<PAGE>
PROSPECTUS
MAY 1, 1998
DELAWARE GROUP PREMIUM FUND, INC.
1818 Market Street, Philadelphia, PA 19103
Delaware Group Premium Fund, Inc. (the "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 describes the six Series available for investment by
Variable Accounts A and B of American International Life Assurance Company of
New York and Variable Accounts I and II of AIG Life Insurance Company and 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 1-800-441-7468. 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.
- ------------------------------------------------------------------------------
Decatur Total Return Series -- seeks the highest possible total rate of
return by selecting issues that exhibit the potential for capital appreciation
while providing higher than average dividend income. This Series, formerly
known as Equity/Income Series, has the same objective and inv estment
disciplines as Decatur Total Return Fund of Delaware Group Equity Funds II,
Inc., a separate fund in the Delaware Investments family, in that it invests
generally, but not exclusively, in common stocks and income-producing
securities convertible into common stocks, consistent with the Series'
objective.
Delchester Series -- seeks as high a current income as possible by
investing in rated and unrated corporate bonds (including high-yield bonds
commonly known as junk bonds), U.S. government securities and commercial
paper. This Series, formerly known as High Yield Series, has the same
objective and investment disciplines as Delchester Fund of Delaware Group
Income Funds, Inc., a separate fund in the Delaware Investments family. An
investment in this Series may involve greater risks than an investment in a
portfolio comprised primarily of investment grade bonds.
Capital Reserves Series -- seeks a high stable level of current income
while minimizing fluctuations in principal by investing in a diversified
portfolio of short- and intermediate-term securities.
Cash Reserve Series -- a money market fund which seeks the highest level of
income consistent with preservation of capital and liquidity through
investments in short-term money market instruments. This Series, formerly
known as Money Market Series, has the same objective and investment discipline
s as Delaware Group Cash Reserve, Inc., a separate fund in the Delaware
Investments family. The shares of the Cash Reserve Series are neither insured
nor guaranteed by the U.S. government and there is no assurance that the
Series will be able to maintain a stable net asset value of $10.00 per share.
<PAGE>
DelCap Series -- seeks long-term capital appreciation by investing its
assets in a diversified portfolio of securities exhibiting the potential for
significant growth. This Series, formerly known as Growth Series, has the same
objective and investment disciplines as DelCap Fund of Delaware Group Equity
Funds IV, Inc., a separate fund in the Delaware Investments family, in that it
invests in common stocks and other securities including but not limited to,
convertible securities, warrants, preferred stocks, bonds and foreign
securities, consistent with the Series' objective.
Delaware Series -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Series, formerly
known as Multiple Strategy Series, has the same objective and investment
disciplines as Delaware Fund of Delaware Group Equity Funds I, Inc., a
separate fund in the Delaware Investments family, in that, as a "balanced"
fund, the Series, consistent with its objective, invests at least 25% of its
assets in fixed-income securities and the remainder primarily in equity
securities.
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TABLE OF CONTENTS
Cover Page...................................................................1
Summary Information..........................................................3
Financial Highlights.........................................................4
Investment Objectives and Policies..........................................10
Introduction............................................................10
Decatur Total Return Series.............................................10
Delchester Series.......................................................10
Capital Reserves Series.................................................12
Cash Reserve Series.....................................................14
DelCap Series...........................................................15
Delaware Series.........................................................16
Purchase and Redemption.....................................................17
Dividends and Distributions.................................................17
Taxes.......................................................................17
Calculation of Offering Price and Net Asset Value Per Share.................18
Management of the Fund......................................................18
Performance Information.................................................21
Distribution and Service................................................22
Expenses................................................................23
Description of Fund Shares..............................................23
Other Considerations........................................................24
Appendix A Ratings..........................................................29
2
<PAGE>
SUMMARY INFORMATION
Investment Objectives and Policies
Each of the Fund's 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. Each Series may invest a portion of its assets in securities issued by
non-United States 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 United States
companies. See Foreign Securities under Other Considerations.
2. Each Series has the right to engage in certain options transactions for
hedging purposes to counterbalance portfolio volatility. The Series do not
engage in such activities for speculative purposes, but there are certain
risks associated with the use of options which a prospective investor should
consider. See Options under Other Considerations.
3. The objective of the Delchester Series is to seek the highest current
income which Delaware Management believes is consistent with prudent
investment management. The assets of the Series may be invested primarily in
high-yield securities (junk bonds) 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 Risk Factors under Delchester Series.
Investment Manager
Delaware Management Company ("Delaware Management") furnishes investment
management services to the Series, subject to the supervision and direction
of the Fund's Board of Directors. See Management of the Fund for information
about Delaware Management and the fees payable under each Series' Investment
Management Agreement.
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. Each Series operates as a
diversified fund as defined by the Investment Company Act of 1940 (the "1940
Act").
3
<PAGE>
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.
<TABLE>
<CAPTION>
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Decatur Total Return Series
7/28/88(1)
Year Ended through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.980 $14.830 $11.480 $12.510 $11.220 $10.750 $9.240 $11.400 10.160 $10.000
Income From Investment Operations:
- ----------------------------------
Net investment income................ 0.324 0.377 0.416 0.412 0.434 0.416 0.450 0.449 0.281 0.093
Net realized and unrealized gain
(loss) on investments .............. 4.216 2.398 3.574 (0.422) 1.266 0.504 1.550 (1.919) 1.034 0.067
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations... 4.540 2.775 3.990 (0.010) 1.700 0.920 2.000 (1.470) 1.315 0.160
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Dividends and Distributions:
- ---------------------------------
Dividends from net investment income. (0.370) (0.420) (0.430) (0.420) (0.410) (0.450) (0.490) (0.560) (0.075) none
Distributions from net realized gain
on investment transaction.......... (1.350) (1.205) (0.210) (0.600) none none none (0.130) none none
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions.. (1.720) (1.625) (0.640) (1.020 (0.410) (0.450) (0.490) (0.690) (0.075) none
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period....... $18.800 $15.980 $14.830 $11.480 $12.510 $11.220 $10.750 $9.240 $11.400 $10.160
======= ======= ======= ======= ======= ======= ======= ====== ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(2)...................... 31.00% 20.72% 36.12% (0.20%) 15.45%(3) 8.82%(3) 22.32% (13.31%) 13.04% 3.77%
- --------------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- -----------------------------
Net assets, end of period
(000 omitted) .....................$401,402 $166,647 $109,003 $72,725 $65,519 $38,278 $34,840 $29,598 $12,959 $1,873
Ratio of expenses to average net
assets............................. 0.71% 0.67% 0.69% 0.71% 0.75% 0.79% 0.85% 0.96% 1.31% 2.00%
Ratio of expenses to average net
assets prior to expense limitation. 0.71% 0.67% 0.69% 0.71% 0.76% 0.81% 0.85% 0.96% 1.31% 2.00%
Ratio of net investment income to
average net assets................. 2.02% 2.66% 3.24% 3.63% 3.95% 3.86% 4.46% 5.80% 5.06% 6.40%
Ratio of net investment income to
average net assets prior to
expense limitation ................ 2.02% 2.66% 3.24% 3.63% 3.94% 3.84% 4.46% 5.80% 5.06% 6.40%
Portfolio turnover .................. 54% 81% 85% 91 67% 72% 79% 34% 26%
Average commission rate paid(4)...... $0.0600 $0.0600 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
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(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in EXPENSES under
MANAGEMENT OF THE FUND.
(4) 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.
