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INVESTMENT MANAGERS ------------------------
Delaware Management Company
One Commerce Square DELAWARE GROUP
Philadelphia, PA 19103
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Delaware International Advisers Ltd.
Third Floor PREMIUM FUND, INC.
80 Cheapside
London, England EC2V 6EE ------------------------
SUB-ADVISERS
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, Indiana 46802
Vantage Global Advisors, Inc.
630 Fifth Avenue
New York, NY 10111
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103 PART B
SHAREHOLDER SERVICING, STATEMENT OF
DIVIDEND DISBURSING, ADDITIONAL INFORMATION
ACCOUNTING SERVICES
AND TRANSFER AGENT ------------------------
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103 MAY 1, 1998
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
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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 Agreements
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Officers and Directors
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General Information
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Appendix A--Description of Ratings
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Financial Statements
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Delaware Group Premium Fund, Inc. ("Premium Fund" or the "Fund") is a
diversified, open-end management investment company which is intended to meet
a wide range of investment objectives with its 16 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 any Series will be realized.
Decatur Total Return Series seeks the highest possible total
rate of return by selecting issues that exhibit the
potential for capital appreciation while providing higher
than average dividend income. This Series has the same
objective and investment disciplines as Decatur Total Return
Fund of Delaware Group Equity Funds II, Inc., a separate
fund in the Delaware Investments family, in that it invests
generally, but not exclusively, in common stocks and
income-producing securities convertible into common stocks,
consistent with the Series' objective.
Delchester Series seeks as high a current income as possible
by investing in rated and unrated corporate bonds (including
high-yield bonds commonly known as junk bonds), U.S.
government securities and commercial paper. This Series has
the same objective and investment disciplines as Delchester
Fund of Delaware Group Income Funds, Inc., a separate fund
in the Delaware Investments family. An investment in the
Series may involve greater risks than an investment in a
portfolio comprised primarily of investment grade bonds.
Capital Reserves Series seeks a high stable level of current
income while minimizing fluctuations in principal by
investing in a diversified portfolio of short- and
intermediate-term securities.
Cash Reserve Series seeks the highest level of income
consistent with preservation of capital and liquidity
through investments in short-term money market instruments.
This Series has the same objective and investment
disciplines as Delaware Group Cash Reserve, Inc., a separate
fund in the Delaware Investments family.
DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of
securities exhibiting the potential for significant growth.
This Series has the same objective and investment
disciplines as DelCap Fund of Delaware Group Equity Funds
IV, Inc., a separate fund in the Delaware Investments
family, in that it invests in common stocks and other
securities including, but not limited to, convertible
securities, warrants, preferred stocks, bonds and foreign
securities, consistent with the Series' objective.
Delaware Series seeks a balance of capital appreciation,
income and preservation of capital. It uses a
dividend-oriented valuation strategy to select securities
issued by established companies that are believed to
demonstrate potential for income and capital growth. This
Series has the same objective and investment disciplines as
Delaware Fund of Delaware Group Equity Funds I, Inc., a
separate fund in the Delaware Investments family, in that,
as a "balanced" fund, the Series, consistent with its
objective, invests at least 25% of its assets in
fixed-income securities and the remainder primarily in
equity securities.
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International Equity Series seeks long-term growth without
undue risk to principal by investing primarily in equity
securities of foreign issuers providing the potential for
capital appreciation and income. This Series has the same
objective and investment disciplines as International Equity
Series of Delaware Group Global & International Funds, Inc.,
a separate fund in the Delaware Investments family, in that
it invests in a broad range of equity securities of foreign
issuers including common stocks, preferred stocks,
convertible securities and warrants, consistent with the
Series' objective.
Small Cap Value Series (formerly Value Series) seeks capital
appreciation by investing primarily in small cap common
stocks whose market value appears low relative to their
underlying value or future earnings and growth potential.
Emphasis will also be placed on securities of companies that
may be temporarily out of favor or whose value is not yet
recognized by the market. This Series has the same objective
and investment disciplines as Small Cap Value Fund of
Delaware Group Equity Funds V, Inc., a separate fund in the
Delaware Investments family.
Trend Series seeks long-term capital appreciation by
investing primarily in small-cap common stocks and
convertible securities of emerging and other growth-oriented
companies. These securities will have been judged to be
responsive to changes in the market place and to have
fundamental characteristics to support growth. Income is not
an objective. This Series has the same objective and
investment disciplines as Trend Fund of Delaware Group Trend
Fund, Inc., a separate fund in the Delaware Investments
family.
Global Bond Series seeks current income consistent with
preservation of principal by investing primarily in
fixed-income securities that may also provide the potential
for capital appreciation. This Series is a global fund, as
such, at least 65% of the Series' assets will be invested in
fixed-income securities of issuers organized or having a
majority of their assets in or deriving a majority of their
operating income in at least three different countries, one
of which may be the United States. This Series has the same
objective and investment disciplines as Global Bond Series
of Delaware Group Global & International Funds, Inc., a
separate fund in the Delaware Investments family.
Strategic Income Series seeks high current income and total
return. The Series seeks to achieve its objective by using a
multi-sector investment approach, investing primarily in
three sectors of the fixed-income securities markets: high
yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign
fixed-income securities. In addition, the Series may invest
in U.S. equity securities. This Series has the same
objective and investment disciplines as Strategic Income
Fund of Delaware Group Income Funds, Inc., a separate fund
in the Delaware Investments family.
Devon Series seeks current income and capital appreciation.
The Series will seek to achieve its objective by investing
primarily in income-producing common stocks, with a focus on
common stocks that the investment adviser believes have the
potential for above-average dividend increases over time.
Under normal circumstances, the Series will invest at least
65% of its total assets in dividend paying common stocks.
This Series has the same objective and investment
disciplines as Devon Fund of Delaware Group Equity Funds I,
Inc., a separate fund in the Delaware Investments family.
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Emerging Markets Series seeks to achieve long-term capital
appreciation. The Series seeks to achieve its objective by
investing primarily in equity series of issuers located in
emerging countries. The Series is an international fund. As
such, under normal market conditions, at least 65% of the
Series' assets will be invested in equity securities of
issuers organized or having a majority of their assets or
deriving a majority of their operating income in at least
three countries that are considered to be emerging or
developing. This Series has the same objective and
investment disciplines as Emerging Markets Fund of Delaware
Group Global & International Funds, Inc., a separate fund in
the Delaware Investments family.
Convertible Securities Series seeks a high level of total
return on its assets through a combination of capital
appreciation and current income. The Series intends to
pursue its investment objective by investing primarily in
convertible securities. Under normal conditions, the Series
intends to invest at least 65% of its total assets in
convertible securities, which may include privately placed
convertible securities. In pursuit of its investment
objective, the Series may invest the balance of its assets
in, among other things, preferred and common stock, U.S.
Government securities, non-convertible fixed income
securities and money market securities.
Social Awareness Series (formerly Quantum Series) seeks to
achieve long-term capital appreciation. The Series seeks to
achieve its objective by investing primarily in equity
securities of medium to large-sized companies expected to
grow over time that meet the Series' "Social Criteria"
strategy. This Series has the same objective and investment
disciplines as Social Awareness Fund of Delaware Group
Equity Funds II, 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 each Series (other than
Strategic Income, Devon, Emerging Markets, Convertible Securities, Social
Awareness and REIT Series) which may not be amended without approval of a
majority of the outstanding voting securities of the affected Series, which is
the lesser of more than 50% of the outstanding voting securities or 67% of the
voting securities of the affected Series present at a shareholder meeting if
50% or more of the voting securities are present in person or represented by
proxy. The percentage limitations contained in the restrictions and policies
set forth herein apply at the time of purchase of securities. Each such Series
will not:
1. Invest more than 5% of the value of its assets in securities of
any one issuer (other than obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities). This restriction shall apply
to only 75% of the assets of International Equity, Small Cap Value and Trend
Series and to only 50% of the assets of Global Bond Series.
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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
a Series' assets or (c) own securities of investment companies having an
aggregate value in excess of 10% of a Series' assets. Any such purchase shall
be at the customary brokerage commission. The limitations set forth in this
restriction do not apply to purchases by International Equity Series of
securities issued by closed-end investment companies, all of which must be at
the customary brokerage commission.
5. Make any investment in real estate unless necessary for office
space or the protection of investments already made. (This restriction does
not preclude a Series' purchase of securities secured by real estate or
interests therein, or securities issued by companies which invest in real
estate or interests therein, including real estate investment trusts.)
6. Purchase securities on margin, make short sales of securities or
maintain a net short position (except that a Series may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities). This restriction shall not prohibit the Series from
satisfying margin requirements with respect to futures transactions.
7. Invest in interests in oil, gas or other mineral exploration or
development programs, commodities or commodities contracts. This restriction
shall not prohibit International Equity, Small Cap Value and Trend Series from
entering into futures contracts or options thereon, to the extent that not
more than 5% of its assets are required as futures contract margin deposits
and premiums on options and only to the extent that obligations under such
contracts and transactions represent not more than 20% of the Series' assets.
8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to
facilitate redemptions. The Series have no intention of increasing their net
income through borrowing. Any borrowing will be done from a bank and to the
extent that such borrowing exceeds 5% of the value of a Series' assets, asset
coverage of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, the Series shall, within three days
thereafter (not including Sunday and holidays) or such longer period as the
Securities and Exchange Commission may prescribe by rules and regulations,
reduce the amount of its borrowings to an extent that the asset coverage of
such borrowings shall be at least 300%. A Series will not pledge more than 15%
of its net assets. A Series shall not issue senior securities as defined in
the Investment Company Act of 1940 (the "1940 Act"), except for notes to
banks.
9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with each Series' investment
objective and policies are considered loans and except that each Series may
loan up to 25% of its assets to qualified broker/dealers or institutional
investors for their use relating to short sales or other security
transactions.
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10. Invest more than 5% of the value of its total assets in securities
of companies less than three years old. Such three-year period shall include
the operation of any predecessor company or companies.
11. Invest more than 25% of its total assets in any particular industry,
except that a Series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by Standard & Poor's Ratings Group ("S&P")
or P-2 or better by Moody's Investors Service, Inc. ("Moody's").
12. Act as an underwriter of securities of other issuers, except that a
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, a Series might be deemed to
be an underwriter for the purposes of the Securities Act of 1933.
Investment restrictions 2, 3, 7 and 10 above are nonfundamental
policies of Global Bond Series. In addition, although not considered a
fundamental policy, Global Bond Series will not invest more than 10% of its
net assets in repurchase agreements maturing in more than seven days and other
illiquid assets. Securities of foreign issuers which are not listed on a
recognized domestic or foreign exchange or for which a bona fide market does
not exist at the time of purchase or subsequent valuation are included in the
category of illiquid assets.
In addition, the following investment restrictions of such Series may
be changed by the Board of Directors:
(a) Each Series will not invest in warrants valued at lower of cost
or market exceeding 5% of a Series' net assets. Included within that amount,
but not to exceed 2% of a Series' net assets, may be warrants not listed on
the New York Stock Exchange or American Stock Exchange. This restriction shall
not apply to International Equity Series.
