<PAGE>
DELAWARE GROUP
INTERNATIONAL
EQUITY SERIES
ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
January 12, 1998
Dear Policy Holder:
The U.S. economy enjoyed its seventh year of expansion in 1997, propelling
the American stock market to historic highs. Low U.S. inflation contributed
to a strong domestic bond market.
Overseas, European equity and bond markets also performed relatively
well, although returns for U.S. investors were reduced by the fact that the
U.S. dollar rose sharply in value against many European currencies. The
Continent is generally benefiting from fiscal reform and private sector
efforts to improve productivity.
Asia was the world's investment weak spot in 1997. Markets along the
Pacific Rim were negatively affected by a depressed financial sector, poor
fiscal planning, unstable politics and currency devaluations.
1997 TOTAL RETURN
International Equity Series +6.60%
Morgan Stanley Europe Australia Far East (EAFE) Index +2.06%
One year performance through December 31, 1997 quoted above assumes
reinvestment of distributions. Complete performance information can be
found following the discussion section of this report. Past performance
does not guarantee future results.
In the year ahead, we believe that economic growth could accelerate in
Europe. Many countries have adopted prudent fiscal policies to meet the
requirements for European monetary union by 1999.
Meanwhile, Asia's financial problems present both a challenge and an
opportunity for international equity investors. We believe that pockets of
value may develop as Pacific Rim countries expand exports and search for
solutions.
Please keep in mind that your annuity is designed as a long-term
investment and that earnings compound tax-deferred until withdrawal. Thank you
for selecting Delaware Investments.
Sincerely,
/s/ Wayne A. Stork /s/ Jeffrey J. Nick
Wayne A. Stork Jeffrey J. Nick
Chairman President and Chief Executive Officer
<PAGE>
INTERNATIONAL EQUITY SERIES
PORTFOLIO STRATEGY AND PERFORMANCE IN 1997
By focusing on Western European countries, International Equity Series
provided a total return of +6.60% (capital appreciation plus reinvestment of
dividends) for the 12 months ended December 31, 1997. This outpaced our
benchmark, the Morgan Stanley Europe Australia Far East (EAFE) Index, which
had a total return of +2.06% during the same period.
Fiscal 1997 proved a challenging year to invest overseas. Currency
devaluations that began in Thailand reverberated throughout the Pacific Rim
during the fourth quarter. Weak fiscal policies and high debt levels
negatively affected stocks of emerging markets as well as those in Japan.
Approximately 18.7% of International Equity Series' net assets were
invested in Asian countries at year end. This underweighting in Asia, as
compared to our benchmark EAFE index, allowed us to preserve capital to a
greater degree than the Index.
International Equity Series' stock selection process begins by analyzing
countries based on three primary factors:
1) general performance of a particular country's economy, 2) political issues
and 3) the relationship of the U.S. dollar to the local currency.
From there, we seek companies that meet the Series' investment approach
emphasizing value-oriented stocks that appear to offer superior income and
capital appreciation potential. We believe that this investment style, known
as a dividend discount approach, can potentially reduce risk.
Through defensive currency hedging, we seek to preserve principal by
protecting the dollar value of our investments. We believe that reducing
exchange risk is an important consideration for U.S. investors.
A LOOK AT THE PORTFOLIO
International Equity Series' value oriented investment approach led us to
underweight some Pacific Rim markets such as Japan, which helped your Fund
preserve principal.
While most of our Japanese securities were selling below our average
purchase price at year-end, these unrealized losses were offset by relatively
stronger market performance in Australia and New Zealand.
Our Western European stock selections also fared well as continental
Europe enacted fiscal measures to ready itself for the introduction of a
single European currency in 1999. The Series' positions in the Netherlands,
Belgium, and Spain performed well. However, our value investment parameters
did not allow us to participate in the capital appreciation of markets such
as Switzerland and Denmark.
While International Equity Series does not focus on any particular
investment sector, telecommunications, utility, and credit sensitive stocks,
such as banks, had the biggest impact on the Series' total return in fiscal
1997.
