<PAGE>
DELAWARE GROUP
- -------------------------------------
PREMIUM FUND
- -------------------------------------
- -------------------------------------
INTERNATIONAL EQUITY
SERIES
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- -------------------------------------
ANNUAL REPORT
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DECEMBER 31, 1998
DELAWARE
INVESTMENTS
- ---------------------
Philadelphia o London
<PAGE>
January 10, 1999
Dear Policy Holder:
Fiscal year 1998 was the best and worst of times for equity and fixed-income
investors. While the year began and ended with U.S. stocks posting tremendous
gains, the events in between left investors a bit uncertain about the outlook
going forward.
1998 Total Return
Standard & Poor's 500 Index +28.56%
Russell 2000 Index -2.55%
Lehman Brothers Government/Corporate Bond Index +8.69%
Morgan Stanley Europe, Australia, Far East (EAFE) Index +20.33%
Performance quoted above assumes reinvestment of dividends. It is not intended
to represent the performance of any Premium Fund Series. Complete performance
information can be found following each discussion section of this report. Past
performance does not guarantee future results. The indexes are unmanaged and
assume no management fees or expenses. A direct investment in an unmanaged index
is not possible.
During the first half of 1998, U.S. and European stock markets continued to
hit record levels fueled by a positive environment with low inflation, low
interest rates and low unemployment. Between January 1 and July 17, the Standard
& Poor's 500 Index rose +23.3% and the Morgan Stanley Europe, Australia, Far
East (EAFE) Index had posted a comparable gain of +21.3%.
However, as U.S. corporations began lowering their earnings expectations for
the second half of 1998 and investors learned of escalating financial problems
in Asia, Russia and Latin America, concern mounted that the U.S. economy would
weaken. Foreign investors responded by moving their money out of riskier
investments--stocks and non-government bonds--and into U.S. Treasuries for their
safety and liquidity.
Stock and non-government bond prices spiraled downward. Conversely, prices of
U.S. Treasury securities skyrocketed causing yields to decline. For the first
time since the 1960s, the yield on the benchmark 30-year U.S. Treasury fell
below 5% to 4.97% at the end of September.
To help ease the strain on the U.S. economy, the Federal Reserve responded by
lowering its target for short-term interest rates three times in the fall. By
the end of November, the federal funds rate (the interest rate charged between
banks for overnight loans) was reduced a total of 0.75 percentage points to
4.75%.
The impact of the Fed's rate cuts was tremendous. U.S. stocks soared to new
highs--the large-cap S&P 500 Index returned +21.28% in the fourth quarter after
reporting a near 10% drop in the third quarter. Small and mid-cap stocks also
rebounded, but still underperformed their large-cap counterparts in 1998.
Most strategists believe that the economies of Southeast Asia will bottom out
in 1999, that Japan may begin to recover from its recession, and that the
Federal Reserve has the capability, and the will, to keep the U.S. economy
growing. As long as the economy continues to grow, we think the stock market
will enjoy a favorable environment, though volatility may continue and returns
may not be in the 20+% range we have seen for the past four years.
On the following pages, the performance of each Series of Premium Fund is
discussed in detail. After a difficult period like we encountered in 1998, it is
important to remember that your annuity is a long-term investment that requires
patience and a long-term perspective. We thank you for placing your confidence
in Delaware Investments.
Sincerely,
/s/ Jeffrey J. Nick
Jeffrey J. Nick
Chairman, President and Chief Executive Officer
Delaware Investments Family of Funds
<PAGE>
FOR INTERNATIONAL DIVERSIFICATION
International Equity Series
Investment Strategy and Performance in 1998
Global markets faced economic and financial turmoil in fiscal 1998 as Asia's
financial crisis spread to other world economies. This presented us with a
challenging environment for International Equity Series.
For the 12 months ended December 31, 1998, the Series provided a total return
of +10.33% (capital change plus reinvestment of dividends). This was about half
the +20.33% return of our benchmark Morgan Stanley Europe, Australia, Far East
(EAFE) Index for the same period.
Asia's economic decline, which began in 1997, set the pace for more
widespread upheaval in 1998. In August, Russia's currency devaluation and
Brazil's burgeoning national debt added to investor concern about the safety of
international investment portfolios. Many investors cashed out their
international holdings in favor of the safe haven of U.S. Treasury bonds. World
equity markets declined as a result, curtailing the performance of most overseas
investments.
