<PAGE>
PROSPECTUS
MAY 1, 1998
DELAWARE GROUP PREMIUM FUND, INC.
SMALL CAP VALUE SERIES
1818 Market Street, Philadelphia, PA 19103
This Prospectus describes the Small Cap Value Series (the "Series") of
Delaware Group Premium Fund, Inc. (the "Fund"). The Series' objective is to
seek capital appreciation by investing primarily in small cap common stocks
whose market value appears low relative to their underlying value or future
earnings and growth potential. Emphasis will also be placed on securities of
companies that may be temporarily out of favor or whose value is not yet
recognized by the market. This Series has the same objective and investment
disciplines as Small Cap Value Fund of Delaware Group Equity Funds V, Inc., a
separate fund in the Delaware Investments family.
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 objective and principal policies of the
Series are described below. See Investment Objective and Policies. Although
the Series will constantly strive to attain its objective, there can be no
assurance that it will be attained.
This Prospectus sets forth information that you should read and consider
before you invest. Please retain it for future reference. A Statement of
Additional Information ("Part B" of the Fund's registration statement), dated
May 1, 1998 as it may be amended from time to time, contains additional
information about the Fund and has been filed with the Securities and
Exchange Commission ("SEC"). Part B is incorporated by reference into this Pro
spectus and is available, without charge, by writing to Delaware
Distributors, L.P. at the above address or by calling 1-800-523-1918. The SEC
also maintains a Web site (http://www.sec.gov) that contains Part B, material
incorporated by reference into the Fund's registration statement, and other
information regarding registrants that electronically file with the SEC. The
Series' financial statements appear in the Fund's Annual Report, which will
accompany any response to requests for Part B.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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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.
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TABLE OF CONTENTS
Cover Page............................................................. 1
Summary Information.................................................... 2
Financial Highlights................................................... 3
Investment Objective and Policies...................................... 4
Introduction....................................................... 4
Purchase and Redemption................................................ 5
Dividends and Distributions............................................ 5
Taxes.................................................................. 5
Calculation of Offering Price and Net Asset Value Per Share............ 6
Management of the Fund................................................. 6
Performance Information............................................ 7
Distribution and Service........................................... 7
Expenses........................................................... 8
Description of Fund Shares......................................... 8
Other Considerations................................................... 9
Appendix A--Ratings.................................................... 16
<PAGE>
SUMMARY INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
The Series' objective is to seek capital appreciation by investing
primarily in small cap common stocks whose market value appears low relative
to their underlying value or future earnings and growth potential. Emphasis
will also be placed on securities of companies that may be temporarily out of
favor or whose value is not yet recognized by the market. This Series has the
same objective and investment disciplines as Small Cap Value Fund of Delaware
Group Equity Funds V, Inc., a separate fund in the Delaware Investments
family. See Investment Objective and Policies.
SPECIAL CONSIDERATIONS AND RISK FACTORS
Prospective investors should consider a number of factors before
investing in the Series:
1. The 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 the securities of
United States companies and issuers. See Foreign Currency Transactions,
Foreign Securities and Foreign Currency Transactions and Special Risk
Considerations under Other Considerations.
2. The Series has the right to engage in certain options transactions for
hedging purposes to counterbalance portfolio volatility. The Series does 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 Series also may engage in certain hedging transactions involving
futures contracts and options on such contracts, and in connection with such
activities will maintain certain collateral in special accounts established with
or on behalf of futures commission merchants. While the Series does not engage
in such transactions for speculative purposes, there are risks which result from
the use of these instruments which an investor should consider. The Fund is not
registered as a commodity pool operator nor is Delaware Management or the
Sub-Adviser registered as commodities trading advisers in reliance upon various
exemptive rules. See Futures Contracts and Options on Futures Contracts under
Other Considerations.
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 the 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. Neither 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. The Series operates as a
diversified fund as defined by the Investment Company Act of 1940 (the "1940
Act").
2
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FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements
of Delaware Group Premium Fund, Inc. and have been audited by Ernst & Young
LLP, independent auditors. The data should be read in conjunction with the
financial statements, related notes, and the report of Ernst & Young LLP, all
of which are incorporated by reference into Part B. Further information about
the 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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SMALL CAP VALUE SERIES
-------------------------------------------------------------------
12/27/93(1)
YEAR ENDED THROUGH
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $14.500 $12.470 $10.290 $10.210 $10.000
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ 0.122 0.112 0.192 0.148 none
Net realized and unrealized gain (loss) on
investments................................ 4.338 2.548 2.208 (0.068) 0.210
------- ------- ------- ------- -------
Total from investment operations........... 4.460 2.660 2.400 0.080 0.210
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income......... (0.110) (0.180) (0.150) none none
Distributions from net realized gain
on investment transactions................. (0.930) (0.450) (0.070) none none
------- ------- ------- ------- -------
Total dividends and distributions............ (1.040) (0.630) (0.220) none none
------- ------- ------- ------- -------
Net asset value, end of period............... $17.920 $14.500 $12.470 $10.290 $10.210
======= ======= ======= ======= =======
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TOTAL RETURN(2).............................. 32.91%(3) 22.55%(3) 23.85%(3) 0.78%(3) 2.10%(3)
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RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted)...... $84,071 $23,683 $11,929 $6,291 $210
Ratio of expenses to average net assets...... 0.80% 0.80% 0.80% 0.80% (4)
Ratio of expenses to average net assets
prior to expense limitation................ 0.90% 0.99% 0.96% 1.41% (4)
Ratio of net investment income to
average net assets......................... 1.24% 1.28% 2.13% 2.62% (4)
Ratio of net investment income to average
net assets prior to expense limitation..... 1.14% 1.09% 1.97% 2.01% (4)
Portfolio turnover........................... 41% 84% 71% 26% (4)
Average commission rate paid(5).............. $0.0600 $0.0600 N/A N/A N/A
</TABLE>
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(1) Date of initial public offering; total return has not been annualized.
Total return for this short of a time period may not be representative of
longer term results.
(2) Total return does not reflect expenses that apply to the Separate Accounts
or to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects the expense limitation referenced in Expenses under
Management of the Fund.
(4) The ratios of expenses and net investment income to average net assets and
portfolio turnover have been omitted as management believes that such ratios
are not meaningful due to the limited net assets of this Series.
(5) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged.
3
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INVESTMENT OBJECTIVE AND POLICIES
INTRODUCTION
The Fund, a corporation organized in Maryland on February 19, 1987, is an
open-end management investment company offering various series of shares.
The investment objective of the Series is a fundamental policy and cannot
be changed without approval by the holders of a "majority" of the Series'
outstanding shares, as defined in the 1940 Act. Although the 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 the Series, see Other Considerations for investment
techniques available to the Series. Part B provides more information on the
Series' investment policies and restrictions.
The objective of the Series is capital appreciation. The strategy will be to
invest primarily in common stocks and issues convertible into common stocks
which, in the opinion of Delaware Management, have market values which appear
low relative to their underlying value or future earnings and growth potential.
Securities will be purchased that Delaware Management believes to be
undervalued in relation to asset value or long-term earning power of the
companies. Delaware Management may also invest in securities of companies
where current or anticipated favorable changes within a company provide an
opportunity for capital appreciation. Delaware Management's emphasis will be
on securities of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
While not a fundamental policy, under normal market conditions the Fund
intends to invest 65% of its net assets in securities issued by small cap
companies, defined as those currently having a market capitalization
generally of less than $1.5 billion at the time of purchase. As a general
matter, small cap companies may have more limited product lines, markets and
financial resources than large cap companies. In addition, securities of
small cap companies, generally, may trade less frequently (and with a lesser
volume), may be more volatile and may be somewhat less liquid than securities
issued by larger capitalization companies.
Delaware Management will consider the financial strength of the company, the
nature of its management and any developments affecting the security, the
company or the industry. Securities may be out of favor due to a variety of
factors, such as lack of an institutional following, or unfavorable developments
affecting the issuer of the securities, such as poor earning reports, dividend
reductions or cyclical economic or business conditions. Other securities
considered by Delaware Management would include those of companies where current
or anticipated favorable changes such as a new product or service, technological
breakthrough, management change, projected takeovers, changes in capitalization
or redefinition of future corporate operations provide an oppor tunity for
capital appreciation. Delaware Management will also consider securities where
trading patterns suggest that significant positions are being accumulated by
officers of the company, outside investors or the company itself. Delaware
Management feels it may uncover situations where those who have a vested
interest in the company feel the securities are undervalued and have
appreciation potential.
If Delaware Management believes that market conditions warrant, the Series
may employ options strategies. Also, on a temporary, defensive basis, the Series
may invest in fixed-income obligations.
INVESTMENT STRATEGY
While management believes that the Series' objective may best be attained
by investing in common stocks, the Series may also invest in other securities
including, but not limited to, convertible securities, warrants, preferred
stocks, bonds and foreign securities. Although it is expected to receive
relatively less emphasis, the Series may also invest in fixed-income securities
without regard to a minimum grade level in pursuit of its objective where there
are favorable changes in a company's earnings or growth potential or where
general economic conditions and the interest rate environment provide an
opportunity for declining interest rates and consequent appreciation in these
securities. The strategies employed are dependent upon the judgment of Delaware
Management.
In investing for capital appreciation, the Series may hold securities for
any period of time. The degree of portfolio activity will affect brokerage
costs of the Series.
Should the market warrant a temporary, defensive approach, the Series may
also invest in fixed-income obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, as well as money market
instruments, and corporate bonds rated A or above by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P").
The Series may write covered call options on individual issues as well as
write call options on stock indices. The Series may also purchase put options
on individual issues and on stock indices. Delaware Management will employ
these techniques in an attempt to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets. The ability to hedge effectively using options on stock indices will
depend, in part, on the correlation between the composition of the index and
the Series' portfolio as well as the price movement of individual securities.
The Series does not currently intend to write or purchase stock index options.
4
<PAGE>
While there is no limit on the amount of the Series' assets which may be
invested in covered call options, the Series will not invest more than 2% of its
net assets in put options. The Series will only use Exchange-traded options. See
Other Considerations -- Options, below.
The Series may enter into futures contracts and buy and sell options on
futures contracts relating to securities, securities indices or interest rates.
See Other Considerations -- Futures Contracts and Options on Futures Contracts,
below.
RISK FACTORS
The Series may be suitable for the patient investor interested in
long-term capital appreciation. The investor should be willing to accept the
risks associated with investments in domestic and international securities (and
currency hedging transactions in connection therewith), as these investments may
be speculative and subject the Series to an additional risk. See Foreign
Securities and Foreign Currency Transactions under Other Considerations.
Investing in a company temporarily out of favor may involve the risk that the
anticipated favorable change may not occur and, as a result, that security may
decline in value or not appreciate as expected. Although it will receive
relatively minor emphasis in pursuit of its objective, the Series may also
purchase, at times, lower rated or unrated corporate bonds without regard to a
grade minimum, which may be considered speculative and may increase the
portfolio's credit risk. Although the Series will not ordinarily purchase bonds
rated below B by Moody's or S&P (i.e., high-yield, high risk fixed-income
securities), it may do so if Delaware Management believes that capital
appreciation is likely. The Series will not invest more than 25% of its net
assets in bonds rated below B. Investing in such lower rated debt securities may
involve certain risks not typically associated with higher rated securities.
Such bonds are considered very speculative and may possibly be in default or
have interest payments in arrears. See High-Yield, High Risk Securities under
Other Considerations for additional information on the risks associated with
such securities.
Net asset value may fluctuate at times in response to market conditions
and, as a result, the Series is not appropriate for a short-term investor.
This Series is designed primarily for capital appreciation. Providing
current income is not an objective of the Series. Any income produced is
expected to be minimal.
* * *
Part B contains other more specific investment restrictions and Appendix
A to this Prospectus contains descriptions of Moody's and S&P ratings.
PURCHASE AND REDEMPTION
Shares are sold only to separate accounts of life companies at net asset
value. (See Calculation of Offering Price and Net Asset Value Per Share.)
Redemptions will be effected by the separate accounts at the net asset value
next determined after receipt of the order to meet obligations under the
variable contracts. Contract owners do not deal directly with the Fund with
respect to the acquisition or redemption of Fund shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund will make payments from the Series' net income and net realized
securities profits, if any, once a year. Distributions from net realized
securities profits normally will be distributed following the close of the
fiscal year. The Fund's fiscal year ends on December 31.
All dividends and distributions are automatically reinvested in
additional Series shares.
TAXES
The Series has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). As such, the 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 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.
5
<PAGE>
CALCULATION OF OFFERING PRICE AND NET ASSET VALUE PER SHARE
The offering price is the net asset value ("NAV") per share next
determined after an order is received. The offering price and net asset value
are computed as of the close of regular trading on the New York Stock
Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is
open.
The Series' NAV per share is computed by adding the value of all
securities and other assets in the Series' portfolio, deducting any
liabilities of the Series (expenses and fees are accrued daily) and dividing
by the number of the Series' shares outstanding. The valuation criteria set
forth below apply equally to securities purchased in reliance upon Rule 144A
of the 1933 Act. In determining the 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 and, in some cases, convertible
securities) are priced at fair value by an independent pricing service using
methods approved by the Fund's Board of Directors. Short-term investments
having a maturity of less than 60 days are valued at amortized cost, which
approximates market value. All other securities are valued at their fair
value as determined in good faith and in a method approved by the Fund's
Board of Directors.
To the extent the Series holds foreign securities that are listed
primarily on foreign exchanges which trade on days when the New York Stock
Exchange is closed (such as U.S. Holidays and Saturdays), the net asset value
of the Series could be affected by 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 the
Series.
Delaware Management and its predecessors have been managing the funds in
Delaware Investments since 1938. On December 31, 1997, Delaware Management
and its affiliates within Delaware Investments, including Delaware
International, were supervising in the aggregate more than $40 billion in
assets in the various institutional or separately managed (approximately
$24,040,760,000) and investment company (approximately $16,482,523,000)
accounts.
Delaware Management is a series of Delaware Management Business Trust.
Delaware Management changed its form of organization from a corporation to a
business trust on March 1, 1998. Delaware Management is an indirect, wholly
owned subsidiary of Delaware Management Holdings, Inc. ("DMH"). Delaware
International is also controlled by DMH through several subsidiaries. On
April 3, 1995, a merger between DMH and a wholly owned subsidiary of Lincoln
National Corporation ("Lincoln National") was completed. DMH, Delaware
Management and Delaware International are now indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National.
Lincoln National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services
industry, including insurance and investment management. In connection with
the merger, a new Investment Management Agreement between the Fund on behalf
of the Series and Delaware Management was executed following shareholder
approval. Delaware Management's address is One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103.
Delaware Management manages the Series' portfolio and makes investment
decisions which are implemented by the Fund's Trading Department. For these
services, Delaware Management is paid an annual fee equal 0.75% of the
average daily net assets of the Series.
See Expenses for a discussion of the voluntary waiver of its management
fee undertaken by Delaware Management. For the fiscal year ended December 31,
1997, the investment management fee, as a percentage of average daily net
assets, incurred by the Series was 0.75% and 0.65% was paid after the voluntary
waiver of fees by Delaware Management.
The directors of the Fund annually review fees paid to Delaware Management.
6
<PAGE>
Beginning in May 1997, Christopher S. Beck, Vice President/Senior Portfolio
Manager of the Fund, assumed primary responsibility for making day-to-day
investment decisions for the Series. Mr. Beck has been in the investment
business for 17 years, starting with Wilmington Trust in 1981. Later, he became
Director of Research at Cypress Capital Management in Wilmington and Chief
Investment Officer of the University of Delaware Endowment Fund. Prior to
joining the Delaware Investments in May 1997, he managed the Small Cap Fund
since October 1995 at Pitcairn Trust Company. He holds a B.S. from the
University of Delaware, an M.B.A. from Lehigh University and is a CFA
charterholder. In making investment decisions for the Series, Mr. Beck regularly
consults with Wayne A. Stork, Richard G. Unruh, Jr. and Andrea Giles. 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 the Delaware
Management and was named an Executive Vice President of Delaware Management in
1994. Ms. Giles, Research Analyst for the Fund, holds a BSAD from the
Massachusetts Institute of Technology and an MBA in Finance from Columbia
University. Prior to joining the Delaware Group in 1996, she was an account
officer in the Leveraged Capital Group with Citibank.
PORTFOLIO TRADING PRACTICES
The Series normally will not invest for short-term trading purposes.
However, the Series may sell securities without regard to the length of time
they have been held. Given the Series' investment objective, its annual
portfolio turnover rate may exceed 100%. A 100% turnover rate would occur if all
of the securities in the Series were sold and replaced within one year. The rate
of portfolio turnover is not a limiting factor when Delaware Management deems it
desirable to purchase or sell securities. High portfolio turnover (over 100%)
involves correspondingly greater brokerage commissions and other transaction
costs and may affect taxes payable by the Series' shareholders that are subject
to federal income taxes. The turnover rate may also be affected by cash
requirements from redemptions and repurchases of the Series' shares. The degree
of portfolio activity may affect brokerage costs of the Series and taxes payable
by shareholders that are subject to federal income taxes.
Best efforts are used to obtain the best available price and most favorable
execution for portfolio transactions. Orders may be placed with brokers or
dealers who provide brokerage and research services to Delaware Management or
their respective advisory clients. These services may be used by Delaware
Management in servicing any of its 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
From time to time, the Fund may quote the Series' total return performance
in advertising and other types of literature. Total return will be based on a
hypothetical $1,000 investment, reflecting the reinvestment of all distributions
at net asset value. Each presentation will include the average annual total
return for one-, five- and ten-year (or life of Series, if applicable) periods.
The Fund may also advertise aggregate and average total return information
concerning the Series over additional periods of time.
Because securities' prices fluctuate, investment results of the Series
will fluctuate and past performance should not be considered as a
representation of future results.
DISTRIBUTION AND SERVICE
The Distributor, Delaware Distributors, L.P., serves as the Fund's
national distributor under Distribution Agreement dated April 3, 1995 for the
Series. The Distributor bears all of the costs of promotion and distribution.
Delaware Service Company, Inc. (the "Transfer Agent") is the shareholder
servicing, dividend disbursing and transfer agent for the Series under the
Amended and Restated Shareholders Services Agreement dated May 1, 1998. The
Transfer Agent also provides accounting services to the Series pursuant to
the terms of a separate Fund Accounting Agreement.
The directors of the Fund annually review service fees paid to the
Distributor and Transfer Agent. The Distributor and the Transfer Agent are
indirect, wholly owned subsidiaries of DMH.
* * *
As with other mutual funds, financial and business organizations and
individuals around the world, the Series could be adversely affected if the
computer systems used by its service providers do not properly process and
calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Fund is taking steps to obtain
satisfactory assurances that the Series' major service providers are taking
steps reasonably designed to address the Year 2000 Problem with respect to the
computer systems that such service providers use. There can be no assurances
that these steps will be sufficient to avoid any adverse impact on the business
of the Series.
7
<PAGE>
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. The Series 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 the 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 the Series.
