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DELAWARE(SM)
INVESTMENTS
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Philadelphia [ ] London
Delaware Group
Premium Fund, Inc.
1818 Market Street,
Philadelphia, PA 19103
U.S. Growth Series
Prospectus October 15, 1999
This Prospectus offers the U.S. Growth Series of Delaware Group Premium Fund,
Inc. The Series is in effect a separate fund issuing its own shares. The shares
of the Series 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 Series in accordance with allocation
instructions received from contract owners. The investment objectives and
principal policies of the Series are described in this Prospectus.
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As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal offense.
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Table of contents
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Profile Page 1
U.S. Growth Series 1
How we manage the Series 2
Our investment strategies 2
The securities we typically invest in 2
The risks of investing in the Series 4
Who manages the Series 5
Investment manager 5
Portfolio manager 5
Fund Administration (Who's who) 6
Important information about the Series 7
Purchase and redemption of shares 7
Valuation of shares 7
Dividends, distributions and taxes 7
Year 2000 7
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Profile: U.S. Growth Series
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What is the Fund's Goal?
U.S. Growth Series seeks to maximize capital appreciation. Although the
Series will strive to achieve its investment goal, there is no assurance
that it will.
What are the Series' main investment strategies? We invest primarily in stocks
of companies of all sizes. We look for stocks with low dividend yields, strong
balance sheets and high expected earnings growth rates as compared to other
companies in the same industry. Our strategy is to identify companies whose
earnings are expected to grow faster than the U.S. economy in general. Whether
companies provide dividend income and how much income they provide will not be a
primary factor in the Series' selection decisions.
What are the main risks of investing in the Series? Investing in any mutual fund
involves risk, including the risk that you may lose part or all of the money you
invest. The price of Series shares will increase and decrease according to
changes in the value of the Series' investments. This Series will be
particularly affected by changes in stock prices, which tend to fluctuate more
than bond prices. Stock prices may be negatively affected by declines in the
stock market or poor performance in specific industries or companies. Stocks of
companies with high growth expectations may be more susceptible to price
declines if they do not meet those high expectations. For a more complete
discussion of risk, please turn to "The risks of investing in the Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Series is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Series with your financial adviser to
determine whether it is an appropriate choice for you.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for capital growth potential.
o Investors looking for a fund that can be a complement to income-producing or
value-oriented investments.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly, over the short term.
o Investors whose primary goal is to receive current income.
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How we manage the Series
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Our investment strategies
U.S. Growth Series' investment goal is to seek to maximize capital appreciation.
It seeks to achieve its objective by investing in companies of all sizes which
have low dividend yields, strong balance sheets and high expected earnings
growth rates relative to their industry.
U.S. Growth Series uses the same investment strategy as U.S. Growth Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
We will seek investments in companies of all sizes that we believe have earnings
that may be expected to grow faster than the U.S. economy in general. Those
types of companies may offer the possibility of accelerated earnings growth
because of management changes, new products, or structural changes in the
economy. In addition, companies with relatively high rates of return on invested
capital may be able to finance future growth from internal sources. Income
derived from securities of such companies will be only an incidental
consideration of the Series.
The securities we typically invest in
Stocks offer investors the potential for capital appreciation.
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Securities How we use them
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U.S. Growth Series
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Common stocks: Securities that represent shares of ownership in a Generally, we invest primarily in common stock of companies of
corporation. Stockholders participate in the corporation's profits all sizes that we think have appreciation potential.
and losses, proportionate to the number of shares they own.
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Foreign securities and American Depositary Receipts The Series may invest up to 20% of its assets in securities of
Securities of foreign entities issued directly or, in the foreign issuers. Such foreign securities may be traded on a
case of American Depositary Receipts, through a U.S. bank. foreign exchange, or they may be in the form of ADRs.
ADRs are issued by a U.S. bank and represent the bank's
holding of a stated number of shares of a foreign
corporation. An ADR entitles the holder to all dividends and
capital gains earned by the underlying foreign shares. ADRs
are bought and sold the same as U.S. securities.
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Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term
the Series, and a seller of securities in which the seller investment for the Series' cash position. In order to enter
agrees to buy the securities back within a specified time at into these repurchase agreements, the Series must have
the same price the buyer paid for them, plus an amount equal collateral of at least 102% of the repurchase price.
to an agreed upon interest rate. Repurchase agreements are
often viewed as equivalent to cash.
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The securities we typically invest in
(continued)
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Securities How we use them
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U.S. Growth Series
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Restricted securities: Privately placed securities whose resale is We may invest in privately placed securities that are eligible
restricted under securities law. for resale only among certain institutional buyers without
registration, including Rule 144A Securities. Restricted
securities that are determined to be illiquid may not exceed
the Series' 15% limit on illiquid securities, which is
described below.
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Illiquid securities: Securities that do not have a ready market, We may invest up to 15% of net assets in illiquid securities,
and cannot be easily sold within seven days at approximately the including repurchase agreements with maturities of over seven
price that the Series has valued them. days.
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Fixed-income securities: Securities that may include debt We may invest up to 35% of the Series' assets in debt
securities, bonds, convertible bonds, preferred stock, as well as, securities, bonds, convertible bonds, preferred stock and
non-investment grade fixed-income securities. convertible preferred stock. We may also invest up to 10% of
the Series' assets in non-investment grade bonds if we believe
that doing so would further the Series' objective.
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The Series may also invest in other securities including U.S. government
securities, futures and options. Please see the Statement of Additional
Information for additional descriptions and risk information on these securities
as well as those listed in the table above. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities The Series may lend up to 25% of its assets to qualified
dealers and institutional investors for their use in security transactions.
Borrowing from banks The Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets. Whenever
these borrowings, including reverse repurchase agreements, exceed 5% of the
value of the Series' total assets, the Series will not purchase any securities.
Purchasing securities on a when-issued or delayed delivery basis The Series may
buy or sell securities on a when-issued or delayed delivery basis; that is,
paying for securities before delivery or taking delivery at a later date.