International Equity Series held the largest percentage of its net assets
(30.15%) in the United Kingdom at year end. This emphasis helped boost our
returns early in 1998 as the U.K. stock market performed extremely well. During
the summer, however, our U.K. holdings suffered as market volatility increased
and investors sold the stocks of even strong performing companies.
We focus on dividend-paying stocks in established markets. Traditionally, we
have had a heavy concentration in Western Europe. Our research of countries
evaluates the potential effects of currency fluctuations, inflation, local
economy and political issues. Next, we look for individual companies that offer
superior income and capital appreciation potential.
Our selection process, known as a dividend discount approach, seeks to lower
the Series' overall risk profile. We also attempt to reduce risk through
defensive currency hedging which helps protect the dollar value of our
investments.
Portfolio Snapshot
In fiscal 1998, we defensively hedged the British pound due to our heavy
exposure to U.K. securities and our belief that the pound was somewhat
overvalued. We used forward currency contracts to limit the risk of loss should
the pound decline in value. The added expense of this contract reduced the
Series' total return, but also reduced the risk to capital from fluctuating
exchange rates. We believe the added cost was worth the protection we acquired.
Because of the Series' value-oriented investment style, our holdings in
Japanese stocks have historically been lower than the Index. This remained true
as of year end; however, compared to our past, we held a slightly higher
position (15.87% of net assets). We believed that Japan's lower interest rates,
rising personal incomes and an effort to reform its banking system had improved
the country's prospects for economic recovery.
The International Monetary Fund (IMF) recently said that Japan is the key to
the global economic picture. We agree. In mid-October, the Japanese parliament
approved a $60 trillion yen ($509 billion) bank bailout package. Only time will
tell how effectively the banking plan is implemented. Certainly, Japan's
stabilization would help stimulate global economic recovery.
- --------------------------------------------------------------------------------
International Equity Series Investment Objective
Seeks long-term growth without undue risk to principal. It seeks to achieve this
objective by investing primarily in stocks of foreign companies providing the
potential for capital appreciation and income.
- --------------------------------------------------------------------------------
International Equity-1
<PAGE>
Investment Outlook
As we concluded 1998, the IMF lowered its forecast for world economic growth
in 1999. The IMF now predicts a 2.2% growth rate--down slightly from its
previous 2.5% prediction.
In its outlook, the IMF stated that it would be "premature to consider the
global economy's difficulties to be over," citing the risk of a possible global
recession. We believe the global economy should still perform reasonably well in
1999, especially if Japan stabilizes.
We expect market volatility to remain high in 1999, reflecting investors'
concerns over this past year's economic difficulties in Asia, Russia and Latin
America. This could certainly reduce the returns on international investments.
We continue to closely monitor the condition of the Japanese economy. We
anticipate keeping our position in Japanese stocks relatively small. The
nation's recent economic weakness is beginning to offer significant value to
investors and long-term potential for capital appreciation.
The new unified currency in Europe--the Euro--will also bear watching. A
unified European currency is expected to enhance trade and lead to increased
efficiency across borders. While the initial reaction is positive, issues of
labor mobility, nationalism and the ability for the European Central Bank to
remain independent create some uncertainty for long-term prospects.
Growth of a $10,000 Investment
October 29, 1992 through
December 31, 1998
International Equity Series MSCI EAFE Index
10/29/92 $10,000 $10,000
12/31/92 $10,030 $10,146
3/31/93 $10,090 $11,363
6/30/93 $10,150 $12,505
9/30/93 $10,800 $13,335
12/31/93 $11,630 $13,450
3/31/94 $11,668 $13,920
6/30/94 $11,809 $14,631
9/30/94 $12,041 $14,646
12/31/94 $11,930 $14,496
3/31/95 $12,323 $14,766
6/30/95 $12,500 $14,873
9/30/95 $13,226 $15,493
12/31/95 $13,599 $16,121
3/31/96 $14,336 $16,587
6/30/96 $14,864 $16,849
9/30/96 $15,264 $16,828
12/31/96 $16,323 $17,096
3/31/97 $16,919 $16,828
6/30/97 $18,600 $19,025
9/30/97 $18,702 $18,903
12/31/97 $17,403 $17,435
3/31/98 $19,576 $20,272
6/30/98 $19,565 $20,502
9/30/98 $16,779 $17,600
12/31/98 $19,196 $21,159
International Equity Series
Average Annual Total Returns
-------------------------------
Lifetime +11.14%
Five Years +10.54%
One Year +10.33%
For periods ending December 31, 1998
Past performance is not a guarantee of future results. Return and share price
will fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
The chart above shows a $10,000 investment in both the International Equity
Series and the Morgan Stanley EAFE Index for the period from the Series'
inception on October 29, 1992 through December 31, 1998. All dividends and
capital gains were reinvested. The Index is unmanaged, with no set investment
objective and does not include the "real world" costs of managing a mutual fund.