EXPENSES
The Series is responsible for all of its own expenses other than those
borne by Delaware Management under the Investment Management Agreement and
those borne by the Distributor under the Distribution Agreement.
Beginning May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of the Series to the extent necessary to ensure
that the Series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, do not exceed 0.85% of
average daily net assets through October 31, 1998.
Prior to May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of the Series to the extent necessary to ensure
that the Series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, did not exceed 0.80% of
average daily net assets from the commencement of operations through April
30, 1998. For the fiscal year ended December 31, 1997, the Series' ratio of
expenses to average daily net assets were 0.80%, reflecting the voluntary
waiver of fees and payment of expenses by Delaware Management. The ratio of
expenses to average daily net assets would have been 0.90% without the voluntary
waiver of fees and payment of expenses.
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, Inheiritage of Allmerica Life
Insurance and Annuity Company and Separate Accounts ABD, ABD2, QP and QPN of The
Travelers Life and Annuity Co. 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.
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. The Series is currently allocated fifty million
shares.
The Series' shares have equal voting rights and are equal in all other
respects. 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. Shareholders of the
Series are entitled to a pro-rata share of all dividends and distributions
arising from an investment in the 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 prospectus for the separate
account which invests in the Fund, the voting instructions received from
contract owners may be disregarded.
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OTHER CONSIDERATIONS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Series may invest in U.S. government securities and corporate debt
obligations on a when-issued or delayed delivery basis. Such transactions
involve commitments to buy a new issue with settlement up to 60 days later.
The average settlement date for when-issued or delayed delivery securities
purchased by the Series is generally between 30 and 45 days. During the time
between the commitment and settlement, the Series does not accrue interest,
but the market value of the bonds may fluctuate. This can result in the
Series' share value increasing or decreasing. The Series will not ordinarily
sell when-issued or delayed delivery securities prior to settlement. If the
Series invests in securities of this type, it will maintain a segregated
account to pay for them and mark the account to market daily.
HIGH-YIELD, HIGH RISK SECURITIES
Investing in so-called "high-yield" or "high risk" securities entails
certain risks, including the risk of loss of principal, which may be greater
than the risks involved in investment grade securities, and which should be
considered by investors contemplating an investment in the Series. Such
securities are sometimes issued by companies whose earnings at the time of
issuance are less than the projected debt service on the high-yield securities.
The risks include the following:
Youth and Volatility of the High-Yield Market -- Although the market for
high-yield securities 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 securities, 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
securities, an increase in the number of high-yield bond defaults and
corresponding volatility in the Series' net asset value.
The Series will not ordinarily purchase securities rated below B by Moody's
and S&P. However, it may do so if Delaware Management believes that capital
appreciation is likely. The Series will not invest more than 25% of its assets
in such securities.
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 such securities for regulatory, financial or other reasons, such as the
savings and loan crisis. A less liquid secondary market may have an adverse
effect 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. 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
deductibility 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
and could reduce the number of new high-yield securities being issued.
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FOREIGN SECURITIES AND FOREIGN CURRENCY TRANSACTIONS
The Series may invest up to 25% of its assets in securities of issuers
organized or having a majority of their assets in or deriving a majority of
their operating income outside the United States. In connection with
investments in foreign securities, the 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). The
Series will engage in these foreign currency transactions in order to
expedite settlement of portfolio transactions and to minimize currency value
fluctuations. Investing in foreign securities and, in conjunction therewith,
engaging in foreign currency transactions present special considerations not
presented by investments in securities issued by United States companies. See
Foreign Currency Transactions, below.
The risks involved in investing in foreign securities include the
possibility of expropriation, nationalization or confiscatory taxation, taxation
of income earned in foreign nations or other taxes imposed with respect to
investments in foreign nations, foreign exchange control (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability or diplomatic
developments which could affect investments in secur ities of issuers in those
nations. In addition, in many countries, there is less publicly available
information about issuers than is available in reports about companies in the
United States, and the information that is available is often of lesser quality
than information available on U.S. companies. Foreign companies are not subject
to uniform accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to United
States companies. Further, the Series may encounter difficulty or be unable to
pursue legal remedies and obtain judgments in foreign courts. Commission rates
on securities transactions in foreign countries, which are sometimes fixed
rather than subject to negotiation as in the United States, are likely to be
higher. Moreover, the settlement period of securities transactions in foreign
markets may be longer than in domestic markets. In many foreign countries, there
is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. The foreign securities markets of many of the countries in which the
Series may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
Emerging Markets. Compared to the United States and other developed
countries, emerging countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade a
small number of securities. Prices on these exchanges tend to be volatile and,
in the past, securities in these countries have offered greater potential for
gain (as well as loss) than securities of companies located in developed
countries. Further, investments by foreign investors (such as the Series) are
subject to a variety of restrictions in many emerging countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which the Series invests. In
addition, the repatriation of both investment income and capital from several
foreign countries is restricted and controlled under certain regulations,
including, in some cases, the need for certain governmental consents. Although
these restrictions may in the future make it undesirable to invest in emerging
countries, Delaware Management does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which the Series may invest have historically experienced and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctu ations or currency depreciation, large amounts of external
debt, balance of payments and trade difficulties and extreme poverty and
unemployment. Additional factors which may influence the ability or willingness
to service debt include, but are not limited to, a country's cash flow
situation, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of its debt service burden to the economy as a whole,
its government's policy towards the International Monetary Fund, the World Bank
and other international agencies and the political constraints to which a
government debtor may be subject.
With respect to investment in debt issues of foreign governments, including
Brady Bonds, the ability of a foreign government or government-related issuer to
make timely and ultimate payments on its external debt obligations will also be
strongly influenced by the issuer's balance of payments, including export
performance, its access to international credits and investments, fluctuations
in interest rates and the extent of its foreign reserves. A country whose
exports are concentrated in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to fluctuations in international
prices of these commodities or imports. To the extent that a country receives
payment for its exports in currencies other than dollars, its ability to make
debt payments denominated in dollars could be adversely affected.
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The issuers of the emerging market country government and government-related
high yield securities in which the Series may invest have in the past
experienced substantial difficulties in servicing their external debt
obligations, which have led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance interest
payments. Holders of certain foreign government and government-related high
yield securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign government and
government-related high yield securities in which the Series may invest will not
be subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
Foreign Currency Transactions. The Series may also purchase options and
forward contracts in foreign currency for hedging purposes in connection with
such foreign securities transactions. As in the case of other kinds of
options, the writing of an option on foreign currency will constitute only a
partial hedge, up to the amount of the premium received, and the Series could
be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on
foreign currency may constitute an effective hedge against fluctuations in
exchange rates, although, in the event of rate movements adverse to the
Series' position, the Series may forfeit the entire amount of the premium
plus related transaction costs.
Although the Series values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Series will, however, from time to time, purchase or sell
foreign currencies and/or engage in forward foreign currency transactions in
order to expedite settlement of transactions and to minimize currency value
fluctuations. The Series may conduct its 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). The Series will convert currency on a spot basis from time
to time, and investors should be aware of the costs of currency conversion.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. The 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. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the underlying
security transaction, the Series will be able to protect itself against a
possible loss resulting from an adverse change in currency exchange rates during
the period between the date the security is purchased or sold and the date on
which payment is made or received.
For example, when Delaware Management believes that the currency of a
particular foreign country may suffer a significant decline against the U.S.
dollar or against another currency, the 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 the Series'
securities denominated in such foreign currency. The Series will not enter into
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Series to deliver an amount of
foreign currency in excess of the value of the Series' securities or other
assets denominated in that currency.
The Series may enter into forward contracts to hedge the currency risk
associated with the purchase of individual securities denominated in
particular currencies. In the alternative, the Series may also engage in
currency "cross hedging" when, in the opinion of Delaware Management, the
historical relationship among foreign currencies suggests that the Series may
achieve the same protection for a foreign security at reduced cost and/or
administrative burden through the use of a forward contract relating to a
currency other than the U.S. dollar or the foreign currency in which the
security is denominated.
At the maturity of a forward contract, the Series may either sell the
portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency. The Series may realize a gain or loss
from currency transactions.
With respect to forward foreign currency contracts, the precise matching
of forward contract amounts and the value of the securities involved is
generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and
the date it matures. The projection of short-term currency strategy is highly
uncertain.
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It is impossible to forecast the market value of portfolio securities at the
expiration of the contract. Accordingly, it may be necessary for the Series to
purchase additional foreign currency on the spot market (and bear the expense of
such purchase) if the market value of the security is less than the amount of
foreign currency the Series is obligated to deliver (and if a decision is made
to sell the security and make delivery of the foreign currency). Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds the
amount of foreign currency the Series is obligated to deliver.
Depositary Receipts. The Series may make foreign investments through the
purchase and sale of sponsored or unsponsored American, European and Global
Depositary Receipts ("Depositary Receipts"). Depositary Receipts are receipts
typically issued by a U.S. or foreign bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. "Sponsored"
Depositary Receipts are issued jointly by the issuer of the underlying security
and a depository, whereas "unsponsored" Depositary Receipts are issued without
participation of the issuer of the deposited security. Holders of unsponsored
Depositary Receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts in
respect of the deposited securities. Therefore, there may not be a correlation
between information concerning the issuer of the security and the market value
of an unsponsored Depositary Receipt.
OPTIONS
To achieve the Series' objective, the Series intends 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 the 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 it may invest.
Purchasing a put option gives the 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 the 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.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed upon date. The
advantage is that the purchaser may hedge against an increase in the price of
securities it ultimately wishes to buy.
Closing transactions essentially let the Series offset a put option or call
option prior to its exercise or expiration. If it cannot effect a closing
transaction, it may have to hold a security it would otherwise sell with a
potential decline in net asset value, or deliver a security it might want to
hold.
The Series will use Exchange-traded options, but reserves the right to use
over-the-counter options upon written notice to shareholders.
The 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 or purchasing a call option on stock indices is similar to
the writing or purchasing of a call option on an individual stock. Purchasing
a protective put option on stock indices is similar to the purchase of
protective puts on an individual stock. Stock indices used will include, but
will not be limited to, the S&P 100 and the S&P Over-the-Counter 250. The
ability to hedge effectively using options on stock indices will depend on
the degree to which price movements in the underlying index correlate with price
movements in the portfolio securities of, as the case may be, the Series.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
For hedging purposes, the Series may enter into futures contracts relating
to securities, securities indices or interest rates.
A futures contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement at a stated
time in the future for a fixed price. By its terms, a futures contract
provides for a specified settlement date on which, in the case of the
majority of interest rate and foreign currency futures contracts, the
fixed-income securities or currency underlying the contract are delivered by
the seller and paid for by the purchaser, or on which, in the case of
securities index futures contracts and certain interest rate and foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures contracts differ from options in
that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. In addition, futures contracts
call for settlement only on the expiration date, and cannot be "exercised" at
any other time during their term.
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The purchase or sale of a futures contract also differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which varies
but may be as low as 5% or less of the value of the contract, must be deposited
with or on behalf of the broker as "initial margin" as a good faith deposit.
Subsequent payments to and from the broker, referred to as "variation margin,"
are made on a daily basis as the value of the index or instrument underlying the
futures contract fluctuates, making positions in the futures contract more or
less valuable, a process known as "marking to the market."
A futures contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the Commodity Futures Trading Commission
for the trading of such contract, and only through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. The contract
market clearing house guarantees the performance of each party to a futures
contract, by in effect taking the opposite side of such contract. At any time
prior to the expiration of a futures contract, a trader may elect to close
out its position by taking an opposite position on the contract market on
which the position was entered into, subject to the availability of a
secondary market, which will operate to terminate the initial position. At
that time, a final determination of variation margin is made and any loss
experienced by the trader is required to be paid to the contract market
clearing house while any profit due to the trader must be delivered to it.
Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, U.S. Treasury
Notes, GNMA modified pass-through mortgage-backed securities, U.S. Treasury
Bills, bank certificates of deposit and commercial paper. In addition, interest
rate futures contracts include contracts on indexes of municipal securities.
Foreign currency futures contracts currently are traded on the British pound,
Canadian dollar, Japanese yen, Swiss franc, German mark and on Eurodollar
deposits.
A securities index or municipal bond index futures contract provides for
the making and acceptance of a cash settlement in much the same manner as the
settlement of an option on a securities index. The types of indexes underlying
securities index futures contracts are essentially the same as those underlying
securities index options, as described above. The index underlying a municipal
bond index futures contract is a broad based index of municipal securities
designed to reflect movements in the municipal securities market as a whole. The
index assigns weighted values to the securities included in the index and its
composition is changed periodically.
The Series may also purchase and write options on the types of futures
contracts the Series could invest in.
A call option on a futures contract provides the holder with the right to
purchase, or enter into a "long" position in, the underlying futures contract. A
put option on a futures contract provides the holder with the right to sell, or
enter into a "short" position in, the underlying futures contract. In both
cases, the option provides for a fixed exercise price up to a stated expiration
date. Upon exercise of the option by the holder, the contract market clearing
house establishes a corresponding short position for the writer of the option,
in the case of a call option, or a corresponding long position in the case of a
put option and the writer delivers to the holder the accumulated balance in the
writer's margin account which represents the amount by which the market price of
the futures contract at exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. In the event that an option written by the Series is exercised, the
Series will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation market deposits. In addition, the writer
of an option on a futures contract, unlike the holder, is subject to initial and
variation margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
An option, whether based on a futures contract, a securities index, a
security or foreign currency, becomes worthless to the holder when it
expires. Upon exercise of an option, the exchange or contract market clearing
house assigns exercise notices on a random basis to those of its members
which have written options of the same series and with the same expiration
date. A brokerage firm receiving such notices then assigns them on a random
basis to those of its customers which have written options of the same series
and expiration date. A writer therefore has no control over whether an option
will be exercised against it, nor over the timing of such exercise.
To the extent that interest or exchange rates or securities prices move
in an unexpected direction, the Series may not achieve the anticipated
benefits of investing in futures contracts and options thereon, or may
realize a loss. To the extent that the Series purchases an option on a
futures contract and fails to exercise the option prior to the exercise date,
it will suffer a loss of the premium paid. Further, the possible lack of a
secondary market could prevent the Series from closing out its positions
relating to futures.
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RISKS OF TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS
The use of futures contracts, options on futures contracts, forward
contracts and certain options for hedging and other non-speculative purposes as
described above involves certain risks. For example, a lack of correlation
between price changes of an option or futures contract and the assets being
hedged could render the Series' hedging strategy unsuccessful and could result
in losses. The same results could occur if movements of foreign currencies do
not correlate as expected by the investment adviser at a time when the Series is
using a hedging instrument denominated in one foreign currency to protect the
value of a security denominated in a second foreign currency against changes
caused by fluctuations in the exchange rate for the dollar and the second
currency. If the direction of securities prices, interest rates or foreign
currency prices is incorrectly predicted, the Series will be in a worse position
than if such transactions had not been entered into. In addition, since there
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, the Series may be required to maintain a position (and in the
case of written options may be required to continue to hold the securities used
as cover) until exercise or expiration, which could result in losses. Further,
options and futures contracts on foreign currencies and forward contracts entail
particular risks related to conditions affecting the underlying currency.
Over-the-counter transactions in options and forward contracts also involve
risks arising from the lack of an organized exchange trading environment.
BORROWINGS
The 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 its net assets. See Part B for additional
possible restrictions on borrowing. The Series has no intention of increasing
its 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 its 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
its net assets, or issue senior securities as defined in the 1940 Act, except
for notes to banks. Investment securities will not be purchased while the Series
has an outstanding borrowing.
REPURCHASE AGREEMENTS
The Series may also use repurchase agreements which are at least 102%
collateralized by U.S. government. The 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 security and the seller agrees to repurchase
the security at a future time and set price, thereby determining the yield
during the purchaser's holding period. The value of the securities subject to
the repurchase agreement is marked to market daily. In the event of a bankruptcy
or other default of the seller, the Series could experience delays and expenses
in liquidating the underlying securities.
The funds in Delaware Investments 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. The
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
The 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 the 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, the 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 the Series has sufficient liquidity, the Series
may not invest more than 10% of its net assets in illiquid assets. With respect
to the Series and subject to the following paragraphs, this policy shall not
limit the acquisition of securities purchased in reliance upon Rule 144A of the
Securities Act of 1933 ("1933 Act"). Rule 144A permits many privately placed and
legally restricted securities to be freely traded among certain institutional
buyers such as the Series. Investing in Rule 144A Securities could have the
effect of increasing the level of illiquidity of the Series to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
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While maintaining oversight, the Board of Directors has delegated to
Delaware Management the day-to-day functions of determining whether or not
individual Rule 144A Securities are liquid for purposes of the 10% limitation on
investments in illiquid assets. The Board has instructed Delaware Management to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; (iv) the nature of the security and the nature
of the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer).
If the Delaware Management determines that a Rule 144A Security which was
previously determined to be liquid is no longer liquid and, as a result, the
Series' holdings of illiquid securities exceed the Series' 10% limit on
investment in such securities, Delaware Management will determine what action
shall be taken to ensure that the Series continues to adhere to such limitation.
SPECIAL RISK CONSIDERATIONS
Shareholders should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in the Series, nor
can there be any assurance that the Series' investment objective will be
attained.
* * *
The Series' investment objective, the Fund's designation as an open-end
investment company, the Series' designation as a diversified fund, and certain
other policies of the Series 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 the 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 the
Series' outstanding voting securities. Pa rt B lists other more specific
investment restrictions of the Series which may not be changed without a
majority shareholder vote. A brief discussion of those factors that materially
affected the Series' performance during its most recently completed fiscal year
appears in the Series' Annual Report. The remaining investment policies are not
fundamental and may be changed by the Board of Directors of the Fund without a
shareholder vote.
DIVERSIFICATION
The Fund was established as the underlying investment for variable contracts
issued by life companies. Section 817(h) of the Internal Revenue Code of 1986,
as amended (the "Code"), imposes certain diversification standards on the
underlying assets of variable contracts held in the Portfolios of the Fund. The
Code provides that a variable contract shall not be treated as an annuity
contract or life insurance for any period (and any subsequent period) for which
the investments are not, in accordance with regulations prescribed by the United
States Treasury Department ("Treasury Department"), adequately diversified.
Disqualification of the variable contract would result in the imposition of
federal income tax to the contract owner with respect to earnings allocable to
the contract prior to distributions under the contract (e.g., withdrawals). The
Code contains a safe harbor provision which provides that variable contracts
meet the diversification requirements if, as of the close of each quarter, the
underlyi ng 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."
The Series will be managed in such a manner as to comply with these
diversification requirements.
15
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APPENDIX A -- RATINGS
General Rating Information
BONDS
Excerpts from Moody's description of its bond ratings:
Aaa--judged to be the best quality. They carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations; Baa--considered
as medium grade obligations. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; Ba--judged to
have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B--generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small; Caa--are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest; Ca--represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C--the lowest
rated class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Excerpts from S&P's description of its bond ratings:
AAA--highest grade obligations. They possess the ultimate degree of protection
as to principal and interest; AA--also qualify as high grade obligations, and in
the majority of instances differ from AAA issues only in a small degree;
A--strong ability to pay interest and repay principal although more susceptible
to changes in circumstances; BBB--regarded as having an adequate capacity to pay
interest and repay principal; BB, B, CCC, CC--regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions; C--reserved for income bonds on which no interest is being paid;
D--in default, and payment of interest and/or repayment of principal is in
arrears.
