<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.
Prospectus
May 1, 1998
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, 1998,
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 ("SEC").
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 SEC also maintains a Web site
(http://www.sec.gov) that contains Part B, material incorporated by reference
into the fund's registration statement, and other information regarding
registrants that electronically file with the SEC. 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 SERIES 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 THE PRINCIPAL AMOUNT INVESTED. SHARES OF
THE SERIES ARE NOT BANK OR CREDIT UNION DEPOSITS.
<PAGE>
Emerging Markets Series -- seeks to achieve long-term capital appreciation. The
series seeks to achieve its objective by investing primarily in equity
securities of issuers located or operating in emerging countries. The series is
an international fund. As such, under normal market conditions, at least 65% of
the series' assets will be invested in equity securities of issuers organized or
having a majority of their assets or deriving a majority of their operating
income in at least three countries that are considered to be emerging or
developing. This series has the same objective and investment disciplines as
Emerging Markets Series of Delaware Group Global & International Funds, Inc., a
separate fund in the Delaware Investments family.
Small Cap Value Series -- seeks capital appreciation by investing primarily in
small cap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis will also be
placed on securities of companies that may be temporarily out of favor or whose
value is not yet recognized by the market. This series has the same objective
and investment disciplines as Small Cap Value Fund of Delaware Group Equity
Funds V, Inc., a separate fund in the Delaware Investments family.
Trend 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 Trend Fund of Delaware Group
Equity Funds III, Inc., a separate fund in the Delaware Investments family.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
1
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TABLE OF CONTENTS
Page
- -------------------------------------------------
COVER PAGE 1
- -------------------------------------------------
SUMMARY INFORMATION 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 5
- -------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 8
Introduction 8
Emerging Markets Series 8
Small Cap Value Series 9
Trend Series 11
- -------------------------------------------------
PURCHASE AND REDEMPTION 11
- -------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS 11
- -------------------------------------------------
TAXES 12
- -------------------------------------------------
CALCULATION OF OFFERING PRICE
AND NET ASSET VALUE PER SHARE 12
- -------------------------------------------------
MANAGEMENT OF THE FUND 12
Performance information 14
Distribution and service 14
Expenses 15
Description of fund shares 15
- -------------------------------------------------
OTHER CONSIDERATIONS 16
- -------------------------------------------------
APPENDIX A - RATINGS 22
- -------------------------------------------------
2
<PAGE>
SUMMARY INFORMATION
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.
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 Emerging Markets Series invests primarily in securities issued by
non-United States companies. Small Cap Value and Trend 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 risk and opportunity considerations not typically
associated with investing in the securities of United States companies and
issuers. See Foreign securities and foreign currency transactions 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. Each 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. 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 are Delaware
Management or Delaware International registered as commodities trading
advisers in reliance upon various exemptive rules. See Futures contracts and
options on futures contracts under Other considerations.
<PAGE>
4. Emerging Markets Series will invest primarily in issuers located or operating
in markets of emerging countries. The securities markets in these countries
may be subject to a greater degree of economic, political or social
instability than is the case in the United States, Western Europe and other
developed markets. See Foreign securities and foreign currency transactions
under Other considerations.
5. Emerging Markets Series may invest up to 35% of its net assets in high-yield,
high risk fixed income securities and greater risks may be involved in an
investment in the series than in an investment in a mutual fund comprised
primarily of investment grade bonds. See High yield, high risk securities
under Emerging Markets Series.
6. While Emerging Markets Series intends to seek to qualify as "diversified"
investment companies 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, U.S. government securities 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.
3
<PAGE>
INVESTMENT MANAGERS
Delaware Management Company ("Delaware Management") furnishes investment
management services to the Small Cap Value and Trend Series, subject to the
supervision and direction of the fund's Board of Directors. See Management of
the fund for further information regarding Delaware Management and the fees
payable under the series' investment Management Agreements.
Delaware International Advisers Ltd. ("Delaware International") furnishes
investment management services to the Emerging Markets Series, subject to the
supervision and direction of the FUND'S Board of Directors. See Management of
the fund for further information regarding Delaware International and the fees
payable under the series' investment Management Agreement.
Delaware Management and Delaware International also provide investment
management services to certain of the other funds in the Delaware Investments
family.
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.
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 Emerging
Markets Series, each series operates as a diversified fund as defined by the
Investment Company Act of 1940 (the "1940 Act"). The Emerging Markets Series
operates as a nondiversified fund as defined by the 1940 Act.
4
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FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delaware Group Premium Fund, Inc. and have been audited by Ernst & Young LLP,
independent auditors. The data should be read in conjunction with the financial
statements, related notes, and the report of Ernst & Young LLP, 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.
Emerging
Markets Series
--------------
5/1/97(1)
through
12/31/97
--------------
Net asset value,
beginning of period $10.000
- ------------------------------
Income from
investment operations:
* Net investment income 0.060(2)
- ------------------------------
* Net realized and unrealized
gain (loss) on investments
and foreign currencies (1.180)
- ------------------------------ ------
Total from
investment operations (1.120)
- ------------------------------ ------
Less dividends
and distributions:
* Dividends from net
investment income none
- ------------------------------
* Distributions from net
realized gain on
investment transactions none
- ------------------------------ ------
Total dividends and
distributions none
- ------------------------------ ------
Net asset value, end
of period $8.880
- ------------------------------ ======
Total return(3) (11.20%)(4)
- ------------------------------
Ratios and
supplemental data:
* Net assets, end of period
(000 omitted) $5,776
- ------------------------------
* Ratio of expenses to
average net assets 1.50%
- ------------------------------
* Ratio of expenses to
average net assets
prior to expense limitation 2.45%
- ------------------------------
* Ratio of net investment
income to average net
assets 0.89%
- ------------------------------
* Ratio of net investment
income to average net
assets prior to expense
limitation (0.06%)
- ------------------------------
* Portfolio turnover 48%
- ------------------------------
* Average commission
rate paid(5) $0.0036
- ------------------------------
<PAGE>
(1) 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.
(2) Per share information for the period ended December 31, 1997 was based on
the average shares outstanding method.
(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) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged.
5
<PAGE>
<TABLE>
<CAPTION>
Small Cap Value Series
------------------------------------------------
Year Ended 12/27/93(1)
-------------------------------------- through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.500 $12.470 $10.290 $10.210 $10.000
- -------------------------------
Income from
investment operations:
* Net investment income 0.122 0.112 0.192 0.148 none
- -------------------------------
* Net realized and unrealized
gain (loss) on investments 4.338 2.548 2.208 (0.068) 0.210
- ------------------------------- ------- ------- ------- ------- -------
Total from
investment operations 4.460 2.660 2.400 0.080 0.210
- ------------------------------- ------- ------- ------- ------- -------
Less dividends
and distributions:
* Dividends from net
investment income (0.110) (0.180) (0.150) none none
- -------------------------------
* Distributions from net
realized gain on
investment transactions (0.930) (0.450) (0.070) none none
- ------------------------------- ------- ------- ------- ------- -------
Total dividends and
distributions (1.040) (0.630) (0.220) none none
- ------------------------------- ------- ------- ------- ------- -------
Net asset value, end
of period $17.920 $14.500 $12.470 $10.290 $10.210
- ------------------------------- ======= ======= ======= ======= =======
Total return(2) 32.91%(3) 22.55%(3) 23.85%(3) 0.78%(3) 2.10%(3)
- -------------------------------
Ratios and
supplemental data:
* Net assets, end of period
(000 omitted) $84,071 $23,683 $11,929 $6,291 $210
- -------------------------------
* Ratio of expenses to
average net assets 0.80% 0.80% 0.80% 0.80% (4)
- -------------------------------
* Ratio of expenses to
average net assets
prior to expense limitation 0.90% 0.99% 0.96% 1.41% (4)
- -------------------------------
* Ratio of net investment
income to average net
assets 1.24% 1.28% 2.13% 2.62% (4)
- -------------------------------
* Ratio of net investment
income to average net
assets prior to expense
limitation 1.14% 1.09% 1.97% 2.01% (4)
- -------------------------------
* Portfolio turnover 41% 84% 71% 26% (4)
- -------------------------------
* Average commission
rate paid(5) $0.0600 $0.0600 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) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in Expenses under
Management of the fund.
(4) The ratios of expenses and net investment income to average net assets and
portfolio turnover have been omitted as management believes that such ratios
are not meaningful due to the limited net assets of this series.
(5) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged.
6
<PAGE>
<TABLE>
<CAPTION>
Trend Series
------------------------------------------------
Year Ended 12/27/93(1)
-------------------------------------- through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.560 $14.020 $10.160 $10.200 $10.000
- -------------------------------
Income from
investment operations:
* Net investment income 0.019 0.050 0.098 0.079 none
- -------------------------------
* Net realized and unrealized
gain (loss) on investments 3.031 1.380 3.852 (0.119) 0.200
- ------------------------------- ------- ------- ------- ------- -------
Total from
investment operations 3.050 1.430 3.950 (0.040) 0.200
- ------------------------------- ------- ------- ------- ------- -------
Less dividends
and distributions:
* Dividends from net
investment income (0.050) (0.090) (0.090) none none
- -------------------------------
* Distributions from net
realized gain on
investment transactions (0.180) (0.800) none none none
- ------------------------------- ------- ------- ------- ------- -------
Total dividends and
distributions (0.230) (0.890) (0.090) none none
- ------------------------------- ------- ------- ------- ------- -------
Net asset value, end
of period $17.380 $14.560 $14.020 $10.160 $10.200
- ------------------------------- ======= ======= ======= ======= =======
Total return(2) 21.37%(3) 11.00%(3) 39.21%(3) (0.39%) 32.00%(3)
- -------------------------------
Ratios and
supplemental data:
* Net assets, end of period
(000 omitted) $118,276 $56,423 $20,510 $7,087 $204
- -------------------------------
* Ratio of expenses to
average net assets 0.80% 0.80% 0.80% 0.80% (4)
- -------------------------------
* Ratio of expenses to
average net assets
prior to expense limitation 0.88% 0.92% 0.96% 1.47% (4)
- -------------------------------
* Ratio of net investment
income to average net
assets 0.16% 0.56% 1.03% 1.63% (4)
- -------------------------------
* Ratio of net investment
income to average net
assets prior to expense
limitation 0.08% 0.44% 0.87% 0.96% (4)
- -------------------------------
* Portfolio turnover 125% 112% 76% 59% (4)
- -------------------------------
* Average commission
rate paid(5) $0.0599 $0.0600 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) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in Expenses under
Management of the fund.
(4) The ratios of expenses and net investment income to average net assets and
portfolio turnover have been omitted as management believes that such ratios
are not meaningful due to the limited net assets of this series.
(5) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged.
7
<PAGE>
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.