INTERNATIONAL EQUITY SERIES INVESTMENT OBJECTIVE
Seeks long-term growth without undue risk to principal by investing primarily
in stocks of foreign companies providing the potential for capital
appreciation.
3
<PAGE>
INVESTMENT OUTLOOK
In our opinion, there are no clear signs that Japan or the emerging
"tiger" economies of the Pacific Rim are poised for economic recovery.
During the coming months, in 1998, we presently plan to continue to
underweight Japan and most likely to minimize our exposure to countries such
as South Korea, Thailand and Indonesia.
We expect that the majority of International Equity Series' net assets
will be allocated to European countries in the year ahead. We believe
European economic growth will accelerate in 1998 if interest rates remain
stable and companies continue to restructure a-positive environment for
potential corporate earnings' increases.
In our opinion, the economic environment across Continental Europe will
also benefit from tighter governmental fiscal measures. These measures will
allow countries to join the European Monetary Union (EMU) in 1999.
We are especially optimistic about economic prospects in the United
Kingdom, which is one of the few Western European countries not joining the
EMU in 1999. The U.K. has taken steps to make the Bank of England -
the U.K.'s central bank - more independent, similar to the U.S. Federal
Reserve Board. We take this as a sign that inflation there is likely to
remain tame.
Investing overseas has special risks that include different accounting
and political standards and less stable economies. However, we believe our
value oriented approach can help reduce these risks and provide attractive
results over the long term.
INTERNATIONAL EQUITY SERIES
AVERAGE ANNUAL TOTAL RETURNS
LIFETIME +11.30%
THREE YEARS +13.40%
ONE YEAR +6.60%
Through December 31, 1997
International Morgan Stanley
Period End Equity Series EAFE Index
10/29/92 $10,000 $10,000
12/31/92 10,030 10,146
3/31/93 10,090 11,363
6/30/93 10,150 12,505
9/30/93 10,800 13,335
12/31/93 11,630 13,450
3/31/94 11,668 13,920
6/30/94 11,809 14,631
9/30/94 12,041 14,646
12/31/94 11,930 14,496
3/31/95 12,323 14,766
6/30/95 12,500 14,873
9/30/95 13,226 15,493
12/31/95 13,599 16,121
3/31/96 14,336 16,587
6/30/96 14,864 16,849
9/30/96 15,264 16,828
12/31/96 16,323 17,096
3/31/97 16,919 16,828
6/30/97 18,600 19,025
9/30/97 18,702 18,903
12/31/97 17,403 17,435
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. RETURN AND SHARE
PRICE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
*The chart above shows a $10,000 investment in the International Equity Series
and the Morgan Stanley EAFE Index from the Series' inception on October 29,
1992, through December 31, 1997. All dividends and capital gains were
reinvested. The Index is unmanaged, with no set investment objective and does
not include the "real world" costs of managing a mutual fund. Earnings from a
variable annuity investment compound tax-free until withdrawal, so no
adjustments were made for income taxes. The effect of an expense limitation
is included in the chart. Performance does not reflect insurance fees related
to a variable product investment nor the deferred sales charge that would
apply to certain withdrawals of investments held for less than eight years.
Performance shown here would have been reduced if such fees were included and
the expense limitation were removed. For more information about fees, consult
your variable annuity prospectus.
