contracts on indexes of municipal securities. Foreign
currency futures contracts currently are traded on the British pound,
Canadian dollar, Japanese yen, Swiss franc, German mark and on
Eurodollar deposits.
A securities index or municipal bond index futures contract
provides for the making and acceptance of a cash settlement in much
the same manner as the settlement of an option on a securities index.
The types of indexes underlying securities index futures contracts
are essentially the same as those underlying securities index
options, as described above. The index underlying a municipal bond
index futures contract is a broad based index of municipal securities
designed to reflect movements in the municipal securities market as a
whole. The index assigns weighted values to the securities included
in the index and its composition is changed periodically.
The Emerging Growth and Global Bond Series may also purchase and
write options on the types of futures contracts that series could
invest in.
A call option on a futures contract provides the holder with the
right to purchase, or enter into a "long" position in, the underlying
futures contract. A put option on a futures contract provides the
holder with the right to sell, or enter into a "short" position in,
the underlying futures contract. In both cases, the option provides
for a fixed exercise price up to a stated expiration date. Upon
exercise of the option by the holder, the contract market clearing
house establishes a corresponding short position for the writer of
the option, in the case of a call option, or a corresponding long
position in the case of a put option and the writer delivers to the
holder the accumulated balance in the writer's margin account which
represents the amount by which the market price of the futures
contract at exercise exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures
contract. In the event that an option written by the fund is
exercised, the fund will be subject to all the risks associated with
the trading of futures contracts, such as payment of variation market
deposits. In addition, the writer of an option on a futures
contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
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 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.
The Global Bond Series has the right to purchase securities in
any foreign country, developed and underdeveloped, or emerging growth
countries. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and
governments of foreign nations. These risks are in addition to the
usual risks inherent in domestic investments. There is the
possibility of expropriation, nationalization or confiscatory
taxation, taxation of income earned in foreign nations or other taxes
imposed with respect to investments in foreign nations, foreign
exchange control (which may include suspension of the ability to
transfer currency from a given country), default in foreign
government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers
in those nations. In addition, in many countries, there is less
publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are
not subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be
comparable to those applicable to United States companies. Further,
the series may encounter difficulty or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates on
securities transactions in foreign countries, which are sometimes
fixed rather than subject to negotiation as in the United States, are
likely to be higher. Further, the settlement period of securities
transactions in foreign markets may be longer than in domestic
markets. In many foreign countries, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States.
The foreign securities markets of many of the countries in which the
series may invest may also be smaller, less liquid and subject to
greater price volatility than those in the United States.
Compared to the United States and other developed countries,
emerging countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that
trade a small number of securities. Prices on these exchanges tend
to be volatile and, in the past, securities in these countries have
offered greater potential for gain (as well as loss) than securities
of companies located in developed countries. Further, investments by
foreign investors (such as the Fund) are subject to a variety of
restrictions in many emerging countries. These restrictions may take
the form of prior governmental approval, limits on the amount or type
of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions
may be imposed at any time by these or other countries in which the
series invests. In addition, the repatriation of both investment
income and capital from several foreign countries is restricted and
controlled under certain regulations, including, in some cases, the
need for certain governmental consents. Although these restrictions
may in the future make it undesirable to invest in emerging
countries, Delaware International does not believe that any current
repatriation restrictions would affect its decision to invest in such
countries. Countries such as those in which the series may invest
have historically experienced and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations
or currency depreciation, large amounts of external debt, balance of
payments and trade difficulties and extreme poverty and unemployment.
Additional factors which may influence the ability or willingness to
service debt include, but are not limited to, a country's cash flow
situation, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of its debt service burden
to the economy as a whole, its government's policy towards the
International Monetary Fund, the World Bank and other international
agencies and the political constraints to which a government debtor
may be subject.
To the extent that interest or exchange rates or securities
prices move in an unexpected direction, a series may not achieve the
anticipated benefits of investing in futures contracts and options
thereon, or may realize a loss. To the extent that the series
purchases an option on a futures contract and fails to exercise the
option prior to the exercise date, it will suffer a loss of the
premium paid. Further, the possible lack of a secondary market could
prevent the series from closing out its positions relating to
futures.