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.
EMERGING MARKETS SERIES
The objective of Emerging Markets Series is to seek long-term capital
appreciation. The series seeks to achieve this objective by investing primarily
in equity securities of issuers located or operating in emerging countries. The
series is an international fund. Under normal circumstances, at least 65% of the
series' assets will be invested in equity securities of issuers organized or
having a majority of their assets or deriving a majority of their operating
income in at least three different emerging market countries. The series will
attempt to achieve its objective by investing in a broad range of equity
securities, including common stocks, preferred stocks, convertible securities
and warrants issued by companies located or operating in emerging countries or
the principal securities trading market for which is in an emerging country.
The series considers an "emerging country" to be any country which is generally
recognized to be an emerging or developing country by the international
financial community, including the World Bank and the International Finance
Corporation, as well as countries that are classified by the United Nations or
otherwise regarded by their authorities as developing. In addition, any country
that is included in the IFC Free Index or MSCI EMF Index will be considered to
be an "emerging country." As of the date of this Prospectus, there are more than
130 countries which, in Delaware International's judgment, are generally
considered to be emerging or developing countries by the international financial
community, approximately 40 of which currently have stock markets. Within this
group of developing or emerging countries are included almost every nation in
the world, except the United States, Canada, Japan, Australia, New Zealand and
most nations located in Western and Northern Europe.
<PAGE>
Currently, investing in many emerging countries is not feasible, or may, in
Delaware International's opinion, involve unacceptable political risks. The
series will focus its investments in those emerging countries where Delaware
International considers the economies to be developing strongly and where the
markets are becoming more sophisticated. Delaware International believes that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may particularly
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets in such countries.
In considering possible emerging countries in which the series may invest,
Delaware International will place particular emphasis on certain factors, such
as economic conditions (including growth trends, inflation rates and trade
balances), regulatory and currency controls, accounting standards and political
and social conditions. It is currently anticipated that the countries in which
the series may invest will include, but not be limited to, Argentina, Botswana,
Brazil, Chile, China, Colombia, Czech Republic, Egypt, Estonia, Ghana, Greece,
Hong Kong, Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica, Jordan,
Kenya, Korea, Latvia, Lithuania, Malaysia, Mauritius, Mexico, Morocco, Nigeria,
Pakistan, Peru, the Philippines, Poland, Portugal, Russia, Slovenia, South
Africa, Sri Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. As markets
in other emerging countries develop, Delaware International expects to expand
and further diversify the countries in which the series invests.
Although not an exclusive list of criteria to be considered by Delaware
International, an emerging country equity security is one issued by a company
that, in the opinion of Delaware International, exhibits one or more of the
following characteristics: (i) its principal securities trading market is an
emerging country, as defined above; (ii) while traded in any market, alone or on
a consolidated basis, the company derives 50% or more of its annual revenues
from either goods produced, sales made or services performed in emerging
countries; or (iii) it is organized under the laws of, and has a principal
office in, an emerging country. Determinations as to eligibility will be made by
Delaware International based on publicly available information and inquiries
made of the companies.
The series may invest in Depositary Receipts, and in both open-end and, listed
or unlisted, closed-end investment companies, as well as unregistered investment
companies. See Investment company securities under Other considerations. The
series may also invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock, and certain
other non-traditional equity securities.
8
<PAGE>
The series may invest up to 35% of its net assets in fixed-income securities
issued by emerging country companies, and foreign governments, their agencies,
instrumentalities or political subdivisions, all of which may be high yield,
high risk fixed-income securities rated lower than BBB by S&P and Baa by Moody's
or, if unrated, are considered by Delaware International to be of equivalent
quality and which present special investment risks. See High yield, high risk
securities below. See Appendix A for more rating information. The series may
also invest in Brady Bonds and zero coupon securities. See Foreign securities
and foreign currency transactions under Other considerations. The series'
investments generally did not exceed 5% of its assets during the past fiscal
year, although the percentages of the series ' assets allocated to such
investments may vary from year to year.
For temporary, defensive purposes, the series may invest all or a substantial
portion of its assets in high quality debt instruments issued by foreign
governments, their agencies, instrumentalities or political subdivisions, the
U.S. government, its agencies or instrumentalities and which are backed by the
full faith and credit of the U.S. government, or issued by foreign or U.S.
companies. Any corporate debt obligations will be rated AA or better by S&P, or
Aa or better by Moody's or, if unrated, will be determined to be of comparable
quality by Delaware International. For example, the series may enter the global
fixed-income markets when Delaware International believes that the global equity
markets are excessively volatile or overvalued so that the series' objective
cannot be achieved in such markets. In addition, the series may invest in the
U.S. fixed-income markets for temporary, defensive purposes when Delaware
International believes that the international equity and fixed-income markets
are evidencing such excessive volatility or overvaluation. The series may also
invest in the securities listed for defensive investing pending investment of
proceeds from new sales of series shares and to maintain sufficient cash to meet
redemption requests.
HIGH YIELD, HIGH RISK SECURITIES
Emerging Markets Series may invest up to 35% of its net assets, in high yield,
high risk foreign fixed-income securities, including so-called Brady Bonds. See
Foreign securities and foreign currency transactions under Other considerations.
In the past, in the opinion of Delaware International, the high yields from
these bonds have more than compensated for their higher default rates. There can
be no assurance, however, that yields will continue to offset default rates on
these bonds in the future. Delaware International intends to maintain an
adequately diversified portfolio of these bonds. While diversification can help
to reduce the effect of an individual default on the series, there can be no
assurance that diversification will protect the series from widespread bond
defaults brought about by a sustained economic downturn.
Medium- and low-grade bonds held by the series may be issued as a consequence of
corporate restructurings, such as leveraged buy-outs, mergers, acquisitions,
debt recapitalizations or similar events. Also these bonds are often issued by
smaller, less creditworthy companies or by highly leveraged (indebted) firms,
which are generally less able than more financially stable firms to make
scheduled payments of interest and principal. The risks posed by bonds issued
under such circumstances are substantial.
The economy and interest rates may affect these high yield, high risk securities
differently from other securities. Prices have been found to be less sensitive
to interest rate changes than higher rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or a substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service principal and interest payment obligations, to meet
projected business goals and to obtain additional financing. Changes by
recognized rating agencies in their rating of any security and in the ability of
an issuer to make payments of interest and principal will also ordinarily have a
more dramatic effect on the values of these investments than on the values of
higher-rated securities. Such changes in value will not affect cash income
derived from these securities, unless the issuers fail to pay interest or
dividends when due. Such changes will, however, affect the series' net asset
value per share.
<PAGE>
SMALL CAP VALUE SERIES
The objective of the series is capital appreciation. The strategy will be to
invest primarily in common stocks and issues convertible into common stocks
which, in the opinion of Delaware Management, have market values which appear
low relative to their underlying value or future earnings and growth potential.
Securities will be purchased that Delaware Management believes to be undervalued
in relation to asset value or long-term earning power of the companies. Delaware
Management may also invest in securities of companies where current or
anticipated favorable changes within a company provide an opportunity for
capital appreciation. Delaware Management's emphasis will be on securities of
companies that may be temporarily out of favor or whose value is not yet
recognized by the market.
While not a fundamental policy, under normal market conditions the series
intends to invest 65% of its net assets in securities issued by small cap
companies, defined as those currently having a market capitalization generally
of less than $1.5 billion at the time of purchase. As a general matter, small
cap companies may have more limited product lines, markets and financial
resources than large cap companies. In addition, securities of small cap
companies, generally, may trade less frequently (and with a lesser volume),
9
<PAGE>
may be more volatile and may be somewhat less liquid than securities issued by
larger capitalization companies.
Delaware Management will consider the financial strength of the company, the
nature of its management and any developments affecting the security, the
company or the industry. Securities may be out of favor due to a variety of
factors, such as lack of an institutional following, or unfavorable developments
affecting the issuer of the securities, such as poor earning reports, dividend
reductions or cyclical economic or business conditions. Other securities
considered by Delaware Management would include those of companies where current
or anticipated favorable changes such as a new product or service, technological
breakthrough, management change, projected takeovers, changes in capitalization
or redefinition of future corporate operations provide an opportunity for
capital appreciation. Delaware Management will also consider securities where
trading patterns suggest that significant positions are being accumulated by
officers of the company, outside investors or the company itself. Delaware
Management feels it may uncover situations where those who have a vested
interest in the company feel the securities are undervalued and have
appreciation potential.
Although the series will constantly strive to attain the objective of long-term
growth, there can be no assurance that it will be attained. If Delaware
Management believes that market conditions warrant, the series may employ
options strategies. Also, on a temporary, defensive basis, Delaware Management
may invest in fixed-income obligations. The objective of the series may not be
changed without shareholder approval.
INVESTMENT STRATEGY
While management believes that the series' objective may best be attained by
investing in common stocks, the SERIES may also invest in other securities
including, but not limited to, convertible securities, warrants, preferred
stocks, bonds and foreign securities. Although it is expected to receive
relatively less emphasis, the series may also invest in fixed-income securities
without regard to a minimum grade level in pursuit of its objective where there
are favorable changes in a company's earnings or growth potential or where
general economic conditions and the interest rate environment provide an
opportunity for declining interest rates and consequent appreciation in these
securities. The strategies employed are dependent upon the judgment of Delaware
Management.
In investing for capital appreciation, the series may hold securities for any
period of time. The degree of portfolio activity will affect brokerage costs of
the series.
<PAGE>
Should the market warrant a temporary, defensive approach, the series may also
invest in fixed-income obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities, as well as money market instruments, and
corporate bonds rated A or above by Moody's or S&P.
The series may write covered call options on individual issues as well as write
call options on stock indices. The series may also purchase put options on
individual issues and on stock indices. Delaware Management will employ these
techniques in an attempt to protect appreciation attained, to offset capital
losses and to take advantage of the liquidity available in the option markets.
The ability to hedge effectively using options on stock indices will depend, in
part, on the correlation between the composition of the index and the series'
portfolio as well as the price movement of individual securities. The series
does not currently intend to write or purchase stock index options.
While there is no limit on the amount of the series' assets which may be
invested in covered call options, the series will not invest more than 2% of its
net assets in put options. The series will only use Exchange-traded options. See
Other considerations - Options, below.
The series may enter into futures contracts and buy and sell options on futures
contracts relating to securities, securities indices or interest rates. See
Other considerations - Futures contracts and options on futures contracts,
below.
RISK FACTORS
The series may be suitable for the patient investor interested in long-term
capital appreciation. The investor should be willing to accept the risks
associated with investments in domestic and international securities (and
currency hedging transactions in connection therewith), as these investments may
be speculative and subject the series to an additional risk. See Foreign
securities and foreign currency transactions under Other considerations.