Earnings from a variable annuity investment compound tax-free until withdrawal,
so no adjustments were made for income taxes. The effect of an expense
limitation is included in the chart. Performance does not reflect insurance fees
related to a variable annuity product investment nor the deferred sales charge
that would apply to certain withdrawals of investments held for less than eight
years. Performance shown here would have been reduced if such fees were included
and the expense limitation was removed. For more information about fees, consult
your variable annuity prospectus.
International Equity-2
<PAGE>
Delaware Group Premium Fund, Inc.-International Equity Series
Statement of Net Assets
December 31, 1998
Market
Number Value
of Shares (U.S. $)
COMMON STOCK-96.40%
Australia-11.23%
+Amcor .......................................... 1,415,000 $ 6,033,545
CSR ............................................ 1,904,966 4,647,898
Foster's Brewing Group ......................... 2,827,051 7,641,038
+National Australia Bank ........................ 393,757 5,923,247
Orica .......................................... 599,900 3,114,462
-----------
27,360,190
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Belgium-2.37%
Electrabel ..................................... 13,115 5,762,415
-----------
5,762,415
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France-7.77%
Alcatel Alsthom ................................ 38,015 4,652,965
Compagnie de Saint Gobain ...................... 34,299 4,842,584
Elf Aquitaine .................................. 43,583 5,038,118
Societe Generale ............................... 27,108 4,390,003
-----------
18,923,670
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Germany-11.35%
+Bayer .......................................... 134,600 5,650,616
Bayerische Vereinsbank ......................... 60,900 4,817,211
Continental .................................... 117,200 3,256,654
RWE ............................................ 146,000 8,061,274
Siemens ........................................ 89,050 5,852,091
-----------
27,637,846
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Hong Kong-2.15 %
Hong Kong Electric ............................. 810,000 2,456,921
Wharf Holdings ................................. 1,900,000 2,771,216
-----------
5,228,137
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Japan-15.87%
Canon .......................................... 115,000 2,447,454
Eisai .......................................... 287,000 5,564,219
Hitachi ........................................ 888,000 5,477,856
+Kinki Coca-Cola Bottling ....................... 191,000 2,523,101
Koito Manufacturing ............................ 596,000 2,515,831
Matsushita Electric ............................ 435,000 7,663,050
Nichido Fire & Marine .......................... 783,000 3,829,608
West Japan Railway ............................. 1,959 8,631,854
-----------
38,652,973
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Malaysia-0.37%
Oriental Holdings .............................. 510,720 589,292
Sime Darby ..................................... 380,000 326,785
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916,077
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Netherlands-5.22%
Elsevier ....................................... 199,500 2,794,720
Koninklijke Van Ommeren ........................ 60,100 1,872,708
Royal Dutch Petroleum .......................... 63,000 3,137,558
Unilever ....................................... 57,440 4,910,539
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12,715,525
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- -----------------
Top 10 stock holdings, representing 30.9% of net assets, are printed in bold.