4
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.-INTERNATIONAL EQUITY SERIES
STATEMENT OF NET ASSETS
December 31, 1997
MARKET
NUMBER OF VALUE
SHARES (U.S. $)
COMMON STOCK-93.72%
AUSTRALIA-10.20%
+Amcor ......................... 865,000 $ 3,803,946
CSR ........................... 1,224,966 4,149,940
FOSTER'S BREWING GROUP ........ 2,827,051 5,378,125
NATIONAL AUSTRALIA BANK ....... 448,327 6,259,382
Telstra ....................... 328,090 692,552
-----------
20,283,945
-----------
BELGIUM-3.16%
ELECTRABEL SA ................. 27,200 6,283,973
-----------
6,283,973
-----------
FRANCE-8.23%
Alcatel Alsthom ............... 38,015 4,828,003
Compagnie de Saint Gobain ..... 25,299 3,591,043
Elf Aquitaine ................. 36,583 4,251,366
Societe Generale .............. 27,108 3,690,306
-----------
16,360,718
-----------
GERMANY-9.29%
Bayer ......................... 134,600 4,994,885
Continental ................... 117,200 2,638,833
+RHEINISCH WESTFAELISCHES
ELEKTRIC ..................... 121,000 6,491,452
Siemens ....................... 72,050 4,346,032
-----------
18,471,202
-----------
HONG KONG-3.64%
Hong Kong Electric ............ 810,000 3,079,073
Wharf Holdings ................ 1,900,000 4,169,194
-----------
7,248,267
-----------
JAPAN-12.70%
+Amano ......................... 185,000 1,419,311
+Eisai ......................... 287,000 4,381,681
HITACHI ....................... 728,000 5,194,217
+Kinki Coca-Cola Bottling ...... 191,000 2,036,826
Koito Manufacturing ........... 596,000 2,377,691
Matshushita Electric Industrial 290,000 4,249,493
Nichido Fire & Marine ......... 483,000 2,519,775
West Japan Railway ............ 965 3,079,828
-----------
25,258,822
-----------
MALAYSIA-0.50%
Oriental Holdings Berhad ...... 510,720 624,782
Sime Darby Berhad ............. 380,000 365,253
-----------
990,035
-----------
Top 10 stock holdings, representing 29.0% of net assets, are in bold.
<PAGE>
MARKET
NUMBER OF VALUE
SHARES (U.S. $)
COMMON STOCK (CONTINUED)
NETHERLANDS-6.16%
Elsevier ......................... 199,500 $ 3,229,015
Koninklijke Van Ommeren .......... 60,100 2,016,679
Royal Dutch Petroleum ............ 63,000 3,460,104
Unilever ......................... 57,440 3,543,054
-----------
12,248,852
-----------
NEW ZEALAND-3.25%
Carter Holt Harvey Limited ....... 1,187,800 1,834,118
+Telecom Corporation of New Zealand 954,784 4,628,005
-----------
6,462,123
-----------
PHILIPPINES-0.88%
Philippine Long Distance Telephone
Company ADR .................... 77,800 1,750,500
-----------
1,750,500
-----------
SINGAPORE-0.86%
Jardine Matheson Holdings ........ 336,622 1,716,772
-----------
1,716,772
-----------
SOUTH KOREA-0.06%
Cho Hung Bank Limited GDR ........ 80,948 121,422
-----------
121,422
-----------
SPAIN-5.53%
Banco Central Hispanoamericano ... 184,898 4,502,457
+Iberdrola SA ..................... 197,800 2,603,059
Telefonica de Espana ............. 136,500 3,897,313
-----------
11,002,829
-----------
UNITED KINGDOM-29.26%
BASS ............................. 411,000 6,345,562
BG ............................... 617,647 2,791,536
Blue Circle Industry ............. 688,236 4,038,635
BOOTS ............................ 433,200 6,309,595
BRITISH AIRWAYS .................. 525,000 5,165,615
Cable & Wireless ................. 556,000 4,902,017
Centrica ......................... 700,000 1,016,092
GKN .............................. 252,000 5,183,455
GLAXO WELLCOME ................... 214,470 5,087,188
Great Universal Stores ........... 323,000 3,995,914
Rio Tinto ........................ 412,100 4,795,699
Taylor Woodrow ................... 1,365,000 4,019,048
Unigate .......................... 458,000 4,544,158
-----------
58,194,514
-----------
TOTAL COMMON STOCK
(COST $164,798,064) ............ 186,393,974
-----------
5
<PAGE>
INTERNATIONAL EQUITY SERIES
STATEMENT OF NET ASSETS (CONTINUED)
MARKET
NUMBER OF VALUE
SHARES (U.S. $)
WARRANTS-0.01%
INDONESIA-0.01%
*PT Bank Dagang Nasional ...................... 567,750 $5,265
------
TOTAL WARRANTS (COST $0) ..................... 5,265
------
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENTS-6.00%
With Chase Manhattan 6.00% 01/02/98
(dated 12/31/97, collateralized by
$1,872,000 U.S. Treasury Notes
7.75% due 01/31/00, market value
$2,006,561 and $1,509,000
U.S. Treasury Notes 7.75% due
11/30/99, market value $1,574,111) .......... $3,508,000 3,508,000
MARKET
PRINCIPAL VALUE
AMOUNT (U.S. $)
REPURCHASE AGREEMENTS (CONTINUED)
With JP Morgan Securities 6.25%
01/02/98 (dated 12/31/97, collateralized
by $1,169,000 U.S. Treasury Notes
9.00% due 05/15/98, market value
$1,197,620 and $3,744,000
U.S. Treasury Notes 6.00% due 05/31/98,
market value $3,768,882) ..................... $4,867,000 $4,867,000