Investing in a company temporarily out of favor may involve the risk that the
anticipated favorable change may not occur and, as a result, that security may
decline in value or not appreciate as expected. Although it will receive
relatively minor emphasis in pursuit of its objective, the series may also
purchase, at times, lower rated or unrated corporate bonds without regard to a
grade minimum, which may be considered speculative and may increase the
portfolio's credit risk. Although the series will not ordinarily purchase bonds
rated below B by Moody's or S&P (i.e., high-yield, high-risk fixed-income
securities), it may do so if Delaware Management believes that capital
appreciation is likely. The series will not invest more than 25% of its net
assets in bonds rated below B. Investing in such lower rated debt securities may
involve certain risks not typically associated with higher rated securities.
Such bonds are considered very speculative and
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may possibly be in default or have interest payments in arrears. See Emerging
Markets Series for additional information on the risks associated with such
securities. See Appendix A for more rating information.
Net asset value may fluctuate at times 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.
TREND 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.
<PAGE>
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.
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
For each series, the fund will make payments from the series' net income and net
realized securities profits, if any, once 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. The fund's fiscal year ends on December
31.
All dividends and distributions are automatically reinvested in additional
series shares.
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TAXES
Small Cap Value Series and Trend Series have qualified, and intend to continue
to qualify, as regulated investment companies under Subchapter M of the Internal
Revenue Code (the "Code"). Emerging Markets Series intends to qualify as a
regulated investment company under the Code. As such, a series 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 Emerging Markets Series' portfolio will be comprised primarily of foreign
securities. From time to time, those securities may be listed primarily on
foreign exchanges which trade on days when the New York Stock Exchange is closed
(such as U.S. Holidays and Saturdays). As a result, the NAV of the series may be
significantly affected by such trading on days when shareholders have no access
to the 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 the series.
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS
The business and affairs of the fund are managed under the direction of its
Board of Directors. Part B contains additional information regarding the
directors and officers.
INVESTMENT MANAGERS
Delaware Management furnishes investment management services to the Small Cap
Value and Trend Series. Delaware International, an affiliate of Delaware
Management, furnishes investment management services to the Emerging Markets
Series.
Delaware Management and its predecessors have been managing the funds in
Delaware Investments since 1938. On December 31, 1997, Delaware Management and
its affiliates within Delaware Investments, including Delaware International,
were supervising in the aggregate more than $40 billion in assets in the various
institutional or separately managed (approximately $24,040,760,000) and
investment company (approximately $16,482,523,000) accounts.
Delaware Management is a series of Delaware Management Business Trust. Delaware
Management changed its form of organization from a corporation to a business
trust on March 1, 1998. 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 Emerging Markets 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 Third Floor, 80 Cheapside, London, England EC2V 6EE.
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Delaware Management manages the Small Cap Value and Trend 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 each of the Small Cap Value and
Trend Series' average daily net assets. The investment management fee incurred
by each of the Small Cap Value and Trend Series' for the fiscal year ended
December 31, 1997 was 0.75% 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 Small Cap Value and Trend Series was
0.65% and 0.67%, respectively, of average daily net assets.
Delaware International manages the Emerging Markets Series' portfolio and
implements investment decisions on behalf of the series. For these services,
Delaware International is paid an annual fee equal to 1.25% of the average daily
net assets of the Emerging Markets Series. The investment management fee
incurred by the Emerging Markets Series for the period May 1, 1997 (date of
initial public offering) through December 31, 1997 was 1.25% (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 Emerging Markets Series was 0.29% (annualized) of
average daily net assets.
The directors of the fund annually review service fees paid to each investment
manager.
Gerald S. Frey, Vice President/Senior Portfolio Manager of the fund, has primary
responsibility for making day-to-day investment decisions for the Trend Series.
Mr. Frey has been senior portfolio manager of the series since March 1997 and
was Co-Manager from June 1996 to March 1997. Mr. Frey has 21 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
Delaware Investments 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,
John A. Heffern and Lori Wachs. 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 Delaware Investments in 1962 and has served in various executive
capacities at different times within the Delaware organization. Mr. Bassett,
Vice President, joined Delaware Investments 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.
<PAGE>
He received his bachelor's degree and MBA from Duke University. Mr. Heffern,
Vice President, holds a bachelor's degree and an MBA from the University of
North Carolina at Chapel Hill. He joined Delaware Investments 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 Delaware Investments 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.
Clive A. Gillmore also has primary responsibility for making day-to-day
investment decisions for Emerging Markets Series. He has been the senior
portfolio manager for this series since its inception. A graduate of the
University of Warwick, Mr. Gillmore joined Delaware International in 1990 after
eight years of investment experience. Mr. Gillmore began his career at Legal and
General Investment Management, the asset management division of Legal and
General Assurance Society Ltd., which is a large U.K. life and pension company.
His most recent position prior to joining Delaware Investments was as a Pacific
Basin equity analyst and senior portfolio manager for Hill Samuel Investment
Advisers Ltd. Mr. Gillmore completed the London Business School Investment
program. In making investment decisions for Emerging Markets Series, Mr.
Gillmore regularly consults with an international equity team of fourteen
members. Mr. Gillmore also regularly consults with David G. Tilles, Robert
Akester and Joshua A. Brooks. Mr. Tilles, who is Chief Investment Officer for
Delaware International, is a graduate of the University of Warwick with a BS in
management sciences. Before joining Delaware Investments in 1990, he was Chief
Investment Officer of Hill Samuel Investment Advisers Ltd. He is a member of the
Institute of Investment Management & Research and the Operational Research
Society. Prior to joining Delaware International in 1996 as a Senior Portfolio
Manager, Mr. Akester, who began his investment career in 1969, was most recently
a Director of Hill Samuel Investment Advisers Ltd., which he joined in 1985. His
prior experience included working as a Senior Analyst and head of the South-East
Asian Research team at James Capel, and as a Fund Manager at Prudential
Assurance Co., Ltd. Mr. Akester holds a BS in Statistics and Economics from
University College, London and is an associate of the Institute of Actuaries,
with a certificate in Finance and Investment. Mr. Brooks holds a bachelor's
degree from Yale University and has undertaken graduate studies at The London
Business School. He began his investment career with Delaware Investments in
1991. Prior to joining the emerging markets team in London, he was based in
Philadelphia with responsibilities that included equity market analysis and
liaison with Delaware International.
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Christopher S. Beck, Vice President/Senior Portfolio Manager of the fund,
assumed primary responsibility for making day-to-day investment decisions for
the Small Cap Value Series in May 1997. Mr. Beck has been in the investment
business for 17 years, starting with Wilmington Trust in 1981. Later, he became
Director of Research at Cypress Capital Management in Wilmington and Chief
Investment Officer of the University of Delaware Endowment Fund. Prior to
joining Delaware Investments in May 1997, he managed the Small Cap Value Fund
from October 1995 at Pitcairn Trust Company. He holds a BS from the University
of Delaware, an MBA from Lehigh University and is a CFA charterholder. In making
investment decisions for the Fund, Mr. Beck regularly consults with Wayne A.
Stork, Richard G. Unruh, Jr. and Andrea Giles. A graduate of Brown University,
Mr. Unruh received his MBA from the University of Pennsylvania's Wharton School
and joined Delaware Investment 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 Delaware
Management Company, Inc. and was named an Executive Vice President of Delaware
Management Company, Inc. in 1994. Andrea Giles, Research Analyst for the series,
holds a BSAD from the Massachusetts Institute of Technology and an MBA in
Finance from Columbia University. Prior to joining Delaware Investments in 1996,
she was an account officer in the Leveraged Capital Group with Citibank.
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. Given the respective series' investment objectives, the annual
portfolio turnover rates are not expected to exceed 100% for the Emerging
Markets Series and may exceed 100% for the Small Cap Value and Trend Series. A
100% turnover rate would occur if all of the securities in a series were sold
and replaced within one year. The rate of portfolio turnover is not a limiting
factor when the investment manager deems it desirable to purchase or sell
securities. High portfolio turnover (over 100%) involves correspondingly greater
brokerage commissions and other transaction costs and may affect taxes payable
by the series' shareholders that are subject to federal income taxes. The
turnover rate may also be affected by cash requirements from redemptions and
repurchases of the series' shares. The degree of portfolio activity may affect
brokerage costs of the series and taxes payable by shareholders that are subject
to federal income taxes.
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 Investments
family 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.
<PAGE>
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.
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 serves as the fund's national distributor under Distribution
Agreements dated April 3, 1995 for the Small Cap Value and Trend Series. The
Emerging Markets Series' Distribution Agreement is dated as of May 1, 1997. The
Distributor bears all of the costs of promotion and distribution.
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, 1998. 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 Distributor
and Transfer Agent. The Distributor and the Transfer Agent are indirect, wholly
owned subsidiaries of DMH.
* * *
As with other mutual funds, financial and business organizations and individuals
around the world, each series could be adversely affected if the computer
systems used by its service providers do not properly process and calculate
date-related information from and after January 1, 2000. This is commonly known
as the "Year 2000 Problem." The fund is taking steps to obtain satisfactory
assurances that the series' major service providers are taking steps reasonably
designed to address the Year 2000 Problem with respect to the computer systems
that such service providers use. There can be no assurances that these steps
will be sufficient to avoid any adverse impact on the business of any of the
series.
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Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro." It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. Each series investing in securities of
participating countries could be adversely affected if the computer systems used
by its major service providers are not properly prepared to handle the
implementation of this single currency or the adoption of the Euro by additional
countries in the future. The fund is taking steps to obtain satisfactory
assurances that the major service providers of affected series are taking steps
reasonably designed to address these matters with respect to the computer
systems that such service providers use. There can be no assurances that these
steps will be sufficient to avoid any adverse impact on the business of any
series.
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.
Beginning May 1, 1998, Delaware Management elected voluntarily to waive its fee
and pay the expenses of the Small Cap Value and Trend Series to the extent
necessary to ensure that a series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses, do not exceed
0.85% of average daily net assets through October 31, 1998.
Prior to May 1, 1998, Delaware Management elected voluntarily to waive its fee
and pay the expenses of the Small Cap Value and Trend Series to the extent
necessary to ensure that a series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses, did not
exceed 0.80% of average daily net assets from the commencement of operations
through April 30, 1998. For the fiscal year ended December 31, 1997, the Small
Cap Value and Trend Series' ratio of expenses to average daily net assets was as
follows:
With Voluntary Without Voluntary
Waiver of Fees Waiver of Fees
Small Cap Value Series 0.80% 0.90%
Trend Series 0.80% 0.88%
Delaware International elected voluntarily to waive its fee and pay the expenses
of Emerging Markets Series to the extent necessary to ensure that the series'
annual operating expenses, exclusive of taxes, interest, brokerage commissions
and extraordinary expenses, did not exceed 1.50% of average daily net assets
from the commencement of operations through April 30, 1998. This waiver and
payment commitment has been extended through October 31, 1998. For the fiscal
year ended December 31, 1997, the Emerging Markets Series' ratio of expenses to
average daily net assets was 1.50% (annualized), reflecting the voluntary waiver
of fees by Delaware International. If the voluntary fee waiver was not in
effect, the ratio of operating expenses to average daily net assets would have
been 2.45% (annualized).