<PAGE>
Market
Number Value
of Shares (U.S. $)
COMMON STOCK (Continued)
New Zealand-2.33%
Carter Holt Harvey ............................. 1,187,800 $ 1,062,535
+Telecom Corporation of New Zealand ............. 954,784 4,144,861
+Telecom Corporation of New Zealand IR .......... 209,409 457,293
-----------
5,664,689
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Singapore-0.36%
Jardine Matheson Holdings Limited .............. 336,622 868,485
-----------
868,485
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Spain-7.23%
Banco Central Hispanoamericano ................. 611,244 7,265,941
Iberdrola ...................................... 197,800 3,704,829
Telefonica de Espana ........................... 148,909 6,628,689
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17,599,459
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United Kingdom-30.15%
Bass ........................................... 436,964 6,124,978
BG ............................................. 867,647 5,462,432
Blue Circle Industry ........................... 918,236 5,282,372
Boots .......................................... 433,200 7,336,215
British Airways ................................ 889,473 6,001,660
Cable & Wireless ............................... 556,000 6,816,449
*Centrica ....................................... 700,000 1,401,298
GKN ............................................ 594,000 7,912,570
Glaxo Wellcome ................................. 214,470 7,328,073
Great Universal Stores ......................... 438,000 4,571,041
Rio Tinto ...................................... 522,100 6,007,011
Taylor Woodrow ................................. 1,365,000 3,405,762
Unigate ........................................ 808,000 5,786,825
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73,436,686
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Total Common Stock
(cost $199,255,236) 234,766,152
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RIGHTS-0.05%
New Zealand-0.05%
*Telefonica de Espana ........................... 148,909 132,364
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Total Rights (cost $0) 132,364
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WARRANTS-0.00%
Hong Kong-0.00%
*Wharf Holdings ................................. 95,000 7,848
-----------
Total Warrants (cost $0) 7,848
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International Equity-3
<PAGE>
International Equity Series
Statement of Net Assets (Continued)
Market
Principal Value
Amount (U.S.$)
REPURCHASE AGREEMENTS-3.61%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $2,264,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$2,511,805) .................................. $2,461,000 $2,461,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $3,139,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$3,229,162) .................................. 3,162,000 3,162,000
Market
Principal Value
Amount (U.S.$)
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98, collateralized by $688,000
U.S. Treasury Notes 7.75% due 12/31/99, market value
$709,135 and $962,000 U.S. Treasury Notes 7.75%
due 1/31/00, market value $1,024,590 and $966,000
U.S. Treasury Notes 6.25% due 8/31/00, market value
$1,011,404 and $461,000 U.S. Treasury Notes 6.50%
due 5/31/01, market value $482,434) ............... $3,163,000 $3,163,000
----------
Total Repurchase Agreements
(cost $8,786,000) .................................. 8,786,000
----------
TOTAL MARKET VALUE OF SECURITIES-100.06% (cost $208,041,236) $243,692,364
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.06%) (156,323)
------------
NET ASSETS APPLICABLE TO 14,780,659 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $16.48 PER SHARE-100.00% $243,536,041
============
COMPONENTS OF NET ASSETS AT DECEMBER 31, 1998:
Common stock, $ 0.01 par value, 1,000,000,000 shares
authorized to the Fund with 50,000,000 shares
allocated to the Series ........................................ $203,108,109
Undistributed net investment income** .......................... 4,931,609
Accumulated net realized loss on investments ................... (477,750)
Net unrealized appreciation of investments
and foreign currencies ......................................... 35,974,073
------------
Total net assets ............................................... $243,536,041
============
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*Non-income producing security for the year ended December 31, 1998.
**Undistributed net investment income includes net realized gains (losses) on
foreign currencies. Net realized gains (losses) on foreign currencies are
treated as net investment income in accordance with provisions of the Internal
Revenue Code.
+Security is partially or fully on loan.