(b) The Money Market Series will not invest more than 25% of its
assets in foreign banks which are subject to the same regulation as United
States banks or to foreign branches of United States banks where such a bank
is liable for the obligations of the branch.
While such Series are permitted under certain circumstances to borrow
money, they do not normally do so. No investment securities will be purchased
while a Series has an outstanding borrowing. The Fund has undertaken, for so
long as required by California Regulatory Authority and so long as insurance
policy premiums or proceeds of contracts sold in California are used to
purchase Fund shares, each Series will not borrow money in excess of 25% of
the value of its net assets.
The following restrictions are fundamental policies of Strategic
Income, Devon, Emerging Markets, Convertible Securities and Social Awareness
Series, which may not be changed without the approval of the holders of a
majority of the affected Series' outstanding voting securities:
1. Each such Series, other than Emerging Markets Series, will not
with respect to 75% of its total assets, purchase the securities of any issuer
(other than those of other investment companies or of the U.S. Government or
its agencies or instrumentalities), if immediately thereafter the Series would
(a) have more than 5% of the value of its total assets in the securities of
such issuer or (b) own more than 10% of the outstanding voting securities of
such issuer.
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2. Each such Series will not invest 25% or more of its total assets
in any one industry provided that there is no limitation with respect to
investments in obligations issued or guaranteed as to principal or interest by
the U.S. Government, its agencies or instrumentalities.
3. Each such Series will not make loans other than by the purchase of
all or a portion of a publicly or privately distributed issue of bonds,
debentures or other debt securities of the types commonly offered publicly or
privately and purchased by financial institutions (including repurchase
agreements), whether or not the purchase was made upon the original issuance
of the securities, and except that each Series may loan its assets to
qualified broker/dealers or institutional investors.
4. Each such 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.
5. Each such 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, each Series may engage in
short sales, purchase securities on margin, and write put and call options.
6. Each such 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.
7. Purchase or sell real estate; provided that the Series may invest
in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
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.
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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 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 further, that the Series may own real estate directly as a
result of a default on securities the Series owns.
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.
ADDITIONAL INFORMATION ON THE CASH RESERVE AND CAPITAL RESERVES SERIES
MONEY MARKET INSTRUMENTS
The Capital Reserves Series may, from time to time, invest all or
part of its available assets in money market instruments maturing in one year
or less. Cash Reserve Series will invest all of its available assets in
instruments which have a remaining maturity of 13 months or less at the time
of acquisition and which will otherwise meet the maturity, quality and
diversification conditions with which taxable money market funds must comply.
The types of instruments which these Series may purchase are described below:
1. U.S. Government Securities--Securities issued or guaranteed by the
U.S. government, including Treasury Bills, Notes and bonds.
2. U.S. Government Agency Securities--Obligations issued or guaranteed
by agencies or instrumentalities of the U.S. government whether supported by the
full faith and credit of the U.S. Treasury or the credit of a particular agency
or instrumentality.
3. Bank Obligations--Certificates of deposit, bankers' acceptances and
other short-term obligations of U.S. commercial banks and their overseas
branches and foreign banks of comparable quality, provided each such bank
combined with its branches has total assets of at least one billion dollars, and
certificates and issues of domestic savings and loan associations of one billion
dollars in assets whose deposits are insured by the
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Federal Deposit Insurance Corporation. Any obligations of foreign banks shall
be denominated in U.S. dollars. Obligations of foreign banks and obligations
of overseas branches of U.S. banks are subject to somewhat different
regulations and risks than those of U.S. domestic banks. In particular, a
foreign country could impose exchange controls which might delay the release
of proceeds from that country. Such deposits are not covered by the Federal
Deposit Insurance Corporation. Because of conflicting laws and regulations, an
issuing bank could maintain that liability for an investment is solely that of
the overseas branch which could expose the Series to a greater risk of loss.
The Series will only buy short-term instruments in nations where these risks
are minimal. The Series will consider these factors along with other
appropriate factors in making an investment decision to acquire such
obligations and will only acquire those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by the
Series. Either Series may invest more than 25% of its assets in foreign banks
except that this limitation shall not apply to United States branches of
foreign banks which are subject to the same regulations as United States banks
or to foreign branches of United States banks where such a bank is liable for
the obligations of the branch. This policy may be changed by the Board of
Directors without shareholder approval.
Cash Reserve Series is subject to certain maturity, quality and
diversification conditions applicable to taxable money market funds. Thus, if
a bank obligation or, as relevant, its issuer is considered to be rated at the
time of the proposed purchase, it or, as relevant, its issuer must be so rated
in one of the two highest rating categories by at least two
nationally-recognized statistical rating organizations or, if such security
or, as relevant, its issuer is not so rated, the purchase of the security must
be approved or ratified by the Board of Directors in accordance with the
maturity, quality and diversification conditions with which taxable money
market funds must comply.
4. Commercial Paper--Short-term promissory notes issued by
corporations which at the time of purchase are rated A-2 or better by S&P or
P-2 or better by Moody's or which have received comparable ratings from a
nationally-recognized statistical rating organization approved by the Board of
Directors or, if not rated, issued or guaranteed by a corporation with
outstanding debt rated AA, Aa or better by S&P or Moody's. Cash Reserve Series
invests in commercial paper in accordance with the restrictions set forth in
the Prospectuses.
5. Short-term Corporate Debt--In addition to the other debt
securities described in the Prospectuses, corporate notes, bonds and
debentures which at the time of purchase are rated AA or better by S&P or Aa
or better by Moody's or which have received comparable ratings from a
nationally-recognized statistical rating organization approved by the Board of
Directors, provided such securities have one year or less remaining to
maturity. Such securities generally have greater liquidity and are subject to
considerably less market fluctuation than longer issues. Cash Reserve Series
invests in corporate notes, bonds and debentures in accordance with the
restrictions set forth in the Prospectuses.
The ratings of S&P, Moody's and other rating services represent their
opinions as to the quality of the money market instruments which they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. These ratings are the initial
criteria for selection of portfolio investments, but the Series will further
evaluate these securities. See Appendix A--Description of Ratings.
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ADDITIONAL INFORMATION ON THE CAPITAL RESERVES, CASH RESERVE, DELAWARE
AND DEVON SERIES
ASSET-BACKED SECURITIES
The Capital Reserves, Cash Reserve, Delaware and Devon Series may
invest a portion of their assets in asset-backed securities. The rate of
principal payment on asset-backed securities generally depends on the rate of
principal payments received on the underlying assets. Such rate of payments
may be affected by economic and various other factors such as changes in
interest rates or the concentration of collateral in a particular geographic
area. Therefore, the yield may be difficult to predict and actual yield to
maturity may be more or less than the anticipated yield to maturity. The
credit quality of most asset-backed securities depends primarily on the credit
quality of the assets underlying such securities, how well the entities
issuing the securities are insulated from the credit risk of the originator or
affiliated entities, and the amount of credit support provided to the
securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments due on the underlying pool is timely. Protection against losses
resulting from ultimate default enhances the likelihood of payments of the
obligations on at least some of the assets in the pool. Such protection may be
provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Series will not pay any additional fees for such credit support, although the
existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets
exceeds that required to make payments of the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquencies or losses in excess of
those anticipated could adversely affect the return on an investment in such
issue.
ADDITIONAL INFORMATION ON THE CAPITAL RESERVES SERIES
AVERAGE WEIGHTED MATURITY
The Capital Reserves Series ordinarily maintains its average dollar
weighted portfolio maturity within the five to seven year range, but not in
excess of ten years. However, many of the securities in which the Series
invests will have remaining maturities in excess of seven years. The Series
may purchase individual securities with a remaining maturity of up to 15
years.
Some of the securities in the Series' portfolio may have periodic
interest rate adjustments based upon an index such as the 91-day Treasury Bill
rate. This periodic interest rate adjustment tends to lessen the volatility
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of the security's price. With respect to securities with an interest rate
adjustment period of one year or less, the Series will, when determining
average weighted maturity, treat such a security's maturity as the amount of
time remaining until the next interest rate adjustment.
Instruments such as GNMA, FNMA and FHLMC securities and similar
securities backed by amortizing loans generally have shorter effective
maturities than their stated maturities. This is due to changes in
amortization caused by demographic and economic forces such as interest rate
movements. These effective maturities are calculated based upon historical
payment patterns. For purposes of determining the Series' average weighted
maturity, the maturities of such securities will be calculated based upon the
issuing agency's payment factors using industry-accepted valuation models.
ADDITIONAL INFORMATION ON THE CASH RESERVE SERIES
The Series intends to achieve its objective by investing its assets
in a diversified portfolio of money market instruments. See Money Market
Instruments below and Appendix A--Description of Ratings.
The Series maintains its net asset value at $10 per share by valuing
its securities on an amortized cost basis. See Offering Price. The Series
maintains a dollar weighted average portfolio maturity of not more than 90
days and does not purchase any issue having a remaining maturity of more than
13 months. In addition, the Series limits its investments, including
repurchase agreements, to those instruments which the Board of Directors
determines present minimal credit risks and which are of high quality. The
Series may sell portfolio securities prior to maturity in order to realize
gains or losses or to shorten the average maturity if it deems such actions
appropriate to maintain a stable net asset value. While the Series will make
every effort to maintain a fixed net asset value of $10 per share, there can
be no assurance that this objective will be achieved.
While the Series intends to hold its investments until maturity when
they will be redeemable at their full principal value plus accrued interest,
it may attempt, from time to time, to increase its yield by trading to take
advantage of market variations. Also, revised evaluations of the issuer or
redemptions may cause sales of portfolio investments prior to maturity or at
times when such sales might otherwise not be desirable. The Series' right to
borrow to facilitate redemptions may reduce but does not guarantee a reduction
in the need for such sales. The Series will not purchase new securities while
any borrowings are outstanding. See Dividends and Realized Securities Profits
Distributions and Taxes for effect of any capital gains distributions.
A shareholder's rate of return will vary with the general interest
rate levels applicable to the money market instruments in which the Series
invests. In the event of an increase in current interest rates, a national
credit crisis or if one or more of the issuers became insolvent prior to the
maturity of the instruments, principal values could be adversely affected.
Investments in obligations of foreign banks and of overseas branches of U.S.
banks may be subject to less stringent regulations and different risks than
those of U.S. domestic banks. The rate of return and the net asset value will
be affected by such other factors as sales of portfolio securities prior to
maturity and the Series' operating expenses.
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ADDITIONAL INFORMATION ON THE INTERNATIONAL EQUITY, SMALL CAP VALUE, TREND,
GLOBAL BOND, STRATEGIC INCOME, DEVON, EMERGING MARKETS, CONVERTIBLE SECURITIES,
SOCIAL AWARENESS AND REIT SERIES
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS--As noted in the Prospectus, each of International Equity,
Small Cap Value, Trend, Global Bond, Strategic Income, Devon, Emerging
Markets, Convertible Securities, Social Awareness and REIT Series may enter
into futures contracts relating to securities, securities indices or interest
rates. In addition, International Equity, Global Bond, Strategic Income,
Emerging Markets and Convertible Securities Series may enter into foreign
currency futures contracts. (Unless otherwise specified, interest rate futures
contracts, securities and securities index futures contracts and foreign
currency futures contracts are collectively referred to as "futures
contracts.") Such investment strategies will be used as a hedge and not for
speculation.
Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Series may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
the Series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When a Series is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made,
the corresponding positions in stock or bond index futures contracts will be
closed out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on
a Series' current or intended investments in fixed-income securities. For
example, if a Series owned long-term bonds and interest rates were expected to
increase, that Series might sell interest rate futures contracts. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Series' portfolio. However, since the futures market is more liquid than the
cash market, the use of interest rate futures contracts as a hedging technique
allows a Series to hedge its interest rate risk without having to sell its
portfolio securities. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Series'
interest rate futures contracts would be expected to increase at approximately
the same rate, thereby keeping the net asset value of that Series from
declining as much as it otherwise would have. On the other hand, if interest
rates were expected to decline, interest rate futures contracts could be
purchased to hedge in anticipation of subsequent purchases of long-term bonds
at higher prices. Because the fluctuations in the value of the interest rate
futures contracts should be similar to those of long-term bonds, a Series
could protect itself against the effects of the anticipated rise in the value
of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and that Series' cash reserve could then
be used to buy long-term bonds on the cash market.
As noted in the Prospectus, International Equity, Global Bond,
Strategic Income, Emerging Markets and Convertible Securities Series may each
purchase and sell foreign currency futures contracts for hedging purposes to
attempt to protect its current or intended investments from fluctuations in
currency exchange rates. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the cost
of foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant.
Each of International Equity, Global Bond, Strategic Income, Emerging Markets
and Convertible Securities Series may sell futures contracts on a foreign
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currency, for example, when a Series holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative
to the dollar. In the event such decline occurs, the resulting adverse effect
on the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts. However, if the value of the foreign
currency increases relative to the dollar, the Series' loss on the foreign
currency futures contract may or may not be offset by an increase in the value
of the securities because a decline in the price of the security stated in
terms of the foreign currency may be greater than the increase in value as a
result of the change in exchange rates.
Conversely, each of International Equity, Global Bond, Strategic
Income, Emerging Markets and Convertible Securities Series could protect
against a rise in the dollar cost of foreign-denominated securities to be
acquired by purchasing futures contracts on the relevant currency, which could
offset, in whole or in part, the increased cost of such securities resulting
from a rise in the dollar value of the underlying currencies. When a Series
purchases futures contracts under such circumstances, however, and the price
of securities to be acquired instead declines as a result of appreciation of
the dollar, the Series will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities
to be acquired.
The Series may also engage in currency "cross hedging" when, in the
opinion of the Series' investment manager Delaware Management Company
("Delaware Management") or Delaware International Advisers Ltd. ("Delaware
International"), as applicable, the historical relationship among foreign
currencies suggests that a Series may achieve protection against fluctuations
in currency exchange rates similar to that described above at a reduced cost
through the use of a futures contract relating to a currency other than the
U.S. dollar or the currency in which the foreign security is denominated. Such
"cross hedging" is subject to the same risks as those described above with
respect to an unanticipated increase or decline in the value of the subject
currency relative to the dollar.
OPTIONS ON FUTURES CONTRACTS--As noted in the Prospectus, each of
International Equity, Small Cap Value, Trend, Global Bond, Strategic Income,
Emerging Markets and Convertible Securities and REIT 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
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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
International Equity, Global Bond, Strategic Income, Emerging
Markets, Convertible Securities and 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 currency for a fixed amount in dollars and will thereby offset, in whole
or in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movement in exchange rates. As in the case of other types of options,
however, the benefit to the Series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Series could sustain losses on transactions
in foreign currency options which would require it to forego a portion or all
of the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types
of hedging purposes. For example, where the Series anticipate a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, they could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in
the value of portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against the
anticipated increase in the dollar cost of securities to be acquired, the
Series could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Series to hedge
such increased costs up to the value of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may
be exercised and the Series would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Series also
may be required to forego all or a portion of the benefit which might
otherwise have been obtained from favorable movements in exchange rates.
Each Series intends to write covered call options on foreign
currencies. A call option written on a foreign currency by a 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
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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,
a 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.
ADDITIONAL INFORMATION ON THE DEVON SERIES
MORTGAGE-BACKED SECURITIES--In addition to mortgage-backed securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
or government sponsored corporations, Devon Series may also invest its assets
in securities issued by certain private, nongovernment corporations, such as
financial institutions. Certain of these private-backed securities are fully
collateralized at the time of issuance by securities or certificates issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Two
principal types of mortgage-backed securities are collateralized mortgage
obligations (CMOs) and real estate mortgage investment conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes
or series with different maturities. The classes or series are retired in
sequence as the underlying mortgages are repaid. Prepayment may shorten the
stated maturity of the obligation and can result in a loss of premium, if any
has been paid. Certain of these securities may have variable or floating
interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities.
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. Devon Series will
invest in such private-backed securities only if they are 100% collateralized
at the time of issuance by securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Series currently invests in
privately-issued CMOs and REMICs only if they are rated at the time of
purchase in the four highest grades by a nationally-recognized rating agency.
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CONVERTIBLE SECURITIES--The Series may invest in convertible
securities, including corporate debentures, bonds, notes and preferred stocks
that may be converted into or exchanged for common stock. While providing a
fixed-income stream (generally higher in yield than the income derivable from
a common stock but lower than that afforded by a non-convertible debt
security), a convertible security also affords the investor an opportunity,
through its conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible. As the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis and so may not experience market declines to the
same extent as the underlying common stock. When the market price of the
underlying common stock increases, the price of a convertible security tends
to rise as a reflection of the value of the underlying common stock. To obtain
such a higher yield, the Series may be required to pay for a convertible
security an amount in excess of the value of the underlying common stock.
Common stock acquired by the Series upon conversion of a convertible security
will generally be held for so long as Delaware Management anticipates such
stock will provide the Series with opportunities which are consistent with the
Series' investment objectives and policies.
The Series may invest in convertible debentures without regard to
rating categories. Investing in convertible debentures that are rated below
investment grade or unrated but of comparable quality entails certain risks,
including the risk of loss of principal, which may be greater than the risks
involved in investing in investment grade convertible debentures. Under rating
agency guidelines, lower rated securities and comparable unrated securities
will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
The Series may have difficulty disposing of such lower rated
convertible debentures because the trading market for such securities may be
thinner than the market for higher rated convertible debentures. To the extent
a secondary trading market for these securities does exist, it generally is
not as liquid as the secondary trading market for higher rated securities. The
lack of a liquid secondary market as well as adverse publicity with respect to
these securities, may have an adverse impact on market price and the Series'
ability to dispose of particular issues in response to a specific economic
event such as a deterioration in the creditworthiness of the issuer. The lack
of a liquid secondary market for certain securities also may make it more
difficult for the Series to obtain accurate market quotations for purposes of
pricing the Series' portfolio and calculating its net asset value. The market
behavior of convertible securities in lower rating categories is often more
volatile than that of higher quality securities. Lower quality convertible
securities are judged by Moody's and S&P to have speculative elements or
characteristics; their future cannot be considered as well assured and
earnings and asset protection may be moderate or poor in comparison to
investment grade securities.
In addition, such lower quality securities face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions, which could lead to inadequate capacity to meet timely payments.
The market values of securities rated below investment grade tend to be more
sensitive to company specific developments and changes in economic conditions
than higher rated securities. Issuers of these securities are often highly
leveraged, so that their ability to service their debt obligations during an
economic downturn or during sustained periods of rising interest rates may be
impaired. In addition, such issuers may not have more traditional methods of
financing available to them, and may be unable to repay debt at maturity by
refinancing.
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ADDITIONAL INFORMATION ON THE STRATEGIC INCOME, EMERGING MARKETS, CONVERTIBLE
SECURITIES AND REIT SERIES
WHEN-ISSUED, "WHEN, AS AND IF ISSUED" AND DELAYED DELIVERY SECURITIES
AND FORWARD COMMITMENTS -- The 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.
Strategic Income and Emerging Markets Series may also invest in other
enhanced convertible securities. See Enhanced Convertible Securities under
Convertible Securities Series in the Prospectus.
RESTRICTED SECURITIES
The Series may purchase privately-placed debt and other securities
whose resale is restricted under applicable securities laws. Such restricted
securities generally offer a higher return than comparable registered
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. Strategic
Income, Convertible Securities and REIT Series will not purchase illiquid
assets if more than 15% of its respective net assets would then consist of
such illiquid securities.
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ADDITIONAL INFORMATION ON THE SOCIAL AWARENESS SERIES
INVESTMENT COMPANY SECURITIES--Any investments that Social Awareness
Series makes in either closed-end or open-end investment companies will be
limited by the 1940 Act, and would involve an indirect payment of a portion of
the expenses, including advisory fees, of such other investment companies.
Under the 1940 Act's current limitations, the Series may not (1) own more than
3% of the voting stock of another investment company; (2) invest more than 5%
of the Series' total assets in the shares of any one investment company; nor
(3) invest more than 10% of the Series' total assets in shares of other
investment companies. If a Series elects to limit its investment in other
investment companies to closed-end investment companies, the 3% limitation
described above is increased to 10%. These percentage limitations also apply
to the Series' investments in unregistered investment companies.
UNSEASONED COMPANIES--Social Awareness Series may invest in
relatively new or unseasoned companies which are in their early stages of
development, or small companies positioned in new and emerging industries
where the opportunity for rapid growth is expected to be above average.
Securities of unseasoned companies present greater risks than securities of
larger, more established companies. The companies in which the Series may
invest may have relatively small revenues, limited product lines, and may have
a small share of the market for their products or services. Small companies
may lack depth of management, they may be unable to internally generate funds
necessary for growth or potential development or to generate such funds
through external financing or favorable terms, or they may be developing or
marketing new products or services for which markets are not yet established
and may never become established. Due these and other factors, small companies
may suffer significant losses as well as realize substantial growth, and
investments in such companies tend to be volatile and are therefore
speculative.
In addition, as a matter of non-fundamental policy, Social Awareness
Series will adhere to a Social Criteria strategy:
Vantage will utilize the Social Investment Database published by KLD
in determining whether a company is engaged in any activity precluded by the
Series' Social Criteria. The Social Investment Database reflects KLD's
determination of the extent to which a company's involvement in the activities
prohibited by the Social Criteria is significant enough to merit a concern or
a major concern. Significance may be determined on the basis of percentage of
revenue generated by, or the size of the operations attributable to,
activities related to such Social Criteria, or other factors selected by KLD.
The social screening undergoes continual refinement and modification.
Pursuant to the Social Criteria presently in effect, the Series will
not knowingly invest in or hold securities of companies which engage in:
1. Activities which result or are likely to result in damage to the
natural environment;
2. The production of nuclear power, the design or construction of
nuclear power plants, or the manufacture of equipment for the
production of nuclear power;
3. The manufacture of, or contracting for, military weapons; or
4. The liquor, tobacco or gambling industries.
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Because of its Social Criteria, the Series may not be able to take
the same advantage of certain investment opportunities as do funds which do
not have Social Criteria. Only securities of companies not excluded by any of
the Social Criteria will be eligible for consideration for purchase by the
Series according to its objective and policies described in the Prospectus.