4
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<CAPTION>
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Delchester Series
----------------------------------------------------------------------------------------------
7/28/88(1)
Year Ended through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.170 $8.940 $8.540 $9.770 $9.290 $9.130 $7.480 $9.200 $9.860 $10.000
Income From Investment Operations:
- ----------------------------------
Net investment income................ 0.863 0.853 0.872 0.962 0.976 1.022 1.032 1.114 1.085 0.475
Net realized and unrealized
gain (loss) on investments 0.332 0.230 0.400 (1.230) 0.480 0.160 1.650 (1.720) (0.635) (0.140)
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations... 1.195 1.083 1.272 (0.268) 1.456 1.182 2.682 (0.606) 0.450 0.335
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Dividends and Distributions:
- ---------------------------------
Dividends from net investment
income ........................... (0.855) (0.853) (0.872) (0.962) (0.976) (1.022) (1.032) (1.114) (1.085) (0.475)
Distributions from net realized
gain on investment transactions.... none none none none none none none none (0.025) none
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions.. (0.855) (0.853) (0.872) (0.962) (0.976) (1.022) (1.032) (1.114) (1.110) (0.475)
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period....... $9.510 $9.170 $8.940 $8.540 $9.770 $9.290 $9.130 $7.480 $9.200 $9.860
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(2)...................... 13.63% 12.79% 15.50% (2.87%) 16.36%(3) 13.44%(3) 37.53%(3)(7.13%)(3)4.62%(3)8.15%(3)
- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- -----------------------------
Net assets, end of period
(000 omitted) ..................... $98,875 $67,665 $56,605 $43,686 $34,915 $11,311 $5,918 $5,092 $4,427 $2,425
Ratio of expenses to average
net assets ........................ 0.70% 0.70% 0.69% 0.72% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average
net assets prior to expense
limitation.............. .......... 0.70% 0.70% 0.69% 0.72% 0.82% 0.94% 1.06% 1.17% 1.50% 1.21%
Ratio of net investment
income to average net
assets............................. 9.24% 9.54% 9.87% 10.56% 10.05% 10.93% 12.05% 13.30% 11.21% 11.00%
Ratio of net investment income
to average net assets prior
to expense limitation ............. 9.24% 9.54% 9.87% 10.56% 10.03% 10.79% 11.80% 12.93% 10.50% 10.58%
Portfolio turnover................... 121% 93% 74% 47% 43% 73% 70% 115% 19% 31%
</TABLE>
- --------------
(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in EXPENSES under
MANAGEMENT OF THE FUND.
5
<PAGE>
<TABLE>
<CAPTION>
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Capital Reserves Series
----------------------------------------------------------------------------------------------
7/28/88(1)
Year Ended through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.690 $9.930 $9.300 $10.260 $10.200 $10.230 $10.040 $9.980 $9.970 $10.000
Income From Investment Operations:
- ----------------------------------
Net investment income................ 0.613 0.623 0.643 0.636 0.636 0.647 0.669 0.733 0.840 0.329
Net realized and unrealized
gain (loss) on investments 0.100 (0.240) 0.630 (0.905) 0.145 0.060 0.190 0.060 0.010 (0.030)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations... 0.713 0.383 1.273 (0.269) 0.781 0.707 0.859 0.793 0.850 0.299
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Dividends and Distributions:
- ---------------------------------
Dividends from net investment
income ............................ (0.613) (0.623) (0.643) (0.636) (0.636) (0.647) (0.669) (0.733) (0.840) (0.329)
Distributions from net
realized gain on
investment transactions............ none none none (0.055) (0.085) (0.090) none none none none
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions.. .................. (0.613) (0.623) (0.643) (0.691) (0.721) (0.737) (0.669) (0.733) (0.840) (0.329)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period....... $9.790 $9.690 $9.930 $9.300 $10.260 $10.200 $10.230 10.040 $9.980 $9.970
====== ====== ====== ====== ======= ======= ======= ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(2)...................... 7.60% 4.05% 14.08% (2.68%) 7.85%(3) 7.20%(3) 8.85%(3) 8.23%(3)8.86%(3) 7.20%(3)
- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- -----------------------------
Net assets, end of period
(000 omitted) .....................$29,177 $27,768 $27,935 $25,975 $24,173 $9,790 $4,392 $4,093 $2,575 $1,784
Ratio of expenses to
average net assets ................ 0.75% 0.72% 0.71% 0.74% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to
average net assets
prior to expense limitation........ 0.75% 0.72% 0.71% 0.74% 0.85% 0.98% 1.15% 1.49% 1.80% 1.26%
Ratio of net investment
income to average net
assets............................. 6.31% 6.43% 6.64% 6.57% 6.20% 6.39% 6.62% 7.32% 8.41% 7.63%
Ratio of net investment
income to average
net assets prior to
expense limitation ................ 6.31% 6.43% 6.64% 6.57% 6.15% 6.21% 6.27% 6.62% 7.41% 7.16%
Portfolio turnover................... 120% 122% 145% 219% 198% 241% 95% 38% -- 0.43%
</TABLE>
- ------------------
(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in EXPENSES under
MANAGEMENT OF THE FUND.
6
<PAGE>
<TABLE>
<CAPTION>
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Cash Reserve Series
----------------------------------------------------------------------------------------------
7/28/88(1)
Year Ended through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000
Income From Investment Operations:
- ----------------------------------
Net investment income................ 0.497 0.482 0.535 0.361 0.245 0.320 0.544 0.731 0.829 0.320
Net realized and unrealized
gain (loss) on investments ........ none none none none none none none none none none
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations... 0.497 0.482 0.535 0.361 0.245 0.320 0.544 0.731 0.829 0.320
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Dividends and Distributions:
- ---------------------------------
Dividends from net investment
income ............................ (0.497) (0.482) (0.535) (0.361) (0.245) (0.320) (0.544) (0.731) (0.829) (0.320)
Distributions from
net realized gain
on investment transactions......... none none none none none none none none none none
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total dividends and
distributions.. ................... (0.497) (0.482) (0.535) (0.361) (0.245) (0.320) (0.544) (0.731) (0.829) (0.320)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period......................$10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 $10.000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(2)...................... 5.10% .93% 5.48% 3.68% 2.48%(3) 3.25%(3) 5.58%(3) 7.56%(3) 8.61%(3) 7.70%(3)
- ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- -----------------------------
Net assets, end of period
(000 omitted) .....................$30,711 $26,479 $16,338 $20,125 $10,245 $7,774 $7,768 $8,174 $2,109 $932
Ratio of expenses to
average net assets ................ 0.64% 0.61% 0.62% 0.66% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to
average net assets
prior to expense limitation........ 0.64% 0.61% 0.62% 0.66% 0.86% 0.85% 0.99% 0.99% 2.01% 2.11%
Ratio of net investment
income to average net
assets............................. 4.98% 4.82% 5.35% 3.79% 2.44% 3.21% 5.45% 7.25% 8.26% 7.50%
Ratio of net investment
income to average
net assets prior to
expense limitation ................ 4.98% 4.82% 5.35% 3.79% 2.38% 3.16% 5.26% 7.05% 7.05% 6.19%
</TABLE>
- --------------
(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in EXPENSES under
MANAGEMENT OF THE FUND.
7
<PAGE>
<TABLE>
<CAPTION>
DelCap Series
---------------------------------------------------------------------------------------
7/12/91(1)
Year Ended through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $15.890 $15.130 $11.750 $12.240 $11.120 $11.030 $10.000
Income From Investment Operations:
- ----------------------------------
Net investment income (loss)(2)............ (0.010) (0.015) 0.072 0.069 0.056 0.023 0.010
Net realized and unrealized gain (loss)
on investments ......................... 2.260 2.030 3.378 (0.499) 1.214 0.197 1.020
------ ------ ------ ------ ------ ------ ------
Total from investment operations........ 2.250 2.015 3.450 (0.430) 1.270 0.220 1.030
------ ------ ------ ------ ------ ------ ------
Less Dividends and Distributions:
- ---------------------------------
Dividends from net investment income ..... none (0.070) (0.070) (0.060) (0.020) (0.010) none
Distributions from net realized gain
on investment transactions.............. (0.870) (1.185) none none (0.130 (0.120) none
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions....... (0.870) (1.255) (0.070) (0.060) (0.150) (0.130) none
------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............ $17.270 $15.890 $15.130 $11.750 $12.240 $11.120 $11.030
======= ======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
Total return(3)........................... 14.90%(4) 14.46%(4) 29.53%(4) (3.54%)(4) 11.56%(4) 1.99%(4) 21.60%
- ---------------
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- -----------------------------
Net assets, end of period (000 omitted) .. $110,455 $79,900 $58,123 $39,344 $33,180 $14,251 $6,950
Ratio of expenses to average net assets .. 0.80% 0.80% 0.80% 0.80% 0.80% 0.98% 1.94%
Ratio of expenses to average net assets
prior to expense limitation............. 0.87% 0.82% 0.85% 0.88% 1.00% 1.25% 1.94%
Ratio of net investment income (loss) to
average net assets...................... (0.06%) (0.11%) 0.61% 0.64% 0.67% 0.28% 0.33%
Ratio of net investment income (loss)
to average net assets prior to
expense limitation ...................... (0.13%) (0.13%) 0.56% 0.56% 0.47% 0.01% 0.33%
Portfolio turnover........................ 134% 85% 73% 43% 57% 52% 40%
Average commission rate paid(5)........... $0.0600 $0.0600 N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) 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.