With PaineWebber 6.375% 01/02/98
(dated 12/31/97, collateralized by
$3,618,000 U.S. Treasury Notes
6.25% due 06/30/98,
market value $3,632,427) ..................... 3,557,000 3,557,000
---------
TOTAL REPURCHASE AGREEMENTS
(COST $11,932,000) .......................... 11,932,000
----------
TOTAL MARKET VALUE OF SECURITIES-99.73% (COST $176,730,064) .... $198,331,239
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-0.27% .......... 532,022
-------
NET ASSETS APPLICABLE TO 12,815,894 SHARES ($.01 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $15.52 PER SHARE-100.00% ........................ $198,863,261
============
COMPONENTS OF NET ASSETS AT DECEMBER 31, 1997:
Common stock, $.01 par value, 750,000,000 shares authorized
to the Fund with 50,000,000 shares allocated to the Series ..... $171,652,423
Undistributed net investment income** .......................... 7,156,052
Accumulated net realized loss on investments ................... (1,517,754)
Net unrealized appreciation of investments and foreign currencies 21,572,540
------------
Total net assets ............................................... $198,863,261
============
- ---------
*Non-income producing security.
**Undistributed net investment income includes net realized gains (losses) on
foreign currencies. Net realized gains (losses) on foreign currencies are
treated as net investment income in accordance with provisions of the
Internal Revenue Code.
+Security is partially or fully on loan.
ADR-American Depository Receipt
GDR-Global Depository Receipt
See accompanying notes
6
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.-INTERNATIONAL EQUITY SERIES
STATEMENT OF OPERATIONS
Year ended December 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ....................................................... $719,010
Dividends ...................................................... 5,175,035
Foreign tax withheld ........................................... (440,598) $5,453,447
---------
EXPENSES:
Management fees ................................................ 1,304,340
Custodian fees ................................................. 86,403
Dividend disbursing and transfer agent fees and expenses ....... 9,906
Registration fees .............................................. 21,145
Reports and statements to shareholders ......................... 22,040
Accounting and administration .................................. 83,593
Professional fees .............................................. 10,154
Directors' fees ................................................ 3,269
Taxes (other than taxes on income) ............................. 11,685
Other .......................................................... 20,491
---------
1,573,026
---------
Less expenses absorbed by Delaware International
Advisers Ltd .................................................. (96,663) 1,476,363
--------- ----------
NET INVESTMENT INCOME .......................................... 3,977,084
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions ....................................... (971,541)
Foreign currencies ............................................ 3,549,014
----------
Net realized gain .............................................. 2,577,473
----------
Net change in unrealized appreciation/depreciation of
investments and foreign currencies ............................ 1,459,920
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES .................................................... 4,037,393
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $8,014,477
==========
</TABLE>
See accompanying notes
7
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.-INTERNATIONAL EQUITY SERIES
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
12/31/97 12/31/96
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income .............................. $ 3,977,084 $ 2,763,530
Net realized gain on investments and foreign
currencies ........................................ 2,577,473 1,560,830
Net change in unrealized appreciation/depreciation
on investments and foreign currencies ............. 1,459,920 14,667,391
------------ ------------
Net increase in net assets resulting from operations 8,014,477 18,991,751
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................. (4,927,079) (2,695,399)
Net realized gain on investment transactions ....... -- (725,191)
------------ ------------
(4,927,079) (3,420,590)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold .......................... 70,066,962 37,727,987
Net asset value of shares issued upon reinvestment
of dividends from net investment income and net
realized gain on investment transactions .......... 4,927,079 3,420,590