Portfolio turnover We anticipate that the Series' annual portfolio turnover may
be greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
Temporary defensive positions For temporary defensive purposes, the Series may
invest up to 100% of its assets in money market instruments when the manager or
sub-adviser determines that market conditions warrant. The Series may also hold
a portion of its assets in cash for liquidity purposes. To the extent that it
does so, the Series may be unable to meet its investment objective.
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How we manage the Series (continued)
The risks of investing in the Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in U.S. Growth Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
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Risks How we strive to manage them
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U.S. Growth Series
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Market risk is the risk that all or a majority of the securities We maintain a long-term investment approach and focus on
in a certain market--like the stock or bond market--will decline stocks we believe can appreciate over an extended time frame
in value because of factors such as economic conditions, future regardless of interim market fluctuations. We do not try to
expectations or investor confidence. predict overall stock market movements and do not trade for
short-term purposes.
We may hold a substantial part of the Series' assets in cash
or cash equivalents as a temporary, defensive strategy.
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Industry and security risk is the risk that the value of We limit the amount of U.S. Growth Series' assets invested in
securities in a particular industry or the value of an individual any one industry and in any individual security.
stock or bond will decline because of changing expectations for
the performance of that industry or for the individual company
issuing the stock or bond.
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Foreign risk is the risk that foreign securities may be adversely We are permitted to invest up to 20% of the Series' portfolio
affected by political instability, changes in currency exchange in foreign securities. When we do purchase foreign securities,
rates, foreign economic conditions or inadequate regulatory and they are generally American Depositary Receipts which are
accounting standards. denominated in U.S. dollars and traded on U.S. stock
exchanges.
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Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities to 15% of net assets.
readily sold within seven days at approximately the price that the
Series values them.
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Credit risk is the possibility that a bond issuer (or an entity We limit the amount of high-yield bonds (that is, bonds rated
that insures the bond) will be unable to make timely payments of lower than Baa by Moody's or BBB by S&P) to 10% of net assets.
interest and principal. This limitation, combined with our careful, credit-oriented
bond selection and our commitment to hold a diversified
selection of high-yield bonds, are designed to manage the
risk.
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Who manages the Series
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Investment manager and sub-adviser
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. Lynch & Mayer, Inc. is the
Series' sub-adviser. As sub-adviser, Lynch & Mayer is responsible for day-to-day
management of the Series' assets. Delaware Management Company administers the
Series' affairs and has ultimate responsibility for all investment advisory
services for the Series. Delaware Management Company also supervises the
sub-adviser's performance. The Series will pay Delaware Management Company the
following fee on an annual basis: 0.65% on the first $500 million of average
daily net assets; 0.60% on the next $500 million; 0.55% on the next $1.5 billion
and 0.50% on assets in excess of $2.5 billion.
Portfolio managers
Frank Houghton and Rufus Winton have primary responsibility for making
investment decisions for U.S. Growth Series. When making decisions for the
Series, Mr. Houghton and Mr. Winton regularly consult with the Lynch & Mayer
investment team.
Frank Houghton
President and Portfolio Manager of Lynch & Mayer, Inc.
Mr. Houghton joined Lynch & Mayer in 1990 and became President in 1999. Prior to
joining Lynch & Mayer, Mr. Rufus was Chairman of BMI Capital from 1984 to 1990,
a Portfolio Manager at Neuberger & Berman from 1977 to 1984 and a Partner at
Oppenheimer & Co., Inc. from 1969-1977. Mr. Houghton received a BBA from
Manhattan College and attended New York University Graduate School of Business
Administration.
Rufus Winton
Senior Vice President and Portfolio Manager of Lynch & Mayer, Inc.
Mr. Winton joined Lynch & Mayer in 1993. Prior to joining Lynch & Mayer, Mr.
Rufus was a Planning Analyst at Northwest Airlines, Inc., Director of Business
development at Postal Automation Inc. and a Manager in Mortgage-Backed
Securities Sales at Citicorp Investment Bank. He received a BA in Economics from
Connecticut College in 1982 and an MBA from Kellogg Graduate School of
Management in 1991, where he was an Amoco Scholar.
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Who manages the Series (continued)
Who's who?
The following describes the various organizations involved with managing,
administering, and servicing the Series.
Board of directors
A mutual fund is governed by a board of directors which has oversight
responsibility for the management of the fund's business affairs. Directors
establish procedures and oversee and review the performance of the investment
manager, the distributor and others that perform services for the fund. At least
40% of the board of directors must be independent of the fund's investment
manager and distributor. These independent fund directors, in particular, are
advocates for shareholder interests.
Investment manager
Delaware Management Company, One Commerce Square, Philadelphia, PA 19103
An investment manager is a company responsible for selecting portfolio
investments consistent with objectives and policies stated in the mutual fund's
prospectus. The investment manager places portfolio orders with broker/dealers
and is responsible for obtaining the best overall execution of those orders. A
written contract between a mutual fund and its investment manager specifies the
services the manager performs. Most management contracts provide for the manager
to receive an annual fee based on a percentage of the fund's average net assets.
The manager is subject to numerous legal restrictions, especially regarding
transactions between itself and the funds it advises.
Delaware Management Company and its predecessors have been managing the funds in
Delaware Investments since 1938. On August 31, 1999, Delaware Management Company
and its affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $46 billion in assets in
the various institutional or separately managed (approximately $28,183,690,000)
and investment company (approximately $18,686,470,000) accounts. Delaware
International Advisers began operating in 1990 and manages global and
international institutional and mutual fund accounts. Delaware Management
Company is a series of Delaware Management Business Trust, which is an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
Sub-adviser
Lynch & Mayer, Inc., 350 Park Avenue, New York, New York 10022
A sub-adviser is a company generally responsible for the management of the
fund's assets. They are selected and supervised by the investment manager.
Portfolio managers
Portfolio managers are employed by the investment managers or sub-advisers to
make investment decisions for individual portfolios on a day-to-day basis. See
"Portfolio managers" on page 5 for information about the portfolio managers of
the Series.
Distributor
Delaware Distributors, L.P., 1818 Market Street, Philadelphia, PA 19103
Shares of the Series are only sold to separate accounts of insurance companies
used in connection with variable annuity or variable life products.