IR-Installment Receipts
See accompanying notes
International Equity-4
<PAGE>
Delaware Group Premium Fund, Inc.-
International Equity Series
Statement of Operations
Year Ended December 31, 1998
INVESTMENT INCOME:
Dividends ...................................................... $7,078,322
Interest ....................................................... 815,143
Foreign tax withheld ........................................... (529,311)
-----------
7,364,154
-----------
EXPENSES:
Management fees ................................................ 1,679,911
Custodian fees ................................................. 93,175
Accounting and administration .................................. 91,538
Professional fees .............................................. 26,180
Reports and statements to shareholders ......................... 21,600
Registration fees .............................................. 11,350
Taxes (other than taxes on income) ............................. 11,149
Dividend disbursing and transfer agent
fees and expenses ............................................. 6,911
Directors' fees ................................................ 3,789
Other .......................................................... 31,506
-----------
1,977,109
-----------
Less expenses absorbed or waived by
Delaware International Advisers Ltd. ........................ (28,730)
-----------
Total expenses ................................................. 1,948,379
-----------
NET INVESTMENT INCOME .......................................... 5,415,775
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NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain on:
Investments .................................................... 1,016,624
Foreign currencies ............................................. 14,464
-----------
Net realized gain .............................................. 1,031,088
Net change in unrealized appreciation / depreciation
of investments and foreign currencies ....................... 14,401,533
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NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS AND
FOREIGN CURRENCIES .......................................... 15,432,621
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $20,848,396
===========
See accompanying notes
<PAGE>
Delaware Group Premium Fund, Inc.-
International Equity Series
Statements of Changes in Net Assets
Year Ended Year Ended
12/31/98 12/31/97
---------- ----------
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income ........................... $5,415,775 $3,977,084
Net realized gain on investments
and foreign currencies ....................... 1,031,088 2,577,473
Net change in unrealized appreciation /
depreciation of investments and foreign
currencies ................................... 14,401,533 1,459,920
------------ ------------
Net increase in net assets resulting
from operations .............................. 20,848,396 8,014,477
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................... (7,631,302) (4,927,079)
------------ ------------
(7,631,302) (4,927,079)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ....................... 66,971,858 70,066,962
Net asset value of shares issued upon
reinvestment of dividends from net
investment income ............................ 7,631,302 4,927,079
------------ ------------
74,603,160 74,994,041
Cost of shares repurchased ...................... (43,147,474) (10,645,895)
------------ ------------
Increase in net assets derived from capital
share transactions ........................... 31,455,686 64,348,146
------------ ------------
NET INCREASE IN NET ASSETS ...................... 44,672,780 67,435,544
------------ ------------
NET ASSETS:
Beginning of year ............................... 198,863,261 131,427,717
------------ ------------
End of year ..................................... $243,536,041 $198,863,261
============ ============
See accompanying notes
International Equity-5
<PAGE>
Delaware Group Premium Fund, Inc.-International Equity Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..................... $15.520 $15.110 $13.120 $11.840 $11.620
Income from investment operations:
Net investment income(1) ............................... 0.386 0.359 0.557 0.419 0.220
Net realized and unrealized gain on
investments and foreign currencies .................. 1.169 0.596 1.966 1.191 0.080
------- ------- ------- ------- -------
Total from investment operations ....................... 1.555 0.955 2.523 1.610 0.300
------- ------- ------- ------- -------
Less dividends and distributions:
Dividends from net investment income ................... (0.595) (0.545) (0.420) (0.240) (0.070)
Distributions from net realized gain
on investments ...................................... none none (0.113) (0.090) (0.010)
------- ------- ------- ------- -------
Total dividends and distributions ...................... (0.595) (0.545) (0.533) (0.330) (0.080)
------- ------- ------- ------- -------
Net asset value, end of year ........................... $16.480 $15.520 $15.110 $13.120 $11.840
======= ======= ======= ======= =======
Total return ........................................... 10.33% 6.60% 20.03% 13.98% 2.57%
Ratios and supplemental data:
Net assets, end of year (000 omitted) .................. $243,536 $198,863 $131,428 $81,548 $57,649
Ratio of expenses to average net assets ................ 0.87% 0.85% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets prior
to expense limitation ............................... 0.88% 0.90% 0.91% 0.89% 1.01%
Ratio of net investment income to average net assets ... 2.41% 2.28% 4.71% 3.69% 2.63%
Ratio of net investment income to average net
assets prior to expense limitation .................. 2.40% 2.23% 4.60% 3.60% 2.42%
Portfolio turnover ..................................... 5% 7% 8% 19% 13%
</TABLE>
- ------------------
(1)Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.
See accompanying notes
International Equity-6
<PAGE>
Delaware Group Premium Fund, Inc.-International Equity Series
Notes to Financial Statements
December 31, 1998
Delaware Group Premium Fund, Inc. (the "Fund") is registered as a diversified
open-end investment company under the Investment Company Act of 1940, as
amended. The Fund is organized as a Maryland Corporation and offers 16 series:
the Trend Series, the DelCap Series, the Small Cap Value Series (formerly the
Value Series), the Social Awareness Series (formerly the Quantum Series), the
Devon Series, the Decatur Total Return Series, the REIT Series, the Delaware
Series, the Convertible Securities Series, the Emerging Markets Series, the
International Equity Series, the Global Bond Series, the Delchester Series, the
Strategic Income Series, the Capital Reserves Series, and the Cash Reserve
Series. These financial statements and the related notes pertain to the
International Equity Series (the "Series"). The shares of the Fund are sold only
to separate accounts of life insurance companies.