------------ ------------
74,994,041 41,148,577
Cost of shares repurchased ......................... (10,645,895) (6,840,060)
------------ ------------
Increase in net assets derived from capital share
transactions ...................................... 64,348,146 34,308,517
------------ ------------
NET INCREASE IN NET ASSETS ......................... 67,435,544 49,879,678
------------ ------------
NET ASSETS:
Beginning of year .................................. 131,427,717 81,548,039
------------ ------------
End of year ........................................ $198,863,261 $131,427,717
============ ============
See accompanying notes
8
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.-INTERNATIONAL EQUITY SERIES
FINANCIAL HIGHLIGHTS
Selected data for each share of the Series outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY SERIES
-------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $15.110 $13.120 $11.840 $11.620 $10.030
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(1) .................................. 0.359 0.557 0.419 0.220 0.052
Net realized and unrealized gain on investments and
foreign currencies ....................................... 0.596 1.966 1.191 0.080 1.548
------- ------- ------- ------- -------
Total from investment operations .......................... 0.955 2.523 1.610 0.300 1.600
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ...................... (0.545) (0.420) (0.240) (0.070) (0.010)
Distributions from net realized gain on
investment transactions .................................. none (0.113) (0.090) (0.010) none
------- ------- ------- ------- -------
Total dividends and distributions ......................... (0.545) (0.533) (0.330) (0.080) (0.010)
------- ------- ------- ------- -------
Net asset value, end of period ............................ $15.520 $15.110 $13.120 $11.840 $11.620
======= ======= ======= ======= =======
Total return .............................................. 6.60% 20.03% 13.98% 2.57% 15.97%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) ................... $198,863 $131,428 $81,548 $57,649 $16,664
Ratio of expenses to average net assets ................... 0.85% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets prior to
expense limitation ....................................... 0.90% 0.91% 0.89% 1.01% 1.85%
Ratio of net investment income to average net assets ...... 2.28% 4.71% 3.69% 2.63% 1.85%
Ratio of net investment income to average net assets prior
to expense limitation .................................... 2.23% 4.60% 3.60% 2.42% 0.80%
Portfolio turnover ........................................ 7% 8% 19% 13% 9%
Average commission rate paid(2) ........................... $0.0150 $0.0100 N/A N/A N/A
</TABLE>
- ---------
(1)Per share information for the period ended December 31, 1997 was based on
the average shares outstanding method.
(2)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.
See accompanying notes
9
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.-INTERNATIONAL EQUITY SERIES
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Delaware Group Premium Fund, Inc. (The "fund"), is registered as a
diversified open-end investment company under the Investment Company Act of
1940, as amended. The Fund is organized as a Maryland Corporation and offers
15 series: the Trend Series, the DelCap Series, the Value Series, the Quantum
Series, the Devon Series, the Decatur Total Return Series, the Delaware
Series, the Convertible Securities Series, the Emerging Markets Series, the
International Equity Series, the Global Bond Series, the Delchester Series,
the Strategic Income Series, the Capital Reserves Series, and the Cash
Reserve Series (the "Series"). The shares of the Fund are sold only to
separate accounts of life insurance companies.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Series:
SECURITY VALUATION-Securities listed on an exchange are valued at the last
quoted sales price as of the close of the NYSE on the valuation date.
Securities not traded or securities not listed on an exchange are valued at
the mean of the last quoted bid and asked prices. Securities listed on a
foreign exchange are valued at the last quoted sales price before the Series
is valued. Long-term debt securities are valued by an independent pricing
service and such prices are believed to reflect the fair value of such
securities. Money market instruments having less than 60 days to maturity are
valued at amortized cost which approximates market value. Other securities
and assets for which market quotations are not readily available are valued
at fair value as determined in good faith by or under the direction of the
Fund's Board of Directors.