Custodian
The Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn, NY 11245
Mutual funds are legally required to protect their portfolio securities and most
funds place them with a qualified bank custodian who segregates fund securities
from other bank assets.
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Important information about the Series
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Purchase and redemption of shares
Shares are sold only to separate accounts of life companies at net asset value.
(See Valuation of shares.) Redemptions will be effected by the separate accounts
at the net asset value next determined after receipt of the order to meet
obligations under the variable contracts. Contract owners do not deal directly
with the Series with respect to the acquisition or redemption of Series shares.
Valuation of shares
The price you pay for shares will depend on when we receive your purchase order.
If we or an authorized agent receives your order before the close of trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern Time) on a business day,
you will pay that day's closing share price which is based on the Series' net
asset value. If we receive your order after the close of trading, you will pay
the next business day's price. A business day is any day that the New York Stock
Exchange is open for business. We reserve the right to reject any purchase
order.
We determine the Series' net asset value (NAV) per share at the close of trading
of the New York Stock Exchange each business day that the Exchange is open. We
calculate this value by adding the market value of all the securities and assets
the Series' portfolio, deducting all liabilities, and dividing the resulting
number by the number of shares outstanding. The result is the net asset value
per share. We price securities and other assets for which market quotations are
available at their market value. We price debt securities on the basis of
valuations provided to us by an independent pricing service that uses methods
approved by the board of directors. Any investments that have a maturity of less
than 60 days we price at amortized cost. We price all other securities at their
fair market value using a method approved by the board of directors.
Dividends, distributions and taxes
Dividends and capital gain distributions, if any, are distributed annually.
We automatically reinvest all dividends and any capital gains.
The Series will not be subject to federal income tax to the extent its earnings
are distributed. The Fund intends to distribute substantially all of the Series'
net investment income and net capital gains. Shareholders may be proportionately
liable for taxes on income and gains of the Series but shareholders not subject
to tax on their income will not be required to pay tax on amounts distributed to
them, and the Fund will inform shareholders of the amount and nature of such
income or gains.
Please refer to the prospectus for the variable insurance contract for
additional tax information relevant to such contracts.
Year 2000
As with other mutual funds, financial and business organizations and individuals
around the world, the Series could be adversely affected if the computer systems
used by its service providers do not properly process and calculate date-related
information from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Series is taking steps to obtain satisfactory assurances that
its major service providers are taking steps reasonably designed to address the
Year 2000 Problem on the computer systems that the service providers use.
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the business of the Series. The Year 2000 Problem may also
adversely affect the issuers of securities in which the Series invests. The
portfolio managers and investment professionals of the Series consider Year 2000
compliance (including, but not limited to, any or all of the following: impact
on business; Cost of compliance plan to review and contingency planning; and
vendor compliance) in the securities selection and investment process. However,
there can be no guarantee that, even with their due diligence efforts, they will
be able to predict the effect of Year 2000 on any company or the performance of
its securities.
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Delaware Group
Premium Fund, Inc.
Additional information about the Series' investments will be available in the
Series' Annual and Semi-Annual Reports to shareholders. In the Series' annual
reports you will find a discussion of the market conditions and investment
strategies that significantly affected the Series' performance during its last
fiscal period. You can find more detailed information about the Series in the
current Statement of Additional Information (SAI), which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
legally a part of this prospectus. You may obtain a free copy of the Statement
of Additional Information by writing to us at One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103, or call toll-free 800-231-8002.
You can find reports and other information about the Series on the SEC web site
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Series, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. You can get information on the public
reference room by calling the SEC at 1-800-SEC-0330.
Investment Company Act File Number: 811-5162
DELAWARE(SM)
INVESTMENTS
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Philadelphia [ ] London
<PAGE>
PART B--STATEMENT OF ADDITIONAL INFORMATION
October 15, 1999
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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 1
Investment Objectives and Policies 3
Accounting and Tax Issues
Performance Information
Trading Practices and Brokerage
Offering Price
Dividends and Realized Securities Profits Distributions
Taxes
Investment Management Agreements and Sub-Advisory Agreements
Officers and Directors
General Information
Appendix A--Description of Ratings
Financial Statements
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Delaware Group Premium Fund, Inc. ("Premium Fund" or the "Fund") is a
diversified, open-end management investment company that is intended to meet a
wide range of investment objectives with its separate Portfolios ("Series").
Each Series is in effect a separate fund issuing its own shares.
The shares of the Fund are sold only to separate accounts of life
insurance companies ("life companies"). The separate accounts are used in
conjunction with variable annuity contracts and variable life insurance policies
("variable contracts"). The separate accounts invest in shares of the various
Series in accordance with allocation instructions received from contract owners.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectuses of
the Fund dated May 1, 1999 and October 15, 1999, 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. The Funds' financial
statements, the notes relating thereto, the financial highlights and the report
of independent auditors are incorporated by reference from the Annual Report
into this Part B. The Annual Report will accompany any request for Part B. The
Annual Report can be obtained, without charge, by calling 800-523-1918.
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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.
Aggressive Growth Series seeks long-term capital appreciation
which the Series attempts to achieve by investing primarily in
equity securities of companies which the manager believes have
the potential for high earnings growth. This Series has the
same objective and investment discipline as Delaware
Aggressive Growth Fund of Voyageur Mutual Funds III, Inc., a
separate fund in the Delaware Investments family.
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 Cash Reserve Fund of Delaware Group Cash Reserve,
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.
Delaware Balanced 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 Balanced 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.
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 Delaware
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.
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 Delaware
Delchester Fund of Delaware Group Income Funds, 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.
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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
Delaware Devon Fund of Delaware Group Equity Funds I, Inc., a
separate fund in the Delaware Investments family.
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 Delaware Emerging Markets Fund of Delaware
Group Global & International Funds, 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 Delaware Global Bond
Fund of Delaware Group Global & International Funds, Inc., a
separate fund in the Delaware Investments family.
Growth and Income Series (formerly named 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 Delaware Growth and Income 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.
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 Delaware International
Equity Fund 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.
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.