As in the case of other kinds of options, the writing of an
option on foreign currency will constitute only a partial hedge, up
to the amount of the premium received, and a series could be required
to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on
foreign currency may constitute an effective hedge against
fluctuations in exchange rates, although, in the event of rate
movements adverse to a series' position, the series may forfeit the
entire amount of the premium plus related transaction costs.
With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities
involved is generally not possible since the future value of such
securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date
the forward contract is entered into and the date it matures. The
projection of short-term currency strategy is highly uncertain.
It is impossible to forecast the market value of portfolio
securities at the expiration of the contract. Accordingly, it may be
necessary for the series to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency the
series is obligated to deliver (and if a decision is made to sell the
security and make delivery of the foreign currency). Conversely, it
may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the series is
obligated to deliver.
The Global Bond Series may invest in zero coupon bonds. The
market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater
degree than do non-zero coupon securities having similar maturities
and credit quality. Current federal income tax law requires that a
holder of a taxable zero coupon security report as income each year
the portion of the original issue discount of such security that
accrues that year, even though the holder receives no cash payments
of interest during the year. The series has qualified as a regulated
investment company under the Code. Accordingly, during periods when
the series receives no interest payments on its zero coupon
securities, it will be required, in order to maintain its desired tax
treatment, to distribute cash approximating the income attributable
to such securities. Such distribution may require the sale of
portfolio securities to meet the distribution requirements and such
sales may be subject to the risk factor discussed above.
The use of interest rate swaps by the Global Bond Series involves
investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If Delaware
International is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment
performance of the series will be less favorable than it would have
been if this investment technique were never used. Interest rate
swaps do not involve the delivery of securities or other underlying
assets or principal. Thus, if the other party to an interest rate
swap defaults, the series' risk of loss consists of the net amount of
interest payments that the series is contractually entitled to
receive.
While the Global Bond Series intends to seek to qualify as a
"diversified" investment company under provisions of Subchapter M of
the Code, it will not be diversified for purposes of the 1940 Act.
Thus, while at least 50% of such series' total assets will be
represented by cash, cash items, and other securities limited in
respect of any one issuer to an amount not greater than 5% of the
series' total assets, it will not satisfy the 1940 Act requirement in
this respect, which applies that test to 75% of the series' assets.
A nondiversified portfolio is believed to be subject to greater risk
because adverse effects on the portfolio's security holdings may
affect a larger portion of the overall assets.
* * *
Each series' investment objective, the fund's designation as an
open-end investment company, the Equity/Income and Emerging Growth
Series' designation as a diversified fund, and each series' policies
concerning portfolio lending, borrowing and purchases of illiquid
securities may not be changed unless authorized by the vote of a
majority of the series' outstanding voting securities. A "majority
vote of the outstanding voting securities" is the vote by the holders
of the lesser of (a) 67% or more of a series' voting securities
present in person or represented by proxy if the holders of more than
50% of the outstanding voting securities of such series are present
or represented by proxy; or b) more than 50% of a series' outstanding
voting securities. Part B lists other more specific investment
restrictions of the series which may not be changed without a
majority shareholder vote. A brief discussion of those factors that
materially affected the series' performance during its most recently
completed fiscal year appears in the series' Annual Report. The
remaining investment policies are not fundamental and may be changed
by the Board of Directors of the fund without a shareholder vote.
Diversification
The fund was established as the underlying investment for
variable contracts issued by life companies. Section 817(h) of the
Internal Revenue Code of 1986, as amended (the "Code"), imposes
certain diversification standards on the underlying assets of
variable contracts held in the Portfolios of the fund. The Code
provides that a variable contract shall not be treated as an annuity
contract or life insurance for any period (and any subsequent period)
for which the investments are not, in accordance with regulations
prescribed by the United States Treasury Department ("Treasury
Department"), adequately diversified. Disqualification of the
variable contract would result in the imposition of federal income
tax to the contract owner with
respect to earnings allocable to the contract prior to distributions
under the contract (e.g., withdrawals). The Code contains a safe
harbor provision which provides that variable contracts meet the
diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than 55 percent of the total assets
consist of cash, cash items, U.S. government securities and
securities of other regulated investment companies.