The Series will commence the orderly sale of securities of a company
when it is determined by Vantage that such company no longer adheres to the
Social Criteria. The Series will sell such securities in a manner so as to
minimize any adverse affect on the Series' assets. Typically, such sales will
be made within 90 days from the date of Vantage's determination, unless a sale
within the 90 day period would produce a significant loss to the overall value
of the Series' assets.
REPURCHASE AGREEMENTS
Each of the Fund's 16 Series may, from time to time, enter into
repurchase transactions. Repurchase agreements are instruments under which
securities are purchased from a bank or securities dealer with an agreement by
the seller to repurchase the securities. Under a repurchase agreement, the
purchaser acquires ownership of the security but the seller agrees, at the
time of sale, to repurchase it at a mutually agreed-upon time and price. The
Series will take custody of the collateral under repurchase agreements.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred. The resale
price is in excess of the purchase price and reflects an agreed-upon market
rate unrelated to the coupon rate or maturity of the purchase security. Such
transactions afford an opportunity for the Series to invest temporarily
available cash. The Series' risk is limited to the seller's ability to buy the
security back at the agreed-upon sum at the agreed-upon time, since the
repurchase agreement is secured by the underlying obligation. Should such an
issuer default, the investment managers believe that, barring extraordinary
circumstances, the Series will be entitled to sell the underlying securities
or otherwise receive adequate protection for its interest in such securities,
although there could be a delay in recovery. The Series consider the
creditworthiness of the bank or dealer from whom it purchases repurchase
agreements. The Series will monitor such transactions to assure that the value
of the underlying securities subject to repurchase agreements is at least
equal to the repurchase price. The underlying securities will be limited to
those described above.
The funds in the Delaware Investments family have obtained an
exemption from the joint-transaction prohibitions of Section 17(d) of the
Investment Company Act of 1940 to allow the funds in the Delaware Investments
family jointly to invest cash balances. Each Series of the Fund may invest
cash balances in a joint repurchase agreement in accordance with the terms of
the Order and subject generally to the conditions described above.
PORTFOLIO LOAN TRANSACTIONS
Each of the Fund's 16 Series, except for Cash Reserve Series, may
loan up to 25% of its assets to qualified broker/dealers or institutional
investors for their use relating to short sales or other security
transactions.
It is the understanding of the Series' respective investment manager
that the staff of the Securities and Exchange Commission permits portfolio
lending by registered investment companies if certain conditions are met.
These conditions are as follows: 1) each transaction must have 100% collateral
in the form of cash, short-term U.S. government securities, or irrevocable
letters of credit payable by banks acceptable to the Fund from the borrower;
2) this collateral must be valued daily and should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the Series; 3) the Series must be able to terminate the loan after notice, at
any time; 4) the Series must receive reasonable interest on any loan, and any
dividends,
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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 the Series' respective
investment manager, under the supervision of the Board of Directors, including
the creditworthiness of the borrowing broker, dealer or institution and then
only if the consideration to be received from such loans would justify the
risk. Credit worthiness will be monitored on an ongoing basis by the Series'
respective investment manager.
FOREIGN SECURITIES
To the extent the Fund's 16 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 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
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part of a "section 988 hedging transaction" (as defined in the Internal
Revenue Code of 1986 (the "Code"), as amended, and the Treasury Regulations)
will be integrated and treated as a single transaction or otherwise treated
consistently for purposes of the Code. The income tax effects of integrating
and treating a transaction as a single transaction are generally to create a
synthetic debt instrument that is subject to the original discount provisions.
It is anticipated that some of the non-U.S. dollar denominated investments and
foreign currency contracts a Series may make or enter into will be subject to
the special currency rules described above.
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FOREIGN CURRENCY TRANSACTIONS
In connection with a Series' investment in foreign securities, a
Series may purchase or sell currencies and/or engage in forward foreign
currency transactions in order to expedite settlement of portfolio
transactions and to minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades. A Series will account
for forward contracts by marking to market each day at daily exchange rates.
When a Series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of that Series' assets
denominated in such foreign currency, the Series' custodian bank or
subcustodian will place cash or liquid high grade debt securities in a
separate account of the Series in an amount not less than the value of such
Series' total assets committed to the consummation of such forward contracts.
If the additional cash or securities placed in the separate account declines,
additional cash or securities will be placed in the account on a daily basis
so that the value of the account will equal the amount of the Series'
commitments with respect to such contracts.
OPTIONS
Each of the Fund's 16 Series, except for Cash Reserve Series, may
write call options and purchase put options on a covered basis only.
International Equity, Global Bond, Emerging Markets, Convertible Securities
and 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 International Equity,
Global Bond, Emerging Markets, Convertible Securities and REIT Series may also
invest in options that are traded over-the-counter. The other Series reserve
the right to invest in over-the-counter options upon written notice to their
shareholders. The Series will enter into an option position only if there
appears to be a liquid market for such options. However, there can be no
assurance that a liquid secondary market will be maintained. Thus, it may not
be possible to close option positions and this may have an adverse impact on a
Series' ability to effectively hedge its securities.
A. COVERED CALL WRITING--A Series may write covered call options from
time to time on such portion of its portfolio, without limit, as the
respective investment manager determines is appropriate in seeking to obtain
the Series' investment objective. A call option gives the purchaser of such
option the right to buy, and the writer, in this case the Series, has the
obligation to sell the underlying security at the exercise price during the
option period. The advantage to a Series of writing covered calls is that the
Series receives a premium which is additional income. However, if the security
rises in value, the Series may not fully participate in the market
appreciation.
During the option period, a covered call option writer may be
assigned an exercise notice by the broker/dealer through whom such call option
was sold requiring the writer to deliver the underlying security against
payment of the exercise price. This obligation is terminated upon the
expiration of the option period or at such earlier time in which the writer
effects a closing purchase transaction. A closing purchase transaction cannot
be effected with respect to an option once the option writer has received an
exercise notice for such option.
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With respect to such options, the Series may enter into closing
purchase transactions. A closing purchase transaction is one in which the
Series, when obligated as a writer of an option, terminates its obligation by
purchasing an option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to realize
a profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether
the net amount of the original premium received on the call option is more or
less than the cost of effecting the closing purchase transaction. Any loss
incurred in a closing purchase transaction may be partially or entirely offset
by the premium received from a sale of a different call option on the same
underlying security. Such a loss may also be wholly or partially offset by
unrealized appreciation in the market value of the underlying security.
Conversely, a gain resulting from a closing purchase transaction could be
offset in whole or in part by a decline in the market value of the underlying
security.
If a call option expires unexercised, the Series will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Series will realize a gain or loss from the sale of
the underlying security equal to the difference between the cost of the
underlying security and the proceeds of the sale of the security plus the
amount of the premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
A Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at
all times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Series will normally have expiration dates between one
and nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying
security at the time the option is written.
B. PURCHASING PUT OPTIONS--A Series may invest up to 2% of its total
assets in the purchase of put options. The Series will, at all times during
which it holds a put option, own the security covered by such option.
A put option purchased by the Series gives it the right to sell one
of its securities for an agreed price up to an agreed date. The Series intend
to purchase put options in order to protect against a decline in market value
of the underlying security below the exercise price less the premium paid for
the option ("protective puts"). The ability to purchase put options will allow
a Series to protect unrealized gain in an appreciated security in its
portfolio without actually selling the security. If the security does not drop
in value, the Series will lose the value of the premium paid. A Series may
sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such sales will result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option which is sold.
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The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions.
A closing sale transaction is one in which a Series, when it is the holder of
an outstanding option, liquidates its position by selling an option of the
same series as the option previously purchased.
C. PURCHASING CALL OPTIONS--International Equity, Global Bond,
Emerging Markets, Convertible Securities and 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 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--The DelCap, International Equity, Small
Cap Value, Trend, Global Bond, Emerging Markets, Convertible Securities and
REIT 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
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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, DelCap, International Equity, Small Cap Value,
Trend, Global Bond, Emerging Markets, Convertible Securities and REIT Series
may offset positions in stock index options prior to expiration by entering
into a closing transaction on an Exchange or may let the option expire
unexercised.
A stock index fluctuates with changes in the market values of the
stock so included. Some stock index options are based on a broad market index
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index, or a narrower market index such as the Standard & Poor's 100. Indices
are also based on an industry or market segment such as the AMEX Oil and Gas
Index or the Computer and Business Equipment Index. Options on stock indices
are currently traded on the following Exchanges among others: The Chicago
Board Options Exchange, New York Stock Exchange and American Stock Exchange.
The Series' ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the Series' portfolio securities. Since the Series' portfolio
will not duplicate the components of an index, the correlation will not be
exact. Consequently, the Series bear the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both such securities and
the hedging instrument.
Positions in stock index options may be closed out only on an
Exchange which provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular stock index option.
Thus, it may not be possible to close such an option. The inability to close
options positions could have an adverse impact on the Series' ability to
effectively hedge its securities. The Series will enter into an option
position only if there appears to be a liquid secondary market for such
options.
DelCap, International Equity, Small Cap Value, Trend, Global Bond,
Emerging Markets, Convertible Securities and REIT Series will not engage in
transactions in options on stock indices for speculative purposes but only to
protect appreciation attained, to offset capital losses and to take advantage
of the liquidity available in the option markets.
E. WRITING COVERED PUTS--Convertible Securities and 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
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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 DelCap, International Equity, Small Cap Value, Trend, Global Bond,
Emerging Markets, Convertible Securities and REIT 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--Each Series, other than Strategic Income,
Devon, Emerging Markets, Convertible Securities, Social Awareness and REIT
Series, has qualified, and intends to continue to qualify, as a regulated
investment company under Subchapter M of the Internal Revenue Code (the
"Code"). Strategic Income, Devon, Emerging Markets, Convertible Securities,
Social Awareness and REIT Series intend to qualify as regulated investment
companies 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:
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(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 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:
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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 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
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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
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.
-31-
<PAGE>
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.
-32-
<PAGE>
PERFORMANCE INFORMATION
Contract owners and prospective investors will be interested in
learning from time to time the current yield of Delchester, Capital Reserves,
Global Bond and Strategic Income Series and, in addition, the effective
compounded yield of Cash Reserve Series. Advertisements of performance of the
underlying Series, if any, will be accompanied by a statement of performance
of the separate account. As explained under Dividends and Realized Securities
Profits Distributions, dividends for Delchester, Capital Reserves, Strategic
Income and Cash Reserve Series are declared daily from net investment income
and dividends for Global Bond Series are declared quarterly. Yield will
fluctuate as income earned fluctuates.
From time to time, the Fund may state each Series' total return in
advertisements and other types of literature. Any statements of total return
performance data will be accompanied by information on the Series' average
annual total rate of return over the most recent one-, five- and ten-year
periods. Each Series may also advertise aggregate and average total return
information over additional periods of time.
Each Series' average annual total rate of return is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase
order of $1,000;
T = average annual total return;
n = number of years;
ERV = redeemable value of the
hypothetical $1,000 purchase at
the end of the period.
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes all distributions are
reinvested at net asset value.
The performance of each Series, other than Strategic Income, Devon,
Emerging Markets, Convertible Securities, Social Awareness Series and REIT
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. Strategic Income, Devon, Emerging Markets,
Convertible Securities and Social Awareness Series commenced operations on May
1, 1997. Securities prices fluctuated during the periods covered and past
results should not be considered as representative of future performance.