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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 Delaware Small Cap Value Fund of
Delaware Group Equity Funds V, Inc., a separate fund in the
Delaware Investments family.
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 Delaware Social Awareness Fund of Delaware Group Equity
Funds II, 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 Delaware Strategic Income Fund of
Delaware Group Income Funds, 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 Delaware Trend Fund of Delaware Group Equity Funds III, a
separate fund in the Delaware Investments family.
U.S. Growth Series seeks to maximize capital appreciation The
Series seeks to achieve its investment objective by investing
in companies of all sizes which have low dividend yields,
strong balance sheets and high expected earnings growth rates
relative to their industry. This Series has the same objective
and investment disciplines as Delaware U.S. Growth Fund of
Delaware Group Adviser Funds, Inc., a separate fund in the
Delaware Investments family.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions -- The Fund has adopted the
following restrictions for each Series which cannot be changed without approval
by the holders of a "majority" of the respective Series' outstanding shares,
which is a vote by the holders of the lesser of a) 67% or more of the voting
securities present in person or by proxy at a meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy; or b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time a Series purchases securities.
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Each Series may not:
1. With respect to each Series, except the REIT Series, make
investments that will result in the concentration (as that term may be defined
in the Investment Company Act of 1940 ("1940 Act"), any rule or order
thereunder, or U.S. Securities and Exchange Commission ("SEC") staff
interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does not
limit the Portfolio from investing in obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or in tax-exempt securities
or certificates of deposit. The REIT Series will concentrate its investments in
the real estate industry. The REIT Series otherwise makes investments that will
result in the concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of its
investments in the securities of issuers primarily engaged in the same industry,
provided that this restriction does not limit the Series from investing in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or in tax-exempt securities or certificates of deposit. In
addition, the Cash Reserve Series may concentrate its investments in 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").
2. Borrow money or issue senior securities, except as the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof, may permit.
3. Underwrite the securities of other issuers, except that the
Portfolio may engage in transactions involving the acquisition, disposition or
resale of its portfolio securities, under circumstances where it may be
considered to be an underwriter under the Securities Act of 1933.
4. With respect to each Series , purchase or sell real estate, unless
acquired as a result of ownership of securities or other instruments and
provided that this restriction does not prevent the Series from investing in
issuers which invest, deal or otherwise engage in transactions in real estate or
interests therein, or investing in securities that are secured by real estate or
interests therein.
5. Purchase or sell physical commodities, unless acquired as a result
of ownership of securities or other instruments and provided that this
restriction does not prevent the Series from engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities.
6. Make loans, provided that this restriction does not prevent the
Portfolio from purchasing debt obligations, entering into repurchase agreements,
loaning its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
In addition to the fundamental policies and investment restrictions
described above, and the various general investment policies described in the
prospectus, each Series will be subject to the following investment
restrictions, which are considered non-fundamental and may be changed by the
Board of Directors without shareholder approval.
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1. The Series are permitted to invest in other investment companies,
including open-end, closed-end or unregistered investment companies, either
within the percentage limits set forth in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof, or without regard to percentage
limits in connection with a merger, reorganization, consolidation or other
similar transaction. However, none of the Series, may operate as a "fund of
funds" which invests primarily in the shares of other investment companies as
permitted by Section 12(d)(1)(F) or (G) of the 1940 Act, if its own shares are
utilized as investments by such a "fund of funds."
2. A Series may not invest more than 15% of its net assets in
securities which it cannot sell or dispose of in the ordinary course of business
within seven days at approximately the value at which the Series has valued the
investment.
Additional Nonfundamental Investment Restrictions -- Each Series
(except as noted) is subject to the following investment restrictions, which are
considered non-fundamental and may be changed by the Board of Directors without
shareholder approval. The percentage limitations contained in the restrictions
and policies set forth herein apply at the time of purchase of securities.
Each Series (other than Aggressive Growth, Strategic Income, Devon,
Emerging Markets, Convertible Securities, Social Awareness REIT and U.S. Growth
Series) may 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.
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.
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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.
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 S&P or P-2 or better by 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.
13. 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.
14. 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.
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In addition, 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.
Strategic Income, Devon, Emerging Markets, Convertible Securities and
Social Awareness Series may not:
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.
2. 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. 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. 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. 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. 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 REIT Series may not:
1. The Series will concentrate its investments in the real estate
industry. The Series may 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.
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2. 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. Engage in underwriting of securities of other issuers, except that
portfolio securities, including securities purchased in private placements, may
be acquired under circumstances where, if sold, the Series might be deemed to be
an underwriter under the Securities Act of 1933. No limit is placed on the
proportion of the Series' assets which may be invested in such securities.
4. 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. 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. 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.
7. Invest for the purpose of acquiring control of any company.
8. 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.
9. Invest in interests in oil, gas and other mineral leases or other
mineral exploration or development programs.
10. 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.
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.
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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 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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Asset-Backed Securities
The Capital Reserves, Delaware Balanced, Cash Reserve, Strategic Income
and Devon Series may invest in securities which are backed by assets such as
receivables on home equity and credit loans, receivables regarding automobile,
mobile home and recreational vehicle loans, wholesale dealer floor plans and
leases (i.e., receivables on loans to car dealers for cars used in their
showrooms) or other loans or financial receivables currently available or which
may be developed in the future. For the Capital Reserves, Delaware, Strategic
Income and Devon Series, all such securities must be rated in one of the four
highest rating categories by a reputable rating agency (e.g., BBB or better by
S&P or Baa or better by Moody's). It is the Cash Reserve Series' current policy
to limit asset-backed investments to those rated in the highest rating category
by a reputable rating agency (e.g., AAA by S&P or Aaa by Moody's) and
represented by interests in credit card receivables, wholesale dealer floor
plans, home equity loans and automobile loans.
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.
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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 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.
Mortgage-Backed Securities
The Capital Reserves, Delaware Balanced, Strategic Income, Devon and
REIT Series may invest in mortgage-backed securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities or government sponsored
corporations or those issued by certain private, non-government corporations,
such as financial institutions. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. The Series may
invest in such private-backed securities, but the REIT Series will do so (i)
only if the securities are 100% collateralized at the time of issuance by
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and (ii) currently, only if they are rated at the time of
purchase in the two highest grades by a nationally-recognized statistical rating
agency.