COMMERCIAL PAPER
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing
the highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
16
PROSPECTUS
MAY 1, 1998
DELAWARE GROUP PREMIUM FUND, INC.
REIT Series
1818 Market Street, Philadelphia, PA 19103
This Prospectus describes the REIT Series (the "Series") of Delaware
Group Premium Fund, Inc. (the "Fund"). The Series' objective is to seek to
achieve maximum long-term total return. Capital appreciation is a secondary
objective. It seeks to achieve its objectives by investing in securities of
companies primarily engaged in the real estate industry. This Series has the
same objective and investment discipline as The Real Estate Investment Trust
Portfolio and The Real Estate Investment Trust Portfolio II of Delaware Pooled
Trust, Inc., separate funds in the Delaware Investments family, which also
invest in securities of companies primarily engaged in the real estate industry.
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 objective and principal policies of the Series are described
below. See Investment Objective and Policies. Although the Series will
constantly strive to attain its objective, there can be no assurance that it
will be attained.
This Prospectus sets forth information that you should read and
consider before you invest. Please retain it for future reference. A Statement
of Additional Information ("Part B" of the Fund's registration statement), dated
May 1, 1998 as it may be amended from time to time, contains additional
information about the Fund and has been filed with the Securities and Exchange
Commission ("SEC"). Part B is incorporated by reference into this Prospectus and
is available, without charge, by writing to Delaware Distributors, L.P. at the
above address or by calling 1-800-523-1918. The SEC also maintains a Web site
(http://www.sec.gov) that contains Part B, material incorporated by reference
into the Fund's registration statement, and other information regarding
registrants that electronically file with the SEC. The Series' financial
statements will 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.
TABLE OF CONTENTS
Cover Page................................................................1
Summary Information.......................................................2
Investment Objective and Policies.........................................3
Introduction.............................................................3
Purchase and Redemption...................................................5
Dividends and Distributions...............................................5
Taxes.....................................................................5
Calculation of Offering Price and Net Asset Value Per Share...............6
Management of the Fund....................................................6
Performance Information..................................................7
Distribution and Service.................................................7
Expenses.................................................................8
Description of Fund Shares...............................................8
Other Considerations......................................................8
Appendix A-Ratings.......................................................16
1
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SUMMARY INFORMATION
Investment Objective and Policies
The Series' objective is to seek to achieve maximum long-term total
return. Capital appreciation is a secondary objective. It seeks to achieve its
objectives by investing in securities of companies primarily engaged in the real
estate industry. This Series has the same objective and investment discipline as
The Real Estate Investment Trust Portfolio and The Real Estate Investment Trust
Portfolio II of Delaware Pooled Trust, Inc., separate funds in the Delaware
Investments family, which also invest in securities of companies primarily
engaged in the real estate industry.
See Investment Objective and Policies.
Special Considerations and Risk Factors
Prospective investors should consider a number of factors before
investing in the Series:
1. The Series concentrates its investments in the real estate industry,
so its net asset value can be expected to fluctuate in light of factors
affecting that industry and may fluctuate more widely than a portfolio that
invests in a broader range of industries. By investing primarily in securities
of REITs, the Series is also subject to interest rate risk.
2. The 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 the securities of United States companies
and issuers. See Foreign Currency Transactions, Foreign Securities and Foreign
Currency Transactions and Special Risk Considerations under Other
Considerations.
3. The Series has the right to engage in certain options transactions
for hedging purposes to counterbalance portfolio volatility. The Series does 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.
4. The Series also may engage in certain hedging transactions involving
futures contracts and options on such contracts, and in connection with such
activities will maintain certain collateral in special accounts established with
or on behalf of futures commission merchants. While the Series does not engage
in such transactions for speculative purposes, there are risks which result from
the use of these instruments which an investor should consider. The Fund is not
registered as a commodity pool operator nor is Delaware Management or the
Sub-Adviser registered as commodities trading advisers in reliance upon various
exemptive rules. See Futures Contracts and Options on Futures Contracts under
Other Considerations.
5. While the Series intends to seek to qualify as a "diversified"
investment company under provisions of Subchapter M of the Internal Revenue
Code, as amended (the "Code"), the Series will not be diversified under the
Investment Company Act of 1940 (the "1940 Act"). Thus, while at least 50% of the
Series' total assets will be represented by cash, cash items, U.S. government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Series' total assets, it will not satisfy the
1940 Act requirement in this respect, which applies that test to 75% of the
Series' assets. A nondiversified portfolio is believed to be subject to greater
risk because adverse effects on the portfolio's security holdings may affect a
larger portion of the overall assets.
Investment Managers and Sub-Advisers
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 the Series'
Investment Management Agreement.
Lincoln Investment Management, Inc. ("Lincoln" or "Sub-Adviser") serves
as Sub-Adviser to REIT Series. See Management of the Fund for information about
the Sub-Adviser and the fees payable under the Sub-Advisory 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. Neither 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. The Series operates as a
nondiversified fund as defined by the 1940 Act.
2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION
The Fund, a corporation organized in Maryland on February 19, 1987, is
an open-end management investment company offering various series of shares.
The objective of the Series is to seek to achieve maximum long-term
total return. Capital appreciation is a secondary objective. It seeks to achieve
its objectives by investing in securities of companies primarily engaged in the
real estate industry. The Series is considered a nondiversified investment
company under the 1940 Act and may be subject to greater risks than if the
Series were diversified. A nondiversified portfolio of securities is believed to
be subject to greater risk because adverse effects on the portfolio's security
holdings may affect a larger portion of its overall assets.
The Series may be suitable for the patient investor interested in
long-term capital appreciation with the potential for current income. Investors
should be willing to accept the risks associated with investments in a portfolio
of equity securities and convertible securities issued by domestic and foreign
issuers concentrated in the real estate industry. Because current income is a
secondary objective of the Series, the Series is not suitable as an investment
vehicle for investors whose primary investment goal is current income.
The risks associated with an investment in the Series are discussed
below under Special Risk Factors.
The investment objective of the Series is described below, together
with the policies the Series employs in its efforts to achieve its objective.
There is no assurance that the Series will attain its objective. The investment
objective of the Series is nonfundamental and may be changed without approval of
shareholders. Unless otherwise noted, the investment policies described below
are not fundamental policies and may be changed without shareholder approval.
Part B provides more information on the Series' investment policies and
restrictions.
Investment Strategy
The investment objective of the Series is to achieve maximum long-term
total return. Capital appreciation is a secondary objective. The Series seeks to
achieve its objectives by investing in securities of companies principally
engaged in the real estate industry. Under normal circumstances, at least 65% of
the Series' total assets will be invested in equity securities of real estate
investment trusts ("REITs"). The Series will operate as a nondiversified fund as
defined by the 1940 Act.
As a fundamental policy, the Series will concentrate its investments in
the real estate industry. The Series invests in equity securities of REITs and
other real estate industry operating companies ("REOCs"). For purposes of the
Series' investments, a REOC is a company that derives at least 50% of its gross
revenues or net profits from either (1) the ownership, development,
construction, financing, management or sale of commercial, industrial or
residential real estate, or (2) products or services related to the real estate
industry, such as building supplies or mortgage servicing. The Series'
investments in equity securities of REITs and REOCs may include, from time to
time, sponsored or unsponsored American Depositary Receipts ("ADRs") actively
traded in the United States. Equity securities for this purpose include common
stocks, securities convertible into common stocks and securities having common
stock characteristics, such as rights and warrants to purchase common stocks.
The Series may also purchase preferred stock. The Series may invest up to 10% of
its assets in foreign securities (not including ADRs), and in convertible
securities. See Foreign Securities and Foreign Currency Transactions and Conve
rtible, Debt and Non-Traditional Equity Securities under Other Considerations
for further discussion of these investment policies. The Series may also invest
in mortgage-backed securities. See Mortgage-Backed Securities under Oth er
Considerations for more detailed information about this investment policy.
The Series may hold cash or invest in short-term debt securities and
other money market instruments when, in Delaware Management's opinion, such
holdings are prudent given then prevailing market conditions. Except when
Delaware Management believes a temporary defensive approach is appropriate, the
Series will not hold more than 5% of its total assets in cash or such short-term
investments. All these short-term investments will be of the highest quality as
determined by a nationally-recognized statistical rating organization (e.g. AAA
by Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or be of comparable quality as determined by Delaware
Management. See Other Considerations for further details concerning these and
other investment policies.
Although as a fundamental policy the Series does not invest directly in
real estate, the Series does invest primarily in REITs, and may purchase equity
securities of REOCs, as well as own real estate directly as a result of a
default on securities the Series owns. Thus, because the Series concentrates its
investments in the real estate industry, an investment in the Series may be
subject to certain risks associated with direct ownership of real estate and
with the real estate industry in general. These risks include, among others:
possible declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition;
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties resulting from,
environmental problems; casualty for condemnation losses, uninsured damages from
floods, earthquakes or other natural disasters; limitations on and variations in
rents; and changes in interest rates.
3
<PAGE>
The Series may invest without limitation in shares of 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 such as the Series, REITs are not taxed on income distributed to
shareholders provided they comply with several requirements in the Internal
Revenue Code of 1986, as amended (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. By investing in REITs indirectly through
the Series, a shareholder bears not only a proportionate share of the expenses
of the Series, but also, indirectly, similar expenses of the REITs. For a
further discussion of the risks presented by investing in REITs, see Other
Considerations--REITs.
While the Series does not intend to invest directly in real estate, the
Series could, under certain circumstances, own real estate directly as a result
of a default on securities that it owns. In addition, if the Series has rental
income or income from the direct disposition of real property, the receipt of
such income may adversely affect the Series' ability to retain its tax status as
a regulated investment company.
The Series may also, to a limited extent, enter into futures contracts
on stocks, purchase or sell options on such futures, engage in certain options
transactions on stocks and enter into closing transactions with respect to those
activities. However, these activities will not be entered into for speculative
purposes, but rather to hedge uninvested cash against movements in the prices of
securities in which the Series intends to invest. Such positions will generally
be eliminated when it becomes possible to invest in such securities. See Other
Considerations--Futures Contracts and Options on Futures Contracts and Options
for a further discussion of these investment policies.
In connection with the Series' ability to invest up to 10% of its total
assets in the securities of foreign issuers, currency considerations may present
risks if the Series holds international securities. Currency considerations
carry a special risk for a portfolio of international securities. In this
regard, the Series may actively carry on hedging activities, and may invest in
forward foreign currency exchange contracts to hedge currency risks associated
with the purchase of individual securities denominated in a particular currency.
See Other Considerations--Foreign Securities and Foreign Currency Transactions.
Delaware Management does not normally intend to respond to short-term
market fluctuations or to acquire securities for the purpose of short-term
trading; however, Delaware Management may take advantage of short-term
opportunities that are consistent with the Series' investment objectives. It is
anticipated that the annual turnover rate of the Series, under normal
circumstances, will generally not exceed 100%. See Portfo lio Trading Practices
under Management of the Fund.
Special Risk Factors
An investment in the Series entails certain risks and considerations
about which an investor should be aware.
The Series may invest up to 10% of its total assets in securities of
foreign issuers which normally are denominated in foreign currencies, and may
hold foreign currency directly. Investments in securities of non-United States
issuers which are generally denominated in foreign currencies involve certain
risk and opportunity considerations not typically associated with investing in
United States companies. Consequently, the Series may be affected by changes in
currency rates and exchange control regulations and may incur costs in
connection with conversions between currencies. To hedge this currency risk
associated with investments in non-U.S. dollar denominated securities, the
Series may invest in forward foreign currency contracts. Those activities pose
special risks which do not typically arise in connection with investments in
U.S. securities. In addition, the Series may engage in foreign currency options
and futures transactions. For a discussion of the risks associated with foreign
securities see Foreign Securities and Foreign Currency Transactions and for
those concerning these hedging instruments see Risks of Transactions IN Options,
Futures and Forward Contracts, both of which references appear under the heading
Other Considerations.
The Series may commit its assets eligible for foreign investment to
securities of issuers located in emerging markets. Investments in securities of
companies in emerging markets present a greater degree of risk than tends to be
the case for foreign investments in Western Europe and other developed markets.
Among other things, there is a greater possibility of expropriation,
nationalization, confiscatory taxation, income earned or other special taxes,
foreign exchange restrictions, limitations on the repatriation of income and
capital from investments, defaults in foreign government debt, and economic,
political or social instability. In addition, in many emerging markets, there is
substantially less publicly available information about issuers and the
information that is available tends to be of a lesser quality. Economic markets
and structures tend to be less mature and diverse and the securities markets
which are subject to less government regulation or supervision may also be
smaller, less liquid and subject to greater price volatility. See Other
Considerations--Foreign Securities and Foreign Currency Transactions for a more
extensive discussion of these and other factors.
4
<PAGE>
The foreign securities in which the Series may invest from time to time
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 may be significantly affected by such trading on days when
shareholders will have no access to the Series. See Calculation of Offering
Price and Net Asset Value Per Share.
The Series also may, under certain circumstances, use certain futures
contracts and options on futures contracts, as well as options on stock. The
Series will only enter into these transactions for hedging purposes. See Futur
es Contracts and Options on Futures Contracts and Risks of Transactions in
Options, Futures and Forward Contracts, both of which references appear under
the heading Other Considerations.
As a fundamental policy, the Series concentrates its investments in the
real estate industry. As a consequence, the net asset value of the Series can be
expected to fluctuate in light of the factors affecting that industry, and may
fluctuate more widely than a portfolio that invests in a broader range of
industries. The Series may be more susceptible to any single economic, political
or regulatory occurrence affecting the real estate industry.
The Series, by investing primarily in securities of real estate
investment trusts, is subject to interest rate risk, in that as interest rates
decline, the value of the Series' investments in REITs holding fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of the Series' investments in REITs holding fixed rate obligations can be
expected to decline. See Other Considerations--REITs.
The Series may lend its portfolio securities, may invest in repurchase
agreements and may purchase securities on a when-issued basis.
While the Series intends to seek to qualify as a "diversified"
investment company under provisions of Subchapter M of the Code, it will not be
diversified under the 1940 Act. Thus, while at least 50% of the Series' total
assets will be represented by cash, cash items, certain qualifying securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the Series' total assets, it will not satisfy the 1940 Act
requirement in this respect, which applies that test to 75% of the Series'
assets. A nondiversified portfolio is believed to be subject to greater risk
because adverse effects on the portfolio's security holdings may affect a larger
portion of the overall assets.
Each of the investment strategies identified above involves special
risks which are described under Other Considerations in this Prospectus and
Investment Objectives and Policies in Part B.
* * *
Part B contains other more specific investment restrictions and
Appendix A to this Prospectus contains descriptions of Moody's and S&P ratings.
PURCHASE AND REDEMPTION
Shares are sold only to separate accounts of life companies at net
asset value. (See Calculation of Offering Price and Net Asset Value Per Share.)
Redemptions will be effected by the separate accounts at the net asset value
next determined after receipt of the order to meet obligations under the
variable contracts. Contract owners do not deal directly with the Fund with
respect to the acquisition or redemption of Fund shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund will make payments from the Series' net income and net
realized securities profits, if any, once a year. Distributions from net
realized securities profits normally will be distributed following the close of
the fiscal year. The Fund's fiscal year ends on December 31.
All dividends and distributions are automatically reinvested in
additional Series shares.
TAXES
The Series intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). As such, the 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 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.
5
<PAGE>
CALCULATION OF OFFERING PRICE AND NET ASSET VALUE PER SHARE
The offering price is the net asset value ("NAV") per share next
determined after an order is received. The offering price and net asset value
are computed as of the close of regular trading on the New York Stock Exchange
(ordinarily, 4 p.m., Eastern time) on days when the Exchange is open.
The Series' NAV per share is computed by adding the value of all
securities and other assets in the Series' portfolio, deducting any liabilities
of the Series (expenses and fees are accrued daily) and dividing by the number
of the Series' shares outstanding. The valuation criteria set forth below apply
equally to securities purchased in reliance upon Rule 144A of the 1933 Act. In
determining the 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 and, in
some cases, convertible securities) are priced at fair value by an independent
pricing service using methods approved by the Fund's Board of Directors.
Short-term investments having a maturity of less than 60 days are valued at
amortized cost, which approximates market value. All other securities are valued
at their fair value as determined in good faith and in a method approved by the
Fund's Board of Directors.
To the extent the Series holds foreign securities that are listed
primarily on foreign exchanges which trade on days when the New York Stock
Exchange is closed (such as U.S. Holidays and Saturdays), the net asset value of
the Series could be affected by 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 Managers and Sub-Advisers
Delaware Management furnishes investment management services to the
Series. In its capacity as investment manager, Delaware Management makes
investment decisions for the Series, effects the purchases and sales of
investments in carrying out the Series' investment objective and policies and
furnishes the Board of Directors with information and reports regarding the
Series' investments as Delaware Management deems appropriate or as the Board of
Directors may reasonably request.
Delaware Management and its predecessors have been managing the funds
in Delaware Investments since 1938. On December 31, 1997, Delaware Management
and its affiliates within Delaware Investments, including Delaware
International, were supervising in the aggregate more than $40 billion in assets
in the various institutional or separately managed (approximately
$24,040,760,000) and investment company (approximately $16,482,523,000)
accounts.
Delaware Management is a series of Delaware Management Business Trust.
Delaware Management changed its form of organization from a corporation to a
business trust on March 1, 1998. Delaware Management is an indirect, wholly
owned subsidiary of Delaware Management Holdings, Inc. ("DMH"). Delaware
International is also controlled by DMH through several subsidiaries. On April
3, 1995, a merger between DMH and a wholly owned subsidiary of Lincoln National
Corporation ("Lincoln National") was completed. DMH, Delaware Management and
Delaware International are now indirect, wholly owned subsidiaries, and subject
to the ultimate control, of Lincoln National. Lincoln National, with
headquarters in Fort Wayne, Indiana, is a diversified organization with
operations in many aspects of the financial services industry, including
insurance and investment management. Delaware Management's address is One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103.
Delaware Management manages the Series' portfolio 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:
Assets up to $500 million: 0.75% of average daily net assets
Assets over $500 million - $1,000 million: 0.70% of average daily
net assets
Assets over $1,000 million - $2,500 million: 0.65% of average daily
net assets
Assets over $2,500 million: 0.60% of average daily net assets
See Expenses for a discussion of a voluntary waiver of its management
fee undertaken by Delaware Management.