Treasury Department Regulations (Treas. Reg. Section 1.817-5)
provide that a fund will be deemed to be considered adequately
diversified if (i) no more than 55 percent of the value of the total
assets of the fund is represented by any one investment; (ii) no more
than 70 percent of such value is represented by any two investments;
(iii) no more than 80 percent of such value is represented by any
three investments; and (iv) no more than 90 percent of such value is
represented by any four investments.
The Technical and Miscellaneous Revenue Act of 1988 provides that
for purposes of determining whether or not the diversification
standards imposed on the underlying assets of variable contracts by
Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate
issuer."
Each series of the fund will be managed in such a manner as to
comply with these diversification requirements.
Purchase and redemption
Shares are sold only to separate accounts of life companies at
net asset value. (See Calculation of offering price and net asset
value per share.) Redemptions will be effected by the separate
accounts at the net asset value next determined after receipt of the
order to meet obligations under the variable contracts. Contract
owners do not deal directly with the fund with respect to the
acquisition or redemption of fund shares.
Dividends and distributions
Dividends for the Global Bond Series are declared and paid
monthly on the first business day after the end of the month. Short-
term capital gains distributions, if any, may be paid with the
dividend; otherwise, any distributions from net realized securities
profits normally will be distributed following the close of the
fiscal year. The fund's fiscal year ends on December 31.
For the Equity/Income Series, the fund will make payments from
the series' net investment income quarterly. Distributions from the
series' net realized securities profits, if any, normally will be
made following the close of the fiscal year.
For the Emerging Growth Series, the fund will make payments from
the series' net investment income and net realized securities
profits, if any, twice a year.
All dividends and distributions are automatically reinvested in
additional series shares.
Taxes
The fund has qualified as a regulated investment company under
Subchapter M of the Internal Revenue Code. As such, the fund will
not be subject to federal income tax to the extent its earnings are
distributed. The fund intends to distribute substantially all of the
respective series' net investment income and net capital gains.
Shareholders may be proportionately liable for taxes on income and
gains of the series but shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to
them, and the fund will inform shareholders of the amount and nature
of such income or gains.
Calculation of offering price and net asset value per share
The offering price is the net asset value ("NAV") per share next
determined after an order is received. The offering price and net
asset value are computed as of the close of regular trading on the
New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on days
when the Exchange is open.
A series' NAV per share is computed by adding the value of all
securities and other assets in that series' portfolio, deducting any
liabilities of that series (expenses and fees are accrued daily) and
dividing by the number of that series' shares outstanding. The
valuation criteria set forth below apply equally to securities
purchased in reliance upon Rule 144A of the 1933 Act. In determining
each series' total net assets, portfolio securities listed or traded
on a national securities exchange, except for bonds, are valued at
the last sale price on the exchange upon which such securities are
primarily traded. Securities not traded on a particular day, over-
the-counter securities and government and agency securities are
valued at the mean value between bid and asked prices. Foreign
securities expressed in foreign currency values will be converted
into U.S. dollar values at the mean between the currencies' bid and
offered quotations. Debt securities (other than short-term
investments) are priced at fair value by an independent pricing
service using methods approved by the fund's Board of Directors.
Short-term investments having a maturity of less than 60 days are
valued at amortized cost, which approximates market value. All other
securities are valued at their fair value as determined in good faith
and in a method approved by the fund's Board of Directors.
The Global Bond Series' portfolio may be comprised primarily of
foreign securities. From time to time, those securities may be
listed primarily on foreign exchanges which trade on days when the
New York Stock Exchange is closed (such as Saturday). As a result,
the NAV of that series may be significantly affected by such trading
on days when shareholders have no access to that series. To the
extent other series hold foreign securities which are so listed, the
net asset value of those series also could be affected by trading on
days when shareholders have no access to those series.
Management of the fund
Directors
The business and affairs of the fund are managed under the
direction of its Board of Directors. Part B contains additional
information regarding the directors and officers.
Investment managers
Delaware Management furnishes investment management services to
the Equity/Income and Emerging Growth Series. Delaware
International, an affiliate of Delaware Management, furnishes
investment management services to the Global Bond Series.
Delaware Management and its predecessors have been managing the
funds in the Delaware Group since 1938. On December 31, 1995,
Delaware Management and its affiliate, Delaware International, were
supervising in the aggregate more than $28 billion in assets in the
various institutional (approximately $17,606,321,000) and investment
company (approximately $10,522,726,000) accounts.