<PAGE>
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 Life Insurance
Company and Separate Accounts VA-K, VEL, VEL II and Inheiritage of Allmerica
Life and Annuity Insurance 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
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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.
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 Emerging Markets Series intends to invest its assets
primarily in securities of foreign issuers. The Small Cap Value and Trend Series
may invest a portion 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.
The risk involved in investing in foreign securities include the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations or other taxes imposed with respect to
<PAGE>
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, and the information that is available is often of lesser quality
than information available on U.S. companies. 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, a 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. Moreover, 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 a
series may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
Emerging Markets. 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 Emerging Markets 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
16
<PAGE>
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.
With respect to investment in debt issues of foreign governments, including
Brady Bonds, the ability of a foreign government or government-related issuer to
make timely and ultimate payments on its external debt obligations will also be
strongly influenced by the issuer's balance of payments, including export
performance, its access to international credits and investments, fluctuations
in interest rates and the extent of its foreign reserves. A country whose
exports are concentrated in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to fluctuations in international
prices of these commodities or imports. To the extent that a country receives
payment for its exports in currencies other than dollars, its ability to make
debt payments denominated in dollars could be adversely affected.
The issuers of the emerging market country government and government-related
high yield securities in which the series may invest have in the past
experienced substantial difficulties in servicing their external debt
obligations, which have led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance interest
payments. Holders of certain foreign government and government-related high
yield securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign government and
government-related high yield securities in which the series may invest will not
be subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
Foreign Currency Transactions. The series may also purchase options and forward
contracts in foreign currency for hedging purposes in connection with such
foreign securities transactions. 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.
<PAGE>
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.
Depositary Receipts. Each series may make foreign investments through the
purchase and sale of sponsored or unsponsored American, European and Global
Depositary Receipts ("Depositary Receipts"). Depositary Receipts are receipts
typically issued by a U.S. or foreign bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. "Sponsored"
Depositary Receipts are issued jointly by the issuer of the underlying security
and a depository, whereas "unsponsored" Depositary Receipts are issued without
participation of the issuer of the deposited security. Holders of unsponsored
Depositary Receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts in
respect of the deposited securities. Therefore, there may not be a correlation
between information concerning the issuer of the security and the market value
of an unsponsored Depositary Receipt.
17
<PAGE>
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 Emerging Markets 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 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 Small Cap Value and Trend Series, will use Exchange-traded options, but
reserve the right to use over-the-counter options upon written notice to
shareholders. The Emerging Markets Series may use both Exchange-traded and
over-the-counter options. Certain over-the-counter options may be illiquid. The
Emerging Markets Series will only invest in such options to the extent
consistent with its 10% limit on investments in illiquid securities.
Each series also may write call options and purchase put options on stock
indices and enter into closing transactions in connection therewith. The
Emerging Markets 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 series.
<PAGE>
FUTURES CONTRACTS AND OPTIONS
ON FUTURES CONTRACTS
For hedging purposes, each series may enter into futures contracts relating to
securities, securities indices or interest rates. In addition, the Emerging
Markets 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 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
18
<PAGE>
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.
Each 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.
<PAGE>
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
19
<PAGE>
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%. 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. 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 102%
collateralized by U.S. government securities except that the Emerging Markets
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 Investments family have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
funds in the Delaware Investments family 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.
<PAGE>
LIQUIDITY AND RULE 144A SECURITIES
In order to assure that each series has sufficient liquidity, no series may
invest more than 10% of its net assets in illiquid assets. 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
investment 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
applicable 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.
INVESTMENT COMPANY SECURITIES
Any investments that the Emerging Markets Series make in either closed-end or
open-end investment companies will be limited by the 1940 Act, and would involve
an indirect payment of a portion of the expenses, including advisory fees, of
such other investment companies. The limitations under the 1940 Act also apply
to Emerging Markets Series' investments in unregistered investment companies.
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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<PAGE>
While the Emerging Markets 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, U.S. government
securities 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 Small Cap Value and Trend 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.
<PAGE>
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.
21
<PAGE>
APPENDIX A-RATINGS
General Rating Information
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 very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B--generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small; CAA--are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest; CA--represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C--the lowest
rated class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
COMMERCIAL PAPER
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 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.
<PAGE>
(DGPFSCEMT-SAI/PART B)
--------------------------
DELAWARE GROUP
--------------------------
PREMIUM FUND, INC.
--------------------------
INVESTMENT MANAGERS
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
Delaware International Advisers Ltd.
Third Floor
80 Cheapside
London, England EC2V 6EE
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING, PART B
DIVIDEND DISBURSING,
ACCOUNTING SERVICES STATEMENT OF
AND TRANSFER AGENT ADDITIONAL INFORMATION
Delaware Service Company, Inc. --------------------------
1818 Market Street MAY 1, 1998
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
INVESTMENTS
-----------
<PAGE>
(DGPFSCEMT-SAI/PART B)
- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
- --------------------------------------------------------------------------------
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
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Investment management agreements
- --------------------------------------------------------------------------------
Officers and directors
- --------------------------------------------------------------------------------
General information
- --------------------------------------------------------------------------------
Appendix A--Description of ratings
- --------------------------------------------------------------------------------
Financial statements
- --------------------------------------------------------------------------------
-1-
<PAGE>
(DGPFSCEMT-SAI/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, 1998, 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.
-2-
<PAGE>
(DGPFSCEMT-SAI/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.
Small Cap Value Series seeks capital appreciation by investing
primarily in small cap common stocks whose market value
appears low relative to their underlying value or future
earnings and growth potential. Emphasis will also be placed on
securities of companies that may be temporarily out of favor
or whose value is not yet recognized by the market. This
series has the same objective and investment disciplines as
Small Cap Value Fund of Delaware Group Equity Funds V, Inc., a
separate fund in the Delaware Investments family.
Trend 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 Trend Fund of Delaware Group Trend Fund, Inc., a separate
fund in the Delaware Investments family.
Emerging Markets Series seeks to achieve long-term capital
appreciation. The series seeks to achieve its objective by
investing primarily in equity series of issuers located in
emerging countries. The series is an international fund. As
such, under normal market conditions, at least 65% of the
series' assets will be invested in equity securities of
issuers organized or having a majority of their assets or
deriving a majority of their operating income in at least
three countries that are considered to be emerging or
developing. This series has the same objective and investment
disciplines as Emerging Markets Fund of Delaware Group Global
& International Funds, Inc., a separate fund in the Delaware
Investments family.
Investment restrictions
The fund has the following restrictions for Small Cap Value Series and
Trend 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 such 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 Small Cap Value and Trend 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.
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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 Small Cap Value and Trend Series from entering into futures
contracts or options thereon, to the extent that not more than 5% of its assets
are required as futures contract margin deposits and premiums on options and
only to the extent that obligations under such contracts and transactions
represent not more than 20% of the series' assets.
8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to facilitate
redemptions. The series have no intention of increasing their net income through
borrowing. Any borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of a series' assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the series shall, within three days thereafter (not including
Sunday and holidays) or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount of its
borrowings to an extent that the asset coverage of such borrowings shall be at
least 300%. A series will not pledge more than 15% of its net assets. A series
shall not issue senior securities as defined in the Investment Company Act of
1940 (the "1940 Act"), except for notes to banks.
9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with each series' investment
objective and policies are considered loans and except that each series may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for their use relating to short sales or other security transactions.
10. Invest more than 5% of the value of its total assets in securities of
companies less than three years old. Such three-year period shall include the
operation of any predecessor company or companies.
11. Invest more than 25% of its total assets in any particular industry,
except that a series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by Standard & Poor's Ratings Group ("S&P") or
P-2 or better by Moody's Investors Service, Inc. ("Moody's").
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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.
In addition, the following investment restriction of Small Cap Value
Series and Trend 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 Small Cap Value and Trend 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.
The following restrictions are fundamental policies of Emerging Markets
Series, which may not be changed without the approval of the holders of a
majority of the series' outstanding voting securities:
1. The series will not invest 25% or more of its total assets in any
one industry provided that there is no limitation with respect to investments in
obligations issued or guaranteed as to principal or interest by the U.S.
Government, its agencies or instrumentalities.
2. The series will not make loans other than by the purchase of all or
a portion of a publicly or privately distributed issue of bonds, debentures or
other debt securities of the types commonly offered publicly or privately and
purchased by financial institutions (including repurchase agreements), whether
or not the purchase was made upon the original issuance of the securities, and
except that the series may loan its assets to qualified broker/dealers or
institutional investors.
3. The series will not engage in underwriting of securities of other
issuers, except that portfolio securities, including securities purchased in
private placements, may be acquired under circumstances where, if sold, the
series might be deemed to be an underwriter under the Securities Act of 1933. No
limit is placed on the proportion of the series' assets which may be invested in
such securities.
4. The series will not borrow money or issue senior securities, except
to the extent permitted by the 1940 Act or any rule or order thereunder or
interpretation thereof. Subject to the foregoing, the series may engage in short
sales, purchase securities on margin, and write put and call options.
5. The series will not purchase or sell physical commodities or
physical commodity contracts, including physical commodity option or futures
contracts in a contract market or other futures market.
6. Purchase or sell real estate; provided that the series may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
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Futures contracts and options on futures contracts
Futures contracts--As noted in the Prospectus, each series may enter into
futures contracts relating to securities, securities indices or interest rates.
In addition, Emerging Markets Series may enter into foreign currency futures
contracts. (Unless otherwise specified, interest rate futures contracts,
securities and securities index futures contracts and foreign currency futures
contracts are collectively referred to as "futures contracts.") Such investment
strategies will be used as a hedge and not for speculation.
Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a series' current or intended
investments from broad fluctuations in stock or bond prices. For example, a
series may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When a series is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the series intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be closed
out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
series' current or intended investments in fixed-income securities. For example,
if a series owned long-term bonds and interest rates were expected to increase,
that series might sell interest rate futures contracts. Such a sale would have
much the same effect as selling some of the long-term bonds in that series'
portfolio. However, since the futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique allows
a series to hedge its interest rate risk without having to sell its portfolio
securities. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that series' interest rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the net asset value of that series from declining as much as it
otherwise would have. On the other hand, if interest rates were expected to
decline, interest rate futures contracts could be purchased to hedge in
anticipation of subsequent purchases of long-term bonds at higher prices.