-33-
<PAGE>
Average Annual Total Return*
<TABLE>
<CAPTION>
Decatur
Total Capital Cash
Return Delchester Reserves Reserve Delaware DelCap
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ended 1 year ended
12/31/97 31.00% 13.63% 7.60% 5.10% 26.40% 12/31/97 14.90%
3 years ended 3 years ended
12/31/97 29.12% 13.97% 8.50% 5.17% 22.86% 12/31/97 19.43%
5 years ended 5 years ended
12/31/97 19.92% 10.84% 6.03% 4.33% 14.91% 12/31/97 12.89%
Period 7/28/88** Period 7/12/91**
through 12/31/97 13.45% 10.77% 7.04% 5.28% 13.91% through 12/31/97 11.83%
International Small Cap
Equity Value Trend Global Bond
1 year ended 1 year ended 1 year ended
12/31/97 6.60% 12/31/97 32.91% 21.37% 12/31/97 0.88%
3 years ended 3 years ended Period 5/2/96**
12/31/97 13.40% 12/31/97 26.35% 23.32% through 12/31/97 7.48%
5 years ended Period 12/27/93**
12/31/97 11.65% through 12/31/97 19.96% 17.42%
Period 10/29/92**
through 12/31/97 11.30%
</TABLE>
* The respective investment manager elected to waive voluntarily the portion
of its annual compensation under its Investment Management Agreement with
each Series to limit operating expenses of the Series to the amounts noted
under Investment Management Agreements. In the absence of such voluntary
waiver, performance would have been affected negatively.
** Date of initial public offering.
-34-
<PAGE>
Delchester, Capital Reserves, Global Bond and Strategic Income Series may
also quote its current yield, calculated as described below, in advertisements
and investor communications.
The yield computation for Delchester, Capital Reserves, Global Bond and
Strategic Income Series is determined by dividing the net investment income
per share earned during the period by the maximum offering price per share on
the last day of the period and annualizing the resulting figure, according to
the following formula:
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends;
d = the maximum offering price per share on the last
day of the period.
The above formula will be used in calculating quotations of yield, based
on specific 30-day periods identified in advertising by the Series. The yields
of Delchester, Capital Reserves and Strategic Income Series as of December 31,
1997 using this formula were 9.05%, 5.92% and 7.31%, respectively.
Yield quotations are based on the offering price determined by the Series'
net asset value on the last day of the period and will fluctuate depending on
the period covered.
Cash Reserve Series may also quote its current yield in advertisements and
investor communications.
Yield calculation for Cash Reserve Series begins with the value of a
hypothetical account of one share at the beginning of a seven-day period; this
is compared with the value of that same account at the end of the same period
(including shares purchased for the account with dividends earned during the
period). The net change in the account value is generally the net income
earned per share during the period, which consists of accrued interest income
plus or minus amortized purchase discount or premium, less all accrued
expenses (excluding expenses reimbursed by the investment manager) but does
not include realized gains or losses or unrealized appreciation or
depreciation.
The current yield of Cash Reserve Series represents the net change in this
hypothetical account annualized over 365 days. In addition, a shareholder may
achieve a compounding effect through reinvestment of dividends which is
reflected in the effective yield shown below.
-35-
<PAGE>
The following is an example, for purposes of illustration only, of the
current and effective yield calculations for Cash Reserve Series for the
seven-day period ended December 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
Value of a hypothetical account with one
share at the beginning of the period................................................. $10.00000000
Value of the same account at the
end of the period.................................................................... 10.00982291
===========
Net change in account value................................................................. .00982291*
Base period return = net change in account
value / beginning account value...................................................... .000982291
Current yield [base period return x (365 / 7)].............................................. 5.12%**
=====
365/7
Effective yield (1 + base period) - 1.................................................. 5.25%***
=====
</TABLE>
Weighted average life to maturity of the portfolio on December 31, 1997 was 49
days.
* This represents the net income per share for the seven calendar days ended
December 31, 1997.
** This represents the average of annualized net investment income per share
for the seven calendar days ended December 31, 1997.
*** This represents the current yield for the seven calendar days ended
December 31, 1997 compounded daily.
The yield quoted at any time represents the amount being earned on a
current basis and is a function of the types of instruments in Cash Reserve
Series' portfolio, their quality and length of maturity and the Series'
operating expenses. The length of maturity for the portfolio is the average
dollar weighted maturity of the portfolio. This means that the portfolio has
an average maturity of a stated number of days for its issues. The calculation
is weighted by the relative value of the investment.
The yield will fluctuate daily as the income earned on the investments of
Cash Reserve Series fluctuates. Accordingly, there is no assurance that the
yield quoted on any given occasion will remain in effect for any period of
time. It should also be emphasized that the Fund is an open-end investment
company and that there is no guarantee that the net asset value or any stated
rate of return will remain constant. Investment performance is not insured.
Investors comparing results of Cash Reserve Series with investment results and
yields from other sources such as banks or savings and loan associations
should understand these distinctions. Historical and comparative yield
information may, from time to time, be presented by Cash Reserve Series.
Although Cash Reserve Series determines the yield on the basis of a
seven-calendar-day period, it may, from time to time, use a different time
span.
Other funds of the money market type may calculate their yield on a
different basis and the yield quoted by the Series could vary upward or
downward if another method of calculation or base period were used.
-36-
<PAGE>
Investors should note that income earned and dividends paid by Delchester,
Capital Reserves, Global Bond and Strategic Income Series will also vary
depending upon fluctuations in interest rates and performance of each Series'
portfolio. The net asset value of each Series may change. Unlike Cash Reserve
Series, Delchester, Capital Reserves, Global Bond and Strategic Income Series
invest in longer-term securities that fluctuate in value and do so in a manner
inversely correlated with changing interest rates. The Series' net asset
values will tend to rise when interest rates fall. Conversely, the Series' net
asset values will tend to fall as interest rates rise. Normally, fluctuations
in interest rates have a greater effect on the prices of longer-term bonds.
The value of the securities held in the Series will vary from day to day and
investors should consider the volatility of the Series' net asset values as
well as their yields before making a decision to invest.
COMPARATIVE INFORMATION
From time to time, each Series may also quote its actual total return
performance, dividend results and other performance information in advertising
and other types of literature. This information may be compared to that of
other mutual funds with similar investment objectives and to stock, bond and
other relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of
mutual funds. For example, the performance of a Series may be compared to data
prepared by Lipper Analytical Services, Inc., Morningstar, Inc., or to the S&P
500 Index, the Dow Jones Industrial Average, the Morgan Stanley Capital
International (MSCI), Europe, Australia and Far East (EAFE) Index, the MSCI
Emerging Markets Free Index, or the Salomon Brothers World Government Bond
Index. Performance also may be compared to data prepared by Lipper Analytical
Services, Inc., Morningstar, Inc. or the performance of unmanaged indices
compiled or maintained by statistical research firms such as Lehman Brothers
or Salomon Brothers, Inc.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well
as unmanaged indices compiled and maintained by these firms, will be used in
preparing comparative illustrations. In addition, the performance of multiple
indices compiled and maintained by these firms may be combined to create a
blended performance result for comparative purposes. Generally, the indices
selected will be representative of the types of securities in which a Series
may invest and the assumptions that were used in calculating the blended
performance will be described.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance. Rankings that compare a
Series' performance to another fund in appropriate categories over specific
time periods also may be quoted in advertising and other types of literature.
The S&P 500 and the Dow Jones Industrial Average are industry-accepted
unmanaged indices of generally-conservative securities used for measuring
general market performance. Similarly, the MSCI EAFE Index, the MSCI Emerging
Markets Free Index, and the Salomon Brothers World Government Bond Index are
industry-accepted unmanaged indices of equity securities in developed
countries and global debt securities, respectively, used for measuring general
market performance. The total return performance reported for these indices
will reflect the reinvestment of all distributions on a quarterly basis and
market price fluctuations. The indices do not take into account any sales
charges or other fees. A direct investment in an unmanaged index is not
possible.
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
-37-
<PAGE>
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.
Current interest rate and yield information on government debt obligations
of various durations, as reported weekly by the Federal Reserve (Bulletin
H.15), may also be used. As well, current industry rate and yield information
on all industry available fixed-income securities, as reported weekly by The
Bond Buyer, may also be used in preparing comparative illustrations.
Each Series may also promote its yield and/or total return performance and
use comparative performance information computed by and available from certain
industry and general market research and publications, such as Lipper
Analytical Services, Inc., IBC/Donoghue's Money Market Report and Morningstar,
Inc.
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 or global or international investments),
economic and political conditions, the relationship between sectors of the
economy and the economy as a whole, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements, sales literature,
communications to shareholders or other materials may summarize the substance
of information contained in shareholder reports (including the investment
composition of a Series), as well as the views as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Series. In addition, selected indices may be used to illustrate
historic performance of selected asset classes. The Series may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings which illustrate the potential risks and
rewards of investment in various investment vehicles, including but not
limited to, domestic and international stocks, and/or bonds, treasury bills
-38-
<PAGE>
and shares of a Series. In addition, advertisements, sales literature,
communications to shareholders or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in a Series
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management and tax planning and
investment alternatives to certificates of deposit and other financial
instruments. Such sales literature, communications to shareholders or other
materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the Series and may
illustrate how to find the listings of the Series in newspapers and
periodicals. Materials may also include discussions of other Series, products,
and services.
The Series may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Series may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Series may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Series may include
information regarding the background and experience of its portfolio managers.
-39-
<PAGE>
The following table is an example, for purposes of illustration only, of
cumulative total return performance for the each Series, other than REIT
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*
<TABLE>
<CAPTION>
Decatur
Total Capital Cash
Return Delchester Reserves Reserve Delaware DelCap
<S> <C> <C> <C> <C> <C> <C> <C>
3 months ended 3 months ended
12/31/97 2.23% 1.93% 1.85% 1.27% 4.73% 12/31/97 (2.10%)
6 months ended 6 months ended
12/31/97 10.77% 7.08% 4.53% 2.57% 13.16% 12/31/97 8.34%
9 months ended 9 months ended
12/31/97 27.71% 12.15% 7.44% 3.86% 25.38% 12/31/97 23.45%
1 year ended 1 year ended
12/31/97 31.00% 13.63% 7.60% 5.10% 26.40% 12/31/97 14.90%
3 years ended 3 years ended
12/31/97 115.27% 48.03% 27.72% 16.33% 85.45% 12/31/97 70.34%
5 years ended 5 years ended
12/31/97 148.02% 67.30% 34.04% 23.59% 100.33% 12/31/97 83.31%
Period 7/28/88** Period 7/12/91**
through 12/31/97 228.69% 162.28% 89.86% 62.48% 241.38% through 12/31/97 106.22%
</TABLE>
* The respective investment manager elected to waive voluntarily the portion
of its annual compensation under its Investment Management Agreement with
each Series to limit operating expenses of the Series to the amounts noted
under Investment Management Agreements. In the absence of such voluntary
waiver, performance would have been affected negatively.