8
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Delaware Series
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7/28/88(1)
Year Ended through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 12/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period . $16.640 $15.500 $12.680 $13.330 $13.550 $12.980 $10.840 $11.800 $10.160 $10.000
Income From Investment Operations:
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Net investment income................. 0.435 0.530 0.509 0.437 0.328 0.457 1.082 0.341 0.130 0.064
Net realized and unrealized gain
(loss) on investments .............. 3.575 1.765 2.761 (0.447) 0.692 1.233 1.668 (0.391) 1.550 0.096
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations.... 4.010 2.295 3.270 (0.010) 1.020 1.690 2.750 (0.050) 1.680 0.160
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Dividends and Distributions:
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Dividends from net investment
income ............................. (0.530) (0.500) (0.450) (0.340) (0.460) (1.060) (0.350) (0.270) (0.040) none
Distributions from net realized
gain on investment transactions..... (1.070) (0.655) none (0.300) (0.780) (0.060) (0.260) (0.640) none none
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions ..................... (1.600) (1.155) (0.450) (0.640 (1.240) (1.120) (0.610) (0.910) (0.040) none
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period........ $19.050 $16.640 $15.500 $12.680 $13.330 $13.550 $12.980 $10.840 $11.800 $10.160
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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Total return(2)....................... 26.40% 15.91% 26.58% (0.15%) 8.18%(3) 13.85%(3) 26.58% (0.18%) 16.60% 3.77%
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Ratios and Supplemental Data:
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Net assets, end of period
(000 omitted) ......................$127,675 $75,402 $63,215 $47,731 $37,235 $15,150 $12,138 $6,137 $3,182 $151
Ratio of expenses to average
net assets ......................... 0.67% 0.68% 0.69% 0.70% 0.80% 0.86% 1.03% 1.35% 1.99% (4)
Ratio of expenses to average
net assets prior to
expense limitation................... 0.67% 0.68% 0.69% 0.70% 0.89% 0.94% 1.03% 1.35% 1.99% (4)
Ratio of net investment income to
average net assets.................. 2.85% 3.56% 3.75% 3.71% 3.33% 3.60% 11.35% 3.84% 2.22% (4)
Ratio of net investment income
to average net assets prior
to expense limitation .............. 2.85% 3.56% 3.75% 3.71% 3.24% 3.52% 11.35% 3.84% 2.22% (4)
Portfolio turnover.................... 67% 92% 106% 140% 162% 202% 1,010% 210% 132% (4)
Average commission rate
paid(5)............................. $0.0600 $0.0600 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
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(1) Date of initial public offering; ratios and total return have been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in EXPENSES under
MANAGEMENT OF THE FUND.
(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.
9
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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.
DECATUR TOTAL RETURN SERIES
The objective of the Decatur Total Return Series is to seek to achieve
long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to
principal. The Series seeks to provide shareholders with a current return
while allowing them to participate in the capital gains potential associated
with equity investments.
Investment Strategy
The Series generally invests in common stocks and income-producing
securities that are convertible into common stocks. The portfolio manager
looks for securities having a better dividend yield than the average of the
Standard & Poor's ("S&P") 500 Stock Index, as well as capital gains
potential.
All available types of appropriate securities are under continuous study.
The Series may invest in all classes of securities, bonds and preferred and
common stocks in any proportion deemed prudent under existing market and
economic conditions. In seeking to obtain its objective, the Series may hold
securities for any period of time. For temporary, defensive purposes, the
Series may hold a substantial portion of its assets in cash or short-term
obligations.
Income-producing convertible securities include preferred stock and
debentures that pay a stated or variable interest rate or dividend and are
convertible into common stock at an established ratio. These securities, which
are usually priced at a premium to their conversion value, may allow the
Series to receive current income while participating to some extent in any
appreciation in the underlying common stock. The value of a convertible
security tends to be affected by changes in interest rates, as wel l as
factors affecting the market value of the underlying common stock.
The Series may be suitable for the patient investor interested in
long-term growth. The investor should be willing to accept the risks
associated with investments in common stocks and income-producing securities,
including those that are convertible into common stocks. The Series is
suitable for investors who want a current return with the possibility of
capital appreciation. Naturally, the Series cannot assure a specific rate of
return or that principal will be protected. The value of the Series' shares
can be expected to fluctuate depending upon market conditions. However,
through the cautious selection and supervision of its portfolio, the Series
will strive to achieve its objective of long-term growth through both income
and capital appreciation without undue risk to principal.
DELCHESTER SERIES
The objective of the Delchester Series is to seek the highest current
income which Delaware Management believes is consistent with prudent
investment management. The strategy is to invest primarily in those securities
having a liberal and consistent yield and those tending to reduce the risk of
market fluctuations. The Series will invest at least 80% of its assets at the
time of purchase in:
(1) Corporate Bonds. The Series will invest in both rated and unrated
bonds. See APPENDIX A to this PROSPECTUS for information concerning ratings.
Unrated bonds may be more speculative in nature than rated bonds;
(2) Government Securities. Securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities; and
10
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(3) Commercial Paper. Commercial paper of companies rated A-1 or A-2 by
S&P or rated P-1 or P- by Moody's Investors Service, Inc. ("Moody's").
Investment Strategy
The Series expects to invest at least 80% of its assets in securities of
the types described above. The Series must invest the remaining assets, if
any, in income-producing securities, including common stocks and
preferred stocks, some of which may have convertible features or attached
warrants. For temporary defensive purposes, the Series may hold a substantial
portion of its assets in cash or short-term obligations. In the long run, the
Series' assets are expected to be invested primarily in unrated corporate
bonds and bonds rated BBB or lower by S&P.
Risk Factors
The assets of Delchester Series may be invested primarily in bonds rated
BBB or lower by S&P or Baa or lower by Moody's and in unrated corporate
bonds. See APPENDIX A to this PROSPECTUS for more rating information.
Investing in these so-called "junk" or "high-yield" bonds entails certain
risks, including the risk of loss of principal, which may be greater than the
risks involved in investment grade bonds, and which should be considered by
investors contemplating an investment in the Series. Such bonds are sometimes
issued by companies whose earnings at the time of issuance are less than the
projected debt service on the junk bonds. In addition to the considerations
discussed elsewhere in this PROSPECTUS, those risks include
the following:
YOUTH AND VOLATILITY OF THE HIGH-YIELD MARKET. Although the market for
high-yield bonds has been in existence for many years, including periods of
economic downturns, the high-yield market grew rapidly during the long
economic expansion which took place in the United States during the 1980s.
During that economic expansion, the use of high-yield debt securities to fund
highly leveraged corporate acquisitions and restructurings increased
dramatically. As a result, the high-yield market grew substantially during
that economic expansion. Although experts disagree on the impact recessionary
periods have had and will have on the high-yield market, some analysts believe
a protracted economic downturn would severely disrupt the market for
high-yield bonds, would adversely affect the value of outstanding bonds and
would adversely affect the ability of high-yield issuers to repay principal
and interest. Those analysts cite volatility experienced in the high-yield
market in the past as evidence for their position. It is likely that
protracted periods of economic uncertainty would result in increased
volatility in the market prices of high-yield bonds, an increase in the number
of high-yield bond defaults and corresponding volatility in the Series' net
asset value. At times in the past, uncertainty and volatility in the
high-yield market resulted in volatility in the Series' net asset value.
REDEMPTIONS. If, as a result of volatility in the high-yield market or
other factors, the Series experiences substantial net redemptions of the
Series' shares for a sustained period of time (i.e., more shares of the Series
are redeemed than are purchased), the Series may be required to sell
securities without regard to the investment merits of the securities to be
sold. If the Series sells a substantial number of securities to generate
proceeds for redemptions, the asset base of the Series will decrease and the
Series' expense ratio may increase.