6
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Lincoln, a wholly owned subsidiary of Lincoln National, 200 E. Berry
Street, Fort Wayne, Indiana 46802, acts as sub-adviser to Delaware Management
with respect to the Series. In its capacity as sub-adviser, Lincoln furnishes
Delaware Management with investment recommendations, asset allocation advice,
research, economic analysis and other investment services with respect to the
securities in which the Series may invest. Lincoln receives 30% of the advisory
fee paid to Delaware Management for acting as sub-adviser to Delaware Management
with respect to the Series.
Babak Zenouzi, Vice President/Senior Portfolio Manager of the Fund and
Delaware Management, has had primary responsibility for making day-to-day
investment decisions for the Series since its inception. Mr. Zenouzi holds a BS
in Finance and Economics from Babson College in Wellesley, Massachusetts, and an
MS in Finance from Boston College. Prior to joining the Manager in 1992, he was
with The Boston Company where he held the positions of assistant vice president,
senior financial analyst, financial analyst and portfolio accountant. In making
investment decisions for the Series, Mr. Zenouzi regularly consults with Wayne
A. Stork and Richard G. Unruh. 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 the Delaware Management and was named an
Executive Vice President of Delaware Management in 1994.
Portfolio Trading Practices
The Series normally will not invest for short-term trading purposes.
However, the Series may sell securities without regard to the length of time
they have been held. Given the Series' investment objective, the annual
portfolio turnover rate is not expected to exceed 100% for the Series. A 100%
turnover rate would occur if all of the securities in the Series were sold and
replaced within one year. The rate of portfolio turnover is not a limiting
factor when Delaware Management deems it desirable to purchase or sell
securities. High portfolio turnover (over 100%) involves correspondingly greater
brokerage commissions and other transaction costs and may affect taxes payable
by the Series' shareholders that are subject to federal income taxes. The
turnover rate may also be affected by cash requirements from redemptions and
repurchases of the Series' shares. The degree of portfolio activity may affect
brokerage costs of the Series and taxes payable by shareholders that are subject
to federal income taxes.
Best efforts are used to obtain the best available price and most
favorable execution for portfolio transactions. Orders may be placed with
brokers or dealers who provide brokerage and research services to Delaware
Management or their respective advisory clients. These services may be used by
Delaware Management in servicing any of its 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
From time to time, the Fund may quote the Series' total return
performance in advertising and other types of literature. Total return will be
based on a hypothetical $1,000 investment, reflecting the reinvestment of all
distributions at net asset value. Each presentation will include the average
annual total return for one-, five- and ten-year (or life of Series, if
applicable) periods. The Fund may also advertise aggregate and average total
return information concerning the Series over additional periods of time.
Because securities' prices fluctuate, investment results of the Series
will fluctuate and past performance should not be considered as a representation
of future results.
DISTRIBUTION AND SERVICE
The Distributor, Delaware Distributors, L.P., serves as the Fund's
national distributor under Distribution Agreements dated May 1, 1998. The
Distributor bears all the costs of promotion and distribution.
Delaware Service Company, Inc. (the "Transfer Agent") is the
shareholder servicing, dividend disbursing and transfer agent for the Series
under the Amended and Restated Shareholders Services Agreement dated May 1,
1998. The Transfer Agent also provides accounting services to the Series
pursuant to the terms of a separate Fund Accounting Agreement.
The directors of the Fund annually review service fees paid to the
Distributor and Transfer Agent. The Distributor and the Transfer Agent are
indirect, wholly owned subsidiaries of DMH.
* * *
As with other mutual funds, financial and business organizations and
individuals around the world, the Series could be adversely affected if the
computer systems used by its service providers do not properly process and
calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Fund is taking steps to obtain
satisfactory assurances that the Series' major service providers are taking
steps reasonably designed to address the Year 2000 Problem with respect to the
computer systems that such service providers use. There can be no assurances
that these steps will be sufficient to avoid any adverse impact on the business
of the Series.
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Several European countries are participating in the European Economic
and Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro." It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. The Series 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 the 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 the Series.
EXPENSES
The Series is responsible for all of its own expenses other than those
borne by Delaware Management under the Investment Management Agreement and those
borne by the Distributor under the Distribution Agreement.
Delaware Management elected voluntarily to waive its fee and pay the
expenses of the Series to the extent necessary to ensure that the Series' annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, do not exceed 0.85% of average daily net assets from the
commencement of operations through October 31, 1998.
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, Inheiritage of
Allmerica Life Insurance and Annuity Company and Separate Accounts ABD, ABD2, QP
and QPN of The Travelers Life and Annuity Co. 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.
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. The Series is currently allocated fifty million
shares.
The Series' shares have equal voting rights and are equal in all other
respects. 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. Shareholders of the Series are
entitled to a pro-rata share of all dividends and distributions arising from an
investment in the 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 prospectus for the separate
account which invests in the Fund, the voting instructions received from
contract owners may be disregarded.
OTHER CONSIDERATIONS
REITS
The REIT Series invests 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.
The Series' investments in REITs present certain further risks that are
unique and in addition to the risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of the
underlying property owned by the REITs, while mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent on management skills,
are not diversified, and are subject to the risks of financing projects. REITs
whose underlying assets include long-term health care properties, such as
nursing, retirement and assisted living homes, may be impacted by federal
regulations concerning the health care industry.
8
<PAGE>
REITs (especially mortgage REITs) are also subject to interest rate
risks--when interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently
and in a limited volume, and may be subject to more abrupt or erratic price
movements than other securities.
When-Issued and Delayed Delivery Securities
The Series may invest in U.S. government securities and corporate debt
obligations on a when-issued or delayed delivery basis. Such transactions
involve commitments to buy a new issue with settlement up to 60 days later. The
average settlement date for when-issued or delayed delivery securities purchased
by the Series is generally between 30 and 45 days. During the time between the
commitment and settlement, the Series does not accrue interest, but the market
value of the bonds may fluctuate. This can result in the Series' share value
increasing or decreasing. The Series will not ordinarily sell when-issued or
delayed delivery securities prior to settlement. If the 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 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. 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.
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. The Series may
invest in such private-backed securities, but the Series will do so (i) only if
the securities are 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
and (ii) currently, only if they are rated at the time of purchase in the two
highest grades by a nationally-recognized statistical rating agency.
Foreign Securities and Foreign Currency Transactions
As noted above, the Series may invest a portion of its assets in
securities of issuers organized or having a majority of their assets in or
deriving a majority of their operating income outside the United States. In
connection with investments in foreign securities, the 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).
The Series will engage in these foreign currency transactions in order to
expedite settlement of portfolio transactions and to minimize currency value
fluctuations. Investing in foreign securities and, in conjunction therewith,
engaging in foreign currency transactions present special considerations not
presented by investments in securities issued by United States companies. See
Foreign Currency Transactions, below.
<PAGE>
The risks involved in investing in foreign securities include the
possibility of expropriation, nationalization or confiscatory taxation, taxation
of income earned in foreign nations or other taxes imposed with respect to
investments in foreign nations, foreign exchange control (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability or diplomatic
developments which could affect investments in secur ities of issuers in those
nations. In addition, in many countries, there is less publicly available
information about issuers than is available in reports about companies in the
United States, and the information that is available is often of lesser quality
than information available on U.S. companies. Foreign companies are not subject
to uniform accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to United
States companies. Further, the Series may encounter difficulty or be unable to
pursue legal remedies and obtain judgments in foreign courts. Commission rates
on securities transactions in foreign countries, which are sometimes fixed
rather than subject to negotiation as in the United States, are likely to be
higher. Moreover, the settlement period of securities transactions in foreign
markets may be longer than in domestic markets. In many foreign countries, there
is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. The foreign securities markets of many of the countries in which the
Series may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
9
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Emerging Markets. Compared to the United States and other developed
countries, emerging countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade a
small number of securities. Prices on these exchanges tend to be volatile and,
in the past, securities in these countries have offered greater potential for
gain (as well as loss) than securities of companies located in developed
countries. Further, investments by foreign investors (such as the Series) are
subject to a variety of restrictions in many emerging countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which the Series invests. In
addition, the repatriation of both investment income and capital from several
foreign countries is restricted and controlled under certain regulations,
including, in some cases, the need for certain governmental consents. Although
these restrictions may in the future make it undesirable to invest in emerging
countries, Delaware Management does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which the Series may invest have historically experienced and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctu ations or currency depreciation, large amounts of external
debt, balance of payments and trade difficulties and extreme poverty and
unemployment. Additional factors which may influence the ability or willingness
to service debt include, but are not limited to, a country's cash flow
situation, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of its debt service burden to the economy as a whole,
its government's policy towards the International Monetary Fund, the World Bank
and other international agencies and the political constraints to which a
government debtor may be subject.
With respect to investment in debt issues of foreign governments,
including Brady Bonds, the ability of a foreign government or government-related
issuer to make timely and ultimate payments on its external debt obligations
will also be strongly influenced by the issuer's balance of payments, including
export performance, its access to international credits and investments,
fluctuations in interest rates and the extent of its foreign reserves. A country
whose exports are concentrated in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to fluctuations in international
prices of these commodities or imports. To the extent that a country receives
payment for its exports in currencies other than dollars, its ability to make
debt payments denominated in dollars could be adversely affected.
The issuers of the emerging market country government and
government-related high yield securities in which the Series may invest have in
the past experienced substantial difficulties in servicing their external debt
obligations, which have led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance interest
payments. Holders of certain foreign government and government-related high
yield securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign government and
government-related high yield securities in which the Series may invest will not
be subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
Foreign Currency Transactions. The Series may also purchase options and
forward contracts in foreign currency for hedging purposes in connection with
such foreign securities transactions. As in the case of other kinds of options,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Series could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although, in the event of rate movements adverse to the Series' position, the
Series may forfeit the entire amount of the premium plus related transaction
costs.
Although the Series values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Series will, however, from time to time, purchase
or sell foreign currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of transactions and to minimize
currency value fluctuations. The Series may conduct its 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). The Series will convert currency on a
spot basis from time to time, and investors should be aware of the costs of
currency conversion.
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A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract, agreed upon by the parties, at a price set at the time
of the contract. The 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. By entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying security transaction, the Series will be able to protect itself
against a possible loss resulting from an adverse change in currency exchange
rates during the period between the date the security is purchased or sold and
the date on which payment is made or received.
For example, when Delaware Management believes that the currency of a
particular foreign country may suffer a significant decline against the U.S.
dollar or against another currency, the 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 the Series'
securities denominated in such foreign currency. The Series will not enter into
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Series to deliver an amount of
foreign currency in excess of the value of the Series' securities or other
assets denominated in that currency.
The Series may enter into forward contracts to hedge the currency risk
associated with the purchase of individual securities denominated in particular
currencies. In the alternative, the Series may also engage in currency "cross
hedging" when, in the opinion of Delaware Management, the historical
relationship among foreign currencies suggests that the Series may achieve the
same protection for a foreign security at reduced cost and/or administrative
burden through the use of a forward contract relating to a currency other than
the U.S. dollar or the foreign currency in which the security is denominated.
At the maturity of a forward contract, the Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Series may realize a gain or loss from currency
transactions.
With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities involved is
generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency strategy is highly
uncertain.
It is impossible to forecast the market value of portfolio securities
at the expiration of the contract. Accordingly, it may be necessary for the
Series to purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency the Series is obligated to deliver (and if a decision
is made to sell the security and make delivery of the foreign currency).
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Series is obligated to deliver.
Depositary Receipts. The Series may make foreign investments through
the purchase and sale of sponsored or unsponsored American, European and Global
Depositary Receipts ("Depositary Receipts"). Depositary Receipts are receipts
typically issued by a U.S. or foreign bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. "Sponsored"
Depositary Receipts are issued jointly by the issuer of the underlying security
and a depository, whereas "unsponsored" Depositary Receipts are issued without
participation of the issuer of the deposited security. Holders of unsponsored
Depositary Receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts in
respect of the deposited securities. Therefore, there may not be a correlation
between information concerning the issuer of the security and the market value
of an unsponsored Depositary Receipt.
<PAGE>
Options
To achieve the Series' objective, the Series intends 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 the 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 it may invest. The Series may also purchase call options and enter into
related closing transactions.
Purchasing a put option gives the 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 the 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.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed upon date. The
advantage is that the purchaser may hedge against an increase in the price of
securities it ultimately wishes to buy.
11
<PAGE>
Closing transactions essentially let the Series offset a put option or
call option prior to its exercise or expiration. If it cannot effect a closing
transaction, it may have to hold a security it would otherwise sell with a
potential decline in net asset value, or deliver a security it might want to
hold.
The Series may use both Exchange-traded and over-the-counter options.
Certain over-the-counter options may be illiquid. The Series will only invest in
such options to the extent consistent with its 15% limit on investments in
illiquid securities.
The Series also may write call options and purchase put options on
stock indices and enter into closing transactions in connection therewith. The
Series also may purchase call 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 or purchasing a call option
on stock indices is similar to the writing or purchasing of a call option on an
individual stock. Purchasing a protective put option on stock indices is similar
to the purchase of protective puts on an individual stock. Stock indices used
will include, but will not be limited to, the S&P 100 and the S&P
Over-the-Counter 250. The ability to hedge effectively using options on stock
indices will depend on the degree to which price movements in the underlying
index correlate with price movements in the portfolio securities of, as the case
may be, the Series.
Futures Contracts and Options on Futures Contracts
For hedging purposes, the Series may enter into futures contracts
relating to securities, securities indices or interest rates.
A futures contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement at a stated time
in the future for a fixed price. By its terms, a futures contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed-income securities or currency
underlying the contract are delivered by the seller and paid for by the
purchaser, or on which, in the case of securities index futures contracts and
certain interest rate and foreign currency futures contracts, the difference
between the price at which the contract was entered into and the contract's
closing value is settled between the purchaser and seller in cash. Futures
contracts differ from options in that they are bilateral agreements, with both
the purchaser and the seller equally obligated to complete the transaction. In
addition, futures contracts call for settlement only on the expiration date, and
cannot be "exercised" at any other time during their term.
The purchase or sale of a futures contract also differs from the
purchase or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with or on behalf of the broker as "initial margin" as a good faith
deposit. Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or instrument
underlying the futures contract fluctuates, making positions in the futures
contract more or less valuable, a process known as "marking to the market."
A futures contract may be purchased or sold only on an exchange, known
as a "contract market," designated by the Commodity Futures Trading Commission
for the trading of such contract, and only through a registered futures
commission merchant which is a member of such contract market. A commission must
be paid on each completed purchase and sale transaction. The contract market
clearing house guarantees the performance of each party to a futures contract,
by in effect taking the opposite side of such contract. At any time prior to the
expiration of a futures contract, a trader may elect to close out its position
by taking an opposite position on the contract market on which the position was
entered into, subject to the availability of a secondary market, which will
operate to terminate the initial position. At that time, a final determination
of variation margin is made and any loss experienced by the trader is required
to be paid to the contract market clearing house while any profit due to the
trader must be delivered to it.
Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, U.S. Treasury
Notes, GNMA modified pass-through mortgage-backed securities, U.S. Treasury
Bills, bank certificates of deposit and commercial paper. In addition, interest
rate futures contracts include contracts on indexes of municipal securities.
Foreign currency futures contracts currently are traded on the British pound,
Canadian dollar, Japanese yen, Swiss franc, German mark and on Eurodollar
deposits.
A securities index or municipal bond index futures contract provides
for the making and acceptance of a cash settlement in much the same manner as
the settlement of an option on a securities index. The types of indexes
underlying securities index futures contracts are essentially the same as those
underlying securities index options, as described above. The index underlying a
municipal bond index futures contract is a broad based index of municipal
securities designed to reflect movements in the municipal securities market as a
whole. The index assigns weighted values to the securities included in the index
and its composition is changed periodically.
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The Series may also purchase and write options on the types of futures
contracts the Series could invest in.
A call option on a futures contract provides the holder with the right
to purchase, or enter into a "long" position in, the underlying futures
contract. A put option on a futures contract provides the holder with the right
to sell, or enter into a "short" position in, the underlying futures contract.
In both cases, the option provides for a fixed exercise price up to a stated
expiration date. Upon exercise of the option by the holder, the contract market
clearing house establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position in the
case of a put option and the writer delivers to the holder the accumulated
balance in the writer's margin account which represents the amount by which the
market price of the futures contract at exercise exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. In the event that an option written by the Series is
exercised, the Series will be subject to all the risks associated with the
trading of futures contracts, such as payment of variation market deposits. In
addition, the writer of an option on a futures contract, unlike the holder, is
subject to initial and variation margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a securities index, a
security or foreign currency, becomes worthless to the holder when it expires.
Upon exercise of an option, the exchange or contract market clearing house
assigns exercise notices on a random basis to those of its members which have
written options of the same series and with the same expiration date. A
brokerage firm receiving such notices then assigns them on a random basis to
those of its customers which have written options of the same series and
expiration date. A writer therefore has no control over whether an option will
be exercised against it, nor over the timing of such exercise.
To the extent that interest or exchange rates or securities prices move
in an unexpected direction, the Series may not achieve the anticipated benefits
of investing in futures contracts and options thereon, or may realize a loss. To
the extent that the Series purchases an option on a futures contract and fails
to exercise the option prior to the exercise date, it will suffer a loss of the
premium paid. Further, the possible lack of a secondary market could prevent the
Series from closing out its positions relating to futures.
Risks of Transactions in Options, Futures
and Forward Contracts
The use of futures contracts, options on futures contracts, forward
contracts and certain options for hedging and other non-speculative purposes as
described above involves certain risks. For example, a lack of correlation
between price changes of an option or futures contract and the assets being
hedged could render the Series' hedging strategy unsuccessful and could result
in losses. The same results could occur if movements of foreign currencies do
not correlate as expected by the investment adviser at a time when the Series is
using a hedging instrument denominated in one foreign currency to protect the
value of a security denominated in a second foreign currency against changes
caused by fluctuations in the exchange rate for the dollar and the second
currency. If the direction of securities prices, interest rates or foreign
currency prices is incorrectly predicted, the Series will be in a worse position
than if such transactions had not been entered into. In addition, since there
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, the Series may be required to maintain a position (and in the
case of written options may be required to continue to hold the securities used
as cover) until exercise or expiration, which could result in losses. Further,
options and futures contracts on foreign currencies and forward contracts entail
particular risks related to conditions affecting the underlying currency.
Over-the-counter transactions in options and forward contracts also involve
risks arising from the lack of an organized exchange trading environment.
Borrowings
The 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 its net assets. See Part B for additional
possible restrictions on borrowing. The Series has no intention of increasing
its 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 its 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
its net assets, or issue senior securities as defined in the 1940 Act, except
for notes to banks. Investment securities will not be purchased while the Series
has an outstanding borrowing.
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Repurchase Agreements
The Series may also use repurchase agreements which are at least 102%
collateralized by U.S. government. The 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 security and the seller agrees to repurchase
the security at a future time and set price, thereby determining the yield
during the purchaser's holding period. The value of the securities subject to
the repurchase agreement is marked to market daily. In the event of a bankruptcy
or other default of the seller, the Series could experience delays and expenses
in liquidating the underlying securities.