Delaware Management is an indirect, wholly owned subsidiary of
Delaware Management Holdings, Inc. ("DMH"). Delaware International
is also controlled by DMH through several subsidiaries. On April 3,
1995, a merger between DMH and a wholly owned subsidiary of Lincoln
National Corporation ("Lincoln National") was completed. DMH,
Delaware Management and Delaware International are now wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln
National. Lincoln National, with headquarters in Fort Wayne,
Indiana, is a diversified organization with operations in many
aspects of the financial services industry, including insurance and
investment management. Except for the Global Bond Series which was
not yet in existence, in connection with the merger, new Investment
Management Agreements between the fund on behalf of each series and
its investment manager were executed following shareholder approval.
Delaware Management's address is One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103. Delaware International's address is
Veritas House, 125 Finsbury Pavement, London, England EC2A 1NQ.
Delaware Management manages the Equity/Income and Emerging Growth
Series' portfolios and makes investment decisions which are
implemented by the fund's Trading Department. For these services,
Delaware Management is paid an annual fee equal to 3/4 of 1% of the
average daily net assets of the Emerging Growth Series and 6/10 of 1%
of the Equity/Income Series' average daily net assets, less, in the
case of the Equity/Income Series, a proportionate share of all
directors' fees paid to the unaffiliated directors of the fund. The
investment management fee incurred by the Equity/Income and Emerging
Growth Series for the year ended December 31, 1995 was 0.60% and
0.75%, respectively, of average daily net assets. After considering
the waiver of fees by Delaware Management, as described under the
caption Expenses, the investment management fee paid by the
Equity/Income and Emerging Growth Series was 0.60% and 0.58%,
respectively, of average daily net assets.
Delaware International manages the Global Bond Series' portfolio
and implements investment decisions on behalf of the series. For
these services, Delaware International is paid an annual fee equal to
0.75% of the average daily net assets of the Global Bond Series. See
Expenses for a discussion of a voluntary waiver of its management fee
undertaken by Delaware International. The Global Bond Series was
first offered to investors on May 1, 1996.
John B. Fields has primary responsibility for making day-to-day
investment decisions for the Equity/Income Series. He has been the
Senior Portfolio Manager of this series since 1992. Mr. Fields, who
has 25 years experience in investment management, earned a bachelor's
degree and an MBA from Ohio State University. Before joining the
Delaware Group in 1992, he was Director of Domestic Equity Risk
Management at DuPont. Prior to that, he was Director of Equity
Research at Comerica Bank. Mr. Fields is a member of the Financial
Analysts Society.
In making investment decisions for the Equity/Income Series, Mr.
Fields works with a team of 12 portfolio managers and analysts, each
of whom specializes in a different industry sector and makes
recommendations accordingly. Mr. Fields also regularly consults with
Wayne A. Stork and Richard G. Unruh, Jr. Mr. Stork, Chairman of
Delaware Management and the fund's Board of Directors, is a graduate
of Brown University and attended New York University's Graduate
School of Business Administration. Mr. Stork joined the Delaware
Group in 1962 and has served in various executive capacities at
different times within the Delaware organization. Mr. Unruh is a
graduate of Brown University and received his MBA from the University
of Pennsylvania's Wharton School. He joined the Delaware Group in
1982 after 19 years of investment management experience with Kidder,
Peabody & Co. Inc. Mr. Unruh was named an executive vice president
of the fund in 1994. He is also a member of the Board of Directors
of the Manager and DMC and was named an executive vice president of
DMC in 1994.
Edward N. Antoian and Gerald S. Frey have primary responsibility
for making day-to-day investment decisions for the Emerging Growth
Series. Mr. Antoian, a Vice President/Senior Portfolio Manager of
the fund, has had such responsibility since the series' inception. A
graduate of The State University of New York at Albany with an MBA in
Finance from the University of Pennsylvania's Wharton School, Mr.
Antoian began his career with Price Waterhouse. Prior to joining the
Delaware Group in June 1984, he worked in the Institutional Equity
Department of E.F. Hutton in Philadelphia. Mr. Antoian is CFA
charterholder, and a member of the Philadelphia Finance Association
and the Philadelphia Securities Association. Mr. Frey joined Mr.