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The Capital Reserves, Delaware Balanced, Strategic Income and Devon each may
invest up to 20% of its total assets in CMOs and REMICs issued by private
entities which are not collateralized by securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g., BBB
or better by S&P or Baa or better by Moody's) and (ii) represent interests in
whole-loan mortgages, multi-family mortgages, commercial mortgages and other
mortgage collateral supported by a first mortgage lien on real estate.
Non-agency mortgage-backed securities are subject to the interest rate and
prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are not
collateralized by securities issued or guaranteed by the U.S. government. In
addition, timely information concerning the loans underlying these securities
may not be as readily available and the market for these securities may be less
liquid than other CMOs and REMICs.
REITs
The REIT Series invests in, and the Delaware Balanced, Strategic Income
and Devon Series may invest in, REITs. REITs are pooled investment vehicles
which invest primarily in income-producing real estate or real estate related
loans or interests. REITs are generally classified as equity REITs, mortgage
REITs or a combination of equity and mortgage REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily
from the collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive income from the
collection of interest payments. Like investment companies, REITs are not taxed
on income distributed to shareholders provided they comply with several
requirements in the Code. REITs are subject to substantial cash flow dependency,
defaults by borrowers, self-liquidation, and the risk of failing to qualify for
tax-free pass-through of income under the Code, and/or to maintain exemptions
from the 1940 Act.
The Series' investments in REITs present certain further risks that are
unique and in addition to the risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of the
underlying property owned by the REITs, while mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent on management skills,
are not diversified, and are subject to the risks of financing projects. REITs
whose underlying assets include long-term health care properties, such as
nursing, retirement and assisted living homes, may be impacted by federal
regulations concerning the health care industry.
REITs (especially mortgage REITs) are also subject to interest rate
risks -- when interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently
and in a limited volume, and may be subject to more abrupt or erratic price
movements than other securities.
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Convertible, Debt and Non-Traditional Equity Securities
In addition to the Convertible Securities Series, the Delaware
Balanced, Devon, Strategic Income, Emerging Markets, Social Awareness, REIT,
Aggressive Growth and U.S. Growth Series may invest in convertible and debt
securities of issuers in any industry. A convertible security is a security
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible and debt securities are senior to common stocks in a corporation's
capital structure, although convertible securities are usually subordinated to
similar nonconvertible securities. Convertible and debt securities provide a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
the convertible security's underlying common stock. Just as with debt
securities, convertible securities tend to increase in market value when
interest rates decline and tend to decrease in value when interest rates rise.
However, the price of a convertible security is also influenced by the market
value of the security's underlying common stock and tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. Common stock acquired by the
Series upon conversion of a convertible security will generally be held for so
long as the investment manager 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.
These Series may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stock
("PERCS"), which provide an investor with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Upon the conversion date, most PERCS convert into common stock of the
issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after a predetermined number of years the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, each PERCS would convert to one share of common stock. If, however, the
issuer's common stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive less than one full
share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However, if called early, the issuer may pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
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The Series may also invest in other enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock.
Zero Coupon Bonds and Pay-In-Kind Bonds
The Global Bond, Strategic Income, Convertible Securities and REIT
Series may invest in zero coupon bonds. The market prices of zero coupon
securities are generally more volatile than the market prices of securities that
pay interest periodically and are likely to respond to changes in interest rates
to a greater degree than do non-zero coupon securities having similar maturities
and credit quality. Current federal income tax law requires that a holder of a
taxable zero coupon security report as income each year the portion of the
original issue discount of such security that accrues that year, even though the
holder receives no cash payments of interest during the year. The Series have
qualified as regulated investment companies under the Code. Accordingly, during
periods when the Series receive no interest payments on their zero coupon
securities, they will be required, in order to maintain their desired tax
treatment, to distribute cash approximating the income attributable to such
securities. Such distribution may require the sale of portfolio securities to
meet the distribution requirements and such sales may be subject to the risk
factor discussed above.
The Strategic Income Series may invest in pay-in-kind ("PIK") bonds.
PIK bonds pay interest through the issuance to holders of additional securities.
PIK bonds are generally considered to be more interest-sensitive than income
bearing bonds, to be more speculative than interest-bearing bonds, and to have
certain tax consequences similar to zero coupon bonds which could, under certain
circumstances, be adverse to the Series.
Interest Rate Swaps
In order to attempt to protect the Global Bond Series' investments from
interest rate fluctuations, the Series may engage in interest rate swaps. The
Series intends to use interest rate swaps as a hedge and not as a speculative
investment. Interest rate swaps involve the exchange by the Series with another
party of their respective rights to receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Series holds an
interest-paying security whose interest rate is reset once a year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset daily. Such a swap position would offset
changes in the value of the underlying security because of subsequent changes in
interest rates. This would protect the Series from a decline in the value of the
underlying security due to rising rates, but would also limit its ability to
benefit from falling interest rates.
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The Series may enter into interest rate swaps on either an asset-based
or liability-based basis, depending upon whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Series receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch as
these hedging transactions are entered into for non-speculative purposes and not
for the purpose of leveraging the Series' investments, Delaware International
and the Series believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The net amount of the excess, if any, of the Series' obligations over its
entitlement with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Custodian Bank. If the Series enters
into an interest rate swap on other than a net basis, the Series would maintain
a segregated account in the full amount accrued on a daily basis of the Series'
obligations with respect to the swap. See Foreign Securities and Foreign
Currency Transactions, above and Special Risk Considerations, below.
When-Issued, "When, As and If Issued" and Delayed Delivery Securities and
Forward Commitments
Consistent with their respective objectives, 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.