The funds in Delaware Investments 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. The
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
The 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 the 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, the 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 the Series has sufficient liquidity, the Series
may not invest more than 15% of its net assets in illiquid assets. With respect
to the Series and subject to the following paragraphs, this policy shall not
limit the acquisition of securities purchased in reliance upon Rule 144A of the
Securities Act of 1933 ("1933 Act"). Rule 144A permits many privately placed and
legally restricted securities to be freely traded among certain institutional
buyers such as the Series. Investing in Rule 144A Securities could have the
effect of increasing the level of illiquidity of the Series to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
While maintaining oversight, the Board of Directors has delegated to
Delaware Management the day-to-day functions of determining whether or not
individual Rule 144A Securities are liquid for purposes of the 15% limitation on
investments in illiquid assets. The Board has instructed the managers to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; (iv) the nature of the security and the nature
of the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer).
If the respective manager determines that a Rule 144A Security which
was previously determined to be liquid is no longer liquid and, as a result, the
applicable Series' holdings of illiquid securities exceed the Series' 15% limit
on investment in such securities, Delaware Management will determine what action
shall be taken to ensure that the Series continues to adhere to such limitation.
Convertible, Debt and Non-Traditional Equity Securities
The Series may invest in convertible and debt securities of issuers in
any industry. A convertible security is a security which may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible and debt securities
are senior to common stocks in a corporation's capital structure, although
convertible securities are usually subordinated to similar nonconvertible
securities. Convertible and debt securities provide a fixed-income stream and
the opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in the convertible security's
underlying common stock. Just as with debt securities, convertible securities
tend to increase in market value when interest rates decline and tend to
decrease in value when interest rates rise. However, the price of a convertible
security is also influenced by the market value of the security's underlying
common stock and tends to increase as the market value of the underlying stock
rises, whereas it tends to decrease as the market value of the underlying stock
declines.
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The Series may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stock
("PERCS"), which provide an investor with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Upon the conversion date, most PERCS convert into com mon stock of the
issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after a predetermined number of years the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, each PERCS would convert to one share of common stock. If, however, the
issuer's common stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive less than one full
share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However, if called early, the issuer may pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The Series may also invest in other enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock.
Zero Coupon Bonds
The Series may invest in zero coupon bonds. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do non-zero coupon securities having
similar maturities and credit quality. Current federal income tax law requires
that a holder of a taxable zero coupon security report as income each year the
portion of the original issue discount of such security that accrues that year,
even though the holder receives no cash payments of interest during the year.
The Series intends to qualify as regulated investment companies under the Code.
Accordingly, during periods when the Series receive no interest payments on its
zero coupon securities, it will be required, in order to maintain its desired
tax treatment, to distribute cash approximating the income attributable to such
securities. Such distribution may require the sale of portfolio securities to
meet the distribution requirements and such sales may be subject to the risk
factor discussed above.
Special Risk Considerations
Shareholders should understand that all investments involve risk and
there can be no guarantee against loss resulting from an investment in the
Series, nor can there be any assurance that the Series' investment objective
will be attained.
While the Series intends to seek to qualify as a "diversified"
investment company under provisions of Subchapter M of the Code, it will not be
diversified for purposes of the 1940 Act. Thus, while at least 50% of the
Series' total assets will be represented by cash, cash items, and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the Series' total assets, it will not satisfy the 1940 Act requirement in
this respect, which applies that test to 75% of the Series' assets. A
nondiversified portfolio is believed to be subject to greater risk because
adverse effects on the portfolio's security holdings may affect a larger portion
of the overall assets.
* * *
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The Fund's designation as an open-end investment company and certain
other policies of the Series 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 the 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 the
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. The remaining investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without a shareholder
vote.
Diversification
The Fund was established as the underlying investment for variable
contracts issued by life companies. Section 817(h) of the Internal Revenue Code
of 1986, as amended (the "Code"), imposes certain diversification standards on
the underlying assets of variable contracts held in the Portfolios of the Fund.
The Code provides that a variable contract shall not be treated as an annuity
contract or life insurance for any period (and any subsequent period) for which
the investments are not, in accordance with regulations prescribed by the United
States Treasury Department ("Treasury Department"), adequately diversified.
Disqualification of the variable contract would result in the imposition of
federal income tax to the contract owner with respect to earnings allocable to
the contract prior to distributions under the contract (e.g., withdrawals). The
Code contains a safe harbor provision which provides that variable contracts
meet the diversification requirements if, as of the close of each quarter, the
underlyi ng 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."
The Series will be managed in such a manner as to comply with these
diversification requirements.
APPENDIX A--RATINGS
General Rating Information
Bonds
Excerpts from Moody's description of its bond ratings: Aaa--judged to
be the best quality. They carry the smallest degree of investment risk;
Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations; Baa--considered
as medium grade obligations. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; Ba--judged to
have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B--generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small; Caa--are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest; Ca--represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C--the lowest
rated class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
<PAGE>
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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PART B--STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
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DELAWARE GROUP
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PREMIUM FUND, INC.
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1818 Market Street
Philadelphia, PA 19103
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TABLE OF CONTENTS
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Cover Page
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Investment Objectives and Policies
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Accounting and Tax Issues
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Performance Information
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Trading Practices and Brokerage
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Offering Price
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Dividends and Realized Securities
Profits Distributions
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Taxes
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Investment Management Agreements
and Sub-Advisory Agreement
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Officers and Directors
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General Information
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Financial Statements
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Delaware Group Premium Fund, Inc. ("Premium Fund" or the "Fund") is an
open-end management investment company which is intended to meet a wide range of
investment objectives with its separate Portfolios ("Series"). Each Series is in
effect a separate fund issuing its own shares.
The shares of the Fund are sold only to separate accounts of life
insurance companies ("life companies"). The separate accounts are used in
conjunction with variable annuity contracts and variable life insurance policies
("variable contracts"). The separate accounts invest in shares of the various
Series in accordance with allocation instructions received from contract owners.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectuses of
the Fund dated May 1, 1998, as they may be amended from time to time. It should
be read in conjunction with the prospectuses for the variable contracts and the
Fund. Part B is not itself a prospectus but is, in its entirety, incorporated by
reference into the Fund's Prospectuses. The Fund's Prospectuses may be obtained
by writing or calling your investment dealer or by contacting the Series'
national distributor, Delaware Distributors, L.P. (the "Distributor"), 1818
Market Street, Philadelphia, PA 19103.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Series are below. There can be no
assurance that the objectives of the Series will be realized.
Small Cap Value Series seeks capital appreciation by investing
primarily in small cap common stocks whose market value
appears low relative to their underlying value or future
earnings and growth potential. Emphasis will also be placed on
securities of companies that may be temporarily out of favor
or whose value is not yet recognized by the market. This
Series has the same objective and investment disciplines as
Small Cap Value Fund of Delaware Group Equity Funds V, Inc., a
separate fund in the Delaware Investments family.
REIT Series seeks to achieve maximum long-term total return.
Capital appreciation is a secondary objective. It seeks to
achieve its objectives by investing in securities of companies
primarily engaged in the real estate industry. This Series has
the same objective and investment discipline as The Real
Estate Investment Trust Portfolio and The Real Estate
Investment Trust Portfolio II of Delaware Pooled Trust, Inc.,
separate funds in the Delaware Investments family, which also
invest in securities of companies primarily engaged in the
real estate industry.
INVESTMENT RESTRICTIONS
The Fund has the following restrictions for Small Cap Value Series
which may not be amended without approval of a majority of the outstanding
voting securities of the Series, which is the lesser of more than 50% of the
outstanding voting securities or 67% of the voting securities of the Series
present at a shareholder meeting if 50% or more of the voting securities are
present in person or represented by proxy. The percentage limitations contained
in the restrictions and policies set forth herein apply at the time of purchase
of securities. The Series will not:
1. Invest more than 5% of the value of its assets in securities of any
one issuer (other than obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities). This restriction shall apply to only 75% of
the assets of the Series.
2. Purchase more than 10% of the voting securities of any company, or
invest in any company for the purpose of exercising control or management.
3. Purchase or retain securities of a company which has an officer or
director who is an officer or director of the Fund, or an officer or director of
its investment manager if such persons, each owning beneficially more than 1/2
of 1% of the shares of the company, own in the aggregate more than 5% thereof.
4. Purchase any security issued by any other investment company (except
in connection with a merger, consolidation or offer of exchange) if after such
purchase it would: (a) own more than 3% of the voting stock of such company, (b)
own securities of such company having a value in excess of 5% of the Series'
assets or (c) own securities of investment companies having an aggregate value
in excess of 10% of the Series' assets. Any such purchase shall be at the
customary brokerage commission.
5. Make any investment in real estate unless necessary for office space
or the protection of investments already made. (This restriction does not
preclude the Series' purchase of securities secured by real
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<PAGE>
estate or interests therein, or securities issued by companies which invest in
real estate or interests therein, including real estate investment trusts.)
6. Purchase securities on margin, make short sales of securities or
maintain a net short position (except that the Series may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities). This restriction shall not prohibit the Series from satisfying
margin requirements with respect to futures transactions.
7. Invest in interests in oil, gas or other mineral exploration or
development programs, commodities or commodities contracts. This restriction
shall not prohibit the Series from entering into futures contracts or options
thereon, to the extent that not more than 5% of its assets are required as
futures contract margin deposits and premiums on options and only to the extent
that obligations under such contracts and transactions represent not more than
20% of the Series' assets.
8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to facilitate
redemptions. The Series has no intention of increasing its 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' assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the Series shall, within three days thereafter (not including
Sunday and holidays) or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount of its
borrowings to an extent that the asset coverage of such borrowings shall be at
least 300%. The Series will not pledge more than 15% of its net assets. The
Series shall not issue senior securities as defined in the Investment Company
Act of 1940 (the "1940 Act"), except for notes to banks.
9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with the Series' investment
objective and policies are considered loans and except that the Series may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for their use relating to short sales or other security transactions.
10. Invest more than 5% of the value of its total assets in securities of
companies less than three years old. Such three-year period shall include the
operation of any predecessor company or companies.
11. Invest more than 25% of its total assets in any particular industry,
except that the Series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by Standard & Poor's Ratings Group ("S&P") or
P-2 or better by Moody's Investors Service, Inc. ("Moody's").
12. Act as an underwriter of securities of other issuers, except that the
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, the Series might be deemed to
be an underwriter for the purposes of the Securities Act of 1933.
In addition, the following investment restrictions of the Small Cap
Value Series may be changed by the Board of Directors:
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<PAGE>
The Series will not invest in warrants valued at
lower of cost or market exceeding 5% of its net assets.
Included within that amount, but not to exceed 2% of the
Series' net assets, may be warrants not listed on the New York
Stock Exchange or American Stock Exchange.
While the Series is permitted under certain circumstances to borrow
money, it does not normally do so. No investment securities will be purchased
while the Series has an outstanding borrowing. The Fund has undertaken, for so
long as required by California Regulatory Authority and so long as insurance
policy premiums or proceeds of contracts sold in California are used to purchase
Fund shares, the Series will not borrow money in excess of 25% of the value of
its net assets.
The Fund has adopted the following restrictions for the REIT Series
which may not be amended without approval of a majority of the outstanding
voting securities of the REIT Series, which is the lesser of more than 50% of
the outstanding voting securities or 67% of the voting securities of the REIT
Series present at a shareholder meeting if 50% or more of the voting securities
are present in person or represented by proxy. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities.
1. The Series will concentrate its investments in the real estate
industry. The Series will not invest more than 25% of its total assets in any
other single industry, provided that there is no limitation with respect to
investments in obligations issued or guaranteed as to principal or interest by
the U.S. Government, its agencies or instrumentalities.
2. The Series will not make loans other than by the purchase of all or
a portion of a publicly or privately distributed issue of bonds, debentures or
other debt securities of the types commonly offered publicly or privately and
purchased by financial institutions (including repurchase agreements and loan
participations), whether or not the purchase was made upon the original issuance
of the securities, and except that the Series may loan its assets to qualified
broker/dealers or institutional investors.
3. The Series will not engage in underwriting of securities of other
issuers, except that portfolio securities, including securities purchased in
private placements, may be acquired under circumstances where, if sold, the
Series might be deemed to be an underwriter under the Securities Act of 1933. No
limit is placed on the proportion of the Series' assets which may be invested in
such securities.
4. The Series will not borrow money or issue senior securities, except
to the extent permitted by the 1940 Act or any rule or order thereunder or
interpretation thereof. Subject to the foregoing, the Series may engage in short
sales, purchase securities on margin, and write put and call options.
5. The Series will not purchase or sell physical commodities or
physical commodity contracts, including physical commodity option or futures
contracts in a contract market or other futures market.
6. The Series will not purchase or sell real estate; provided, that the
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Series may invest in securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein; provided
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further, that the Series may own real estate directly as a result of a default
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on securities the Series owns.
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In addition to the above fundamental investment restrictions, the
Series has the following investment restrictions which may be amended or changed
without approval of shareholders.
1. The Series will not invest for the purpose of acquiring control of
any company.
2. To the extent that the Series invests in securities of other
investment companies, it will only do so in accordance with the provisions of
the Investment Company Act in effect at the time of the investment.
3. The Series will not invest in interests in oil, gas and other
mineral leases or other mineral exploration or development programs.
4. The Series will not purchase securities on margin except short-term
credits that may be necessary for the clearance of purchases and sales of
securities. This restriction does not apply to the purchase of futures or
options contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS--As noted in the Prospectuses, each Series may enter into
futures contracts relating to securities, securities indices or interest rates.
(Unless otherwise specified, interest rate futures contracts, securities and
securities index futures contracts and foreign currency futures contracts are
collectively referred to as "futures contracts.") Such investment strategies
will be used as a hedge and not for speculation.
Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Series may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When a Series is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be closed
out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
Series' current or intended investments in fixed-income securities. For example,
if a Series owned long-term bonds and interest rates were expected to increase,
that Series might sell interest rate futures contracts. Such a sale would have
much the same effect as selling some of the long-term bonds in that Series'
portfolio. However, since the futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique allows
a Series to hedge its interest rate risk without having to sell its portfolio
securities. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Series' interest rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the net asset value of that Series from declining as much as it
otherwise would have. On the other hand, if interest rates were expected to
decline, interest rate futures contracts could be purchased to hedge in
anticipation of subsequent purchases of long-term bonds at higher prices.
Because the fluctuations in the value of the interest rate futures contracts
should be similar to those of long-term bonds, a Series could protect itself
against the effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became available or the
market had stabilized. At
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that time, the interest rate futures contracts could be liquidated and that
Series' cash reserve could then be used to buy long-term bonds on the cash
market.
The Series may also engage in currency "cross hedging" when, in the
opinion of the Series' investment manager Delaware Management Company ("Delaware
Management"), the historical relationship among foreign currencies suggests that
a Series may achieve protection against fluctuations in currency exchange rates
similar to that described above at a reduced cost through the use of a futures
contract relating to a currency other than the U.S. dollar or the currency in
which the foreign security is denominated. Such "cross hedging" is subject to
the same risks as those described above with respect to an unanticipated
increase or decline in the value of the subject currency relative to the dollar.
OPTIONS ON FUTURES CONTRACTS--As noted in the Prospectuses, each Series may
purchase and write options on the types of futures contracts that Series could
invest in.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in the Series'
portfolio. If the futures price at expiration of the option is below the
exercise price, a Series will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Series' portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the futures contract. If
the futures price at expiration of the put option is higher than the exercise
price, a Series will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities which
the Series intends to purchase. If a put or call option a Series has written is
exercised, the Series will incur a loss which will be reduced by the amount of
the premium it receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value of its options
on futures positions, a Series' losses from exercised options on futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Series may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected marketwide decline or changes in interest or exchange
rates, a Series could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. If the market decline does not
occur, the Series will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Series will increase
prior to acquisition, due to a market advance or changes in interest or exchange
rates, a Series could purchase call options on futures contracts, rather than
purchasing the underlying futures contracts. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Series will suffer a loss equal to
the price of the call, but the securities which the Series intends to purchase
may be less expensive.
OPTIONS ON FOREIGN CURRENCIES
REIT Series may purchase and write options on foreign currencies for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, will be utilized. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Series may purchase put
options on the foreign currency. If the value of the currency does decline, the
Series will have the right to sell such
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currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movement in exchange rates. As in the case of other types of options,
however, the benefit to the Series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Series could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types
of hedging purposes. For example, where the Series anticipate a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, they could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution in the value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against the
anticipated increase in the dollar cost of securities to be acquired, the Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series to hedge such
increased costs up to the value of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Series would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Series also may be required to forego all or
a portion of the benefit which might otherwise have been obtained from favorable
movements in exchange rates.
The Series intends to write covered call options on foreign currencies.
A call option written on a foreign currency by the Series is "covered" if the
Series owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by the Series' custodian bank) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Series has a call on the same foreign currency and in the same principle amount
as the call written where the exercise price of the call held (a) is equal to
less than the exercise price of the call written, or (b) is greater than the
exercise price of the call written if the difference is maintained by the Series
in cash, U.S. government securities or other high-grade liquid debt securities
in a segregated account with its custodian bank.
With respect to writing put options, at the time the put is written,
the Series will establish a segregated account with its custodian bank
consisting of cash, U.S. government securities or other high-grade liquid debt
securities in an amount equal in value to the amount the Series will be required
to pay upon exercise of the put. The account will be maintained until the put is
exercised, has expired, or the Series has purchased a closing put of the same
series as the one previously written.
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WHEN, AS AND IF ISSUED" AND DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS
The REIT Series may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment basis.
The Series may also purchase securities on a "when, as and if issued" basis
under which the issuance of the security depends upon the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring. When such transactions are negotiated, the price is fixed at the
time of commitment, but delivery and payment can take place a month or more
after the date of the commitment. The Series will establish a segregated account
with its custodian bank in which it will continually maintain cash or cash
equivalents or other portfolio securities equal in value to commitments to
purchase securities on a when-issued, "when, as and if issued," delayed delivery
or forward commitment basis.
While the Series will only purchase securities on a when-issued, "when,
as and if issued," delayed delivery or forward commitment basis with the
intention of acquiring the securities, the Series may sell the securities before
the settlement date if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest accrues to the purchaser
during this period. At the time a Series makes the commitment to purchase or
sell securities on a when-issued, "when, as and if issued," delayed delivery or
forward commitment basis, it will record the transaction and thereafter reflect
the value, each day, of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.
ENHANCED CONVERTIBLE SECURITIES
Most PERCS expire three years from the date of issue, at which time
they are convertible into common stock of the issuer (PERCS are generally not
convertible into cash at maturity). Under a typical arrangement, if after three
years the issuer's common stock is trading at a price below that set by the
capital appreciation limit, the PERCS would convert into one share of common
stock. If, however, the issuer's common stock is trading at a price above that
set by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional share of
common stock received by the PERCS holder is determined by dividing the price
set by the capital appreciation limit of the PERCS by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
thus do not provide call protection. However, if called early, the issuer must
pay a premium over the market price to the investor. This call premium declines
at a preset rate daily, up to the maturity date of the PERCS.