FEDERAL INCOME TAXES-The Series intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from
generally accepted accounting principles.
REPURCHASE AGREEMENTS-The Series may invest in a pooled cash account along
with other members of the Delaware Group of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is
held by the Series' custodian bank until the maturity of the respective
repurchase agreements. Each repurchase agreement is at least 100%
collateralized. However, in the event of default or bankruptcy by the
counterparty to the agreement, realization of the collateral may be subject
to legal proceedings.
FOREIGN CURRENCY TRANSACTIONS-Transactions denominated in foreign currencies
are recorded at the current prevailing exchange rates. The value of all
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the exchange rate of such currencies against the U.S. dollar
as of 3:00 PM EST. Transaction gains or losses resulting from changes in
exchange rates during the reporting period or upon settlement of the foreign
currency transaction are reported in operations for the current period. It is
not practical to isolate that portion of both realized and unrealized gains
and losses on investments in equity securities that result from fluctuations
in foreign currency exchange rates in the statement of operations. The Series
does isolate that portion of gains and losses on investments in debt
securities which are due to changes in the foreign exchange rate from that
which are due to changes in market prices of debt securities. The Series
reports certain foreign currency related transactions as components of
realized gains for financial reporting purposes, whereas such components are
treated as ordinary income (loss) for federal income tax purposes.
OTHER-Expenses common to all funds within the Delaware Group of Funds are
allocated amongst the funds on the basis of average net assets. Security
transactions are recorded on the date the securities are purchased or sold
(trade date). Costs used in calculating realized gains and losses
on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income
is recorded on the accrual basis. Foreign dividends are also recorded on the
ex-dividend date or as soon after the ex-dividend date that the Series
is aware of such dividends, net of all non-rebatable tax withholdings.
Original issue discounts are accreted to interest income over the lives of
the respective securities. Withholding taxes on foreign dividends have been
provided for in accordance with the Series' understanding of the
applicable country's tax rules and rates. The Series declares and pays
dividends from net investment income and net realized gains on investment
transactions annually.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Series declared dividends of $0.565 per share from net investment income
on January 28, 1998, payable on January 29, 1998, to shareholders of record
January 27, 1998.
Certain Fund expenses are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Series'
average daily net assets.
USE OF ESTIMATES-The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
2. INVESTMENT MANAGEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
In accordance with the terms of the Investment Management Agreement, the
Series pays Delaware International Advisers Ltd. ("DIAL"), the investment
manager of the Series, an annual fee which is calculated daily at the rate of
0.75% on the average daily net assets of the Series less the fees paid to the
unaffiliated directors. At December 31, 1997, the International Equity Series
had a liability for Investment Management fees and other expenses payable to
DIAL and its affiliates for $121,828.
DIAL has elected to waive their fees and reimburse the Series to the extent
that annual operating expenses exclusive of taxes, interest, brokerage
commissions and extraordinary expenses, exceed 0.95% of average daily net
assets of the Series through April 30, 1998. Total expenses absorbed by DIAL
for the year ended December 31, 1997 were $96,663.
The Series has engaged Delaware Service Company, Inc. ("DSC"), an affiliate
of Delaware Management Company ("DMC"), to serve as dividend disbursing
agent, transfer agent and accounting services agent for the Series. For the
year ended December 31, 1997, the Series expensed $9,906 for dividend
disbursing, transfer agent fees and other expenses and $55,457 for accounting
fees. At December 31, 1997, the Series had a liability for such fees and
other expenses payable to DSC for $657.
Certain officers of DMC, DIAL and DSC are officers, directors and/or
employees of the Fund. These officers, directors and employees are paid no
compensation by the Series.
3. INVESTMENTS
During the year ended December 31, 1997, the International Equity Series made
purchases of $73,496,202 and sales of $11,926,438 of investment securities,
other than U.S. government securities and temporary cash investments.