1. Significant Accounting Policies
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Series.
Security Valuation--Securities listed on an exchange are valued at the last
quoted sales price as of the close of the NYSE on the valuation date. Securities
not traded or securities not listed on an exchange are valued at the mean of the
last quoted bid and asked prices. Securities listed on a foreign exchange are
valued at the last quoted sales price before the Series is valued. Money market
instruments having less than 60 days to maturity are valued at amortized cost,
which approximates market value. Other securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Fund's Board of Directors.
Federal Income Taxes--The Series intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles.
Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 100% collateralized. However,
in the event of default or bankruptcy by the counterparty to the agreement,
realization of the collateral may be subject to legal proceedings.
Foreign Currency Transactions--Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar as of 3:00 PM EST. Transaction gains or losses resulting from changes in
exchange rates during the reporting period or upon settlement of the foreign
currency transaction are reported in operations for the current period. It is
not practical to isolate that portion of both realized and unrealized gains and
losses on investments in equity securities in the statement of operations that
result from fluctuations in foreign currency exchange rates. The Series reports
certain foreign currency related transactions as components of realized gains
(losses) for financial reporting purposes, whereas such components are treated
as ordinary income (loss) for federal income tax purposes.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). Costs used in calculating realized gains and losses on the
sale of investment securities are those of the specific securities sold.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Foreign dividends are also recorded on the
ex-dividend date or as soon after the ex-dividend date that the Series became
aware of such dividends, net of all non-rebatable tax withholdings. Withholding
taxes on foreign dividends have been provided for in accordance with the Series'
understanding of the applicable country's tax rules and rates.
The International Equity Series will make payments from net investment income
and net realized gain on investments, if any, following the close of the fiscal
year.
Certain expenses of the Fund are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Series' average
daily net assets.
2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Series
pays Delaware International Advisers Ltd. ("DIAL"), the Investment Manager of
the Series, an annual fee which is calculated at the rate of 0.75% of the
average daily net assets of the Series, less the fees paid to the unaffiliated
directors.
DIAL has elected to waive that portion, if any, of the annual management fee
payable to the extent necessary to ensure that annual operating expenses
exclusive of taxes, interest, brokerage commissions and extraordinary expenses
do not exceed 0.95% of average daily net assets of the Series through April 30,
1999.
The Series has engaged Delaware Service Company, Inc. ("DSC"), an affiliate of
Delaware Management Company ("DMC"), to provide dividend disbursing, transfer
agent and accounting services. The Series pays DSC a monthly fee based on the
number of shareholder accounts, shareholder transactions and average net assets,
subject to certain minimums.
International Equity-7
<PAGE>
International Equity Series
Notes to Financial Statements (Continued)
On December 31, 1998, the Series had liabilities payable to affiliates as
follows:
Dividend disbursing
Investment transfer agent,
management accounting fees
fee payable to and other expenses
DIAL payable to DSC
-------------- -------------------
$147,533 $7,387
Certain officers of DMC, DSC and DIAL are officers, directors and/or employees
of the Fund. These officers, directors and employees are paid no compensation by
the Fund.
3. Investments
During the year ended December 31, 1998, the Series made purchases and sales of
investment securities other than U.S. government securities and temporary cash
investments as follows:
Purchases ........... $44,100,850
Sales ............... $10,988,732
At December 31, 1998, the aggregate cost of securities and unrealized
appreciation (depreciation) for federal income tax purposes for the Series were
as follows:
Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation appreciation
----------- ------------ ------------ --------------
$208,041,236 $53,406,040 ($17,754,912) $35,651,128
For federal income tax purposes, the Series had accumulated capital losses at
December 31, 1998 as follows:
Year of
expiration
2005
----------
$477,750
4. Capital Stock
Transactions in capital stock shares were as follows:
<TABLE>
<CAPTION>
Shares issued upon
reinvestment of dividends
from net investment Shares Net
Shares sold income repurchased increase
----------- ------------------------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 .... 4,191,375 498,862 (2,725,472) 1,964,765
Year ended December 31, 1997 .... 4,451,284 342,396 (674,626) 4,119,054
</TABLE>
5. Foreign Exchange Contracts
The Series will generally enter into forward foreign currency contracts as a way
of managing foreign exchange rate risk. These contracts may be entered into to
fix the U.S. dollar value of a security that it has agreed to buy or sell for
the period between the date the trade was entered into and the date the security
is delivered and paid for. They may also be used to hedge the U.S. dollar value
of securities it already owns denominated in foreign currencies.