** Date of initial public offering.
-40-
<PAGE>
Cumulative Total Return*
<TABLE>
<CAPTION>
International Global
Equity Small Cap Value Trend Bond
<S> <C> <C> <C> <C> <C> <C>
3 months ended 3 months ended 3 months ended
12/31/97 (6.95%) 12/31/97 (0.06%) (4.45%) 12/31/97 (0.86%)
6 months ended 6 months ended 6 months ended
12/31/97 (6.45%) 12/31/97 13.71% 15.32% 12/31/97 1.13%
9 months ended 9 months ended 9 months ended
12/31/97 2.85% 12/31/97 31.09% 29.01% 12/31/97 4.08%
1 year ended 1 year ended 1 year ended
12/31/97 6.60% 12/31/97 32.91% 21.37% 12/31/97 0.88%
3 years ended 3 years ended Period 5/2/96**
12/31/97 45.84% 12/31/97 101.72% 87.54% through 12/31/97 12.78%
5 years ended Period 12/27/93**
12/31/97 73.48% through 12/31/97 107.57% 90.54%
Period 10/29/92**
through 12/31/97 74.00%
</TABLE>
* The respective investment manager elected to waive voluntarily the portion
of its annual compensation under its Investment Management Agreement with
each Series to limit operating expenses of the Series to 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.
-41-
<PAGE>
Cumulative Total Return*
<TABLE>
<CAPTION>
Strategic Emerging Convertible Social
Income Devon Markets Securities Awareness
3 months ended
<S> <C> <C> <C> <C> <C>
12/31/97 0.47% 5.82% (16.31%) (2.59%) 4.48%
6 months ended
12/31/97 3.81% 16.79% (18.08%) 12.32% 19.00%
Period 5/1/97**
through 12/31/97 6.20% 27.30% (11.20%) 16.70% 28.40%
</TABLE>
* The respective investment manager elected to waive voluntarily the portion
of its annual compensation under its Investment Management Agreement with
each Series to limit operating expenses of the Series to the amounts noted
under Investment Management Agreements. In the absence of such voluntary
waiver, performance would have been affected negatively.
** Date of initial public offering; total return for this short of a time
period may not be representative of longer term results.
Because every investor's goals and risk threshold are different, certain
advertising and other related literature may provide general information about
investment alternatives and scenarios that will allow investors to assess
their personal goals. This information will include general material about
investing as well as materials reinforcing various industry-accepted
principles of prudent and responsible personal financial planning. One typical
way of addressing these issues is to compare an individual's goals and the
length of time the individual has to attain these goals to his or her risk
threshold. In addition, information may be provided discussing the respective
investment manager's overriding investment philosophy and how that philosophy
affects investment disciplines of the Series and other funds in the Delaware
Investments family employed in meeting their objectives.
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
-42-
<PAGE>
consider your dollar-cost averaging program a long-term commitment and invest
an amount you can afford and probably won't need to withdraw.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $5.00 20
Month 4 $100 $10.00 10
---------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of a Series.
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.
-43-
<PAGE>
TRADING PRACTICES AND BROKERAGE
The Fund or, in the case of International Equity, Global Bond and Emerging
Markets Series, Delaware International, selects banks, brokers or dealers to
execute transactions on behalf of the Series for the purchase or sale of
portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have banks,
brokers or dealers execute transactions at best price and execution. Best
price and execution refers to many factors, including the price paid or
received for a security, the commission charged, the promptness and
reliability of execution, the confidentiality and placement accorded the order
and other factors affecting the overall benefit obtained by the account on the
transaction. The Fund pays reasonably competitive brokerage commission rates
based upon the professional knowledge of its trading department or, in the
case of International Equity, Global Bond and Emerging Markets Series,
Delaware International, as to rates paid and charged for similar transactions
throughout the securities industry. In some instances, the Fund pays a minimal
share transaction cost when the transaction presents no difficulty. Some
trades are made on a net basis where the Fund either buys the securities
directly from the dealer or sells them to the dealer. In these instances,
there is no direct commission charged, but there is a spread (the difference
between the buy and sell price) which is in the equivalent of a commission.
During the fiscal years ended December 31, 1995, 1996 and 1997, the
aggregate dollar amounts of brokerage commissions were paid by the Series
noted below:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Decatur Total Return Series $255,600 $302,434 $518,762
Delaware Series $85,124 $83,262 $120,307
DelCap Series $53,072 $101,211 $270,393
International Equity Series $86,131 $110,181 $215,242
Small Cap Value Series $25,600 $53,113 $119,689
Trend Series $18,776 $80,172 $182,867
Devon Series* N/A N/A $21,022
Emerging Markets Series* N/A N/A $28,640
Convertible Securities Series* N/A N/A $5,517
Social Awareness Series* N/A N/A $7,416
</TABLE>
*Commenced operations on May 1, 1997.
The respective investment manager may allocate out of all commission
business generated by all of the funds and accounts under management by the
respective investment manager, brokerage business to brokers or dealers who
provide brokerage and research services. These services include advice, either
directly or through publications or writings, as to the value of securities,
the advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; furnishing
of analyses and reports concerning issuers; securities or industries;
providing information on economic factors and trends; assisting in determining
portfolio strategy; providing computer software and hardware used in security
analyses; and providing portfolio performance evaluation and technical market
analyses. Such services are used by the respective investment manager in
connection with its investment decision-making process with respect to one or
more funds and accounts managed by it, and may not be used, or used
exclusively, with respect to the fund or account generating the brokerage.
-44-
<PAGE>
During the fiscal year ended December 31, 1997, portfolio transactions of
the following Series in the amounts listed below, resulting in brokerage
commissions in the amounts listed below were directed to brokers for brokerage
and research services provided:
<TABLE>
<CAPTION>
Portfolio Brokerage
Transactions Commissions
Amounts Amounts
<S> <C> <C>
Decatur Total Return Series $62,428,498 $78,642
Delaware Series $60,528,614 $82,629
DelCap Series $56,536,147 $110,320
International Equity Series $25,179,824 $58,049
Small Cap Value Series $14,009,956 $33,658
Trend Series $16,770,285 $40,896
Devon Series* $4,820,695 $6,490
Emerging Markets Series* $10,052 $9
Convertible Securities Series* $774,905 $1,854
Social Awareness Series* $421,615 $260
</TABLE>
*Commenced operations on May 1, 1997.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreements, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions
are deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the Fund believes that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services
and that such commissions are reasonable in relation to the value of the
brokerage and research services provided. In some instances, services may be
provided to the respective investment manager which constitute in some part
brokerage and research services used by the respective investment manager in
connection with its investment decision-making process and constitute in some
part services used by the respective investment manager in connection with
administrative or other functions not related to its investment
decision-making process. In such cases, the respective investment manager will
make a good faith allocation of brokerage and research services and will pay
out of its own resources for services used by the respective investment
manager in connection with administrative or other functions not related to
its investment decision-making process. In addition, so long as no fund is
disadvantaged, portfolio transactions which generate commissions or their
equivalent are allocated to broker/dealers who provide daily portfolio pricing
services to the Fund and to other funds in the Delaware Investments family.
Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
The respective investment manager may place a combined order for two or
more accounts or funds engaged in the purchase or sale of the same security
if, in its judgment, joint execution is in the best interest of each
participant and will result in best price and execution. Transactions
involving commingled orders are allocated in a manner deemed equitable to each
account or fund. When a combined order is executed in a series of transactions
at different prices, each account participating in the order may be allocated
an average price obtained from the executing broker. It is believed that the
ability of the accounts to participate in volume transactions will generally
be beneficial to the
-45-
<PAGE>
accounts and funds. Although it is recognized that, in some cases, the joint
execution of orders could adversely affect the price or volume of the security
that a particular account or fund may obtain, it is the opinion of the
respective investment manager and the Fund's Board of Directors that the
advantages of combined orders outweigh the possible disadvantages of separate
transactions.
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 Decatur Total Return,
International Equity, Global Bond, Strategic Income, Emerging Markets, Devon,
Social Awareness and REIT Series, 200% for the Capital Reserves, and Delaware
Series, and may exceed 100% for the Delchester, Small Cap Value and Trend
Series and 200% for the Convertible Securities Series. Although the DelCap
Series' portfolio turnover exceeded 100% for the previous fiscal year, it is
not expected to exceed 100% in the current fiscal year. 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.
-46-
<PAGE>
The portfolio turnover rates for the Series noted below for the past two
fiscal years were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Series December 31, 1997 December 31, 1996
------ ----------------- -----------------
<S> <C> <C>
Decatur Total Return Series 54% 81%
Delchester Series 121% 93%
Capital Reserves Series 120% 122%
Delaware Series 67% 92%
DelCap Series 134% 85%
International Equity Series 7% 8%
Small Cap Value Series 41% 84%
Trend Series 125% 112%
Global Bond Series 97% 56%*
Strategic Income Series 70%** N/A
Devon Series 80%** N/A
Emerging Markets Series 48%** N/A
Convertible Securities Series 209%** N/A
Social Awareness Series 52%** N/A
</TABLE>
* Annualized. Commenced operations on May 2, 1996.
** Annualized. Commenced operations on May 1, 1997.
-47-
<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
-48-
<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.
MONEY MARKET SERIES
The Board of Directors has adopted certain procedures to monitor and
stabilize the price per share of Cash Reserve Series. Calculations are made
each day to compare part of the Series' value with the market value of
instruments of similar character. At regular intervals all issues in the
portfolio are valued at market value. Securities maturing in more than 60 days
are valued more frequently by obtaining market quotations from market makers.
The portfolio will also be valued by market makers at such other times as is
felt appropriate. In the event that a deviation of more than 1/2 of 1% exists
between the Series' $10 per share offering and redemption prices and the net
asset value calculated by reference to market quotations, or if there is any
other deviation which the Board of Directors believes would result in a
material dilution to shareholders or purchasers, the Board of Directors will
promptly consider what action, if any, should be initiated, such as changing
the price to more or less than $10 per share.
-49-
<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Dividends for the Delchester, Capital Reserves and Strategic Income
Series are declared daily and paid monthly. Short-term capital gains
distributions, if any, may be paid with the dividend; otherwise, any
distributions from net realized securities profits normally will be
distributed following the close of the fiscal year. The Fund's fiscal year
ends on December 31.
For the Decatur Total Return, Delaware, Devon, Convertible Securities
and Global Bond Series, the Fund will make payments from the Series' net
investment income quarterly. Distributions from the respective Series' net
realized securities profits, if any, normally will be made following the close
of the fiscal year.
For the DelCap, International Equity, Small Cap Value, Trend,
Emerging Markets, Social Awareness and REIT Series, the Fund will make
payments from the Series' net income and net realized securities profits, if
any, once a year.
All dividends and distributions are automatically reinvested in
additional Series shares.
CASH RESERVE SERIES
The Fund declares a dividend of this Series' net investment income on
a daily basis, to shareholders of record at the time of the previous
calculation of the Series' net asset value, each day that the Fund is open for
business. Payment of dividends will be made monthly on the first business day
following the end of the month. The amount of net investment income will be
determined at the time the offering price and net asset value are determined
(see Offering Price), and shall include investment income accrued, less the
estimated expenses of the Series incurred since the last determination of net
asset value. Gross investment income consists principally of interest accrued
and, where applicable, net pro-rata amortization of premiums and discounts
since the last determination. The dividend declared at the time the offering
price and net asset value are determined, as noted above, will be deducted
immediately before the net asset value calculation is made. See Offering
Price. Net investment income earned on days when the Fund is not open will be
declared as a dividend on the next business day. An investor begins earning
dividends when payments for shares purchased are converted into Federal Funds
and are available for investment.