Liquidity and Rule 144A Securities
In order to assure that each Series has sufficient liquidity, no Series
may invest more than 10% of its net assets in illiquid assets (except
Convertible Securities, REIT, Aggressive Growth and U.S. Growth Series, which
may invest up to 15% of their net assets in illiquid securities). For all
Series, other than the International Equity, Small Cap Value, Trend, Global
Bond, Strategic Income, Emerging Markets, Convertible Securities, REIT,
Aggressive Growth and U.S. Growth Series, this policy shall extend to all
restricted securities, including securities eligible for resale without
registration pursuant to Rule 144A ("Rule 144A Securities") (described below),
and repurchase agreements maturing in more than seven days. With respect to the
International Equity, Small Cap Value, Trend, Global Bond, Strategic Income,
Emerging Markets, Convertible Securities, REIT, Aggressive Growth and U.S.
Growth Series and subject to the following paragraphs, this policy shall not
limit the acquisition of securities purchased in reliance upon Rule 144A of the
Securities Act of 1933 ("1933 Act"). Rule 144A permits many privately placed and
legally restricted securities to be freely traded among certain institutional
buyers such as the Series. Investing in Rule 144A Securities could have the
effect of increasing the level of illiquidity of a Series to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
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While maintaining oversight, the Board of Directors has delegated to
the respective investment manager the day-to-day functions of determining
whether or not individual Rule 144A Securities are liquid for purposes of the
10% limitation on investments in illiquid assets (15% in the case of Convertible
Securities, REIT, Aggressive Growth and U.S. Growth Series). The Board has
instructed the managers to consider the following factors in determining the
liquidity of a Rule 144A Security: (i) the frequency of trades and trading
volume for the security; (ii) whether at least three dealers are willing to
purchase or sell the security and the number of potential purchasers; (iii)
whether at least two dealers are making a market in the security; (iv) the
nature of the security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer).
If the respective manager determines that a Rule 144A Security which
was previously determined to be liquid is no longer liquid and, as a result, the
applicable Series' holdings of illiquid securities exceed the Series' 10% limit
on investment in such securities (15% in the case of Convertible Securities,
REIT, Aggressive Growth and U.S. Growth Series), the respective manager will
determine what action shall be taken to ensure that the Series continues to
adhere to such limitation.
Repurchase Agreements
Each of the Fund's 18 Series may, from time to time, enter into
repurchase transactions which are at least 102% collateralized by U.S.
government securities, except that the International Equity, Global Bond and
Emerging Markets Series may accept as collateral any securities in which such
Series may invest. 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 18 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.
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It is the understanding of the Series' respective investment manager
that the staff of the SEC permits portfolio lending by registered investment
companies if certain conditions are met. These conditions are as follows: 1)
each transaction must have 100% collateral in the form of cash, short-term U.S.
government securities, or irrevocable letters of credit payable by banks
acceptable to the Fund from the borrower; 2) this collateral must be valued
daily and should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Series; 3) the Series must be
able to terminate the loan after notice, at any time; 4) the Series must receive
reasonable interest on any loan, and any dividends, interest or other
distributions on the lent securities, and any increase in the market value of
such securities; 5) the Series may pay reasonable custodian fees in connection
with the loan; 6) the voting rights on the lent securities may pass to the
borrower; however, if the directors of the Fund know that a material event will
occur affecting an investment loan, they must either terminate the loan in order
to vote the proxy or enter into an alternative arrangement with the borrower to
enable the directors to vote the proxy.
The major risk to which a Series would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, a Series will only enter into loan arrangements
after a review of all pertinent facts by 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.
Creditworthiness will be monitored on an ongoing basis by the Series' respective
investment manager.
Foreign Securities
To the extent the Fund's 18 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
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market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts a Series may make or enter into will
be subject to the special currency rules described above.
Foreign Currency Transactions
In connection with a Series' investment in foreign securities, a Series
may purchase or sell currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of portfolio transactions and to
minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A Series will account for
forward contracts by marking to market each day at daily exchange rates.
When a Series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of that Series' 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.
Futures Contracts and Options on Futures Contracts
Futures Contracts--Each of International Equity, Small Cap Value,
Trend, Global Bond, Strategic Income, Devon, Emerging Markets, Convertible
Securities, Social Awareness, REIT, Aggressive Growth and U.S. Growth 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.
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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.
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 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.
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Options on Futures Contracts--Each of International Equity, Small Cap
Value, Trend, Global Bond, Strategic Income, Emerging Markets, Convertible
Securities, REIT, Aggressive Growth and U.S. Growth Series may purchase and
write options on the types of futures contracts that Series could invest in.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in the Series'
portfolio. If the futures price at expiration of the option is below the
exercise price, a Series will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Series' portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the futures contract. If
the futures price at expiration of the put option is higher than the exercise
price, a Series will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities which
the Series intends to purchase. If a put or call option a Series has written is
exercised, the Series will incur a loss which will be reduced by the amount of
the premium it receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value of its options
on futures positions, a Series' losses from exercised options on futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Series may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected marketwide decline or changes in interest or exchange
rates, a Series could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. If the market decline does not
occur, the Series will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Series will increase
prior to acquisition, due to a market advance or changes in interest or exchange
rates, a Series could purchase call options on futures contracts, rather than
purchasing the underlying futures contracts. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Series will suffer a loss equal to
the price of the call, but the securities which the Series intends to purchase
may be less expensive.
Options on Foreign Currencies
International Equity, Global Bond, Strategic Income, Emerging Markets,
Convertible Securities, REIT and U.S. Growth 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.
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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 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.
Options
Each of the Fund's 18 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, REIT, Aggressive
Growth and U.S. Growth 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.
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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, REIT, Aggressive Growth and U.S.
Growth 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.
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.
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A Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Series will normally have expiration dates between one
and nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
B. Purchasing Put Options--A Series may invest up to 2% of its total
assets in the purchase of put options. The Series will, at all times during
which it holds a put option, own the security covered by such option.
A put option purchased by the Series gives it the right to sell one of
its securities for an agreed price up to an agreed date. The Series intend to
purchase put options in order to protect against a decline in market value of
the underlying security below the exercise price less the premium paid for the
option ("protective puts"). The ability to purchase put options will allow a
Series to protect unrealized gain in an appreciated security in its portfolio
without actually selling the security. If the security does not drop in value,
the Series will lose the value of the premium paid. A Series may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option. Such sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions. A
closing sale transaction is one in which a Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
C. Purchasing Call Options--International Equity, Global Bond, Emerging
Markets, Convertible Securities, REIT, Aggressive Growth and U.S. Growth 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.