At December 31, 1997, the aggregate cost of securities for federal income tax
purposes was $176,730,064.
At December 31, 1997, unrealized appreciation for federal income tax purposes
aggregated $21,601,175 of which $34,909,840 related to unrealized
appreciation of securities and $13,308,665 related to unrealized depreciation
of securities.
For federal income tax purposes, the Series had a capital loss carryforward
at December 31, 1997 of $1,494,374 which may be carried forward and applied
against future capital gains. The capital loss carryforward of $522,833
expires in 2004 and $971,541 expires in 2005.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK
Transactions in capital stock shares were as follows:
YEAR ENDED YEAR ENDED
12/31/97 12/31/96
Shares sold: ......................................... 4,451,284 2,717,039
Shares issued upon reinvestment of dividends from
net investment income and net realized gains on
investment transactions: ............................ 342,396 265,574
--------- ---------
4,793,680 2,982,613
Shares repurchased: .................................. (674,626) (503,590)
--------- ---------
Net Increase ......................................... 4,119,054 2,479,023
========= =========
5. FOREIGN EXCHANGE CONTRACTS
The Series will generally enter into forward foreign currency contracts as a
way of managing foreign exchange rate risk. A Series may enter into these
contracts to fix the U.S. dollar value of a security that it has agreed to
buy or sell for the period between the date the trade was entered into and
the date the security is delivered and paid for. A Series may also use these
contracts to hedge the U.S. dollar value of securities it already owns
denominated in foreign currencies.
Forward foreign currency contracts are valued at the mean between the bid and
asked prices of the contracts and are marked-to-market daily. Interpolated
values are derived when the settlement date of the contract is an interim
date for which quotations are not available. The change in market value is
recorded as an unrealized gain or loss. When the contract is closed, a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed is
recorded.
The use of forward foreign currency contracts does not eliminate fluctuations
in the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. Although forward foreign
currency contracts limit the risk of loss due to a decline in the value of
the hedged currency, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Series could be
exposed to risks if the counterparties to the contracts are unable to meet
the terms of their contracts.
6. MARKET AND CREDIT RISKS
Some countries in which the Series may invest require governmental approval
for the repatriation of investment income, capital or the proceeds of sales
of securities by foreign investors. In addition, if there is a deterioration
in a country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially
smaller, less liquid and more volatile than the major securities markets in
the United States. Consequently, acquisition and disposition of securities by
the Series may be inhibited. In addition, a significant proportion of the
aggregate market value of equity securities listed on the major securities
exchanges in emerging markets are held by a smaller number of investors. This
may limit the number of shares available for acquisition or disposition by
the Series.
The Series may invest up to 10% of its total assets in illiquid securities
which may include securities with contractual restrictions on resale,
securities exempt from registration under Rule 144A of the Securities Act of
1933, as amended, and other securities which may not be readily marketable.
The relative illiquidity of some of these securities may adversely affect the
Series' ability to dispose of such securities in a timely manner and at a
fair price when it is necessary to liquidate such securities.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SECURITIES LENDING
Securities on loan are required at all times to be secured by collateral at
least equal to 102% of the market value of securities issued in the U.S. and
105% of the market value of securities issued outside of the U.S. However, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event that the borrower fails to return loaned
securities, and cash collateral being maintained by the borrower is
insufficient to cover the value of loaned securities and provided such
collateral insufficiency is not the result of investment losses, the lending
agent has agreed to pay the amount of the shortfall to the Series or, at the
option of the lending agent, replace the loaned securities. The market value
of securities on loan to brokers and the related cash collateral received at
December 31, 1997 for the Series was as follows:
MARKET VALUE OF CASH
SECURITIES ON LOAN COLLATERAL
------------------ ----------
International Equity Series .............. $15,712,135 $16,809,366
13
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Delaware Group Premium Fund, Inc.
We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc. - International Equity Series as of
December 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1997, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Premium Fund, Inc. - International Equity Series at December
31, 1997, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 4, 1998
14