To the extent necessary to maintain a $10 per share net asset value,
the Board of Directors will consider temporarily reducing or suspending
payment of daily dividends, or making a distribution of realized securities
profits or other distributions at the time the net asset value per share has
changed.
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<PAGE>
TAXES
Each Series, other than Strategic Income, Devon, Emerging Markets,
Convertible Securities, Social Awareness and REIT Series, has qualified, and
intends to continue to qualify, as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Strategic Income,
Devon, Emerging Markets, Convertible Securities, Social Awareness and REIT
Series intend to qualify as regulated investment companies 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.
-52-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-ADVISORY AGREEMENTS
Delaware Management Company ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to Decatur Total Return, Delchester, Capital
Reserves, Cash Reserve, DelCap, Delaware, Small Cap Value, Trend, Strategic
Income, Devon, Convertible Securities, Social Awareness and REIT Series.
Delaware International Advisers Ltd. ("Delaware International"), located at
Third Floor, 80 Cheapside, London, England EC2V 6EE, furnishes investment
management services to International Equity, Global Bond and Emerging Markets
Series. Such services are provided subject to the supervision and direction of
the Fund's Board of Directors. Delaware International is affiliated with
Delaware Management.
Delaware Management and its predecessors have been managing the funds
in Delaware Investments since 1938. On December 31, 1997, Delaware Management
and its affiliates within Delaware Investments, including Delaware
International, were supervising in the aggregate more than $40 billion in
assets in the various institutional or separately managed (approximately
$24,040,760,000) and investment company (approximately $16,482,523,000)
accounts. Delaware Management is a series of Delaware Management Business
Trust. Delaware Management changed its form of organization from a corporation
to a business trust on March 1, 1998.
The Investment Management Agreements for Decatur Total Return,
Delchester, Capital Reserves, Cash Reserve, DelCap, Delaware, International
Equity, Small Cap Value and Trend Series are dated April 3, 1995 and were
approved by shareholders on March 29, 1995. The Investment Management
Agreement for Global Bond Series is dated May 1, 1996 and was approved by the
initial shareholder on May 1, 1996 and will remain in effect for an initial
period of two years. The Investment Management Agreements for Strategic
Income, Devon, Emerging Markets, Convertible Securities and Social Awareness
Series are dated May 1, 1997 and were approved by the initial shareholder May
1, 1997 and will remain in effect for an initial period of two years. 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 the respective investment manager. The Agreements will terminate
automatically in the event of their assignments.
-53-
<PAGE>
Delaware Management is paid an annual fee equal to the following
percentage rates of the average daily net assets of the Series noted below,
less, in the case of Decatur Total Return, Delchester, Capital Reserves, Cash
Reserve, DelCap and Delaware Series, a proportionate share of all directors'
fees paid to the unaffiliated directors of the Fund:
Decatur Total Return Series 0.60%
Delchester Series 0.60%
Capital Reserves Series 0.60%
Cash Reserve Series 0.50%
DelCap Series 0.75%
Delaware Series 0.60%
Small Cap Value Series 0.75%
Trend Series 0.75%
Strategic Income Series 0.65%
Devon Series 0.60%
Convertible Securities Series 0.75%
Social Awareness 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 International is paid an annual fee equal to the following
percentage rates of the average daily net assets of the Series, less, in the
case of International Equity Series, a proportionate share of all directors'
fees paid to the unaffiliated directors of the Fund:
International Equity Series 0.75%
Global Bond Series 0.75%
Emerging Markets Series 1.25%
The respective investment manager administers the affairs of and is
ultimately responsible for the investment management of each of the Series to
which it provides investment management services. In addition, Delaware
Management pays the salaries of all directors, officers and employees who are
affiliated with both it and the Fund.
Subject to the overall supervision of Delaware Management, Delaware
International manages the international sector of Strategic Income Series'
portfolio and furnishes Delaware Management with investment recommendations,
asset allocation advice, research and other investment services with respect
to foreign securities. For the services provided to Delaware Management,
Delaware Management pays the Sub-Adviser a fee equal to one- third of the fee
paid to Delaware Management under the terms of Strategic Income Series'
Investment Management Agreement.
Pursuant to the terms of Sub-Advisory Agreements with Delaware
Management, Vantage Global Advisors, Inc. ("Vantage") participates in the
management of Social Awareness Series' assets. Vantage is responsible for
day-to-day investment management of the Series, makes investment decisions for
the Series in accordance with the Series' investment objectives and stated
policies and places orders on behalf of the Series to effect the investment
decisions made. Delaware Management continues to have ultimate responsibility
for all investment advisory services in connection with the management of the
Series pursuant to the Investment Management Agreement and supervises
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<PAGE>
Vantage's performance of such services For the services provided to Delaware
Management, Delaware Management pays Vantage a fee equal to (i) 0.25% of
average daily net assets up to $20 million; (ii) 0.35% of average daily net
assets between $20 million and $50 million; and (iii) 0.40% of average daily
net assets over $50 million. Vantage's address is 630 Fifth Avenue, New York,
NY 10111.
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.
On December 31, 1997, the total net assets of the Fund were
$1,259,137,743, broken down as follows:
Decatur Total Return Series $401,401,970
Delchester Series $98,874,882
Capital Reserves Series $29,176,832
Cash Reserve Series $30,711,176
DelCap Series $110,454,505
Delaware Series $127,675,344
International Equity Series $198,863,261
Small Cap Value Series $84,071,143
Trend Series $118,276,090
Global Bond Series $16,875,596
Strategic Income Series $8,606,187
Devon Series $16,653,491
Convertible Securities Series $3,921,377
Social Awareness Series $7,800,105
Emerging Markets Series $5,775,784
REIT Series did not publicly offer shares prior to May 1, 1998.
-55-
<PAGE>
Investment management fees were incurred with respect to the Series
noted below for the last three fiscal years.
<TABLE>
<CAPTION>
Series December 31, 1997 December 31, 1996 December 31, 1995
- ------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Decatur Total Return Series $1,640,377 paid $765,301 paid $528,481 paid
Delchester Series $483,877 paid $348,693 paid $311,242 paid
Capital Reserves Series $166,300 paid $164,296 paid $157,204 paid
Cash Reserve Series $149,023 paid $110,155 paid $93,257 paid
DelCap Series $716,228 earned $505,739 earned $357,930 earned
$646,908 paid $491,404 paid $336,345 paid
$69,320 waived $14,335 waived $21,585 waived
Delaware Series $595,126 paid $402,509 paid $329,278 paid
International Equity Series $1,304,340 earned $768,150 earned $525,376 earned
$1,207,677 paid $650,392 paid $457,751 paid
$96,663 waived $117,758 waived $67,625 waived
Small Cap Value Series $380,405 earned $117,000 earned $65,528 earned
$328,056 paid $87,687 paid $51,016 paid
$52,349 waived $29,313 waived $14,512 waived
Trend Series $622,149 earned $247,520 earned $92,985 earned
$558,331 paid $205,501 paid $72,359 paid
$63,818 waived $42,019 waived $20,626 waived
Global Bond Series* $109,310 earned $26,503 earned N/A
$68,076 paid $12,597 paid
$41,234 waived $13,906 waived
Strategic Income Series** $21,320 earned N/A N/A
$7,271 paid
$14,049 waived
Devon Series** $31,110 earned N/A N/A
$25,236 paid
$5,874 waived
Emerging Markets Series** $36,327 earned N/A N/A
$8,587 paid
$27,740 waived
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
Series December 31, 1997 December 31, 1996 December 31, 1995
- ------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Convertible Securities Series** $14,026 earned N/A N/A
-0- paid
$14,026 waived
Social Awareness Series** $20,293 earned N/A N/A
$3,692 paid
$16,601 waived
</TABLE>
* Commenced operations on May 2, 1996.
** Commenced operations on May 1, 1997.
During the period May 1, 1997 (date of commencement of operations)
through December 31, 1997, Delaware International received $2,424 from
Delaware Management for serving as Sub-Adviser to the Strategic Income Series
and Vantage received $5,449 from Delaware Management for serving as
Sub-Adviser to the Social Awareness Series.
Except for those expenses borne by the respective investment manager
under the Investment Management Agreements and the Distributor under the
Distribution Agreements, each Series is responsible for all of its own
expenses. Among others, these include the Series' proportionate share of rent
and certain other administrative expenses; the investment management fees;
transfer and dividend disbursing agent fees and costs; custodian expenses;
federal securities registration fees; proxy costs; and the costs of preparing
prospectuses and reports sent to shareholders.
Beginning May 1, 1998, Delaware Management elected voluntarily to
waive its fee and pay the expenses of a Series to the extent necessary to
ensure that a Series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, do not exceed the following
percentages of average daily net assets through October 31, 1998:
Decatur Total Return Series 0.80%
Delchester Series 0.80%
Capital Reserves Series 0.80%
Cash Reserve Series 0.80%
DelCap Series 0.85%
Delaware Series 0.80%
Small Cap Value Series 0.85%
Trend Series 0.85%
Strategic Income Series 0.80%
Devon Series 0.80%
Convertible Securities Series 0.85%
Social Awareness Series 0.85%
REIT Series 0.85%
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<PAGE>
Beginning May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of a Series to the extent necessary to
ensure that a Series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, do not exceed the following
percentages of average daily net assets through October 31, 1998:
International Equity Series 0.95%
Global Bond Series 0.85%
Emerging Markets Series 1.50%
Prior to May 1, 1998, Delaware Management elected voluntarily to
waive its fee and pay the expenses of a Series to the extent necessary to
ensure that a Series' annual operating expenses, exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, did not exceed 0.80% of
average daily net assets from the commencement of operations through April 30,
1998 for the Delchester, Capital Reserves, Cash Reserve, Small Cap Value,
Trend, Strategic Income, Devon, Convertible Securities and Social Awareness
Series.
Prior to May 1, 1998, Delaware Management elected voluntarily to
waive its fee and pay the expenses of Decatur Total Return, Delaware and
DelCap Series to the extent necessary to ensure that a Series' annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, did not exceed 0.80% of average daily net assets for
the period July 1, 1992 through April 30, 1998.
Prior to May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of International Equity and Global Bond
Series to the extent necessary to ensure that a Series' annual operating
expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, did not exceed 0.80% of average daily net assets from
the commencement of operations through June 30, 1997. The waiver and payment
commitment was extended through April 30, 1998 for Global Bond Series.
Beginning July 1, 1997, Delaware International elected voluntarily to waive
its fee and pay the expenses of International Equity to the extent necessary
to ensure that the Series' annual operating expenses, exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, did not exceed
0.95% of average daily net assets through April 30, 1998.
Prior to May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of the Emerging Markets Series to the
extent necessary to ensure that the Series' annual operating expenses,
exclusive of taxes, interest, brokerage commissions and extraordinary
expenses, did not exceed 1.50% of average daily net assets from the
commencement of operations through April 30, 1998.