Because the fluctuations in the value of the interest rate futures contracts
should be similar to those of long-term bonds, a series could protect itself
against the effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became available or the
market had stabilized. At that time, the interest rate futures contracts could
be liquidated and that series' cash reserve could then be used to buy long-term
bonds on the cash market.
As noted in the Prospectus, Emerging Markets Series may each 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.
Emerging Markets 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.
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Conversely, Emerging Markets Series could protect against a rise in the
dollar cost of foreign-denominated securities to be acquired by purchasing
futures contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the dollar
value of the underlying currencies. When the series purchases futures contracts
under such circumstances, however, and the price of securities to be acquired
instead declines as a result of appreciation of the dollar, the series will
sustain losses on its futures position which could reduce or eliminate the
benefits of the reduced cost of portfolio securities to be acquired.
The series may also engage in currency "cross hedging" when, in the
opinion of the Emerging Markets Series' investment manager, Delaware
International Advisers Ltd. ("Delaware International"), the historical
relationship among foreign currencies suggests that a 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 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
Emerging Markets 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.
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For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the series may purchase put options on the foreign currency. If the value of the
currency does decline, the series will have the right to sell such currency for
a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movement in exchange rates. As in the case of other types of options,
however, the benefit to the series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the series could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The series may write options on foreign currencies for the same types
of hedging purposes. For example, where the series anticipate a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, they 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.
Each 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.
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When-issued, "when, as and if issued" and delayed delivery securities
and forward commitments--Emerging Markets Series may purchase securities on a
when-issued or delayed delivery basis or may purchase or sell securities on a
forward commitment basis. The series may also purchase securities on a "when, as
and if issued" basis under which the issuance of the security depends upon the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring. When such transactions are negotiated, the
price is fixed at the time of commitment, but delivery and payment can take
place a month or more after the date of the commitment. The series will
establish a segregated account with its custodian bank in which it will
continually maintain cash or cash equivalents or other portfolio securities
equal in value to commitments to purchase securities on a when-issued, "when, as
and if issued," delayed delivery or forward commitment basis.
While the series will only purchase securities on a when-issued, "when,
as and if issued," delayed delivery or forward commitment basis with the
intention of acquiring the securities, the series may sell the securities before
the settlement date if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest accrues to the purchaser
during this period. At the time the series makes the commitment to purchase or
sell securities on a when-issued, "when, as and if issued," delayed delivery or
forward commitment basis, it will record the transaction and thereafter reflect
the value, each day, of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.
Enhanced convertible securities--Most PERCS expire three years from the
date of issue, at which time they are convertible into common stock of the
issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after three years the issuer's common stock is trading
at a price below that set by the capital appreciation limit, the PERCS would
convert into one share of common stock. If, however, the issuer's common stock
is trading at a price above that set by the capital appreciation limit, the
holder of the PERCS would receive less than one full share of common stock. The
amount of that fractional share of common stock received by the PERCS holder is
determined by dividing the price set by the capital appreciation limit of the
PERCS by the market price of the issuer's common stock. PERCS can be called at
any time prior to maturity, and thus do not provide call protection. However, if
called early, the issuer must pay a premium over the market price to the
investor. This call premium declines at a preset rate daily, up to the maturity
date of the PERCS.
Emerging Markets Series may also invest in other enhanced convertible
securities. These include but are not limited to ACES (Automatically Convertible
Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES
(Preferred Redeemable Increased Dividend Equity Securities), SAILS (Stock
Appreciation Income Linked Securities), TECONS (Term Convertible Notes), QICS
(Quarterly Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock.
Restricted securities
The series may purchase privately-placed debt and other securities
whose resale is restricted under applicable securities laws. Such restricted
securities generally offer a higher return than comparable registered
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securities but involve some additional risk since they can be resold only in
privately-negotiated transactions or after registration under applicable
securities laws. The registration process may involve delays which could result
in the Series obtaining a less favorable price on a resale.
Repurchase agreements
Each series may, from time to time, enter into repurchase transactions.
Repurchase agreements are instruments under which securities are purchased from
a bank or securities dealer with an agreement by the seller to repurchase the
securities. Under a repurchase agreement, the purchaser acquires ownership of
the security but the seller agrees, at the time of sale, to repurchase it at a
mutually agreed-upon time and price. The series will take custody of the
collateral under repurchase agreements. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred. The resale price is in excess of the purchase price and
reflects an agreed-upon market rate unrelated to the coupon rate or maturity of
the purchase security. Such transactions afford an opportunity for the series to
invest temporarily available cash. The series' risk is limited to the seller's
ability to buy the security back at the agreed-upon sum at the agreed-upon time,
since the repurchase agreement is secured by the underlying obligation. Should
such an issuer default, the investment managers believe that, barring
extraordinary circumstances, the series will be entitled to sell the underlying
securities or otherwise receive adequate protection for its interest in such
securities, although there could be a delay in recovery. The series consider the
creditworthiness of the bank or dealer from whom it purchases repurchase
agreements. The series will monitor such transactions to assure that the value
of the underlying securities subject to repurchase agreements is at least equal
to the repurchase price. The underlying securities will be limited to those
described above.
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the Investment
Company Act of 1940 to allow the funds in the Delaware Investments family
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
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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.
Credit worthiness will be monitored on an ongoing basis by the series'
respective investment manager.
Foreign securities
To the extent each series is authorized and intends to invest in
foreign securities, investors should recognize that investing in securities of
foreign issuers involves certain considerations, including those set forth in
the Prospectus which are not typically associated with investing in United
States issuers. Since the stocks of foreign companies are frequently denominated
in foreign currencies, and since the series may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the series will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The investment policies of certain of the series permit them to
enter into forward foreign currency exchange contracts and various related
currency transactions in order to hedge the series' holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by a series. Payment of
such interest equalization tax, if imposed, would reduce such series' rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the series by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non-equity options are
generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts a series may make or enter into will
be subject to the special currency rules described above.
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Foreign currency transactions
In connection with a series' investment in foreign securities, a series
may purchase or sell currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of portfolio transactions and to
minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A series will account for
forward contracts by marking to market each day at daily exchange rates.
When a series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of that series' assets
denominated in such foreign currency, the series' custodian bank or subcustodian
will place cash or liquid high grade debt securities in a separate account of
the series in an amount not less than the value of such series' total assets
committed to the consummation of such forward contracts. If the additional cash
or securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the series' commitments with respect to
such contracts.
Options
Each series may write call options and purchase put options on a
covered basis only. Emerging Markets Series may also purchase call options. The
series also may enter into closing transactions with respect to such options
transactions. The series will not 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 Emerging Markets Series may
also invest in options that are traded over-the-counter. Small Cap Value and
Trend 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.
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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 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.
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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--Emerging Markets 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 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--Each 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.
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As with stock options, each 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 the series' ability to effectively
hedge its securities. The series will enter into an option position only if
there appears to be a liquid secondary market for such options.
The series will not engage in transactions in options on stock indices
for speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets.
E. Closing transactions--If a series has written an option, it may
terminate its obligation by effecting a closing purchase transaction. This is
accomplished by purchasing an option of the same series as the option previously
written. There can be no assurance that either a closing purchase or sale
transaction can be effected when a series so desires. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the series will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option.
A series will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; a series will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the series.
If a series purchases a put option, the loss to the series is limited to the
premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit a series realizes on the sale of the security will be reduced
by the premium paid for the put option less any amount (net of transaction
costs) for which the put may be sold.
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Accounting and tax issues
When a series writes a call, or purchases a put option, an amount equal
to the premium received or paid by it is included in the series' assets and
liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently "marked
to market" to reflect the current market value of the option written. The
current market value of a written option is the last sale price on the principal
Exchange on which such option is traded or, in the absence of a sale, the mean
between the last bid and asked prices. If an option which a series has written
expires on its stipulated expiration date, a series recognizes a capital gain.
If a series enters into a closing purchase transaction with respect to an option
which a series has written, a series realizes a gain (or loss if the cost of the
closing transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which a
series has written is exercised, a series realizes a capital gain or loss from
the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received.
The premium paid by a series for the purchase of a put option is
recorded in the series' assets and liabilities as an investment and subsequently
adjusted daily to the current market value of the option. For example, if the
current market value of the option exceeds the premium paid, the excess would be
unrealized appreciation and, conversely, if the premium exceeds the current
market value, such excess would be unrealized depreciation. The current market
value of a purchased option is the last sale price on the principal Exchange on
which such option is traded or, in the absence of a sale, the mean between the
last bid and asked prices. If an option which a series has purchased expires on
the stipulated expiration date, a series realizes a short-term or long-term
capital loss for federal income tax purposes in the amount of the cost of the
option. If a series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
Options on certain stock indices--Accounting for options on certain
stock indices will be in accordance with generally accepted accounting
principles. The amount of any realized gain or loss on closing out such a
position will result in a realized gain or loss for tax purposes. Such options
held by the 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--Small Cap Value and Trend Series have
qualified, and intend to continue to qualify, as regulated investment companies
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as
amended. Emerging Markets Series intends to qualify as a regulated investment
company under the Code. As such, a series will not be subject to federal income
tax, or to any excise tax, to the extent its earnings are distributed as
provided in the Code and it satisfies other requirements relating to the sources
of its income and diversification of its assets.
In order to qualify as a regulated investment company for federal
income tax purposes, a series must meet certain specific requirements,
including:
(i) The series must maintain a diversified portfolio of securities,
wherein no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the
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series' total assets, and, with respect to 50% of the series' total assets, no
investment (other than cash and cash items, U.S. government securities and
securities of other regulated investment companies) can exceed 5% of the series'
total assets;
(ii) The series must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) The series must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its fiscal
years, and
(iv) The series must realize less than 30% of its gross income for each
fiscal year from gains from the sale of securities and certain other assets that
have been held by the series for less than three months ("short-short income").
The Taxpayer Relief Act of 1997 (the "1997 Act") repealed the 30% short-short
income test for tax years of regulated investment companies beginning after
August 5, 1997; however, this rule may have continuing effect in some states for
purposes of classifying the series as a regulated investment company.
The Code requires the series to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain net
income earned during the 12 month period ending October 31 (in addition to
amounts from the prior year that were neither distributed nor taxed to the
series) to you by December 31 of each year in order to avoid federal excise
taxes. The series intends as a matter of policy to declare and pay sufficient
dividends in December or January (which are treated by you as received in
December) but does not guarantee and can give no assurances that its
distributions will be sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the year that unrealized losses exceed unrealized gains.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, a series must recognize gain (but not loss) on any constructive
sale of an appreciated financial position in stock, a partnership interest or
certain debt instruments. The series will generally be treated as making a
constructive sale when it: 1) enters into a short sale on the same or
substantially identical property; 2) enters into an offsetting notional
principal contract; or 3) enters into a futures or forward contract to deliver
the same or substantially identical property. Other transactions (including
certain financial instruments called collars) will be treated as constructive
sales as provided in Treasury regulations to be published. There are also
certain exceptions that apply for transactions that are closed before the end of
the 30th day after the close of the taxable year.