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LIQUIDITY AND VALUATION. The secondary market for high-yield securities is
currently dominated by institutional investors, including mutual funds and
certain financial institutions. There is generally no established retail
secondary market for high-yield securities. As a result, the secondary market
for high-yield securities is more limited and less liquid than other secondary
securities markets. The high-yield secondary market is particularly
susceptible to liquidity problems when the institutions which dominate it
temporarily cease buying bonds for regulatory, financial or other reasons,
such as the savings and loan crisis. A less liquid secondary market may have
an adverse affect on the Series' ability to dispose of particular issues, when
necessary, to meet the Series' liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of the
issuer. In addition, a less liquid secondary market makes it more difficult
for the Series to obtain precise valuations of the high-yield securities in
its portfolio. During periods involving such liquidity problems, judgment
plays a greater role in valuing high-yield securities than is normally the
case. The secondary market for high-yield securities is also generally
considered to be more likely to be disrupted by adverse publicity and investor
perceptions than the more established secondary securities markets. The
Series' privately placed high-yield securities are particularly susceptible to
the liquidity and valuation risks outlined above.
LEGISLATIVE AND REGULATORY ACTION AND PROPOSALS. There are a variety of
legislative actions which have been taken or which are considered from time to
time by the United States Congress which could adversely affect the market for
high-yield bonds. For example, Congressional legislation limited the deduc
tibility of interest paid on certain high-yield bonds used to finance
corporate acquisitions. Also, Congressional legislation has, with some
exceptions, generally prohibited federally-insured savings and loan
institutions from investing in high-yield securities. Regulatory actions have
also affected the high-yield market. For example, many insurance companies
have restricted or eliminated their purchases of high-yield bonds as a result
of, among other factors, actions taken by the National Association of
Insurance Commissioners. If similar legislative and regulatory actions are
taken in the future, they could result in further tightening of the secondary
market for high-yield issues, could reduce the number of new high-yield
securities being issued and could make it more difficult for the Series to
attain its investment objective.
ZERO COUPON BONDS AND PAY-IN-KIND BONDS. Although the Series does not
generally purchase a substantial amount of zero coupon bonds or pay-in-kind
("PIK") bonds, from time to time the Series may acquire zero coupon bonds and,
to a lesser extent, PIK bonds. Zero coupon bonds and PIK bonds are genera lly
considered to be more interest-sensitive than income-bearing bonds, to be more
speculative than interest-bearing bonds, and to have certain tax consequences
which could, under certain circumstances, be adverse to the Series. For
example, the Series accrues, and is required to distribute to shareholders,
income on its zero coupon bonds. However, the Series may not receive the cash
associated with this income until the bonds are sold or mature. If the Series
did not have sufficient cash to make the required distribution of accrued
income, the Series could be required to sell other securities in its portfolio
or to borrow to generate the cash required.
CAPITAL RESERVES SERIES
The Capital Reserves Series' objective is to seek a high stable level of
current income while attempting to minimize fluctuations in principal and
provide maximum liquidity. The Series intends to achieve its objective by
investing its assets in a diversified portfolio of short- and
intermediate-term securities, including securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, instruments secured by
such securities and investment grade corporate notes, bonds and other debt
securities. See Diversification.
The Series is not a money market fund. A money market fund is designed for
stability of principal; consequently, the level of income fluctuates. The
Series is designed for greater stability of income at a relatively higher
level; consequently, the principal value will fluctuate over time.
Investment Strategy
The Series will attempt to provide investors with yields higher than those
available in money market vehicles by extending its portfolio maturities.
12
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Maturity Restrictions
The Series seeks to reduce the effects of interest rate volatility on
principal by normally maintaining the average weighted maturity of the Series'
portfolio within the five- to seven-year range and not in excess of ten years.
The decision to position the portfolio at any point within this permissible
maturity range will be guided by Delaware Management's perception of the
direction of interest rates and the risks in the fixed-income markets,
generally. If, in Delaware Management's judgment, interest rates are
relatively high and borrowing requirements in the economy are weakening, the
manager, generally, will extend the average weighted maturity of the Series.
Conversely, if, in its judgment, interest rates are relatively low and
borrowing requirements appear to be strengthening, it, generally, will shorten
the average weighted maturity. Delaware Management has the ability to purchase
individual securities with a remaining maturity of up to 15 years.
Quality Restrictions
The Series will invest in:
(1) securities issued or guaranteed by the U.S. government (e.g., Treasury
Bills and Notes), its agencies (e.g., Federal Housing Administration) or
instrumentalities (e.g., Federal Home Loan Bank) or government-sponsored
corporations (e.g., Federal National Mortgage Association) and repurchase
agreements collateralized by such securities;
(2) corporate notes, bonds and other debt securities rated investment
grade (e.g., BBB or better by S&P or Baa or better by Moody's) or, if unrated,
those securities considered to be of comparable quality by Delaware
Management;
(3) mortgage-backed securities, i.e., bonds collateralized by
mortgage-backed pass-through securities such as GNMA, FNMA and FHLMC, rated
investment grade (e.g., BBB or better by S&P or Baa or better by Moody's) or,
if unrated, those securities considered to be of comparable quality by
Delaware Management. See Other Considerations -- Mortgage-Backed Securities;
(4) certificates of deposit and obligations of both U.S. and foreign banks
if they have assets of at least one billion dollars;
(5) commercial paper of companies rated P-1 or P-2 by Moody's and/or A-1
or A-2 by S&P; and
(6) asset-backed securities, i.e., securities backed by assets such as
home equity loans and credit card receivables rated in one of the four highest
rating categories by a reputable rating agency (e.g., BBB or better by S&P or
Baa or better by Moody's). See Other Considerations -- Asset-Backed Securities.
Debt securities rated in the fourth category of investment grade (e.g.,
BBB by S&P or Baa by Moody's) may have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity by issuers of such debt to make principal and interest
payments than is the case with higher rated debt. To the extent that the
rating of a corporate debt security held by the Series falls below such fourth
grade or Delaware Management determines that an unrated security no longer is
of comparable quality, the Series, as soon as practicable, will dispose of
such security, unless such disposal, in the judgment of Delaware Management,
would be detrimental to the Series in light of then prevailing market
conditions.
The Series may be suitable for the individual who wants relatively stable
and high income flow and the security associated with a portfolio of U.S.
government- (or agency-) backed and other investment grade investments. The
investor should be willing to accept the risks associated with investing in
these securities. The types of securities in which the Series invests is
subject to fluctuations in net asset value, as well as yield. Therefore, the
Series may not be suitable for people whose overriding objective is stability
of principal. The market value of fixed-income securities generally is
affected by changes in the level of interest rates. When interest rates rise,
the share value will tend to fall, and when interest rates fall, the share
value will tend to rise.
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As noted above, the Series will invest in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities or certain
corporations sponsored or established by the U.S. government. U.S. Treasury
securities are backed by the "full faith and credit" of the United States.
Securities issued or guaranteed by Federal agencies and U.S. government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the investors must look principally to
the agency or instrumentality issuing or guaranteeing the obligation for
ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitment. Agencies which are backed by the full faith and credit of the
United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities,
such as the Government National Mortgage Association (GNMA), are, in effect,
backed by the full faith and credit of the United States through provisions in
their charters that they may make "indefinite and unlimited" drawings on the
Treasury, if needed to service its debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association (FNMA), are not guaranteed by the United States, but
those institutions are protected by the discretionary authority for the U.S.
Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System and the Federal Home Loan
Mortgage Corporation (FHLMC), are federally chartered institutions under U.S.
government supervision, but their debt securities are backed only by the
creditworthiness of those institutions, not the U.S. government.
Some of the U.S. government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Immediate Credit Banks, and the Federal National Mortgage Associations.
CASH RESERVE SERIES
As a money market fund, this Series' objective is to seek to provide
maximum current income, while preserving principal and maintaining liquidity,
by investing its assets in a diversified portfolio of money market securities
and managing the portfolio to maintain a constant net asset value of $10 per
share. While the Series will make every effort to maintain a fixed net asset
value of $10 per share, there can be no assurance that this objective will be
achieved.