DISTRIBUTION AND SERVICE
Delaware Distributors, L.P. (which formerly conducted business as
Delaware Distributors, Inc.), located at 1818 Market Street, Philadelphia, PA
19103, serves as the Fund's national distributor under Distribution Agreements
dated as of April 3, 1995 for all Series other than Global Bond, Strategic
Income, Devon, Emerging Markets, Convertible Securities, Social Awareness and
REIT Series. Global Bond Series' Distribution Agreement is dated as of May 1,
1996. Strategic Income, Devon, Emerging Markets, Convertible Securities and
Social Awareness Series' Distribution Agreements are dated as of May 1, 1997.
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 Decatur Total Return,
Delchester,
-58-
<PAGE>
Capital Reserves, Delaware, DelCap, International Equity, Small Cap Value,
Trend, Global Bond, Strategic Income, Devon, Emerging Markets, Convertible
Securities, Social Awareness and REIT Series pursuant to the Amended and
Restated Shareholders Services Agreement dated May 1, 1998 and for Cash
Reserve Series pursuant to the Shareholders Services Agreement dated June 29,
1988. 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.
-59-
<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, new Investment
Management Agreements between the Fund on behalf of all of the Series, except
Global Bond, Strategic Income, Devon, Emerging Markets, Convertible
Securities, Social Awareness and REIT Series, and, as relevant, Delaware
Management and Delaware International, were executed following shareholder
approval. DMH, Delaware Management and Delaware International are now
indirect, wholly owned subsidiaries, and subject to the ultimate control, of
Lincoln National. Lincoln National, with headquarters in Fort Wayne, Indiana,
is a diversified organization with operations in many aspects of the financial
services industry, including insurance and investment management.
Directors and principal officers of the Fund are noted below along
with their ages and their business experience for the past five years. Unless
otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
*Wayne A. Stork (60)
Chairman and Director of the Fund, 33 other investment companies in the
Delaware Investments family, Delaware Management Holdings,
Inc. and Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer, Director of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.
Chairman,President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, President, Chief Executive Officer and Chief Investment
Officer of Delaware Management Company.
Chairman, President, Chief Executive Officer and Chief Investment
Officer and Trustee of Delaware Management Business Trust.
Chairman, Chief Executive Officer, Chief Investment Officer of Delaware
Investment Advisers.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd. and Delaware International
Holdings Ltd.
President and Chief Executive Officer of Delvoy, Inc.
Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
- ------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-60-
<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.
-61-
<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.
-62-
<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.
-63-
<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.
Gerald S. Frey (52)
Vice President/Senior Portfolio Manager of the Fund, of nine
other investment companies in the Delaware Investments
family and of Delaware Management Company, Inc.
Before joining Delaware Investments in 1996, Mr. Frey was a Senior
Director with Morgan Grenfell Capital Management, New York,
NY from 1986 to 1995.
John B. Fields (52)
Vice President/Senior Portfolio Manager of the Fund, of nine
other investment companies in the Delaware Investments
family, Delaware Management Company, Inc., Delaware
Investment Advisers, Delaware Management Company and
Delaware Capital Management, Inc.
During the past five years, Mr. Fields has served in various
capacities within the Delaware organization.
-64-
<PAGE>
George H. Burwell (36)
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.
During the past five years, Mr. Burwell has served in various
capacities at different times within the Delaware
organization.
Gary A. Reed (43)
Vice President/Senior Portfolio Manager of the Fund, of nine
other investment companies in the Delaware Investments
family, of Delaware Management Company, Inc., Delaware
Investment Advisers, Delaware Management Company and
Delaware Capital Management, Inc.
During the past five years, Mr. Reed has served in such capacities
within the Delaware organization.
Gerald T. Nichols (40)
Vice President/Senior Portfolio Manager of the Fund, of 24 other
investment companies in the Delaware Investments family,
Delaware Management Company, Inc., Delaware Investment
Advisers and Delaware Management Company.
Vice President of Founders Holdings, Inc.
Treasurer and Director of Founders CBO Corporation.
During the past five years, Mr. Nichols has served in various
capacities at different times within the Delaware
organization.
Paul A. Matlack (38)
Vice President/Senior Portfolio Manager of the Fund, of 24 other
investment companies in the Delaware Investments family,
Delaware Management Company, Inc., Delaware Investment
Advisers and Delaware Management Company.
Vice President of Founders Holdings, Inc.
President and Director of Founders CBO Corporation.
During the past five years, Mr. Matlack has served in various
capacities at different times within the Delaware
organization.
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.
-65-
<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.
-66-
<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>
-67-
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
DelCap Series SMA Life Assurance Company
Separate Account VA-K
440 Lincoln Street
Worcester, MA 01654 6,479,602 95.32%
International Equity 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>
-68-
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
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>
-69-
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
<S> <C> <C> <C>
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>
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<PAGE>
GENERAL INFORMATION
Delaware Management is the investment manager of each Series of the
Fund other than International Equity, Global Bond and Emerging Markets Series.
Delaware International is the investment manager of International Equity,
Global Bond and Emerging Markets Series. Delaware Management or its affiliate,
Delaware International, manages the other funds in the Delaware Investments
family. While investment decisions for each Series are made independently from
those of the other funds and accounts, investment decisions for such other
funds and accounts may be made at the same time as investment decisions for
the Series.
Access persons and advisory persons of the Delaware Investments family
of funds, as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who
provide services to Delaware Management, Delaware International or their
affiliates, are permitted to engage in personal securities transactions
subject to the exceptions set forth in Rule 17j-1 and the following general
restrictions and procedures: (1) certain blackout periods apply to personal
securities transactions of those persons; (2) transactions must receive
advance clearance and must be completed on the same day as the clearance is
received; (3) certain persons are prohibited from investing in initial public
offerings of securities and other restrictions apply to investments in private
placements of securities; (4) opening positions may only be closed-out at a
profit after a 60-day holding period has elapsed; and (5) the Compliance
Officer must be informed periodically of all securities transactions and
duplicate copies of brokerage confirmations and account statements must be
supplied to the Compliance Officer.
Delaware Distributors, L.P. acts as national distributor for the Fund
and for the other mutual funds in the Delaware Investments family.
In addition, Delaware Service Company, Inc., an affiliate of Delaware
Management, acts as shareholder servicing, dividend disbursing and transfer
agent for the Fund and for the other mutual funds in the Delaware Investments
family. Compensation is fixed each year and approved by the Board of
Directors, including a majority of the disinterested directors. The Transfer
Agent also provides accounting services to the Series. Those services include
performing all functions related to calculating each Series' net asset value
and providing all financial reporting services, regulatory compliance testing
and other related accounting services. For its services, the Transfer Agent is
paid a fee based on total assets of all funds in the Delaware Investments
family for which it provides such accounting services. Such fee is equal to
0.25% multiplied by the total amount of assets in the complex for which the
Transfer Agent furnishes accounting services, where such aggregate complex
assets are $10 billion or less, and 0.20% of assets if such aggregate complex
assets exceed $10 billion. The fees are charged to each fund, including the
Series, on an aggregate pro-rata basis. The asset-based fee payable to the
Transfer Agent is subject to a minimum fee calculated by determining the total
number of investment portfolios and associated classes.
Delaware Management and its affiliates own the name "Delaware Group."
Under certain circumstances, including the termination of the Fund's advisory
relationship with Delaware Management or its distribution relationship with
Delaware Distributors, L.P., Delaware Management and its affiliates could
cause the Fund to delete the words "Delaware Group" from the Fund's name.
The initial public offering date for the Decatur Total Return,
Delchester, Capital Reserves, Cash Reserve and Delaware Series was July 28,
1988. The initial public offering date for DelCap Series was July 2, 1991.
International Equity Series commenced operations on October 29, 1992. Small
Cap Value and Trend Series commenced operations on December 27, 1993. The
initial public offering date for Global Bond Series was May 1, 1996 and for
Strategic Income, Devon, Emerging Markets, Convertible Securities and Social
Awareness Series was May 1, 1997. REIT Series did not commence operations
prior to the date of this Part B.
-71-
<PAGE>
CAPITALIZATION
The Fund has a present authorized capitalization of one billion shares
of capital stock with a $.01 par value per share. The Board of Directors has
allocated fifty million shares to each Series. While all shares have equal
voting rights on matters affecting the entire Fund, each Series would vote
separately on any matter which affects only that Series, such as investment
objective and policy or action to dissolve the Series, and as otherwise
prescribed by the 1940 Act. Shares of each Series have a priority in that
Series' assets, and in gains on and income from the portfolio of that Series.
Shares have no preemptive rights, are fully transferable and, when issued, are
fully paid and nonassessable. All shares participate equally in dividends, and
upon liquidation would share equally.
NONCUMULATIVE VOTING
SERIES SHARES HAVE NONCUMULATIVE VOTING RIGHTS WHICH MEANS THAT THE
HOLDERS OF MORE THAN 50% OF THE SHARES OF THE FUND VOTING FOR THE ELECTION OF
DIRECTORS CAN ELECT ALL THE DIRECTORS IF THEY CHOOSE TO DO SO, AND, IN SUCH
EVENT, THE HOLDERS OF THE REMAINING SHARES WILL NOT BE ABLE TO ELECT ANY
DIRECTORS.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the Securities and Exchange
Commission ("SEC"). Shareholders may obtain a copy of the Registration
Statement by contacting the SEC in Washington, DC.
-72-
<PAGE>
APPENDIX A--DESCRIPTION OF RATINGS
COMMERCIAL PAPER
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing
the highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from Duff and Phelps, Inc.'s description of its two highest
ratings: CATEGORY 1--TOP GRADE: Duff 1- Plus--Highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is clearly outstanding, and
safety is just below risk-free U.S. Treasury short-term obligations. Duff
1--Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor. Duff
1-Minus--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
CATEGORY 2--GOOD GRADE: Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing internal funds'
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Excerpts from Fitch Investors Service, Inc.'s description of its two
highest ratings: F-1--Highest grade commercial paper assigned this rating is
regarded as having the strongest degree of assurance for timely payment. F-2-
- -Very good grade issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than the strongest issues.
BONDS
Excerpts from Moody's description of its bond ratings: Aaa--judged to
be the best quality. They carry the smallest degree of investment risk;
Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations;
Baa--considered as medium grade obligations. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time; Ba--judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this
class; B--generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small; Caa--are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; Ca--represent obligations which
are speculative in a high degree. Such issues are often in default or have
other marked shortcomings; C--the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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
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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.
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FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for each Series of
the Fund and, in its capacity as such, audits the annual financial statements
of each Series. Each Series', other than REIT Series, Statement of Net Assets,
Statement of Operations, Statement of Changes in Net Assets, Financial
Highlights and Notes to Financial Statements, as well as the reports of Ernst
& Young LLP, independent auditors, for the fiscal year ended December 31, 1997
are included in the Fund's Annual Reports to shareholders. The financial
statements and financial highlights, the notes relating thereto and the
reports of Ernst & Young LLP listed above are incorporated by reference from
the Annual Reports into this Part B. REIT Series did not commence operations
prior to the date of this Part B.
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