Forward foreign currency contracts are valued at the mean between the bid and
asked prices of the contracts and are marked-to-market daily. Interpolated
values are derived when the settlement date of the contract is an interim date
for which quotations are not available. The change in market value is recorded
as an unrealized gain or loss. When the contract is closed, a realized gain or
loss is recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Series' securities, but it does establish a rate of
exchange that can be achieved in the future. Although forward foreign currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, they also limit any potential gain that might result should the value
of the currency increase. In addition, a Series could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.
International Equity-8
<PAGE>
International Equity Series
Notes to Financial Statements (Continued)
<TABLE>
<CAPTION>
Value of
In exchange contract at Settlement Unrealized appreciation
Contracts to Receive for 12/31/98 date (depreciation)
- -------------------- ----------- ----------- ---------- -----------------------
<S> <C> <C> <C> <C>
262,363 British Pounds $441,688 $434,910 1/5/99 ($6,778)
218,807 British Pounds 362,673 362,682 1/7/99 9
Value of
In exchange contract at Settlement Unrealized appreciation
Contracts to Deliver for 12/31/98 date (depreciation)
- -------------------- ----------- ----------- ---------- -----------------------
<S> <C> <C> <C> <C>
10,082,609 British Pounds $17,014,000 $16,698,634 1/29/99 $315,366
</TABLE>
6. Credit and Market Risk
Some countries in which the Series may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is a deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Series
may be inhibited. In addition, a significant proportion of the aggregate market
value of equity securities listed on the major securities exchanges in emerging
markets are held by a smaller number of investors. This may limit the number of
shares available for acquisition or disposition by the Series.
The Series may invest up to 10% of its total assets in illiquid securities which
may include securities with contractual restrictions on resale and other
securities which may not be readily marketable. The relative illiquidity of some
of these securities may adversely affect the Series' ability to dispose of such
securities in a timely manner and at a fair price when it is necessary to
liquidate such securities.
7. Securities Lending
The Series may participate, along with other funds in the Delaware Investments
Family of Funds, in a Securities Lending Agreement ("Lending Agreement").
Security loans made pursuant to the Lending Agreement are required at all times
to be secured by U.S. Treasury obligations and/or cash collateral at least equal
to 100% of the market value of securities issued in the U.S. and 105% of the
market value of securities issued outside of the U.S. Cash collateral received
is invested in fixed-income securities, with a weighted average maturity not to
exceed 90 days, rated in one of the top two tiers by Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. or repurchase agreements collateralized
by such securities. However, in the event of default or bankruptcy by the
lending agent, realization and/or retention of the collateral may be subject to
legal proceedings. In the event that the borrower fails to return loaned
securities and the collateral received is insufficient to cover the value of the
loaned securities and provided such collateral is not the result of investment
losses, the lending agent has agreed to pay the amount of the shortfall to the
Series, or at the discretion of the lending agent, replace the loaned
securities. The market value of the securities on loan and the related
collateral received at December 31, 1998 were as follows:
Market value of Market value of
securities on loan collateral
------------------ ---------------
$17,452,250 $18,312,259
Net income from securities lending activities for the year ended December 31,
1998 was $153,758 and is included in interest income on the statement of
operations.
International Equity-9
<PAGE>
Delaware Group Premium Fund, Inc.-International Equity Series
Report of Independent Auditors
To the Shareholders and Board of Directors
Delaware Group Premium Fund, Inc.-International Equity Series
We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-International Equity Series (the "Fund") as of December 31,
1998, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the Fund's
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Premium Fund, Inc.-International Equity Series at December 31,
1998, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Philadelphia, Pennsylvania Ernst & Young LLP
February 5, 1999
International Equity-10