Quality Restrictions
The Series limits its investments to those which the Board of Directors
has determined present minimal credit risks and are of high quality and which
will otherwise meet the maturity, quality and diversification conditions with
which taxable money market funds must comply.
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The Series' investments include securities issued or guaranteed by the
U.S. government (e.g., Treasury Bills and Notes) or by the credit of its
agencies or instrumentalities (e.g., Federal Housing Administration and
Federal Home Loan Bank). The Series may invest in the certificates of deposit
and obligations of both U.S. and foreign banks if they have assets of at least
one billion dollars in accordance with the maturity, quality and
diversification conditions with which taxable money market funds must comply.
The Series also may purchase commercial paper and other corporate obligations;
if, at the time of purchase, such a security or, as relevant, its issuer, is
rated in one of the two highest rating categories (e.g., for commercial paper,
A-2 or better by S&P and P-2 or better by Moody's; and, for other corporate
obligations, AA or better by S&P and Aa or better by Moody's) by at least two
nationally-recognized statistical rating organizations approved by the Board
of Directors or, if such security is not so rated, the purchase of the
security must be approved or ratified by the Board of Directors in accordance
with the maturity, quality and diversification conditions with which taxable
money market funds must comply. APPENDIX A of PART B describes the ratings of
S&P, Moody's, Duff and Phelps, Inc. and Fitch Investors Service, Inc.
("Fitch"), four of the better-known statistical rating organizations. The
Series will not invest more than 5% of its total assets in securities rated in
the second highest category by a ratings organization.
Maturity Restrictions
The Series maintains an average maturity of not more than 90 days. Also,
it does not purchase any instruments with an effective remaining maturity of
more than 13 months.
Investment Techniques
The Series intends to hold its investments until maturity, but may sell
them prior to maturity for a number of reasons. These reasons include: to
shorten or lengthen the average maturity, to increase the yield, to maintain
the quality of the portfolio or to maintain a stable share value.
If there were a national credit crisis, an issuer were to become insolvent
or interest rates were to rise, principal values could be adversely affected.
Investments in foreign banks and overseas branches of U.S. banks may be
subject to less stringent regulations and different risks than U.S. domestic
banks.
DELCAP SERIES
The objective of the Series is long-term capital appreciation. The
Series' strategy is to invest primarily in common stocks that, in the
judgment of Delaware Management, are of superior quality and in securities
that are convertible into such common stocks.
Investment Strategy
The Series will attempt to achieve its objective by purchasing securities
issued by companies whose earnings Delaware Management believes will grow
more rapidly than the average of those listed in the S&P 500 Stock Index.
Delaware Management's emphasis will be on the securities of companies that,
in its judgment, have the characteristics supporting such earnings growth.
This judgment will be based on, among other things, the financial strength of
the company, the expertise of its management, the growth potential of the
company within the industry and the growth potential of the industry itself.
The focus will be on those securities of companies Delaware Management
believes have established themselves within their industry while maintaining
growth potential.
While management believes its objective may best be achieved by investing
in common stock, the Series may also invest in other securities including,
but not limited to, convertible securities, warrants, preferred stock, bonds
and foreign securities. Any specific investment will be dependent upon the
judgment of Delaware Management. Investments may be held for any period of
time.
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The Series may make foreign investments through the purchase and sale of
sponsored or unsponsored American Depositary Receipts ("ADRs"). ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation.
"Sponsored" ADRs are issued jointly by the issuer of the underlying security
and a depository, whereas "unsponsored" ADRs are issued without participation
of the issuer of the deposited security. Holders of unsponsored ADRs 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 ADR.
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 corporate bonds of
investment quality rated Baa or above by Moody's or BBB or above by S&P.
The Series may be suitable for the patient investor interested in
long-term capital appreciation. Providing current income is not an objective
of the Series and any income produced is expected to be minimal. The investor
should be willing to accept the risks associated with investments in domestic
and international securities. Ownership of Series shares reduces the
bookkeeping and administrative inconveniences connected with direct purchases
of these securities. Because the net asset value may fluctuate at times in
response to market conditions, the Series is not appropriate for a short-term
investor.
DELAWARE SERIES
The Delaware Series seeks to provide a balance of capital appreciation,
income and preservation of capital by strategically allocating its assets
among fixed-income and equity securities, that, in the judgment of Delaware
Management, are believed to have the best potential for achieving the Series'
objective.
Investment Strategy
The Series seeks a balance of capital appreciation, income and
preservation of capital. As a "balanced" fund, the Series will generally
invest at least 25% of its assets in fixed-income securities, including U.S.
government securities and corporate bonds. The balance of the portfolio will
be allocated to equity securities principally, including convertible
securities, and also to cash and cash equivalents. If the Series invested in
convertible securities, the value of the convertible security would be allocat
ed to its fixed-income component and its conversion rights component for
purposes of the 25% fixed-income allocation.
The Series uses a dividend-oriented valuation strategy to select
individual securities in which it will invest. In seeking capital
appreciation, the Series invests primarily in common stocks of established
companies believed to have a potential for long-term capital growth. In
seeking current income and preservation of capital, in addition to capital
appreciation, the Series invests in various types of fixed-income securities,
including U.S. government and government agency securities and corporate
bonds. The Series intends to invest in bonds that are rated in the top four
grades by a nationally-recognized rating agency (i.e., Moody's or S&P) at the
time of purchase, or, if unrated, are determined to be equivalent to the top
four grades in the judgment of Delaware Management. The fourth grade is
considered medium grade and may have some speculative characteristics. To the
extent that the rating of a security held by the Series falls below the fourth
grade or Delaware Management determines that an unrated security no longer is
of comparable quality, the Series, as soon as practicable, will dispose of
such security, unless such disposal, in the judgment of Delaware Management,
would be detrimental in light of then prevailing market conditions. Typically,
the maturity of the bonds will range between five and 30 years. The Series may
not concentrate investments in any industry, which means not investing more
than 25% of its assets in any one industry.
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The Series may invest in shares or convertible bonds issued by real estate
investment trusts ("REITS"). REITS invest primarily in income producing real
estate as well as real estate related loans or interests. A REIT is not taxed
on income distributed to shareholders if it complies with several requirements
relating to its organization, ownership, assets and income, and a requirement
that it distribute to its shareholders at least 95% of its taxable income
(other than net capital gains) for each taxable year. The Series anticipates
investing only in REITS that invest the majority of their assets directly in
real property and derive their income primarily from rents, which are known as
"equity REITS." Equity REITS can also realize capital gains by selling
properties that have appreciated in value.
In pursuing its investment objective, the Series may hold securities for
any period of time. For temporary, defensive purposes, the Series may hold a
substantial portion of its assets in cash or short-term obligations,
including repurchase agreements.
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 equity and fixed-income securities.
The value of the Series' shares can be expected to fluctuate depending
upon market conditions and, thus, an investment in the Series may not be
appropriate for a short-term investor. Investment results of the Series will
be affected by the ability of Delaware Management to anticipate changes in
economic and market conditions and, consequently, there can be no assurance
that the Series' investment objective will be realized.
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. The Cash Reserve Series is managed to maintain a constant
$10 per share net asset value although there is no assurance that this
objective can be achieved. Contract owners do not deal directly with the Fund
with respect to the acquisition or redemption of Fund shares.
DIVIDENDS AND DISTRIBUTIONS
Dividends for the Delchester, Capital Reserves and Cash Reserve Series
are declared daily and paid monthly. Short-term capital gains distributions,
if any, may be paid with the daily dividend; otherwise, any distributions
from net realized securities profits normally will be distributed following
the close of the fiscal year.
For the Decatur Total Return and Delaware Series, the Fund will make
payments from the Series' net investment income quarterly. Distributions from
the respective Series' net realized securities profits, if any, normally will
be made following the close of the fiscal year.
For the DelCap Series, the Fund will make payments from the Series' net
income and net realized securities profits, if any, once a year.
All dividends and distributions are automatically reinvested in
additional Series shares.
TAXES
Each Series has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue 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.