Investment in foreign currencies and foreign securities--Each series is
authorized to invest a limited amount in foreign securities. Such investments,
if made, will have the following additional tax consequences to a series:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the series accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the series actually collects such income or pays such
expenses
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generally are treated as ordinary income or loss. Similarly, on the disposition
of debt securities denominated in a foreign currency and on the disposition of
certain options, futures, forward contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
series' net investment company taxable income, which, in turn, will affect the
amount of income to be distributed to you by the series.
If the series' Section 988 losses exceed the series' other net
investment company taxable income during a taxable year, the series generally
will not be able to make ordinary dividend distributions to you for that year,
or distributions made before the losses were realized will be recharacterized as
return of capital distributions of federal income tax purposes, rather than as
an ordinary dividend or capital gain distribution. If a distribution is treated
as a return of capital, your tax basis in your series shares will be reduced by
a like amount (to the extent of such basis), and any excess of the distribution
over your tax basis in your series shares will be treated as capital gain to
you.
The 1997 Act generally requires that foreign income be translated into
U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than two
years after the taxable year to which they relate. This new law may require the
series to track and record adjustments to foreign taxes paid on foreign
securities in which it invests. Under the series' current reporting procedure,
foreign security transactions are recorded generally at the time of each
transaction using the foreign currency spot rate available for the date of each
transaction. Under the new law, the series will be required to record a fiscal
year end (and at calendar year end for excise tax purposes) an adjustment that
reflects the difference between the spot rates recorded for each transaction and
the year-end average exchange rate for all of the series' foreign securities
transactions. There is a possibility that the mutual fund industry will be given
relief from this new provision, in which case no year-end adjustments will be
required.
The series may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of the
series at the end of its fiscal year are invested in securities of foreign
corporations, the series may elect to pass-through to you your pro rata share of
foreign taxes paid by the series. If this election is made, you will be: (i)
required to include in your gross income your pro rata share of foreign source
income (including any foreign taxes paid by the series) and (ii) entitled to
either deduct your share of such foreign taxes in computing your taxable income
or to claim a credit for such taxes against your U.S. income tax, subject to
certain limitations under the Code. You will be informed by the fund at the end
of each calendar year regarding the availability of any such foreign tax credits
and the amount of foreign source income (including any foreign taxes paid by the
series). If the series elects to pass-through to you the foreign income taxes
that it has paid, you will be informed at the end of the calendar year of the
amount of foreign taxes paid and foreign source income that must be included on
your federal income tax return. If the series invests 50% or less of its total
assets in securities of foreign corporations, it will not be entitled to
pass-through to you your pro-rata shares of foreign taxes paid by the series. In
this case, these taxes will be taken as a deduction by the series, and the
income reported to you will be the net amount after these deductions. The 1997
Act also simplifies the procedures by which investors in funds that invest in
foreign securities can claim tax credits on their individual income tax returns
for the foreign taxes paid by the series. These provisions will allow investors
who pay foreign taxes of $300 or less on a single return or $600 or less on a
joint return during any year (all of which must be reported on IRS Form 1099-DIV
from the series to the investor) to claim a tax credit against their U.S.
federal income tax for the amount of foreign taxes paid by the series. This
process will allow you, if you qualify, to bypass the burdensome and detailed
reporting requirements on the foreign tax credit
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schedule (Form 1116) and report your foreign taxes paid directly on page 2 of
Form 1040. You should note that this simplified procedure will not be available
until calendar year 1998.
Investment in passive foreign investment company securities--The series
may invest in shares of foreign corporations which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a series receives an "excess distribution" with
respect to PFIC stock, the series itself may be subject to U.S. federal income
tax on a portion of the distribution, whether or not the corresponding income is
distributed by the series to you. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the series held the PFIC shares. The series itself will be subject to tax
on the portion, if any, of an excess distribution that is so allocated to prior
series taxable years, and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
series. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain distribution might have been classified as capital gain. This may
have the effect of increasing series distributions to you that are treated as
ordinary dividends rather than long-term capital gain dividends.
A series may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the series generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market the series' PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. The series would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction would be
limited to the amount of any net mark-to-market gains previously included with
respect to that particular PFIC security. If the series were to make this second
PFIC election, tax at the series level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the
amount of tax payable by the series (if any), the amounts distributable to you
by the series, the time at which these distributions must be made, and whether
these distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares
of a foreign corporation are acquired to ascertain that the foreign corporation
is a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the series acquires shares in that corporation. While
the series will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so and
it reserves the right to make such investments as a matter of its fundamental
investment policy.
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Most foreign exchange gains are classified as ordinary income which
will be taxable to you as such when distributed. Similarly, you should be aware
that any foreign exchange losses realized by the series, including any losses
realized on the sale of foreign debt securities, are generally treated as
ordinary losses for federal income tax purposes. This treatment could increase
or reduce the series' income available for distribution to you, and may cause
some or all of the series' previously distributed income to be classified as a
return of capital.
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Performance information
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 Emerging Markets Series, as
shown below, is the average annual total return quotations through December 31,
1997. Emerging Markets Series commenced operations on May 1, 1997. Securities
prices fluctuated during the periods covered and past results should not be
considered as representative of future performance.
Average Annual Total Return*
Small Cap Value Trend
1 year ended 12/31/97 32.91% 1 year ended 12/31/97 21.37%
3 years ended 12/31/97 26.35% 3 years ended 12/31/97 23.32%
Period 12/27/93** Period 12/27/93**
through 12/31/97 19.96% through 12/31/97 17.42%
* Delaware Management Company ("Delaware Management"), the investment
manager to the Small Cap Value and Trend Series 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 the amounts noted under Investment Management Agreements.
In the absence of such voluntary waiver, performance would have been
affected negatively.
** Date of initial public offering.
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Comparative information
From time to time, each series may also quote its actual total return
performance, dividend results and other performance information in advertising
and other types of literature. This information may be compared to that of other
mutual funds with similar investment objectives and to stock, bond and other
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of a series may be compared to data prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., or to the S&P 500 Index,
the Dow Jones Industrial Average, the Morgan Stanley Capital International
(MSCI), Europe, Australia and Far East (EAFE) Index or the MSCI Emerging Markets
Free Index. Performance also may be compared to data prepared by Lipper
Analytical Services, Inc., Morningstar, Inc. or the performance of unmanaged
indices compiled or maintained by statistical research firms such as Lehman
Brothers or Salomon Brothers, Inc.
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 purposes. Generally, the indices
selected will be representative of the types of securities in which a series may
invest and the assumptions that were used in calculating the blended performance
will be described.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare a series'
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The S&P 500 and
the Dow Jones Industrial Average are industry-accepted unmanaged indices of
generally-conservative securities used for measuring general market performance.
Similarly, the MSCI EAFE Index and the MSCI Emerging Markets Free Index are
industry-accepted unmanaged indices of equity securities in developed countries
and global debt securities, respectively, used for measuring general market
performance. The total return performance reported for these indices 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. A direct investment in an unmanaged index is not possible.
The performance of multiple indices compiled and maintained by
statistical research firms, such as Morgan Stanley, Salomon Brothers and Lehman
Brothers, may be combined to create a blended performance result for comparative
purposes. 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.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The series may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the series. The
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(DGPFSCEMT-SAI/PART B)
series may also compare performance to that of other compilations or indices
that may be developed and made available in the future.
The series may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a series (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments or global or international investments),
economic and political conditions, the relationship between sectors of the
economy and the economy as a whole, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements, sales literature,
communications to shareholders or other materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a series), as well as the views as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a series. In addition, selected indices may be used to illustrate
historic performance of selected asset classes. The series may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings which illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, domestic and international stocks, and/or bonds, treasury bills and shares
of a series. In addition, advertisements, sales literature, communications to
shareholders or other materials may include a discussion of certain attributes
or benefits to be derived by an investment in a series and/or other mutual
funds, shareholder profiles and hypothetical investor scenarios, timely
information on financial management and tax planning and investment alternatives
to certificates of deposit and other financial instruments. Such sales
literature, communications to shareholders or other materials may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the series and may
illustrate how to find the listings of the series in newspapers and periodicals.
Materials may also include discussions of other series, products, and services.
The series may quote various measures of volatility and benchmark
correlation in advertising. In addition, the series may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A series may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a series may include information
regarding the background and experience of its portfolio managers.
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The following table is an example, for purposes of illustration only,
of cumulative total return performance for each series through December 31,
1997. For these purposes, the calculations assume the reinvestment of any
realized securities profits distributions and income dividends paid during the
indicated periods.
<TABLE>
<CAPTION>
Cumulative Total Return*
Small Cap Emerging
Value Trend Markets
<S> <C> <C> <C> <C> <C> <C>
3 months ended 3 months ended 3 months ended
12/31/97 (0.06%) 12/31/97 (4.45%) 12/31/97 (16.31%)
6 months ended 6 months ended 6 months ended
12/31/97 13.71% 12/31/97 15.32% 12/31/97 (18.08%)
9 months ended 9 months ended Period 5/1/97***
12/31/97 31.09% 12/31/97 29.01% through 12/31/97 (11.20%)
1 year ended 1 year ended
12/31/97 32.91% 12/31/97 21.37%
3 years ended 3 years ended
12/31/97 101.72% 12/31/97 87.54%
Period 12/27/93** Period 12/27/93**
12/31/97 107.57% through 12/31/97 90.54%
</TABLE>
* 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
the amounts noted under Investment Management Agreements. In the
absence of such voluntary waiver, performance would have been affected
negatively.
** Date of initial public offering.
*** Date of initial public offering; total return for this short of a time
period may not be representative of longer term results.
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
investment disciplines of the series and other funds in the Delaware Investments
family employed in meeting their objectives.
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Dollar-cost averaging
For many people, deciding when to invest can be a difficult decision.
Prices of securities such as stocks and bonds tend to move up and down over
various market cycles and are generally intended for longer term investing.
Money market funds, which typically maintain stable prices, are generally
intended for your short-term investment needs and can often be used as a basis
for building a long-term investment plan.
Though logic says to invest when prices are low, even experts can't
always pick the highs and the lows. By using a strategy known as dollar-cost
averaging, you schedule your investments ahead of time. If you invest a set
amount on a regular basis, that money will always buy more shares when the price
is low and fewer when the price is high. You can choose to invest at any regular
interval--for example, monthly or quarterly--as long as you stick to your
regular schedule.