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D. Options on Stock Indices--The DelCap, International Equity, Small
Cap Value, Trend, Global Bond, Emerging Markets, Convertible Securities, REIT,
Aggressive Growth and U.S. Growth Series also may write call options and
purchase put options on certain stock indices and enter into closing
transactions in connection therewith. A stock index assigns relative values to
the common stocks included in the index with the index fluctuating with changes
in the market values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss to the Series on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, DelCap, International Equity, Small Cap Value,
Trend, Global Bond, Emerging Markets, Convertible Securities, REIT, Aggressive
Growth and U.S. Growth 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.
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DelCap, International Equity, Small Cap Value, Trend, Global Bond,
Emerging Markets, Convertible Securities, REIT, Aggressive Growth and U.S.
Growth 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, REIT, Aggressive
Growth and U.S. Growth Series may purchase or sell (write) put options on
securities as a means of achieving additional return or of hedging the value of
the Series' portfolio. A put option is a contract that gives the holder of the
option the right to sell to the writer (seller), in return for a premium, the
underlying security at a specified price during the term of the option. The
writer of the put, who receives the premium, has the obligation to buy the
underlying security upon exercise, at the exercise price during the option
period. The Series will write only "covered" options. In the case of a put
option written (sold) by the Series, the Series will, through its custodian,
deposit and maintain cash and short-term U.S. Treasury obligations with a
securities depository or the custodian having a value equal to or greater than
the exercise price of the underlying security.
F. Closing Transactions-- If a Series has written an option, it may
terminate its obligation by effecting a closing purchase transaction. This is
accomplished by purchasing an option of the same series as the option previously
written. There can be no assurance that either a closing purchase or sale
transaction can be effected when a Series so desires. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Series will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option.
A Series will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; a Series will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Series.
If a Series purchases a put option, the loss to the Series is limited to the
premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit a Series realizes on the sale of the security will be reduced
by the premium paid for the put option less any amount (net of transaction
costs) for which the put may be sold.
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.
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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.
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 Investment Advisors ("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.
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Lower-Rated Debt Securities
U.S. Growth, Delchester, Strategic Income, Convertible Securities and
Emerging Markets Series may purchase high yield, high risk securities, commonly
known as "junk bonds." These securities are rated lower than Baa by Moody's or
lower than BBB by S&P and are often considered to be speculative and involve
significantly higher risk of default on the payment of principal and interest or
are more likely to experience significant price fluctuation due to changes in
the issuer's creditworthiness. Market prices of these securities may fluctuate
more than higher-rated debt securities and may decline significantly in periods
of general economic difficulty which may follow periods of rising interest
rates. While the market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
market in recent years has experienced a dramatic increase in the large-scale
use of such securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high yield bond market, especially
during periods of economic recession. See Appendix A - Description of Ratings in
this Part B.
The market for lower-rated securities may be less active than that for
higher-rated securities, which can adversely affect the prices at which these
securities can be sold. If market quotations are not available, these securities
will be valued in accordance with procedures established by the Board of
Directors, including the use of outside pricing services. Judgment plays a
greater role in valuing high yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by the Fund to value its
portfolio securities and the Fund's ability to dispose of these lower-rated debt
securities.
Since the risk of default is higher for lower-quality securities, the
investment manager's and/or sub-adviser's research and credit analysis is an
integral part of managing any securities of this type held by the Series. In
considering investments for the Series, the investment manager and/or
sub-adviser will attempt to identify those issuers of high-yielding securities
whose financial condition is adequate to meet future obligations, has improved,
or is expected to improve in the future. The investment manager's and/or
sub-adviser's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer. There can be no assurance that
such analysis will prove accurate.
The Series may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of shareholders.
Mortgage Dollar Rolls
U.S. Growth Series may enter into mortgage "dollar rolls" in which the
Series sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. Dollar roll transactions
consist of the sale by the Series of mortgage-backed securities, together with a
commitment to purchase similar, but not necessarily identical, securities at a
future date. Any difference between the sale price and the purchase price is
netted against the interest income foregone on the securities to arrive at an
implied borrowing (reverse repurchase) rate. Alternatively, the sale and
purchase transactions which constitute the dollar roll can be executed at the
same price, with the Series being paid a fee as consideration for entering into
the commitment to purchase. Dollar rolls may be renewed prior to cash settlement
and initially may involve only a firm commitment agreement by the Fund to buy a
security. If the broker/dealer to whom the Series sells the security becomes
insolvent, the Series' right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Series is required to repurchase may be worth
less than the security that the Series originally held, and the return earned by
the Series with the proceeds of a dollar roll may not exceed transaction costs.
The Series will place U.S. government or other liquid, high quality assets in a
segregated account in an amount sufficient to cover its repurchase obligation.
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Over-the-Counter Options and Illiquid Securities
U.S. Growth Series may deal in over-the-counter ("OTC") options. The
Series understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The Series, the
investment manager, and the sub-adviser disagree with this position and have
found the dealers with which they engage in OTC options transactions generally
agreeable to and capable of entering into closing transactions. The Series has
adopted procedures for engaging in OTC options for the purpose of reducing any
potential adverse impact of such transactions upon the liquidity of its
portfolio.