RESTRICTED SECURITIES
The REIT Series may purchase privately-placed debt and other securities
whose resale is restricted under applicable securities laws. Such restricted
securities generally offer a higher return than comparable registered securities
but involve some additional risk since they can be resold only in
privately-negotiated transactions or after registration under applicable
securities laws. The registration process may involve delays which could result
in the Series obtaining a less favorable price on a resale. The Series will not
purchase illiquid assets if more than 15% of its net assets would then consist
of such illiquid securities.
REPURCHASE AGREEMENTS
Each Series may, from time to time, enter into repurchase transactions.
Repurchase agreements are instruments under which securities are purchased from
a bank or securities dealer with an agreement by the seller to repurchase the
securities. Under a repurchase agreement, the purchaser acquires ownership of
the security but the seller agrees, at the time of sale, to repurchase it at a
mutually agreed-upon time and price. The Series will take custody of the
collateral under repurchase agreements. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred. The
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resale price is in excess of the purchase price and reflects an agreed-upon
market rate unrelated to the coupon rate or maturity of the purchase security.
Such transactions afford an opportunity for the Series to invest temporarily
available cash. The Series' risk is limited to the seller's ability to buy the
security back at the agreed-upon sum at the agreed-upon time, since the
repurchase agreement is secured by the underlying obligation. Should such an
issuer default, the investment managers believe that, barring extraordinary
circumstances, the Series will be entitled to sell the underlying securities or
otherwise receive adequate protection for its interest in such securities,
although there could be a delay in recovery. The Series consider the
creditworthiness of the bank or dealer from whom it purchases repurchase
agreements. The Series will monitor such transactions to assure that the value
of the underlying securities subject to repurchase agreements is at least equal
to the repurchase price. The underlying securities will be limited to those
described above.
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the Investment
Company Act of 1940 to allow the funds in the Delaware Investments family
jointly to invest cash balances. Each Series may invest cash balances in a joint
repurchase agreement in accordance with the terms of the Order and subject
generally to the conditions described above.
PORTFOLIO LOAN TRANSACTIONS
Each Series may loan up to 25% of its assets to qualified
broker/dealers or institutional investors for their use relating to short sales
or other security transactions.
It is the understanding of Delaware Management that the staff of the
Securities and Exchange Commission permits portfolio lending by registered
investment companies if certain conditions are met. These conditions are as
follows: 1) each transaction must have 100% collateral in the form of cash,
short-term U.S. government securities, or irrevocable letters of credit payable
by banks acceptable to the Fund from the borrower; 2) this collateral must be
valued daily and should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Series; 3) the Series must be
able to terminate the loan after notice, at any time; 4) the Series must receive
reasonable interest on any loan, and any dividends, interest or other
distributions on the lent securities, and any increase in the market value of
such securities; 5) the Series may pay reasonable custodian fees in connection
with the loan; 6) the voting rights on the lent securities may pass to the
borrower; however, if the directors of the Fund know that a material event will
occur affecting an investment loan, they must either terminate the loan in order
to vote the proxy or enter into an alternative arrangement with the borrower to
enable the directors to vote the proxy.
The major risk to which a Series would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, a Series will only enter into loan arrangements
after a review of all pertinent facts by Delaware Management, under the
supervision of the Board of Directors, including the creditworthiness of the
borrowing broker, dealer or institution and then only if the consideration to be
received from such loans would justify the risk. Creditworthiness will be
monitored on an ongoing basis by Delaware Management.
FOREIGN SECURITIES
To the extent the Series are authorized and intend to invest in foreign
securities, investors should recognize that investing in securities of foreign
issuers involves certain considerations, including those set forth in the
Prospectuses, which are not typically associated with investing in United States
issuers. Since the stocks of foreign companies are frequently denominated in
foreign currencies, and since the Series may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the Series will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in
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connection with conversions between various currencies. The investment policies
of certain of the Series permit them to enter into forward foreign currency
exchange contracts and various related currency transactions in order to hedge
the Series' holdings and commitments against changes in the level of future
currency rates. Such contracts involve an obligation to purchase or sell a
specific currency at a future date at a price set at the time of the contract.
There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by a Series. Payment of
such interest equalization tax, if imposed, would reduce such Series' rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Series by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non-equity options are
generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts a Series may make or enter into will
be subject to the special currency rules described above.
FOREIGN CURRENCY TRANSACTIONS
In connection with a Series' investment in foreign securities, a Series
may purchase or sell currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of portfolio transactions and to
minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A Series will account for
forward contracts by marking to market each day at daily exchange rates.
When a Series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of that Series'
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assets denominated in such foreign currency, the Series' custodian bank or
subcustodian will place cash or liquid high grade debt securities in a separate
account of the Series in an amount not less than the value of such Series' total
assets committed to the consummation of such forward contracts. If the
additional cash or securities placed in the separate account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Series' commitments
with respect to such contracts.
OPTIONS
Each Series may write call options and purchase put options on a
covered basis only. REIT Series may also purchase call options. The Series also
may enter into closing transactions with respect to such options transactions.
No Series will engage in option transactions for speculative purposes.
To the extent authorized to engage in option transactions, the Series
may invest in options that are Exchange listed and REIT Series may also invest
in options that are traded over-the-counter. Small Cap Value Series reserves the
right to invest in over-the-counter options upon written notice to their
shareholders. The Series will enter into an option position only if there
appears to be a liquid market for such options. However, there can be no
assurance that a liquid secondary market will be maintained. Thus, it may not be
possible to close option positions and this may have an adverse impact on a
Series' ability to effectively hedge its securities.
A. COVERED CALL WRITING--A Series may write covered call options from
time to time on such portion of its portfolio, without limit, as Delaware
Management determines is appropriate in seeking to obtain the Series' investment
objective. A call option gives the purchaser of such option the right to buy,
and the writer, in this case the Series, has the obligation to sell the
underlying security at the exercise price during the option period. The
advantage to a Series of writing covered calls is that the Series receives a
premium which is additional income. However, if the security rises in value, the
Series may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to such options, the Series may enter into closing
purchase transactions. A closing purchase transaction is one in which the
Series, when obligated as a writer of an option, terminates its obligation by
purchasing an option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether the
net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market
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value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, the Series will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Series will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
A Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Series will normally have expiration dates between one
and nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
B. PURCHASING PUT OPTIONS--A Series may invest up to 2% of its total
assets in the purchase of put options. The Series will, at all times during
which it holds a put option, own the security covered by such option.
A put option purchased by the Series gives it the right to sell one of
its securities for an agreed price up to an agreed date. The Series intend to
purchase put options in order to protect against a decline in market value of
the underlying security below the exercise price less the premium paid for the
option ("protective puts"). The ability to purchase put options will allow a
Series to protect unrealized gain in an appreciated security in its portfolio
without actually selling the security. If the security does not drop in value,
the Series will lose the value of the premium paid. A Series may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option. Such sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions. A
closing sale transaction is one in which a Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
C. PURCHASING CALL OPTIONS-- REIT Series may purchase call options to
the extent that premiums paid by the Series do not aggregate more than 2% of the
Series' total assets. When the Series purchases a call option, in return for a
premium paid by the Series to the writer of the option, the Series obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage of
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purchasing call options is that the Series may alter portfolio characteristics
and modify portfolio maturities without incurring the cost associated with
portfolio transactions.
The Series may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased. The
Series will realize a profit from a closing sale transaction if the price
received on the transaction is more than the premium paid to purchase the
original call option; the Series will realize a loss from a closing sale
transaction if the price received on the transaction is less than the premium
paid to purchase the original call option.
Although the Series will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on an
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the result that the Series would have
to exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any value
to the Series.
D. OPTIONS ON STOCK INDICES-- Each Series also may write call options
and purchase put options on certain stock indices and enter into closing
transactions in connection therewith. A stock index assigns relative values to
the common stocks included in the index with the index fluctuating with changes
in the market values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss to the Series on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, each Series may offset positions in stock index
options prior to expiration by entering into a closing transaction on an
Exchange or may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
so included. Some stock index options are based on a broad market index such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on stock indices are currently
traded on the following Exchanges among others: The Chicago Board Options
Exchange, New York Stock Exchange and American Stock Exchange.
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The Series' ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the Series' portfolio securities. Since the Series' portfolio will
not duplicate the components of an index, the correlation will not be exact.
Consequently, the Series bear the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an Exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on the Series' ability to effectively
hedge its securities. The Series will enter into an option position only if
there appears to be a liquid secondary market for such options.
Neither Series will engage in transactions in options on stock indices
for speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets.
E. WRITING COVERED PUTS -- REIT Series may purchase or sell (write) put
options on securities as a means of achieving additional return or of hedging
the value of the Series' portfolio. A put option is a contract that gives the
holder of the option the right to sell to the writer (seller), in return for a
premium, the underlying security at a specified price during the term of the
option. The writer of the put, who receives the premium, has the obligation to
buy the underlying security upon exercise, at the exercise price during the
option period. The Series will write only "covered" options. In the case of a
put option written (sold) by the Series, the Series will, through its custodian,
deposit and maintain cash and short-term U.S. Treasury obligations with a
securities depository or the custodian having a value equal to or greater than
the exercise price of the underlying security.
F. CLOSING TRANSACTIONS-- If a Series has written an option, it may
terminate its obligation by effecting a closing purchase transaction. This is
accomplished by purchasing an option of the same series as the option previously
written. There can be no assurance that either a closing purchase or sale
transaction can be effected when a Series so desires. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Series will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option.
A Series will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; a Series will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Series.
If a Series purchases a put option, the loss to the Series is limited to the
premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit a Series realizes on the sale of the security will be reduced
by the premium paid for the put option less any amount (net of transaction
costs) for which the put may be sold.
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ACCOUNTING AND TAX ISSUES
When a Series writes a call, or purchases a put option, an amount equal
to the premium received or paid by it is included in the Series' assets and
liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently "marked
to market" to reflect the current market value of the option written. The
current market value of a written option is the last sale price on the principal
Exchange on which such option is traded or, in the absence of a sale, the mean
between the last bid and asked prices. If an option which a Series has written
expires on its stipulated expiration date, a Series recognizes a capital gain.
If a Series enters into a closing purchase transaction with respect to an option
which a Series has written, a Series realizes a gain (or loss if the cost of the
closing transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which a
Series has written is exercised, a Series realizes a capital gain or loss from
the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received.
The premium paid by a Series for the purchase of a put option is
recorded in the Series' assets and liabilities as an investment and subsequently
adjusted daily to the current market value of the option. For example, if the
current market value of the option exceeds the premium paid, the excess would be
unrealized appreciation and, conversely, if the premium exceeds the current
market value, such excess would be unrealized depreciation. The current market
value of a purchased option is the last sale price on the principal Exchange on
which such option is traded or, in the absence of a sale, the mean between the
last bid and asked prices. If an option which a Series has purchased expires on
the stipulated expiration date, a Series realizes a short-term or long-term
capital loss for federal income tax purposes in the amount of the cost of the
option. If a Series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
OPTIONS ON CERTAIN STOCK INDICES--Accounting for options on certain
stock indices will be in accordance with generally accepted accounting
principles. The amount of any realized gain or loss on closing out such a
position will result in a realized gain or loss for tax purposes. Such options
held by the Series at the end of each fiscal year will be required to be "marked
to market" for federal income tax purposes. Sixty percent of any net gain or
loss recognized on such deemed sales or on any actual sales will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
OTHER TAX REQUIREMENTS--The Small Cap Value Series has qualified, and
intends to continue to qualify, as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). REIT Series intends to
qualify as a regulated investment company under the Code. As such, a Series will
not be subject to federal income tax, or to any excise tax, to the extent its
earnings are distributed as provided in the Code and it satisfies other
requirements relating to the sources of its income and diversification of its
assets.
In order to qualify as a regulated investment company for federal
income tax purposes, a Series must meet certain specific requirements,
including:
(i) The Series must maintain a diversified portfolio of securities,
wherein no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Series' total
assets, and, with respect to 50% of the Series' total assets, no investment
(other than cash and cash
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items, U.S. government securities and securities of other regulated investment
companies) can exceed 5% of the Series' total assets;
(ii) The Series must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) The Series must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its fiscal
years, and
(iv) The Series must realize less than 30% of its gross income for each
fiscal year from gains from the sale of securities and certain other assets that
have been held by the Series for less than three months ("short-short income").
The Taxpayer Relief Act of 1997 (the "1997 Act") repealed the 30% short-short
income test for tax years of regulated investment companies beginning after
August 5, 1997; however, this rule may have continuing effect in some states for
purposes of classifying the Series as a regulated investment company.
The Code requires the Series to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain net
income earned during the 12 month period ending October 31 (in addition to
amounts from the prior year that were neither distributed nor taxed to the
Series) to you by December 31 of each year in order to avoid federal excise
taxes. The Series intends as a matter of policy to declare and pay sufficient
dividends in December or January (which are treated by you as received in
December) but does not guarantee and can give no assurances that its
distributions will be sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the year that unrealized losses exceed unrealized gains.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, a Series must recognize gain (but not loss) on any constructive
sale of an appreciated financial position in stock, a partnership interest or
certain debt instruments. The Series will generally be treated as making a
constructive sale when it: 1) enters into a short sale on the same or
substantially identical property; 2) enters into an offsetting notional
principal contract; or 3) enters into a futures or forward contract to deliver
the same or substantially identical property. Other transactions (including
certain financial instruments called collars) will be treated as constructive
sales as provided in Treasury regulations to be published. There are also
certain exceptions that apply for transactions that are closed before the end of
the 30th day after the close of the taxable year.
INVESTMENT IN FOREIGN CURRENCIES AND FOREIGN SECURITIES--A Series is
authorized to invest a limited amount in foreign securities. Such investments,
if made, will have the following additional tax consequences to a Series:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Series accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the Series actually collects such income or pays such
expenses
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generally are treated as ordinary income or loss. Similarly, on the disposition
of debt securities denominated in a foreign currency and on the disposition of
certain options, futures, forward contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Series' net investment company taxable income, which, in turn, will affect the
amount of income to be distributed to you by the Series.
If the Series' Section 988 losses exceed the Series' other net
investment company taxable income during a taxable year, the Series generally
will not be able to make ordinary dividend distributions to you for that year,
or distributions made before the losses were realized will be recharacterized as
return of capital distributions of federal income tax purposes, rather than as
an ordinary dividend or capital gain distribution. If a distribution is treated
as a return of capital, your tax basis in your Series shares will be reduced by
a like amount (to the extent of such basis), and any excess of the distribution
over your tax basis in your Series shares will be treated as capital gain to
you.
The 1997 Act generally requires that foreign income be translated into
U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than two
years after the taxable year to which they relate. This new law may require the
Series to track and record adjustments to foreign taxes paid on foreign
securities in which it invests. Under the Series' current reporting procedure,
foreign security transactions are recorded generally at the time of each
transaction using the foreign currency spot rate available for the date of each
transaction. Under the new law, the Series will be required to record a fiscal
year end (and at calendar year end for excise tax purposes) an adjustment that
reflects the difference between the spot rates recorded for each transaction and
the year-end average exchange rate for all of the Series' foreign securities
transactions. There is a possibility that the mutual fund industry will be given
relief from this new provision, in which case no year-end adjustments will be
required.
The Series may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of the
Series at the end of its fiscal year are invested in securities of foreign
corporations, the Series may elect to pass-through to you your pro rata share of
foreign taxes paid by the Series. If this election is made, you will be: (i)
required to include in your gross income your pro rata share of foreign source
income (including any foreign taxes paid by the Series) and (ii) entitled to
either deduct your share of such foreign taxes in computing your taxable income
or to claim a credit for such taxes against your U.S. income tax, subject to
certain limitations under the Code. You will be informed by the Fund at the end
of each calendar year regarding the availability of any such foreign tax credits
and the amount of foreign source income (including any foreign taxes paid by the
Series). If the Series elects to pass-through to you the foreign income taxes
that it has paid, you will be informed at the end of the calendar year of the
amount of foreign taxes paid and foreign source income that must be included on
your federal income tax return. If the Series invests 50% or less of its total
assets in securities of foreign corporations, it will not be entitled to
pass-through to you your pro-rata shares of foreign taxes paid by the Series. In
this case, these taxes will be taken as a deduction by the Series, and the
income reported to you will be the net amount after these deductions. The 1997
Act also simplifies the procedures by which investors in funds that invest in
foreign securities can claim tax credits on their individual income tax returns
for the foreign taxes paid by the Series. These provisions will allow investors
who pay foreign taxes of $300 or less on a single return or $600 or less on a
joint return during any year (all of which must be reported on IRS Form 1099-DIV
from the Series to the investor) to claim a tax credit against their U.S.
federal income tax for the amount of foreign taxes paid by the Series. This
process will allow you, if you qualify, to bypass the burdensome and detailed
reporting requirements on the foreign tax credit
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schedule (Form 1116) and report your foreign taxes paid directly on page 2 of
Form 1040. You should note that this simplified procedure will not be available
until calendar year 1998.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES--The Series
may invest in shares of foreign corporations which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a Series receives an "excess distribution" with
respect to PFIC stock, the Series itself may be subject to U.S. federal income
tax on a portion of the distribution, whether or not the corresponding income is
distributed by the Series to you. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Series held the PFIC shares. The Series itself will be subject to tax
on the portion, if any, of an excess distribution that is so allocated to prior
Series taxable years, and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
Series. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain distribution might have been classified as capital gain. This may
have the effect of increasing Series distributions to you that are treated as
ordinary dividends rather than long-term capital gain dividends.
A Series may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Series generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market the Series' PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. The Series would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction would be
limited to the amount of any net mark-to-market gains previously included with
respect to that particular PFIC security. If the Series were to make this second
PFIC election, tax at the Series level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the
amount of tax payable by the Series (if any), the amounts distributable to you
by the Series, the time at which these distributions must be made, and whether
these distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares
of a foreign corporation are acquired to ascertain that the foreign corporation
is a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the Series acquires shares in that corporation. While
the Series will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so and
it reserves the right to make such investments as a matter of its fundamental
investment policy.
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Most foreign exchange gains are classified as ordinary income which
will be taxable to you as such when distributed. Similarly, you should be aware
that any foreign exchange losses realized by the Series, including any losses
realized on the sale of foreign debt securities, are generally treated as
ordinary losses for federal income tax purposes. This treatment could increase
or reduce the Series' income available for distribution to you, and may cause
some or all of the Series' previously distributed income to be classified as a
return of capital.
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PERFORMANCE INFORMATION
From time to time, the Fund may state each Series' total return in
advertisements and other types of literature. Any statements of total return
performance data will be accompanied by information on the Series' average
annual total rate of return over the most recent one-, five- and ten-year
periods. Each Series may also advertise aggregate and average total return
information over additional periods of time.
Each Series' average annual total rate of return is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000;
T = average annual total return;
n = number of years;
ERV = redeemable value of the hypothetical
$1,000 purchase at the end of the period.