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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 NAV 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 Securities
Act of 1933. 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 securities in
the Cash Reserve Series are valued at amortized cost. Under the direction of
the Board of Directors, certain procedures have been adopted to monitor the
value of the Cash Reserve Series' securities and stabilize the price per
share at $10. 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.
Each Series may invest a portion of their assets in foreign securities.
From time to time, those securities may be listed primarily on foreign
exchanges which trade on days when the New York Stock Exchange is closed (such
as Saturday). As a result, the net asset value of the Series could be
significantly affected by such trading on days when shareholders have no
access to the Series.
MANAGEMENT OF THE FUND
Directors
The business and affairs of the Fund are managed under the direction of
its Board of Directors. PART B contains additional information regarding the
directors and officers.
Investment Manager
Delaware Management furnishes investment management services to each
Series of the Fund described in this PROSPECTUS.
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
Advisers Ltd., 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.
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The Manager is a series of Delaware Management Business Trust. The Manager
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"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH and Delaware Management 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. In connection with
the merger, new Investment Management Agreements between the Fund on behalf of
the Series and Delaware Management were executed following shareholder
approval. Delaware Management's address is One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103.
Delaware Management manages each of the 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 the
following percentage rates of the average daily net assets of the Series,
less, in each case, a proportionate share of all directors' fees paid to the
unaffiliated directors of the Fund:
Decatur Total Return Series 0.60%
Delchester Series 0.60%
Capital Reserves Series 0.60%
Cash Reserve Series 0.50%
DelCap Series 0.75%
Delaware Series 0.60%
See EXPENSES for a discussion of a voluntary waiver of its management fee
undertaken by Delaware Management. The investment management fee, as a
percentage of average daily net assets, incurred by each of the below Series
for the fiscal year ended December 31, 1997 was as follows:
Before After
Voluntary Waiver Voluntary Waiver
Decatur Total Return Series 0.60% 0.60%
Delchester Series 0.60% 0.60%
Capital Reserves Series 0.60% 0.60%
Cash Reserve Series 0.50% 0.50%
DelCap Series 0.75% 0.67%
Delaware Series 0.60% 0.60%
The directors of the Fund annually review the fees paid under each
Series' Investment Management Agreement.
John B. Fields, Vice President/Senior Portfolio Manager of the Fund, has
primary responsibility for making day-to-day investment decisions for the
Decatur Total Return Series. He has been the senior portfolio manager of this
Series since 1992. Mr. Fields, who has 27 years' experience in investment
management, earned a bachelor's degree and an MBA from Ohio State University.
Before joining Delaware Investments in 1992, he was Director of Domestic
Equity Risk Management at DuPont. Prior to that, he was Director of Equity
Research at Comerica Bank. Mr. Fields is a member of the Financial Analysts
Society. In making investment decisions for the Decatur Total Return Series,
Mr. Fields works with a team of 12 portfolio managers and analysts, each of
whom specializes in a different industry sector and makes recommendations
accordingly. Mr. Fields also regularly consults with Wayne A. Stork and
Richard G. Unruh, Jr. Mr. Stork, Chairman of Delaware Management and the
Fund's Board of Directors, is a graduate of Brown University and attended New
York University's Graduate School of Business Administration. Mr. Stork
joined Delaware Investments in 1962 and has served in various executive
capacities at different times within the Delaware organization. Mr. Unruh is
a graduate of Brown University and received his MBA from the University of
Pennsylvania's Wharton School. He joined Delaware Investments in 1982 after
19 years of investment management experience with Kidder, Peabody & Co. Inc.
Mr. Unruh was named an Executive Vice President of the Fund in 1994. He is
also a member of the Board of Directors of Delaware Management and Delaware
International and was named an Executive Vice President of Delaware
Management in 1994.
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Paul A. Matlack and Gerald T. Nichols, each a Vice President/Senior
Portfolio Manager of the Fund, have primary responsibility for making
day-to-day investment decisions for the Delchester Series. Mr. Matlack and Mr.
Nichols have been members of this Series' management team since 1990, and were
named co-managers of this Series in January 1993. A CFA charterholder, Mr.
Matlack is a graduate of the University of Pennsylvania with an MBA in Finance
from George Washington University. He began his career at Mellon Bank as a
credit specialist, and later served as a corporate loan officer for Mellon
Bank and then Provident National Bank. Mr. Nichols is a graduate of the
University of Kansas, where he received a BS in Business Administration and an
MS in Finance. Prior to joining Delaware Investments, he was a high-yield
credit analyst at Waddell & Reed, Inc. and subsequently the investment officer
for a private merchant banking firm. He is a CFA charterholder. In making
investment decisions for Delchester Series, Mr. Matlack and Mr. Nichols
regularly consult with Paul E. Suckow. Mr. Suckow is Delaware Management's
Chief Investment Officer for Fixed-Income. A CFA charterholder, he is a
graduate of Bradley University with an MBA from Western Illinois University.
Mr. Suckow was a fixed-income portfolio manager at Delaware Investments from
1981 to 1985. He returned to Delaware Investments in 1993 after eight years
with Oppenheimer Management Corporation, where he served as Executive Vice
President and Director of Fixed Income.
Gary A. Reed, Vice President/Senior Portfolio Manager of the Fund, has
primary responsibility for making investment decisions for the Capital
Reserves Series. He has been the Series' senior portfolio manager since 1989.
He holds an AB in Economics from the University of Chicago and an MA in
Economics from Columbia University. He began his career in 1978 with the
Equitable Life Assurance Company in New York City, where he specialized in
credit analysis. Prior to joining Delaware Investments in 1989, Mr. Reed was
Vice President and Manager of the fixed-income department at Irving Trust
Company in New York. In making investment decisions for the Capital Reserves
Series, Mr. Reed regularly consults with Paul E. Suckow.
Gerald S. Frey, Vice President/Senior Portfolio Manager of the Fund, has
primary responsibility for making day-to-day investment decisions for the
DelCap 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 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, Mr. Bassett, John A. Heffern and Lori Wachs. Mr. Bassett, Vice
President, joined Delaware in 1997. In his most recent position, he served as
Vice President in Morgan Stanley Asset Management's Emerging Growth Group,
where he analyzed small growth companies. Prior to that, he was a trust
officer at Sovran Bank and Trust Company. He received his bachelor's degree
and MBA from Duke University. Mr. Heffern, Vice President, holds a bachelor's
degree and an MBA from the University of North Carolina at Chapel Hill. He
joined Delaware in 1997. Previously, he was a Senior Vice President, Equity
Research at NatWest Securities Corporation's Specialty Finance Services unit.
Prior to that, he was a Principal and Senior Regional Bank Analyst at Alex.
Brown & Sons. Ms. Wachs is an Assistant Vice President. She joined 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.
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<PAGE>
George H. Burwell and Gary A. Reed, each a Vice President/Senior Portfolio
Manager of the Fund, have primary responsibility for making day-to-day
investment decisions for the Delaware Series. Mr. Burwell, who has been
Delaware Series' senior portfolio manager for equities since 1992 and Devon
Series' senior portfolio manager since its inception, holds a BA from the
University of Virginia. Prior to joining Delaware Investments in 1992, Mr.
Burwell was a portfolio manager for Midlantic Bank in Edison, New Jersey,
where he managed an equity mutual fund and three commingled funds. Mr. Burwell
is a CFA charterholder. Mr. Reed has been the Delaware Series' senior
portfolio manager for fixed-income since 1989. In making investment decisions
for the Delaware and Devon Series, Mr. Burwell and Mr. Reed regularly consult
with Wayne A. Stork, Richard G. Unruh, Jr. and Paul E. Suckow.
Portfolio Trading Practices
The Series normally will not invest for short-term trading purposes.
However, the Series may sell securities without regard to the length of time
they have been held. The degree of portfolio activity will affect brokerage
costs of the Series. Given the respective Series' investment objectives, the
annual portfolio turnover rates are not expected to exceed 100% for the
Decatur Total Return Series, 200% for the Capital Reserves and Delaware
Series, and may exceed 100% for Delchester and DelCap Series.