Antoian as Vice President/Senior Portfolio Manager and Co-Manager of
the series in June 1996. Mr. Frey has 20 years' experience in the
money management business and holds a BA in Economics from Bloomsburg
University and an MBA from Wilkes College. 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. Antoian and
Mr. Frey regularly consult with Wayne A. Stork, William H. Miller,
Judith R. Finger and Lori Wachs. 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. 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.
Ian G. Sims has primary responsibility for making day-to-day
investment decisions for the Global Bond Series. He has been the
senior portfolio manager for this series since its inception. Mr.
Sims is a graduate of the University of Newcastle-Upon-Tyne. He
joined Delaware International in 1990 as a senior international
fixed-income and currency manager. Mr. Sims began his investment
career with the Standard Life Assurance Co., and subsequently moved
to the Royal Bank of Canada Investment Management International
Company, where he was an international fixed-income manager. Prior
to joining Delaware International, he was a senior fixed-income and
currency portfolio manager with Hill Samuel Investment Advisers Ltd.
In making investment decisions for the Global Bond Series, Mr.
Sims regularly consults with Hywel Morgan and Christopher A. Moth.
Mr. Morgan was educated at the University of Wales and was
subsequently an Economics Lecturer at Dundee University. Prior to
joining Delaware International, he was Associate Director of the
international fixed-income department and head of the credit review
committee at Hill Samuel Investment Management responsible for over
$500 million in multi-currency fixed interest accounts. His prior
experience included working as an economic adviser for Credit Suisse
and the Economic Intelligence Unit. Mr. Morgan started his business
career as a Corporate Economist & Strategist at Ford of Europe and
Esso Petroleum. Mr. Moth is a graduate of The City University
London. Mr. Moth joined Delaware in 1992. He previously worked at
the Guardian Royal Exchange in an actuarial capacity where he was
responsible for technical analysis, quantitative models and
projections. Mr. Moth has been awarded the certificate in Finance &
Investment from the Institute of Actuaries in London.
Portfolio trading practices
The series normally will not invest for short-term trading
purposes. However, the series may sell securities without regard to
the length of time they have been held. The degree of portfolio
activity will affect brokerage costs of the series. Given the
respective series' investment objectives, the annual portfolio
turnover rates are not expected to exceed 100% for the Equity/Income
and Global Bond Series, but may exceed 100% for the Emerging Growth
Series.
The portfolio turnover rates for the Equity/Income and Emerging
Growth Series for the years ended December 31, 1994 and 1995 were as
follows: Equity/Income Series -- 91% and 85%, respectively, and
Emerging Growth Series -- 59% and 76%, respectively.
Best efforts are used to obtain the best available price and most
favorable execution for portfolio transactions. Orders may be placed
with brokers or dealers who provide brokerage and research services
to the respective investment manager or their respective advisory
clients. These services may be used by the respective investment
manager in servicing any of their respective accounts. Subject to
best price and execution, the respective investment manager may
consider a broker/dealer's sales of variable contracts in placing
portfolio orders, and may place orders with broker/dealers that have
agreed to defray certain series expenses such as custodian fees.
Performance information
From time to time, the fund may quote each series' total return
performance in advertising and other types of literature. Total
return will be based on a hypothetical $1,000 investment, reflecting
the reinvestment of all distributions at net asset value. Each
presentation will include the average annual total return for one-,
five- and ten-year (or life of series, if applicable) periods. The
fund may also advertise aggregate and average total return
information concerning the series over additional periods of time.
From time to time, the fund may also quote the Global Bond
Series' yield or total return performance in advertising and other
types of literature. The current yield for the series will be
calculated by dividing the annualized net investment income earned by
the series during a recent 30-day period by the maximum offering
price per share on the last day of the period. The yield formula
provides for semi-annual compounding which assumes that net
investment income is earned and reinvested at a constant rate and
annualized at the end of a six-month period.
Because securities' prices fluctuate, investment results of the
series will fluctuate and past performance should not be considered
as a representation of future results.