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes all distributions are
reinvested at net asset value.
The performance of Small Cap Value Series, as shown below, is the
average annual total return quotations through December 31, 1997. As of the date
of this Part B, REIT Series had not yet begun investment operations. Securities
prices fluctuated during the periods covered and past results should not be
considered as representative of future performance.
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AVERAGE ANNUAL TOTAL RETURN*
SMALL CAP VALUE
1 year ended
12/31/97 32.91%
3 years ended
12/31/97 26.35%
Period 12/27/93**
through 12/31/97 19.96%
* Delaware Management elected to waive voluntarily the portion of its
annual compensation under its Investment Management Agreement with
the Series to limit operating expenses of the Series to the amounts
noted under Investment Management Agreements. In the absence of
such voluntary waiver, performance would have been affected
negatively.
** Date of initial public offering.
COMPARATIVE INFORMATION
From time to time, each Series may also quote its actual total return
performance, dividend results and other performance information in advertising
and other types of literature. This information may be compared to that of other
mutual funds with similar investment objectives and to stock, bond and other
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of a Series may be compared to data prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., or to the S&P 500 Index,
and the Dow Jones Industrial Average. Performance also may be compared to data
prepared by Lipper Analytical Services, Inc., Morningstar, Inc. or the
performance of unmanaged indices compiled or maintained by statistical research
firms such as Lehman Brothers or Salomon Brothers, Inc.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well as
unmanaged indices compiled and maintained by these firms, will be used in
preparing comparative illustrations. In addition, the performance of multiple
indices compiled and maintained by these firms may be combined to create a
blended performance result for comparative purposes. Generally, the indices
selected will be representative of the types of securities in which a Series may
invest and the assumptions that were used in calculating the blended performance
will be described.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare a Series'
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The S&P 500 and
the Dow Jones Industrial Average are industry-accepted unmanaged indices of
generally-conservative securities used for measuring general market performance.
The total return performance reported for these indices will reflect the
reinvestment of all distributions on a quarterly basis and
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market price fluctuations. The indices do not take into account any sales
charges or other fees. A direct investment in an unmanaged index is not
possible.
Comparative information on the Consumer Price Index may also be included in
advertisements or other literature. The Consumer Price Index, as prepared by the
U.S. Bureau of Labor Statistics, is the most commonly used measure of inflation.
It indicates the cost fluctuations of a representative group of consumer goods.
It does not represent a return from an investment.
The performance of multiple indices compiled and maintained by statistical
research firms, such as Morgan Stanley, Salomon Brothers and Lehman Brothers,
may be combined to create a blended performance result for comparative purposes.
Generally, the indices selected will be representative of the types of
securities in which the Series may invest and the assumptions that were used in
calculating the blended performance will be described.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Series may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Series. The Series may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Series may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Series (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments), economic and political conditions, the
relationship between sectors of the economy and the economy as a whole, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in shareholder
reports (including the investment composition of a Series), as well as the views
as to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Series. In addition, selected indices may be
used to illustrate historic performance of selected asset classes. The Series
may also include in advertisements, sales literature, communications to
shareholders or other materials, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, domestic and international stocks, and/or bonds,
treasury bills and shares of a Series. In addition, advertisements, sales
literature, communications to shareholders or other materials may include a
discussion of certain attributes or benefits to be derived by an investment in a
Series and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management and tax planning and
investment alternatives to certificates of deposit and other financial
instruments. Such sales literature,
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communications to shareholders or other materials may include symbols, headlines
or other material which highlight or summarize the information discussed in more
detail therein.
Materials may refer to the CUSIP numbers of the Series and may
illustrate how to find the listings of the Series in newspapers and periodicals.
Materials may also include discussions of other Series, products, and services.
The Series may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Series may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Series may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Series may include information
regarding the background and experience of its portfolio managers.
The following table is an example, for purposes of illustration only, of
cumulative total return performance for the Small Cap Value Series through
December 31, 1997. For these purposes, the calculations assume the reinvestment
of any realized securities profits distributions and income dividends paid
during the indicated periods.
CUMULATIVE TOTAL RETURN*
SMALL CAP VALUE
3 months ended
12/31/97 (0.06%)
6 months ended
12/31/97 13.71%
9 months ended
12/31/97 31.09%
1 year ended
12/31/97 32.91%
3 years ended
12/31/97 101.72%
Period 12/27/93**
through 12/31/97 107.57%
* Delaware Management elected to waive voluntarily the portion of its
annual compensation under its Investment Management Agreement with
the Series to limit operating expenses of the Series to to the
amounts noted under Investment Management Agreements. In the
absence of such voluntary waiver, performance would have been
affected negatively.
** Date of initial public offering.
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Because every investor's goals and risk threshold are different, certain
advertising and other related literature may provide general information about
investment alternatives and scenarios that will allow investors to assess their
personal goals. This information will include general material about investing
as well as materials reinforcing various industry-accepted principles of prudent
and responsible personal financial planning. One typical way of addressing these
issues is to compare an individual's goals and the length of time the individual
has to attain these goals to his or her risk threshold. In addition, information
may be provided discussing Delaware Management's overriding investment
philosophy and how that philosophy affects investment disciplines of the Series
and other funds in the Delaware Investments family employed in meeting their
objectives.
DOLLAR-COST AVERAGING
For many people, deciding when to invest can be a difficult decision. Prices
of securities such as stocks and bonds tend to move up and down over various
market cycles and are generally intended for longer term investing. Money market
funds, which typically maintain stable prices, are generally intended for your
short-term investment needs and can often be used as a basis for building a
long-term investment plan.
Though logic says to invest when prices are low, even experts can't always
pick the highs and the lows. By using a strategy known as dollar-cost averaging,
you schedule your investments ahead of time. If you invest a set amount on a
regular basis, that money will always buy more shares when the price is low and
fewer when the price is high. You can choose to invest at any regular
interval--for example, monthly or quarterly--as long as you stick to your
regular schedule.
Dollar-cost averaging looks simple and it is, but there are important things
to remember. Dollar-cost averaging works best over longer time periods, and it
doesn't guarantee a profit or protect against losses in declining markets. If
you need to sell your investment when prices are low, you may not realize a
profit no matter what investment strategy you utilize. That's why dollar-cost
averaging can make sense for long-term goals. Since the potential success of a
dollar-cost averaging program depends on continuous investing, even through
periods of fluctuating prices, you should consider your dollar-cost averaging
program a long-term commitment and invest an amount you can afford and probably
won't need to withdraw.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
NUMBER
INVESTMENT PRICE PER OF SHARES
AMOUNT SHARE PURCHASED
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $5.00 20
Month 4 $100 $10.00 10
----------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
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This example is for illustration purposes only. It is not intended to
represent the actual performance of a Series.
THE POWER OF COMPOUNDING
As part of your Variable Annuity contract, any earnings from your investment
selection are automatically reinvested to purchase additional shares of a
Series. This gives your investment yet another opportunity to grow. It's called
the Power of Compounding. Each Series may included illustrations showing the
Power of Compounding in advertisements and other types of literature.
-26-
<PAGE>
TRADING PRACTICES AND BROKERAGE
The Fund selects banks, brokers or dealers to execute transactions on behalf
of the Series for the purchase or sale of portfolio securities on the basis of
its judgment of their professional capability to provide the service. The
primary consideration is to have banks, brokers or dealers execute transactions
at best price and execution. Best price and execution refers to many factors,
including the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. The Fund pays reasonably competitive brokerage
commission rates based upon the professional knowledge of its trading department
as to rates paid and charged for similar transactions throughout the securities
industry. In some instances, the Fund pays a minimal share transaction cost when
the transaction presents no difficulty. Some trades are made on a net basis
where the Fund either buys the securities directly from the dealer or sells them
to the dealer. In these instances, there is no direct commission charged, but
there is a spread (the difference between the buy and sell price) which is in
the equivalent of a commission.
During the fiscal years ended December 31, 1995, 1996 and 1997, the
aggregate dollar amounts of brokerage commissions were paid by the Small Cap
Value Series:
1995 1996 1997
Small Cap Value Series $25,600 $53,113 $119,689
Delaware Management may allocate out of all commission business generated by
all of the funds and accounts under management by Delaware Management, brokerage
business to brokers or dealers who provide brokerage and research services.
These services include advice, either directly or through publications or
writings, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing of analyses and reports
concerning issuers; securities or industries; providing information on economic
factors and trends; assisting in determining portfolio strategy; providing
computer software and hardware used in security analyses; and providing
portfolio performance evaluation and technical market analyses. Such services
are used by Delaware Management in connection with its investment
decision-making process with respect to one or more funds and accounts managed
by it, and may not be used, or used exclusively, with respect to the fund or
account generating the brokerage.
During the fiscal year ended December 31, 1997, portfolio transactions of
$14,009,956 for the Small Cap Value Series, resulting in brokerage commissions
of $33,658 were directed to brokers for brokerage and research services
provided.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreements, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the Fund believes that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
Delaware Management which constitute in some part brokerage and research
services used by Delaware Management in connection with its investment
decision-making process and constitute in some part services used by Delaware
Management in connection with administrative or other functions not related to
-27-
<PAGE>
its investment decision-making process. In such cases, Delaware Management will
make a good faith allocation of brokerage and research services and will pay out
of its own resources for services used by Delaware Management in connection with
administrative or other functions not related to its investment decision-making
process. In addition, so long as no fund is disadvantaged, portfolio
transactions which generate commissions or their equivalent are allocated to
broker/dealers who provide daily portfolio pricing services to the Fund and to
other funds in the Delaware Investments family. Subject to best price and
execution, commissions allocated to brokers providing such pricing services may
or may not be generated by the funds receiving the pricing service.
Delaware Management may place a combined order for two or more accounts or
funds engaged in the purchase or sale of the same security if, in its judgment,
joint execution is in the best interest of each participant and will result in
best price and execution. Transactions involving commingled orders are allocated
in a manner deemed equitable to each account or fund. When a combined order is
executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is believed that the ability of the accounts to participate
in volume transactions will generally be beneficial to the accounts and funds.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or fund may obtain, it is the opinion of Delaware Management and the
Fund's Board of Directors that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Fund may place orders with broker/dealers which have agreed to defray certain
expenses of the funds in the Delaware Investments family, such as custodian
fees, and may, at the request of the Distributor, give consideration to sales of
such funds shares as a factor in the selection of brokers and dealers to execute
Series portfolio transactions.
PORTFOLIO TURNOVER
The rate of portfolio turnover will not be a limiting factor when portfolio
changes are deemed appropriate for each Series. Given the respective Series'
investment objectives, the Fund anticipates that the annual portfolio turnover
rates are not expected to exceed 100% for the REIT Series, and may exceed 100%
for the Small Cap Value Series. It is possible that in any particular year
market conditions or other factors might result in portfolio activity at a
greater rate than anticipated. The portfolio turnover rate of each Series is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular fiscal year by the monthly average of the value of the
portfolio securities owned by the Series during the particular fiscal year,
exclusive of securities whose maturities at the time of acquisition are one year
or less.
The degree of portfolio activity may affect brokerage costs incurred by each
Series. A turnover rate of 100% would occur, for example, if all the investments
in a Series' portfolio at the beginning of the year were replaced by the end of
the year. In investing to achieve their respective objective, a Series may hold
securities for any period of time. Portfolio turnover will also be increased if
a Series writes a large number of call options which are subsequently exercised.
The turnover rate also may be affected by cash requirements from redemptions and
repurchases of Series' shares.
The portfolio turnover rates for the Small Cap Value Series for the past two
fiscal years were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Small Cap Value Series 41% 84%
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<PAGE>
OFFERING PRICE
The offering price of shares is the net asset value per share next to be
determined after an order is received. The purchase of shares becomes effective
at the close of business on the day on which the investment is received from the
life company and after any dividend is declared. Dividends, if any, begin to
accrue on the next business day.
There is no sales charge.
The purchase will be effected at the net asset value next computed after
the receipt of Federal Funds provided they are received by the close of regular
trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on
days when such exchange is open. The New York Stock Exchange is scheduled to be
open Monday through Friday throughout the year except for New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas. When the New York Stock Exchange is
closed, the Fund will generally be closed, pricing calculations will not be made
and purchase and redemption orders will not be processed. In the event of
changes in Securities and Exchange Commission requirements or the Fund's change
in time of closing, the Fund reserves the right to price at a different time, to
price more often than once daily or to make the offering price effective at a
different time.
An example showing how to calculate the net asset value per share is
included in the Series' financial statements which are incorporated by reference
into this Part B.
The net asset value per share is computed by adding the value of all
securities and other assets in a Series' portfolio, deducting any liabilities of
that Series and dividing by the number of that Series' shares outstanding.
Expenses and fees are accrued daily. Each Series' net asset value per share is
computed by adding the value of all the securities and other assets in the
Series' portfolio, deducting any liabilities of the Series, and dividing by the
number of Fund shares outstanding. Expenses and fees are accrued daily. In
determining a Series' total net assets, portfolio securities primarily listed or
traded on a national or foreign securities exchange, except for bonds, are
valued at the last sale price on that exchange. Exchange traded options are
valued at the last reported sale price or, if no sales are reported, at the mean
between bid and asked prices. Non-exchange traded options are valued at fair
value using a mathematical model. Futures contracts are valued at their daily
quoted settlement price. For valuation purposes, foreign currencies and foreign
securities denominated in foreign currency values will be converted into U.S.
dollar values at the mean between the bid and offered quotations of such
currencies against U.S. dollars based on rates in effect that day. Securities
not traded on a particular day, over-the-counter securities, and government and
agency securities are valued at the mean value between bid and asked prices.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Foreign securities and
the prices of foreign securities denominated in foreign currencies are
translated to U.S. dollars based on rates in effect as of 12 p.m., Eastern time.
Use of a pricing service has been approved by the Board of Directors. Prices
provided by a pricing service take into account appropriate factors such as
institutional trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading characteristics and other market data.
Subject to the foregoing, securities for which market quotations are not readily
available and other assets are valued at fair value as determined in good faith
and in a method approved by the Board of Directors.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Series of securities owned by it is not reasonably
practical, or it is not reasonably practical for a Series fairly to value its
assets, or in the event that the Securities and Exchange Commission has provided
for such suspension for the protection of shareholders, the Fund may postpone
payment or suspend the right of redemption or
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<PAGE>
repurchase. In such case, the shareholder may withdraw a request for redemption
or leave it standing as a request for redemption at the net asset value next
determined after the suspension has been terminated.
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
The Fund will make payments from each Series' net income and net
realized securities profits, if any, once a year. Any distributions from net
realized securities profits normally will be distributed following the close of
the fiscal year. The Fund's fiscal year ends on December 31.
TAXES
The Small Cap Value Series has qualified, and intends to continue to
qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"). REIT Series intends to qualify as a regulated
investment company under the Code. As such, a Series will not be subject to
federal income tax to the extent its earnings are distributed and it satisfies
other requirements relating to the sources of its income and diversification of
its assets.
Each Series of the Fund is treated as a single tax entity, and any
capital gains and losses for each series are calculated separately. It is the
Series' policy to pay out substantially all net investment income and net
realized gains to relieve the Fund of federal income tax liability on that
portion of its income paid to shareholders under the Internal Revenue Code.
The Series does not have a fixed policy with regard to distributions of
realized securities profits when such realized securities profits may be offset
by capital losses carried forward. Presently, however, the Series intends to
offset realized securities profits to the extent of the capital losses carried
forward.
All dividends out of net investment income, together with distributions
from short-term capital gains, will be taxable to those shareholders who are
subject to income taxes as ordinary income. (These distributions may be eligible
for the dividends-received deductions for corporations.) Any net long-term
capital gains distributed to those shareholders who are subject to income tax
will be taxable as such, regardless of the length of time a shareholder has
owned their shares.
Under the Taxpayer Relief act of 1997 (the "1997 Act"), the Series is
required to track its sales of portfolio securities and to report its capital
gain distributions to you according to the following categories of holding
periods:
"MID-TERM CAPITAL GAINS" OR "28 PERCENT RATE GAIN": securities sold by
the Series after July 28, 1997 that were held more than one year but not
more than 18 months. These gains will be taxable to individual investors
at a maximum rate of 28%.
"1997 ACT LONG-TERM CAPITAL GAINS" or "20 percent rate gain": securities
sold by the Series after July 28, 1997 that were held for more than 18
months. These gains will be taxable to individual investors at a maximum
rate of 20% for investors in the 28% or higher federal income tax
brackets, and at a maximum rate of 10% for investors in the 15% federal
income tax bracket.
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<PAGE>
"QUALIFIED 5-YEAR GAINS": For individuals in the 15% bracket, qualified
5-year gains are net gains on securities held for more than 5 years
which are sold after December 31, 2000. For individual who are subject
to tax at higher rate brackets, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for
more than 5 years. Taxpayers subject to tax at higher rate brackets may
also make an election for shares held on January 1, 2001 to recognize
gain on their shares (any loss is disallowed) in order to qualify such
shares as qualified 5-year property as though purchased after December
31, 2000. These gains will be taxable to individual investors at a
maximum rate of 18% for investors in the 28% or higher federal income
tax brackets, and at a maximum rate of 8% for investors in the 15%
federal income tax bracket when sold after the 5 year holding period.
-31-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT AND SUB-ADVISORY AGREEMENT
Delaware Management Company ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to each Series. Such services are provided
subject to the supervision and direction of the Fund's Board of Directors.
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. ("Delaware International"), were supervising in the aggregate more
than $40 billion in assets in the various institutional or separately managed
(approximately $24,040,760,000) and investment company (approximately
$16,482,523,000) accounts. Delaware Management is a series of Delaware
Management Business Trust. Delaware Management changed its form of organization
from a corporation to a business trust on March 1, 1998.
The Investment Management Agreement for Small Cap Value Series is dated
April 3, 1995 and was approved by shareholders on March 29, 1995. The Investment
Management Agreement for REIT Series is dated May 1, 1998 and was approved by
the initial shareholder on that date and will remain in effect for an initial
period of two years. The Agreements may be renewed only if such renewal and
continuance are specifically approved at least annually by the Board of
Directors or by vote of a majority of the outstanding voting securities of the
Series, and only if the terms and the renewal thereof have been approved by the
vote of a majority of the directors of the Fund who are not parties thereto or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Agreements are terminable without
penalty on 60 days' notice by the directors of the Fund or by Delaware
Management. The Agreements will terminate automatically in the event of their
assignments.
Delaware Management is paid an annual fee equal to the following
percentage rates of the average daily net assets of the Series:
Small Cap Value Series 0.75%
REIT Series 0.75%*
*Assets up to $500 million: 0.75% of average daily net assets
Assets over $500 million - $1,000 million: 0.70% of average daily net assets
Assets over $1,000 million - $2,500 million: 0.65% of average daily net assets
Assets over $2,500 million: 0.60% of average daily net assets
Delaware Management administers the affairs of and is ultimately
responsible for the investment management of each of the Series. In addition,
Delaware Management pays the salaries of all directors, officers and employees
who are affiliated with both it and the Fund.