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 Delaware
Management or their respective advisory clients. These services may be used
by Delaware Management in servicing any of their respective accounts. Subject
to best price and execution, Delaware Management may consider a
broker/dealer's sales of shares of funds in the Delaware Investments family
in placing portfolio orders, and may place orders with broker/dealers that
have agreed to defray certain expenses of such funds, such as custodian fees.
PERFORMANCE INFORMATION
Decatur Total Return, Delchester,
Capital Reserves, DelCap and Delaware Series
From time to time, the Fund may quote the above listed Series' total
return performance in advertising and other types of literature. Total return
will be based on a hypothetical $1,000 investment, reflecting the
reinvestment of all distributions at net asset value. Each presentation will
include the average annual total return for one-, five- and ten-year (or life
of Series, if applicable) periods. The Fund may also advertise aggregate and
average total return information concerning the Series over additional
periods of time.
From time to time, the Fund may also quote the Delchester and Capital
Reserves Series' yield performance in advertising and other types of
literature. The current yield for both Series will be calculated by dividing
the annualized net investment income earned by these Series during a recent
30-day period by the maximum offering price per share on the last day of the
period. The yield formula provides for semi-annual compounding which assumes
that net investment income is earned and reinvested at a constant rate and
annualized at the end of a six-month period.
Because securities' prices fluctuate, investment results of the Series
will fluctuate and past performance should not be considered as a
representation of
future results.
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Cash Reserve Series
From time to time, the Fund may publish the Series' "yield" and
"effective yield." Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the Series
refers to the income generated by an investment in the Series over a
specified seven-day period. This income is then "annualized," which means the
amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of
the investment. The "effective yield" is calculated in a similar manner but,
when annualized, the income earned by an investment in the Series is assumed
to be reinvested. The "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment. The
Fund may also publish aggregate and average annual total return information
concerning the Series which will reflect the compounded rate of return of an
investment in the Series over a specified period of time and will assume the
investment of all distributions at net asset value. Yield fluctuates and is
not guaranteed. Past performance is not an indication of future results.
DISTRIBUTION AND SERVICE
The Distributor, Delaware Distributors, L.P. serves
as the national distributor for each Series under Distribution Agreements
dated April 3, 1995. The Distributor bears all of the costs of promotion
and distribution.
Delaware Service Company, Inc. (the "Transfer Agent") serves as the
shareholder servicing, dividend disbursing and transfer agent for the Decatur
Total Return, Delchester, Capital Reserves, Delaware and DelCap Series under
the Amended and Restated Shareholders Services Agreement dated May 1, 1998 and
for the Cash Reserve Series under the Shareholders Services Agreement dated
June 29, 1988. The Transfer Agent also provides accounting services to each
Series pursuant to the terms of a Fund Accounting Agreement.
The directors of the Fund annually review fees paid to the Distributor
and Transfer Agent. The Distributor and the Transfer Agent are also 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 system 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.
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.
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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 a Series to the extent that a Series' annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, do not exceed the following percentages of average
daily net assets through October 31, 1998:
Decatur Total Return Series 0.80%
Delchester Series 0.80%
Capital Reserves Series 0.80%
Cash Reserve Series 0.80%
DelCap Series 0.85%
Delaware Series 0.80%
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 Delchester,
Capital Reserves and Cash Reserve Series. For the fiscal year ended December
31, 1997, the Delchester, Capital Reserves and Cash Reserve Series' ratios of
expenses to average daily net assets were as follows:
With Voluntary Without Voluntary
Waiver Waiver
Delchester Series 0.70% 0.70%
Capital Reserves Series 0.75% 0.75%
Cash Reserve Series 0.64% 0.64%
Prior to May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of Decatur Total Return, Delaware and DelCap
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 for the period July 1, 1992 through
April 30, 1998. For the fiscal year ended December 31, 1997, the Decatur
Total Return, Delaware and DelCap Series' ratios of expenses to average daily
net assets were as follows:
With Voluntary Without Voluntary
Waiver Waiver
Decatur Total Return Series 0.71% 0.71%
Delaware Series 0.67% 0.67%
DelCap Series 0.80% 0.87%
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 Insurance and Annuity Company. In the future,
shares of the Fund may be sold to separate accounts of other affiliated or
unaffiliated life companies to fund variable contracts. The Fund's Board of
Directors will monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what
action, if any, should be taken in response thereto. An irreconcilable
conflict that is not resolved might result in the withdrawal of a substantial
amount of assets, causing a negative impact on net asset value.
As a "series" type of mutual fund, the Fund issues separate classes or
series of stock, currently the 16 Series described in this PROSPECTUS.
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 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.
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Each Series' shares have equal voting rights and are equal in all other
respects. Each Series will vote separately on any matter which affects only
that Series. Shareholders get one vote for each share held; fractional shares
are voted. The Fund will hold annual meetings as necessary for shareholder
matters to be voted under the 1940 Act or otherwise. Shares of each Series
will have a priority over shares of any other Series of the Fund in the assets
and income of that Series.
Because of current federal securities law requirements, the Fund expects
that its life company shareholders will offer their contract owners the
opportunity to instruct them as to how Series shares allocable to their
variable contracts will be voted with respect to certain matters, such as
approval of investment advisory agreements. An insurance company will vote all
Series shares held in a separate account in the same proportion as it receives
instructions from contract owners in that separate account. Under certain
circumstances, which are described more fully in the accompanying prospectuses
for the separate accounts which invest in the Fund, the voting instructions
received from contract owners may be disregarded.
OTHER CONSIDERATIONS
When-Issued 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
basis 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.
Mortgage-Backed Securities
The Capital Reserves and Delaware Series may invest in mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or government sponsored corporations or those issued by
certain private, non-government corporations, such as financial institutions,
if the securities are fully collateralized at the time of issuance by
securities or certificates issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes
or series with different maturities. The classes or series are retired in
sequence as the underlying mortgages are repaid. Prepayment may shorten the
stated maturity of the obligation and can result in a loss of premium, if any
has been paid. Certain of these securities may have variable or floating
interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities.
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CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Such private-backed
securities may be 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities (so-called "agency mortgage-backed securities") or may not
be so collateralized (so-called "non-agency mortgage-backed securities"). The
Series may invest in agency and non-agency mortgage-backed securities.
Non-agency mortgage-backed securities may comprise up to 20% of the Series'
respective assets, but all non-agency mortgage-backed securities must (i) be
rated at the time of purchase in the four top rating categories by a
nationally-recognized statistical rating organization (e.g., BBB or better by
Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors
Service, Inc.("Moody's")) and (ii) represent interests in whole-loan
mortgages, multi-family mortgages, commercial mortgages or other mortgage
collateral supported by a first mortgage lien on real estate. Non-agency
mortgage-backed securities are subject to the interest rate and prepayment
risks to which other CMOs and REMICs issued by private issuers are subject.
Non-agency mortgage-backed securities may also be subject to a greater risk of
loss of interest and principal because they are not collateralized by
securities issued or guaranteed by the U.S. government. In addition, timely
information concerning the loans underlying these securities may not be as
readily available and the market for these securities may be less liquid than
the market for other CMOs and REMICs.
Asset-Backed Securities
The Capital Reserves, Delaware and Cash Reserve Series may invest in
securities which are backed by assets such as receivables on home equity and
credit card loans, and receivables regarding automobile, mobile home and
recreational vehicle loans, wholesale dealer floor plans and leases or other
loans or financial receivables currently available or which may be developed
in the future. For the Capital Reserves and Delaware Series, all such
securities must be rated in one of the four highest rating categories by a
reputable rating agency (e.g., BBB or better by S&P or Baa or better by
Moody's). It is the Cash Reserve Series' current policy to limit asset-backed
investments to those rated in the highest rating category by a reputable
credit rating agency (e.g., AAA by S&P or Aaa by Moody's) and represented by
interests in credit card receivables, wholesale dealer floor plans, home
equity loans and automobile loans.
Such receivables are securitized in either a pass-through or a pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments in respect of the
receivables in the underlying pool. Pay-through asset-backed securities are
debt obligations issued usually by a special purpose entity, which are
collateralized by the various receivables and in which the payments on the
underlying receivables provide the funds to pay the debt service on the debt
obligations issued.