Dollar-cost averaging looks simple and it is, but there are important
things to remember. Dollar-cost averaging works best over longer time periods,
and it doesn't guarantee a profit or protect against losses in declining
markets. If you need to sell your investment when prices are low, you may not
realize a profit no matter what investment strategy you utilize. That's why
dollar-cost averaging can make sense for long-term goals. Since the potential
success of a dollar-cost averaging program depends on continuous investing, even
through periods of fluctuating prices, you should consider your dollar-cost
averaging program a long-term commitment and invest an amount you can afford and
probably won't need to withdraw.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $5.00 20
Month 4 $100 $10.00 10
-------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of a series.
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(DGPFSCEMT-SAI/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. Each series may included illustrations showing
the Power of Compounding in advertisements and other types of literature.
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(DGPFSCEMT-SAI/PART B)
Trading practices and brokerage
The fund or, in the case of Emerging Markets 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 Emerging Markets 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, 1995, 1996 and 1997, the
aggregate dollar amounts of brokerage commissions were paid by the series:
1995 1996 1997
---- ---- ----
Small Cap Value Series $25,600 $53,113 $119,689
Trend Series $18,776 $80,172 $182,867
Emerging Markets Series* N/A N/A $28,640
*Commenced operations on May 1, 1997.
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.
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(DGPFSCEMT-SAI/PART B)
During the fiscal year ended December 31, 1997, portfolio transactions
of the following 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:
Portfolio Brokerage
Transactions Commissions
Amounts Amounts
------- -------
Small Cap Value Series $14,009,956 $33,658
Trend Series $16,770,285 $40,896
Emerging Markets Series* $10,052 $9
*Commenced operations on May 1, 1997.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreements, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the fund believes that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the respective investment manager which constitute in some part brokerage and
research services used by the respective investment manager in connection with
its investment decision-making process and constitute in some part services used
by the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In such cases,
the respective investment manager will make a good faith allocation of brokerage
and research services and will pay out of its own resources for services used by
the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the fund and to other funds in the Delaware
Investments family. 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.
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(DGPFSCEMT-SAI/PART B)
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 the Delaware Investments family, 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 Emerging Markets Series
and may exceed 100% for Small Cap Value and Trend Series. It is possible that in
any particular year market conditions or other factors might result in portfolio
activity at a greater rate than anticipated. The portfolio turnover rate of each
series is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value of
the portfolio securities owned by the series during the particular fiscal year,
exclusive of securities whose maturities at the time of acquisition are one year
or less.
The degree of portfolio activity may affect brokerage costs incurred by
each series. A turnover rate of 100% would occur, for example, if all the
investments in a series' portfolio at the beginning of the year were replaced by
the end of the year. In investing to achieve their respective objective, a
series may hold securities for any period of time. Portfolio turnover will also
be increased if a series writes a large number of call options which are
subsequently exercised. The turnover rate also may be affected by cash
requirements from redemptions and repurchases of series' shares.
The portfolio turnover rates for the series for the past two fiscal
years were as follows:
Year Ended Year Ended
Series December 31, 1997 December 31, 1996
------ ----------------- -----------------
Small Cap Value Series 41% 84%
Trend Series 125% 112%
Emerging Markets Series 48%* N/A
*Annualized. Commenced operations on May 1, 1997.
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(DGPFSCEMT-SAI/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, Martin Luther King, Jr. 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. Each series' net asset value per share is
computed by adding the value of all the securities and other assets in the
series' portfolio, deducting any liabilities of the series, and dividing by the
number of fund shares outstanding. Expenses and fees are accrued daily. In
determining a series' total net assets, portfolio securities primarily listed or
traded on a national or foreign securities exchange, except for bonds, are
valued at the last sale price on that exchange. Exchange traded options are
valued at the last reported sale price or, if no sales are reported, at the mean
between bid and asked prices. Non-exchange traded options are valued at fair
value using a mathematical model. Futures contracts are valued at their daily
quoted settlement price. For valuation purposes, foreign currencies and foreign
securities denominated in foreign currency values will be converted into U.S.
dollar values at the mean between the bid and offered quotations of such
currencies against U.S. dollars based on rates in effect that day. 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.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Foreign securities and
the prices of foreign securities denominated in foreign currencies are
translated to U.S. dollars based on rates in effect as of 12 p.m., Eastern time.
Use of a pricing service has been approved by the Board of Directors. Prices
provided by a pricing service take into account appropriate factors such as
institutional trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading characteristics and other market data.
Subject to the foregoing, securities for which market quotations are not readily
available and other assets are valued at fair value as determined in good faith
and in a method approved by the Board of Directors.
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
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(DGPFSCEMT-SAI/PART B)
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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(DGPFSCEMT-SAI/PART B)
Dividends and realized securities profits distributions
The fund will make payments from each series' net income and net
realized securities profits, if any, once a year.
The fund's fiscal year ends on December 31. All dividends and
distributions are automatically reinvested in additional series shares.
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(DGPFSCEMT-SAI/PART B)
Taxes
Small Cap Value and Trend Series have qualified, and intend to continue
to qualify, as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986 (the "Code"), as amended. Emerging Markets Series intends
to qualify as a regulated investment company under the Code. As such, the fund
will not be subject to federal income tax to the extent its earnings are
distributed and it satisfies other requirements relating to the sources of its
income and diversification of its assets.
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 the
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 Code.
The series does not have a 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, the series intends to
offset realized securities profits to the extent of the capital losses carried
forward.
All dividends out of net investment income, together with distributions
from short-term capital gains, will be taxable to those shareholders who are
subject to income taxes as ordinary income. (These distributions may be eligible
for the dividends-received deductions for corporations.) Any net long-term
capital gains distributed to those shareholders who are subject to income tax
will be taxable as such, regardless of the length of time a shareholder has
owned their shares.
Under the Taxpayer Relief act of 1997 (the "1997 Act"), the series is
required to track its sales of portfolio securities and to report its capital
gain distributions to you according to the following categories of holding
periods:
"Mid-term capital gains" or "28 percent rate gain": securities sold by
the series after July 28, 1997 that were held more than one year but
not more than 18 months. These gains will be taxable to individual
investors at a maximum rate of 28%.
"1997 Act long-term capital gains" or "20 percent rate gain":
securities sold by the series after July 28, 1997 that were held for
more than 18 months. These gains will be taxable to individual
investors at a maximum rate of 20% for investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors
in the 15% federal income tax bracket.
"Qualified 5-year gains": For individuals in the 15% bracket, qualified
5-year gains are net gains on securities held for more than 5 years
which are sold after December 31, 2000. For individual who are subject
to tax at higher rate brackets, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for
more than 5 years. Taxpayers subject to tax at higher rate brackets may
also make an election for shares held on January 1, 2001 to recognize
gain on their shares (any loss is disallowed) in order to qualify such
shares as qualified 5-year property as though purchased after December
31, 2000. These gains will be taxable to individual investors at a
maximum rate of 18% for investors in the 28% or higher federal income
tax brackets, and at a maximum rate of 8% for investors in the 15%
federal income tax bracket when sold after the 5 year holding period.
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(DGPFSCEMT-SAI/PART B)
Investment management agreements
Delaware Management Company ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to Small Cap Value and Trend Series. Delaware
International Advisers Ltd. ("Delaware International"), located at Third Floor,
80 Cheapside, London, England EC2V 6EE, furnishes investment management services
to Emerging Markets 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 Delaware Investments since 1938. On December 31, 1997, Delaware Management
and its affiliates within Delaware Investments, including Delaware
International, were supervising in the aggregate more than $40 billion in assets
in the various institutional or separately managed (approximately
$24,040,760,000) and investment company (approximately $16,482,523,000)
accounts. Delaware Management is a series of Delaware Management Business Trust.
Delaware Management changed its form of organization from a corporation to a
business trust on March 1, 1998.
The Investment Management Agreements for Small Cap Value and Trend
Series are dated April 3, 1995 and were approved by shareholders on March 29,
1995. The Investment Management Agreement for Emerging Markets Series is dated
May 1, 1997 and was approved by the initial shareholder May 1, 1997 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.
Delaware Management is paid an annual fee equal to 0.75% of the average
daily net assets of each of the Small Cap Value Series and Trend Series.
Delaware International is paid an annual fee equal to 1.25% of the
average daily net assets of the Emerging Markets Series.
The respective investment manager administers the affairs of and is
ultimately responsible for the investment management of each of 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.
On December 31, 1997, the total net assets of the series were as
follows:
Small Cap Value Series $84,071,143
Trend Series $118,276,090
Emerging Markets Series $5,775,784
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(DGPFSCEMT-SAI/PART B)
Investment management fees were incurred with respect to each series
for the last three fiscal years as follows:
<TABLE>
<CAPTION>
Series December 31, 1997 December 31, 1996 December 31, 1995
- ------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Small Cap Value Series $380,405 earned $117,000 earned $65,528 earned
$328,056 paid $87,687 paid $51,016 paid
$52,349 waived $29,313 waived $14,512 waived
Trend Series $622,149 earned $247,520 earned $92,985 earned
$558,331 paid $205,501 paid $72,359 paid
$63,818 waived $42,019 waived $20,626 waived
Emerging Markets Series* $36,327 earned N/A N/A
$8,587 paid
$27,740 waived
</TABLE>
*Commenced operations on May 1, 1997.
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.
Beginning May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of each of the Small Cap Value and Trend Series to
the extent necessary to ensure that each series' annual operating expenses,
exclusive of taxes, interest, brokerage commissions and extraordinary expenses,
do not exceed 0.85% of average daily net assets through October 31, 1998.
Beginning May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of the Emerging Markets Series to the extent
necessary to ensure that the series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses, do not exceed
1.50% of average daily net assets through October 31, 1998.
Prior to May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of a series to the extent that a series' annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, did not exceed 0.80% of average daily net assets from
the commencement of operations through April 30, 1998 for the Small Cap Value
and Trend Series.
Prior to May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of Emerging Markets Series to the extent that
the series' annual operating expenses, exclusive of taxes, interest, brokerage
commissions and extraordinary expenses, did not exceed 1.50% of average daily
net assets from the commencement of operations through April 30, 1998.
-35-
<PAGE>
(DGPFSCEMT-SAI/PART B)
Distribution and service
Delaware Distributors, L.P., 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 Small Cap Value and Trend
Series. Emerging Markets Series' Distribution Agreement is dated as of May 1,
1997. The Distributor is an affiliate of Delaware Management and Delaware
International and bears all of the costs of promotion and distribution. Delaware
Distributors, L.P. is an indirect, wholly owned subsidiary 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 each series pursuant to the Amended
and Restated Shareholders Services Agreement dated May 1, 1998. The Transfer
Agent also provides accounting services to the series pursuant to the terms of a
separate fund Accounting Agreement. The Transfer Agent is also an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
-36-
<PAGE>
(DGPFSCEMT-SAI/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 Investments family.