Lincoln Investment Management, Inc. ("Lincoln"), a wholly owned
subsidiary of Lincoln National Corporation ("Lincoln National"), acts as
sub-adviser to Delaware Management with respect to REIT Series. In its capacity
as sub-adviser, Lincoln furnishes Delaware Management with investment
recommendations, asset allocation advice, research, economic analysis and other
investment services with respect to the securities in which the Series may
invest. Lincoln receives 30% of the advisory fee paid to Delaware Management for
acting as sub-adviser to Delaware Management with respect to the Series.
Lincoln's address is 200 E. Berry Street, Fort Wayne, Indiana 46802.
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<PAGE>
On December 31, 1997, the total net assets of the Small Cap Value Series
were $84,071,143. REIT Series did not publicly offer shares prior to May 1,
1998.
Investment management fees were incurred with respect to the Small Cap
Value Series for the last three fiscal years.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SERIES DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
- ------ ----------------- ----------------- -----------------
Small Cap Value Series $380,405 earned $117,000 earned $65,528 earned
$328,056 paid $87,687 paid $51,016 paid
$52,349 waived $29,313 waived $14,512 waived
</TABLE>
Except for those expenses borne by Delaware Management under the
Investment Management Agreements and the Distributor under the Distribution
Agreements, each Series is responsible for all of its own expenses. Among
others, these include the Series' proportionate share of rent and certain other
administrative expenses; the investment management fees; transfer and dividend
disbursing agent fees and costs; custodian expenses; federal securities
registration fees; proxy costs; and the costs of preparing prospectuses and
reports sent to shareholders.
Beginning May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of each Series to the extent necessary to ensure
that the Series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, do not exceed 0.85% of average
daily net assets through October 31, 1998.
Prior to May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of the Small Cap Value Series to the extent
necessary to ensure that the Series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses, did not
exceed 0.80% of average daily net assets from the commencement of operations
through April 30, 1998.
DISTRIBUTION AND SERVICE
Delaware Distributors, L.P., located at 1818 Market Street,
Philadelphia, PA 19103, serves as the Fund's national distributor under a
Distribution Agreement dated as of April 3, 1995 for the Small Cap Value Series.
REIT Series' Distribution Agreement is dated as of May 1, 1998. The Distributor
is an affiliate of Delaware Management and Delaware International and bears all
of the costs of promotion and distribution. Delaware Distributors, L.P. is an
indirect, wholly owned subsidiary of Delaware Management Holdings, Inc.
Delaware Service Company, Inc., another affiliate of Delaware Management
and Delaware International, is the Fund's shareholder servicing, dividend
disbursing and transfer agent for the each Series pursuant to the Amended and
Restated Shareholders Services Agreement dated May 1, 1998. The Transfer Agent
also provides accounting services to the Series pursuant to the terms of a
separate Fund Accounting Agreement. The Transfer Agent is also an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
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<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of the Fund are managed under the direction of
its Board of Directors.
Certain officers and directors of the Fund hold identical positions in
each of the other funds in the Delaware Investments family.
DMH Corp., Delvoy, Inc., Delaware Management Company, Inc., Delaware
Management Business Trust, Delaware Management Company, Delaware Investment
Advisers, Delaware Distributors, L.P., Delaware Distributors, Inc., Delaware
Service Company, Inc., Delaware Management Trust Company, Delaware International
Holdings Ltd., Founders Holdings, Inc., Delaware International Advisers Ltd.,
Delaware Capital Management, Inc. and Delaware Investment & Retirement Services,
Inc. are direct or indirect, wholly owned subsidiaries of Delaware Management
Holdings, Inc. ("DMH"). On April 3, 1995, a merger between DMH and a wholly
owned subsidiary of Lincoln National Corporation ("Lincoln National") was
completed. In connection with the merger, a new Investment Management Agreement
between the Fund on behalf of the Small Cap Value Series and Delaware Management
was executed following shareholder approval. REIT Series was not yet in
existence. 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.
Directors and principal officers of the Fund are noted below along with
their ages and their business experience for the past five years. Unless
otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
*WAYNE A. STORK (60)
Chairman and Director of the Fund, 33 other investment companies in the
Delaware Investments family, Delaware Management Holdings,
Inc. and Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer, Director of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.
Chairman,President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, President, Chief Executive Officer and Chief Investment
Officer of Delaware Management Company.
Chairman,President, Chief Executive Officer and Chief Investment
Officer and Trustee of Delaware Management Business Trust.
Chairman, Chief Executive Officer, Chief Investment Officer of Delaware
Investment Advisers.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd. and Delaware International
Holdings Ltd.
President and Chief Executive Officer of Delvoy, Inc.
Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc. and Delaware Investment
& Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware organization.
__________________
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
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<PAGE>
*JEFFREY J. NICK (45)
President, Chief Executive Officer and Director and/or Trustee of the
Fund and 33 other investment companies in the Delaware
Investments family.
President, Chief Executive Officer and Director of Delaware Management
Holdings, Inc.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc.
President of Lincoln Funds Corporation.
From 1992 to 1996, Mr. Nick was Managing Director of Lincoln
National UK plc and from 1989 to 1992, he was Senior Vice
President responsible for corporate planning and development
for Lincoln National Corporation.
RICHARD G. UNRUH, JR. (58)
Executive Vice President of the Fund, each of the other 33 investment
companies in the Delaware Investments family, Delaware
Management Holdings, Inc., Delaware Management
Company and Delaware Capital Management, Inc.
Executive Vice President and Director of Delaware Management
Company, Inc.
Executive Vice President and Trustee of Delaware Management Business
Trust.
President of Delaware Investment Advisers.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
PAUL E. SUCKOW (50)
Executive Vice President/Chief Investment Officer, Fixed Income of the
Fund, each of the other 33 investment companies in the
Delaware Investments family, Delaware Management Company,
Inc., Delaware Management Company, Delaware Investment
Advisers and Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc. and
Delaware Management Business Trust.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to Delaware Investments in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for Delaware Investments.
___________________
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
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<PAGE>
David K. Downes (58)
Executive Vice President, Chief Operating Officer, Chief Financial
Officer of the Fund, each of the other 33 investment companies
in the Delaware Investments family, Delaware Management
Holdings, Inc, Founders CBO Corporation, Delaware Management
Company, Delaware Investment Advisers, Delaware Capital
Management, Inc. and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc.,
DMH Corp., Delaware Distributors, Inc., Founders Holdings,
Inc. and Delvoy, Inc.
President, Chief Executive Officer, Chief Financial Officer and
Director of Delaware Service Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and
Director of Delaware International Holdings Ltd.
Chairman,Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
Executive Vice President, Chief Financial Officer, Chief Administrative
Officer and Trustee of Delaware Management Business Trust.
Director of Delaware International Advisers Ltd. and Delaware Voyageur
Holding, Inc. Vice President of Lincoln Funds Corporation
During the past five years, Mr. Downes has served in various executive
capacities at different times within the Delaware organization.
Walter P. Babich (70)
Director and/or Trustee of the Fund and each of the other 33 investment
companies in the Delaware Investments family.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (59)
Director and/or Trustee of the Fund and each of the other 33 investment
companies in the Delaware Investments family.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and
Treasurer of Columbia University, New York. From 1987 to 1989,
he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group, Inc.,
New York, from 1988 to 1990. Mr. Knerr founded The Publishing
Group, Inc. in 1988.
Ann R. Leven (57)
Director and/or Trustee of the Fund and each of the other 33 investment
companies in the Delaware Investments family.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
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<PAGE>
W. THACHER LONGSTRETH (77)
Director and/or Trustee of the Fund and each of the other 33 investment
companies in the Delaware Investments family.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
THOMAS F. MADISON (62)
Director and/or Trustee of the Fund and each of the other 33 investment
companies in the Delaware Investments family.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
CHARLES E. PECK (72)
Director and/or Trustee of the Fund and each of the other 33 investment
companies in the Delaware Investments family.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive
Officer of The Ryland Group, Inc., Columbia, MD.
GEORGE M. CHAMBERLAIN, JR. (51)
Senior Vice President, Secretary and General Counsel of the Fund,
each of the other 33 investment companies in the Delaware
Investments family, Delaware Management Company, Delaware
Investment Advisers, Delaware Distributors, L.P. and Delaware
Management Holdings, Inc.
Senior Vice President, Secretary, General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc., Delaware Capital Management, Inc. and Delvoy, Inc.
Senior Vice President, Secretary, General Counsel and Trustee of
Delaware Management Business Trust.
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President and Director of Delaware International
Holdings Ltd.
Director of Delaware International Advisers Ltd.
Secretary of Lincoln Funds Corporation
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
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<PAGE>
JOSEPH H. HASTINGS (48)
Senior Vice President/Corporate Controller of the Fund, each of the
other 33 investment companies in the Delaware Investments
family and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Management Business Trust, Delaware
Management Company, Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., Delaware International Holdings Ltd.
and Delvoy, Inc.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation.
Treasurer of Lincoln Funds Corporation
1818 Market Street, Philadelphia, PA 19103.
During the past five years, Mr. Hastings has served in various
capacities at different times within the Delaware
organization.
MICHAEL P. BISHOF (35)
Senior Vice President/Treasurer of the Fund, each of the other 33
investment companies in the Delaware Investments family and
Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc., Delaware Management Company and Delaware
Service Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting of
Delaware Distributors, L.P. and Delaware Investment Advisers.
Senior Vice President and Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining Delaware Investments in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995,
a Vice President for CS First Boston Investment Management,
New York, NY from 1993 to 1994 and an Assistant Vice President
for Equitable Capital Management Corporation, New York, NY
from 1987 to 1993.
CHRISTOPHER S. BECK (40)
Vice President/Senior Portfolio Manager of the Fund, of nine other
investment companies in the Delaware Investments family,
Delaware Management Company, Inc. and Delaware Management
Company.
Before joining Delaware Investments in 1997, Mr. Beck managed the
Small Cap Fund for two years at Pitcairn Trust Company. Prior
to 1995, he was Director of Research at Cypress Capital
Management in Wilmington and Chief Investment Officer of the
University of Delaware Endowment Fund.
BABAK ZENOUZI (35)
Vice President/Portfolio Manager of the Fund and 11 other
investment companies in the Delaware Investments family.
Vice President/Assistant Portfolio Manager of Delaware Investment
Advisers.
During the past five years, Mr. Zenouzi has served in various
capacities at different times within the Delaware organization.
-38-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation received from the
Fund and the total compensation received from all Delaware Investments funds for
the fiscal year ended December 31, 1997 and an estimate of annual benefits to be
received upon retirement under the Delaware Investments Retirement Plan for
Directors/Trustees as of December 31, 1997. Only the independent directors of
the Fund receive compensation from the Fund.
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM ALL 34
AGGREGATE ACCRUED BENEFITS DELAWARE
COMPENSATION AS PART OF UPON INVESTMENTS
NAME FROM FUND FUND EXPENSES RETIREMENT* FUNDS**
<S> <C> <C> <C> <C>
W. Thacher Longstreth $3,097 None $38,500 $59,827
Ann R. Leven $3,433 None $38,500 $65,160
Walter P. Babich $3,370 None $38,500 $64,160
Anthony D. Knerr $3,370 None $38,500 $64,160
Charles E. Peck $3,002 None $38,500 $56,682
Thomas F. Madison*** $2,160 None $38,500 $43,537
</TABLE>
* Under the terms of the Delaware Investments Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his or
her retirement from the Board, has attained the age of 70 years and served
on the Board for at least five continuous years, is entitled to receive
payments from each fund in Delaware Investments for a period equal to the
lesser of the number of years that such person served as a director or the
remainder of such person's life. The amount of such payments will be equal,
on an annual basis, to the amount of the annual retainer that is paid to
directors of each fund at the time of such person's retirement. If an
eligible director retired as of December 31, 1997, he or she would be
entitled to annual payments totaling $38,500, in the aggregate, from all of
the funds in Delaware Investments, based on the number of funds in Delaware
Investments as of that date.
** Each independent director currently receives a total annual retainer fee of
$38,500 for serving as a director or trustee for all funds in Delaware
Investments, plus $3,145 for each Board Meeting attended. Ann R. Leven,
Walter P. Babich, and Anthony D. Knerr serve on the Fund's audit committee;
Ms. Leven is the chairperson. Members of the audit committee currently
receive additional annual compensation of $5,000 from all funds, with the
exception of the chairperson, who receives $6,000.
*** Mr. Madison joined the Board of Directors on April 30, 1997.
-39-
<PAGE>
As of April 7, 1998, management believes the following accounts held 5%
of record or more of the outstanding shares of each series of the Fund.
Management has no knowledge of beneficial ownership of the Fund's shares:
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
Decatur Total SMA Life Assurance Company
Return Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 17,238,651 67.68%
Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 6,483,706 25.45%
Delchester Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 11,011,329 93.25%
Capital Reserves SMA Life Assurance Company
Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 3,001,523 91.74%
Delaware Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 7,744,687 93.45%
Cash Reserve SMA Life Assurance Company
Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 3,336,473 92.22%
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Series Name and Address of Account Share Amount Percentage
DelCap Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 6,479,602 95.32%
International Equity SMA Life Assurance Company
Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 13,296,990 96.91%
Trend Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 3,659,975 49.59%
Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 3,619,110 49.04%
Small Cap Value Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 5,361,951 98.91%
Global Bond Series Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 1,270,957 72.69%
SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 463,287 26.49%
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Series Name and Address of Account Share Amount Percentage
Strategic Income SMA Life Assurance Company
Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 1,020,922 75.93%
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 257,050 19.11%
Devon Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 1,882,719 97.70%
Emerging Markets SMA Life Assurance Company
Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 501,617 70.57%
Lincoln National Life Company
Separate Account - C See Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 206,393 29.04%
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Series Name and Address of Account Share Amount Percentage
Convertible Securities Lincoln National Life Company
Series Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 206,690 47.25%
SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 206,064 47.11%
Social Awareness SMA Life Assurance Company
Series Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 730,177 80.52%
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 152,822 16.85%
</TABLE>
-43-
<PAGE>
GENERAL INFORMATION
Delaware Management is the investment manager of each Series. Delaware
Management or its affiliate, Delaware International, manages the other funds in
the Delaware Investments family. While investment decisions for each Series are
made independently from those of the other funds and accounts, investment
decisions for such other funds and accounts may be made at the same time as
investment decisions for the Series.
Access persons and advisory persons of the Delaware Investments family
of funds, as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who
provide services to Delaware Management, Delaware International or their
affiliates, are permitted to engage in personal securities transactions subject
to the exceptions set forth in Rule 17j-1 and the following general restrictions
and procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions may only be closed-out at a profit after a 60-day holding
period has elapsed; and (5) the Compliance Officer must be informed periodically
of all securities transactions and duplicate copies of brokerage confirmations
and account statements must be supplied to the Compliance Officer.
Delaware Distributors, L.P. acts as national distributor for the Fund
and for the other mutual funds in the Delaware Investments family.
In addition, Delaware Service Company, Inc., an affiliate of Delaware
Management, acts as shareholder servicing, dividend disbursing and transfer
agent for the Fund and for the other mutual funds in the Delaware Investments
family. Compensation is fixed each year and approved by the Board of Directors,
including a majority of the disinterested directors. The Transfer Agent also
provides accounting services to the Series. Those services include performing
all functions related to calculating each Series' net asset value and providing
all financial reporting services, regulatory compliance testing and other
related accounting services. For its services, the Transfer Agent is paid a fee
based on total assets of all funds in the Delaware Investments family for which
it provides such accounting services. Such fee is equal to 0.25% multiplied by
the total amount of assets in the complex for which the Transfer Agent furnishes
accounting services, where such aggregate complex assets are $10 billion or
less, and 0.20% of assets if such aggregate complex assets exceed $10 billion.
The fees are charged to each fund, including the Series, on an aggregate
pro-rata basis. The asset-based fee payable to the Transfer Agent is subject to
a minimum fee calculated by determining the total number of investment
portfolios and associated classes.
Delaware Management and its affiliates own the name "Delaware Group."
Under certain circumstances, including the termination of the Fund's advisory
relationship with Delaware Management or its distribution relationship with
Delaware Distributors, L.P., Delaware Management and its affiliates could cause
the Fund to delete the words "Delaware Group" from the Fund's name.
Small Cap Value Series commenced operations on December 27, 1993. REIT
Series did not commence operations prior to the date of this Part B.
CAPITALIZATION
The Fund has a present authorized capitalization of one billion shares
of capital stock with a $.01 par value per share. The Board of Directors has
allocated fifty million shares to each Series. While all shares have equal
voting rights on matters affecting the entire Fund, each Series would vote
separately on any matter which affects only that Series, such as investment
objective and policy or action to dissolve the Series, and as otherwise
prescribed by the
-44-
<PAGE>
1940 Act. Shares of each Series have a priority in that Series' assets, and in
gains on and income from the portfolio of that Series. Shares have no preemptive
rights, are fully transferable and, when issued, are fully paid and
nonassessable. All shares participate equally in dividends, and upon liquidation
would share equally.
NONCUMULATIVE VOTING
SERIES SHARES HAVE NONCUMULATIVE VOTING RIGHTS WHICH MEANS THAT THE
HOLDERS OF MORE THAN 50% OF THE SHARES OF THE FUND VOTING FOR THE ELECTION OF
DIRECTORS CAN ELECT ALL THE DIRECTORS IF THEY CHOOSE TO DO SO, AND, IN SUCH
EVENT, THE HOLDERS OF THE REMAINING SHARES WILL NOT BE ABLE TO ELECT ANY
DIRECTORS.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the Securities and Exchange
Commission ("SEC"). Shareholders may obtain a copy of the Registration Statement
by contacting the SEC in Washington, DC.
-45-
<PAGE>
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for each series of
the Fund and, in its capacity as such, audits the annual financial statements of
each Series. Small Cap Value Series' Statement of Net Assets, Statement of
Operations, Statement of Changes in Net Assets, Financial Highlights and Notes
to Financial Statements, as well as the report of Ernst & Young LLP, independent
auditors, for the fiscal year ended December 31, 1997 are included in the Fund's
Annual Report to shareholders. The financial statements and financial
highlights, the notes relating thereto and the report of Ernst & Young LLP
listed above are incorporated by reference from the Annual Report into this Part
B. REIT Series did not commence operations prior to the date of this Part B.
-46-
<PAGE>
INVESTMENT MANAGER -----------------------------------
Delaware Management Company DELAWARE GROUP
One Commerce Square -----------------------------------
Philadelphia, PA 19103 PREMIUM FUND, INC.
-----------------------------------
SUB-ADVISER SMALL CAP VALUE SERIES
Lincoln Investment Management, Inc. -----------------------------------
200 E. Berry Street REIT SERIES
Fort Wayne, Indiana 46802 -----------------------------------
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT PART B
Delaware Service Company, Inc.
1818 Market Street STATEMENT OF
Philadelphia, PA 19103 ADDITIONAL INFORMATION
-----------------------------------
LEGAL COUNSEL MAY 1,1998
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center Delaware
Brooklyn, NY 11245 Investments
-----------