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The rate of principal payment on asset-backed securities generally depends
on the rate of principal payments received on the underlying assets. Such rate
of payments may be affected by economic and various other factors such as
changes in interest rates or the concentration of collateral in a particular
geographic area. Therefore, the yield may be difficult to predict and actual
yield to maturity may be more or less than the anticipated yield to maturity.
Due to the shorter maturity of the collateral backing such securities, there
tends to be less of a risk of substantial prepayment than with mortgage-backed
securities but the risk of such a prepayment does exist. See MORTGAGE-BACKED
SECURITIES, above. Such asset-backed securities do, however, involve certain
risks not associated with mortgage-backed securities, including the risk that
security interests cannot be adequately or in many cases ever established, and
other risks which may be peculiar to particular classes of collateral. For
example, with respect to credit card receivables, a number of state and
federal consumer credit laws give debtors the right to set off certain amounts
owed on the credit cards, thereby reducing the outstanding balance. In the
case of automobile receivables, there is a risk that the holders may not have
either a proper or first security interest in all of the obligations backing
such receivables due to the large number of vehicles involved in a typical
issuance and technical requirements under state laws. Therefore, recoveries on
repossessed collateral may not always be available to support payments on the
securities.
REITs
The Delaware Series may invest in REITs. REITs are pooled investment
vehicles which invest primarily in income-producing real estate or real
estate related loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Like investment
companies, REITs are not taxed on income distributed to shareholders provided
they comply with several requirements in the Code. REITs are subject to
substantial cash flow dependency, defaults by borrowers, self-liquidation,
and the risk of failing to qualify for tax-free pass-through of income under
the Code, and/or to maintain exemptions from the 1940 Act.
Foreign Securities
Each Series may invest up to 25% of its assets in foreign securities. Foreign
markets may be more volatile than U.S. markets. Such investments involve
sovereign risk in addition to the normal risks associated with American
securities. These risks include political risks, foreign taxes and exchange
controls and currency fluctuations. For example, foreign portfolio investments
may fluctuate in value due to changes in currency rates (i.e., the value of
foreign investments would increase with a fall in the value of the dollar, and
decrease with a rise in the value of the dollar) and exchange control
regulations apart from market fluctuations. A Series may also experience
delays in foreign securities settlement.
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).
Investors should be aware that there are costs and risks associated with such
currency transactions. A Series may enter into forward contracts to "lock in"
the price of a security it has agreed to purchase or sell, in terms of U.S.
dollars or other currencies in which the transaction will be consummated. When
Delaware Management believes that the currency of a particular foreign country
may suffer a decline against the U.S. dollar or against other currency, a Series
may enter 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 a Series' securities denominated in such foreign
currency. It is impossible to predict precisely the market value of portfolio
securities at the expiration of the forward contract. Accordingly, it may be
necessary for a Series to purchase or sell additional foreign currency on the
spot market (and bear the expense of such purchase or sale) if the market value
of the security is less than or greater than the amount of foreign currency a
Series is obligated to deliver.
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A Series may incur gains or losses from currency transactions. No type of
foreign currency transactions will eliminate fluctuations in the prices of a
Series' foreign securities or will prevent loss if the prices of such
securities should decline.
Options
To achieve the Series' objectives, the Series, except for the Cash
Reserve Series, intend to use certain hedging techniques which might not be
conveniently available to individuals.
These techniques will be used at Delaware Management'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. In purchasing put 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 Delaware Management's judgment is wrong and interest rates
fall or stock prices rise.
Closing transactions essentially let a Series offset a put option or
covered 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.
Each Series will use Exchange-traded options, but reserve the right to
use over-the-counter options upon written notice to shareholders. Certain
over-the-counter options may be illiquid.
The DelCap Series also may write call options and purchase put options on
stock indices and enter into closing transactions in connection therewith.
The Series will not engage in transactions on stock indices for speculative
purposes. Writing a call option on stock indices is similar to the writing 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 the DelCap Series.
Borrowings
Each Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Series will not borrow money in
excess of one-third of the value of their net assets. See PART B for
additional possible restrictions on borrowing. The Series have no intention
of increasing their net income through borrowing. Any borrowing will be done
from a bank and, to the extent that such borrowing exceeds 5% of the value of
the Series' net assets, asset coverage of at least 300% is required. In the
event that such asset coverage shall at any time fall below 300%, the Series
shall, within three days thereafter (not including Sunday or holidays) or
such longer period as the U.S. Securities and Exchange Commission may
prescribe by rules and regulations, reduce the amount of their borrowings to
an extent that the asset coverage of such borrowings shall be at least 300%.
The Series will not 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.
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Repurchase Agreements
The Series may also use repurchase agreements which are at least 102%
collateralized by U.S. government securities. Each Series may enter into
repurchase agreements with broker/dealers or banks which are deemed
creditworthy by Delaware Management 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 debt security and the
seller agrees to repurchase the obligation 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, except for the Cash Reserve 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 Delaware Management,
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 Delaware Management.
Liquidity and Rule 144A Securities
In order to assure that each Series has sufficient liquidity, as a matter
of fundamental policy, no Series may invest more than 10% of its net assets
in illiquid assets, including restricted securities or repurchase agreements
maturing in more than seven days.
* * *
Each Series' investment objective, the Fund's designation as an open-end
investment company, each Series' designation as a diversified fund, and their
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
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assets of variable contracts held in the Portfolios of the Fund. The Code
provides that a variable contract shall not be treated as an annuity contract
or life insurance for any period (and any subsequent period) for which the
investments are not, in accordance with regulations prescribed by the United
States Treasury Department ("Treasury Department"), adequately diversified.
Disqualification of the variable contract would result in the imposition of
federal income tax to the contract owner with respect to earnings allocable
to the contract prior to distributions under the contract (e.g.,
withdrawals). The Code contains a safe harbor provision which provides that
variable contracts meet the diversification requirements if, as of the close
of each quarter, the underlying assets meet the diversification standards for
a regulated investment company and no more than 55 percent of the total
assets consist of cash, cash items, U.S. government securities and securities
of other regulated investment companies.
Treasury Department Regulations (Treas. Reg. Section 1.817-5) provide that
a fund will be deemed to be considered adequately diversified if (i) no more
than 55 percent of the value of the total assets of the fund is represented by
any one investment; (ii) no more than 70 percent of such value is represented
by any two investments; (iii) no more than 80 percent of such value is
represented by any three investments; and (iv) no more than 90 percent of such
value is represented by any four investments.
The Technical and Miscellaneous Revenue Act of 1988 provides that for
purposes of determining whether or not the diversification standards imposed
on the underlying assets of variable contracts by Section 817(h) of the Code
have been met, "each United States government agency or instrumentality shall
be treated as a separate issuer."
Each Series of the Fund will be managed in such a manner as to comply with
these diversification requirements.
Ratings
APPENDIX A of PART B describes the ratings of S&P, Moody's, Duff and
Phelps, Inc. and Fitch Investors Service, Inc., four of the better-known
statistical rating organizations. APPENDIX A to this PROSPECTUS includes
additional information concerning the ratings of securities in the Delchester
Series.
APPENDIX A -- RATINGS
The Delchester Series' assets are invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds. These
credit ratings evaluate only the safety of principal and interest and do not
consider the market value risk associated with high-yield securities. The
table set forth below shows the percentage of the Series' securities included
in each of the specified rating categories and shows the percentage of the
Series' assets held in United States government securities. Certain securities
may not be rated because the rating agencies were either not asked to provide
ratings (e.g., many issuers of privately placed bonds do not seek ratings) or
because the rating agencies declined to provide a rating for some reason, such
as insufficient data. The table below shows the percentage of the Series'
securities which are not rated. The information contained in the table was
prepared based on a dollar weighted average of the Series' portfolio
composition based on month end data for the Series' year ended December 31,
1997. The paragraphs following the table contain excerpts from Moody's and
S&P's ratings descriptions.
Rating Moody's Average Weighted
and/or Percentage of
S&P Portfolio
---------------------------------------
United States
Treasury Obligations 12.50%
Aaa/AAA --
Aa/AA --
A/A --
Baa/BBB --
Ba/BB 3.73%
B/B 75.18%
Caa/CCC 1.51%
Not Rated 7.08%
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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.
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