Distribution and service
The Distributor, Delaware Distributors, L.P. (which formerly
conducted business as Delaware Distributors, Inc.), serves as the
fund's national distributor under Distribution Agreements dated April
3, 1995 for the Equity/Income and Emerging Growth Series. The Global
Bond Series' Distribution Agreement is dated as of May 1, 1996. The
Distributor bears all of the costs of promotion and distribution.
Delaware Service Company, Inc. (the "Transfer Agent") is the
shareholder servicing, dividend disbursing and transfer agent for
each series under the Amended and Restated Shareholders Services
Agreement dated May 1, 1996.
The Distributor and the Transfer Agent are indirect, wholly owned
subsidiaries of DMH.
Expenses
Each series is responsible for all of its own expenses other than
those borne by the respective investment manager under the Investment
Management Agreements and those borne by the Distributor under the
Distribution Agreements.
With respect to the Equity/Income Series, Delaware Management had
elected voluntarily to waive its fee and reimburse this series to the
extent necessary to limit certain expenses of the series to 8/10 of
1% of the series' average daily net assets for the period July 1,
1992 through June 30, 1993. This waiver has been extended through
June 30, 1996. For the year ended December 31, 1995, the
Equity/Income Series' ratio of expenses to average daily net assets
was 0.69%.
In connection with the Emerging Growth Series, Delaware
Management had elected voluntarily to waive its fee and to reimburse
the series to the extent necessary to limit certain expenses to 8/10
of 1% of average daily net assets for the period from commencement of
the public offering for the series through June 30, 1994. This
waiver has been extended through June 30, 1996. For the year ended
December 31, 1995, the Emerging Growth Series' ratio of expenses to
average daily net assets was 0.80%, reflecting the waiver of fees.
With respect to the Global Bond Series, Delaware International
has elected voluntarily to waive its fee and to reimburse the series
to the extent necessary to limit certain expenses to 8/10 of 1% of
average daily net assets for the period from commencement of the
public offering through June 30, 1996.
Description of fund shares
Shares of the fund are sold only to separate accounts of life
companies. Currently, the shares of the fund are sold only to
Variable Annuity Account C and Flexible Premium Variable Life Account
K of Lincoln National Life Insurance Company, Variable Accounts A and
B of American International Life Assurance Company of New York,
Variable Accounts I and II of AIG Life Insurance Company, Separate
Accounts VA-K, VEL II and Inheiritage of First Allmerica Financial
Life Insurance Company and Separate Accounts VA-K, VEL, VEL II and
Inheiritage of Allmerica Financial Life Insurance and Annuity
Company. In the future, shares of the fund may be sold to separate
accounts of other affiliated or unaffiliated life companies to fund
variable contracts. The fund's Board of Directors will monitor
events in order to identify any material irreconcilable conflicts
which may possibly arise and to determine what action, if any, should
be taken in response thereto. An irreconcilable conflict that is not
resolved might result in the withdrawal of a substantial amount of
assets, causing a negative impact on net asset value.
As a "series" type of mutual fund, the fund issues separate
classes or series of stock. Additional series may be established in
the future. An interest in the fund is limited to the assets of the
particular series in which shares are held, and shareholders of each
series are entitled to a pro-rata share of all dividends and
distributions arising from an investment in such series.
The fund was organized as a Maryland corporation on February 19,
1987. The authorized capital stock of the fund consists of five
hundred million shares of common stock, $.01 par value. Each of the
series is currently allocated fifty million shares. The fund may
establish additional series and may allocate its shares either to
such new classes or to any of the existing series.
Each series' shares have equal voting rights and are equal in all
other respects. Each series will vote separately on any matter which
affects only that series. Shareholders get one vote for each share
held; fractional shares are voted. The fund will hold annual
meetings as necessary for shareholder matters to be voted under the
1940 Act or otherwise. Shares of each series will have a priority
over shares of any other series of the fund in the assets and income
of that series.
Because of current federal securities law requirements, the fund
expects that its life company shareholders will offer their contract
owners the opportunity to instruct them as to how series shares
allocable to their variable contracts will be voted with respect to
certain matters, such as approval of investment advisory agreements.
An insurance company will vote all series shares held in a separate
account in the same proportion as it receives instructions from
contract owners in that separate account. Under certain
circumstances, which are described more fully in the accompanying
prospectuses for the separate accounts which invest in the fund, the
voting instructions received from contract owners may be disregarded.