DMH Corp., Delvoy, Inc., Delaware Management Company, Inc., Delaware
Management Business Trust, Delaware Management Company, Delaware Investment
Advisers, 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 all of the Small Cap Value and Trend 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 (60)
Chairman and Director of the fund, 33 other investment companies in
the Delaware Investments family, Delaware Management Holdings,
Inc. and Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer, Director of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, President, Chief Executive Officer and Chief Investment
Officer of Delaware Management Company.
Chairman, President, Chief Executive Officer and Chief Investment
Officer and Trustee of Delaware Management Business Trust.
Chairman, Chief Executive Officer, Chief Investment Officer of
Delaware Investment Advisers.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd. and Delaware International
Holdings Ltd.
President and Chief Executive Officer of Delvoy, Inc.
Chairman of Delaware Distributors, L.P.
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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<PAGE>
(DGPFSCEMT-SAI/PART B)
*Jeffrey J. Nick (45)
President, Chief Executive Officer and Director and/or Trustee of the
fund and 33 other investment companies in the Delaware
Investments family.
President, Chief Executive Officer and Director of Delaware Management
Holdings, Inc.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc.
President of Lincoln Funds Corporation.
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.
Richard G. Unruh, Jr. (58)
Executive Vice President of the fund, each of the other 33 investment
companies in the Delaware Investments family, Delaware
Management Holdings, Inc., Delaware Management
Company and Delaware Capital Management, Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Executive Vice President and Trustee of Delaware Management Business
Trust.
President of Delaware Investment Advisers.
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 (50)
Executive Vice President/Chief Investment Officer, Fixed Income of the
fund, each of the other 33 investment companies in the
Delaware Investments family, Delaware Management Company,
Inc., Delaware Management Company, Delaware Investment
Advisers and Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc. and
Delaware Management Business Trust.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to Delaware Investments 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 Delaware Investments.
- ----------
*Director affiliated with the fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-38-
<PAGE>
(DGPFSCEMT-SAI/PART B)
David K. Downes (58)
Executive Vice President, Chief Operating Officer, Chief Financial
Officer of the fund, each of the other 33 investment companies
in the Delaware Investments family, Delaware Management
Holdings, Inc, Founders CBO Corporation, Delaware Management
Company, Delaware Investment Advisers, Delaware Capital
Management, Inc. and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc.,
DMH Corp., Delaware Distributors, Inc., Founders Holdings,
Inc. and Delvoy, Inc.
President, Chief Executive Officer, Chief Financial Officer and
Director of Delaware Service Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and
Director of Delaware International Holdings Ltd.
Chairman, Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
Executive Vice President, Chief Financial Officer, Chief Administrative
Officer and Trustee of Delaware Management Business Trust.
Director of Delaware International Advisers Ltd. and Delaware Voyageur
Holding, Inc.
Vice President of Lincoln Funds Corporation
During the past five years, Mr. Downes has served in various executive
capacities at different times within the Delaware
organization.
Walter P. Babich (70)
Director and/or Trustee of the fund and each of the other 33 investment
companies in the Delaware Investments family.
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 (59)
Director and/or Trustee of the fund and each of the other 33 investment
companies in the Delaware Investments family.
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 (57)
Director and/or Trustee of the fund and each of the other 33 investment
companies in the Delaware Investments family.
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.
-39-
<PAGE>
(DGPFSCEMT-SAI/PART B)
W. Thacher Longstreth (77)
Director and/or Trustee of the fund and each of the other 33 investment
companies in the Delaware Investments family.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (62)
Director and/or Trustee of the fund and each of the other 33 investment
companies in the Delaware Investments family.
President and Chief Executive Officer, 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.
Charles E. Peck (72)
Director and/or Trustee of the fund and each of the other 33 investment
companies in the Delaware Investments family.
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.
George M. Chamberlain, Jr. (51)
Senior Vice President, Secretary and General Counsel of the fund,
each of the other 33 investment companies in the Delaware
Investments family, Delaware Management Company, Delaware
Investment Advisers, Delaware Distributors, L.P. and Delaware
Management Holdings, Inc.
Senior Vice President, Secretary, General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc., Delaware Capital Management, Inc. and Delvoy, Inc.
Senior Vice President, Secretary, General Counsel and Trustee of
Delaware Management Business Trust.
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President and Director of Delaware International
Holdings Ltd.
Director of Delaware International Advisers Ltd.
Secretary of Lincoln Funds Corporation
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
-40-
<PAGE>
(DGPFSCEMT-SAI/PART B)
Joseph H. Hastings (48)
Senior Vice President/Corporate Controller of the fund, each of the
other 33 investment companies in the Delaware Investments
family and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Management Business Trust, Delaware
Management Company, Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., Delaware International Holdings Ltd.
and Delvoy, Inc.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc. Executive Vice President/Chief Financial
Officer/Treasurer of Delaware Management Trust Company.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation.
Treasurer of Lincoln Funds Corporation
1818 Market Street, Philadelphia, PA 19103.
During the past five years, Mr. Hastings has served in various
capacities at different times within the Delaware
organization.
Michael P. Bishof (35)
Senior Vice President/Treasurer of the fund, each of the other 33
investment companies in the Delaware Investments family and
Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc., Delaware Management Company and Delaware
Service Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting
of Delaware Distributors, L.P. and Delaware Investment
Advisers.
Senior Vice President and Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining Delaware Investments 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.
Gerald S. Frey (52)
Vice President/Senior Portfolio Manager of the fund, of nine other
investment companies in the Delaware Investments family and of
Delaware Management Company, Inc.
Before joining Delaware Investments in 1996, Mr. Frey was a Senior
Director with Morgan Grenfell Capital Management, New York, NY
from 1986 to 1995.
Christopher S. Beck (40)
Vice President/Senior Portfolio Manager of the fund, of nine other
investment companies in the Delaware Investments family,
Delaware Management Company, Inc. and Delaware Management
Company.
Before joining Delaware Investments in 1997, Mr. Beck managed the
Small Cap for two years at Pitcairn Trust Company. Prior to
1995, he was Director of Research at Cypress Capital
Management in Wilmington and Chief Investment Officer of the
University of Delaware Endowment Fund.
-41-
<PAGE>
(DGPFSCEMT-SAI/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 Investments funds for
the fiscal year ended December 31, 1997 and an estimate of annual benefits to be
received upon retirement under the Delaware Investments Retirement Plan for
Directors/Trustees as of December 31, 1997. Only the independent directors of
the fund receive compensation from the fund.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Benefits Annual from all 34
Aggregate Accrued Benefits Delaware
Compensation as Part of Upon Investments
Name from Fund Fund Expenses Retirement* Funds**
<S> <C> <C> <C> <C>
W. Thacher Longstreth $3,097 None $38,500 $59,827
Ann R. Leven $3,433 None $38,500 $65,160
Walter P. Babich $3,370 None $38,500 $64,160
Anthony D. Knerr $3,370 None $38,500 $64,160
Charles E. Peck $3,002 None $38,500 $56,682
Thomas F. Madison*** $2,160 None $38,500 $43,537
</TABLE>
* Under the terms of the Delaware Investments 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 Delaware Investments 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, 1997, he or she would be
entitled to annual payments totaling $38,500, in the aggregate, from all of
the funds in Delaware Investments, based on the number of funds in Delaware
Investments as of that date.
** Each independent director currently receives a total annual retainer fee of
$38,500 for serving as a director or trustee for all funds in Delaware
Investments, plus $3,145 for each Board Meeting attended. Ann R. Leven,
Walter P. Babich, and Anthony D. Knerr serve on the fund's audit committee;
Ms. Leven is the chairperson. Members of the audit committee currently
receive additional annual compensation of $5,000 from all funds, with the
exception of the chairperson, who receives $6,000.
*** Mr. Madison joined the Board of Directors on April 30, 1997.
-42-
<PAGE>
(DGPFSCEMT-SAI/PART B)
As of April 7, 1998, management believes the following accounts held 5%
of record or more of the outstanding shares of each series of the fund.
Management has no knowledge of beneficial ownership of the fund's shares:
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
Decatur Total SMA Life Assurance Company
Return Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 17,238,651 67.68%
Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 6,483,706 25.45%
Delchester Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 11,011,329 93.25%
Capital Reserves Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 3,001,523 91.74%
Delaware Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 7,744,687 93.45%
Cash Reserve Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 3,336,473 92.22%
</TABLE>
-43-
<PAGE>
(DGPFSCEMT-SAI/PART B)
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
DelCap Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 6,479,602 95.32%
International Equity Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 13,296,990 96.91%
Trend Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 3,659,975 49.59%
Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 3,619,110 49.04%
Small Cap Value Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 5,361,951 98.91%
Global Bond Series Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 1,270,957 72.69%
SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 463,287 26.49%
</TABLE>
-44-
<PAGE>
(DGPFSCEMT-SAI/PART B)
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
Strategic Income Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 1,020,922 75.93%
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 257,050 19.11%
Devon Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 1,882,719 97.70%
Emerging Markets Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 501,617 70.57%
Lincoln National Life Company
Separate Account - C See Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 206,393 29.04%
</TABLE>
-45-
<PAGE>
(DGPFSCEMT-SAI/PART B)
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
Convertible Securities Series Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 206,690 47.25%
SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 206,064 47.11%
Social Awareness Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 730,177 80.52%
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 152,822 16.85%
</TABLE>
-46-
<PAGE>
(DGPFSCEMT-SAI/PART B)
General information
Delaware Management is the investment manager of Small Cap Value and
Trend Series. Delaware International is the investment manager of Emerging
Markets Series. Delaware Management or its affiliate, Delaware International,
manages the other funds in the Delaware Investments family. 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 Investments family
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 Investments family.
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 Investments
family. 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 Investments family 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.
Small Cap Value and Trend Series commenced operations on December 27,
1993. The initial public offering date for Emerging Markets Series was May 1,
1997.
-47-
<PAGE>
(DGPFSCEMT-SAI/PART B)
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.
-48-
<PAGE>
(DGPFSCEMT-SAI/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.
-49-
<PAGE>
(DGPFSCEMT-SAI/PART B)
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
-50-
<PAGE>
(DGPFSCEMT-SAI/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 annual financial statements of
each series. Each series' Statement of Net Assets, Statement of Operations,
Statement of Changes in Net Assets, Financial Highlights and Notes to Financial
Statements, as well as the reports of Ernst & Young LLP, independent auditors,
for the fiscal year ended December 31, 1997 are included in the fund's Annual
Reports to shareholders. The financial statements and financial highlights, the
notes relating thereto and the reports of Ernst & Young LLP listed above are
incorporated by reference from the Annual Reports into this Part B.
-51-