As part of these procedures the Series will engage in OTC options
transactions only with primary dealers that have been specifically approved by
the Fund's Board of Directors and the investment manager and/or sub-advisers
believe that the approved dealers should be agreeable and able to enter into
closing transactions if necessary and, therefore, present minimal credit risks
to the Series. The Series anticipates entering into written agreements with
those dealers to whom the Series may sell OTC options, pursuant to which the
Series would have the absolute right to repurchase the OTC options from such
dealers at any time at a price determined pursuant to a formula set forth in
certain no action letters published by the SEC staff. The Series will not engage
in OTC options transactions if the amount invested by the Fund in OTC options
plus, with respect to OTC options written by the Series, the amounts required to
be treated as illiquid pursuant to the terms of such letters (and the value of
the assets used as cover with respect to OTC option sales which are not within
the scope of such letters), plus the amount invested by the Series in illiquid
securities, would exceed 15% of the Series' total assets. OTC options on
securities other than U.S. government securities may not be within the scope of
such letters and, accordingly, the amount invested by the Series in OTC options
on such other securities and the value of the assets used as cover with respect
to OTC option sales regarding such non-U.S. government securities will be
treated as illiquid and subject to the 15% limitation on the Series' net assets
that may be invested in illiquid securities. See Liquidity and Rule 144A
Securities, above.
Combined Transactions
U.S. Growth Series may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single transaction, as
part of a single or combined strategy when, in the opinion of the investment
manager and/or sub-adviser, it is in the best interests of the Series to do so.
A combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the investment manager's and/or sub-adviser's judgment
that the combined strategies will reduce risk or otherwise more effectively
achieve the desired portfolio management goal, it is possible that the
combination will instead increase such risks or hinder achievement of the
portfolio management objective.
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Swaps, Caps, Floors and Collars
U.S. Growth Series may enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. The Series
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Series anticipates
purchasing at a later date. The Series intends to use these transactions as
hedges and not speculative investments and will not sell interest rate caps or
floors where it does not own securities or other instruments providing the
income stream the Series may be obligated to pay. Interest rate swaps involve
the exchange by the Series with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a nominal amount of principal. A currency swap is
an agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them and an index swap
is an agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Series will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Series receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
investment manager and the Series believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Series will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or is determined to
be of equivalent credit quality by the investment manager and/or sub-adviser. If
there is a default by the counterparty, the Series may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agent utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
Eurodollar Instruments
U.S. Growth Series may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Series might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
Reverse Repurchase Agreements
U.S. Growth Series is authorized to enter into reverse repurchase
agreements. A reverse repurchase agreement is the sale of a security by the
Series and its agreement to repurchase the security at a specified time and
price. The Series will maintain in a segregated account with the Custodian cash,
cash equivalents or U.S. government securities in an amount sufficient to cover
its obligations under reverse repurchase agreements with broker/dealers (but no
collateral is required on reverse repurchase agreements with banks). Under the
1940 Act, reverse repurchase agreements may be considered borrowings by the
Series; accordingly, the Series will limit its investments in reverse repurchase
agreements, together with any other borrowings, to no more than one-third of its
total assets. The use of reverse repurchase agreements by the Series creates
leverage which increases the Series' investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the costs of the agreements, the Series' earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or net asset value would decline faster
than otherwise would be the case.
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<PAGE>
"Roll" Transactions
U.S. Growth Series may engage in "roll" transactions. A "roll"
transaction is the sale of securities together with a commitment (for which the
Series may receive a fee) to purchase similar, but not identical, securities at
a future date. Under the 1940 Act, these transactions may be considered
borrowings by the Series; accordingly, the Series will limit its use of these
transactions, together with any other borrowings, to no more than one-fourth of
its total assets. The Series will segregate liquid assets such as cash, U.S.
government securities or other high grade debt obligations in an amount
sufficient to meet its payment obligations in these transactions. Although these
transactions will not be entered into for leveraging purposes, to the extent the
Series' aggregate commitments under these transactions exceed its holdings of
cash and securities that do not fluctuate in value (such as short-term money
market instruments), the Series temporarily will be in a leveraged position
(i.e., it will have an amount greater than its net assets subject to market
risk). Should the market value of the Series' portfolio securities decline while
the Series is in a leveraged position, greater depreciation of its net assets
would likely occur than were it not in such a position. As the Series' aggregate
commitments under these transactions increase, the opportunity for leverage
similarly increases.
Variable and Floating Rate Notes
Variable rate master demand notes, in which U.S. Growth Series may
invest, are unsecured demand notes that permit the indebtedness thereunder to
vary and provide for periodic adjustments in the interest rate according to the
terms of the instrument. The Series will not invest over 5% of its assets in
variable rate master demand notes. Because master demand notes are direct
lending arrangements between the Series and the issuer, they are not normally
traded. Although there is no secondary market in the notes, the Series may
demand payment of principal and accrued interest at any time. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail, financial, and
other business concerns) must satisfy the same criteria as set forth above for
commercial paper. In determining average weighted portfolio maturity, a variable
amount master demand note will be deemed to have a maturity equal to the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Series will be determined by
the Series' investment manager and/or sub-adviser under guidelines established
by the Series' Board of Directors to be of comparable quality at the time of
purchase to rated instruments eligible for purchase under the Series' investment
policies. In making such determinations, the investment manager and/or
sub-adviser, if any, will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate note purchased by the Series,
the Series may re-sell the note at any time to a third party. The absence of
such an active secondary market, however, could make it difficult for the Series
to dispose of the variable or floating rate note involved in the event the
issuer of the note defaulted on its payment obligations, and the Series could,
for this or other reasons, suffer a loss to the extent of the default. Variable
or floating rate notes may be secured by bank letters of credit.
32-
<PAGE>
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Series' total assets only if such notes
are subject to a demand feature that will permit the Series to demand payment of
the principal within seven days after demand by the Series. If not rated, such
instruments must be found by the Series' investment manager and/or sub-adviser
under guidelines established by the Fund's Board of Directors, to be of
comparable quality to instruments that are rated high quality. A rating may be
relied upon only if it is provided by a nationally recognized statistical rating
organization that is not affiliated with the issuer or guarantor of the
instruments. See Appendix A for a description of the rating symbols of S&P and
Moody's. The Series may also invest in Canadian Commercial Paper, which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper which is U.S. dollar denominated commercial
paper of a foreign issuer.
Additional Information on the Cash Reserve Series
Cash Reserve Series intends to achieve its objective by investing its
assets in a diversified portfolio of money market instruments. See Money Market
Instruments above 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.
Concentration
In applying the Series' fundamental policy concerning concentration
that is described above, it is a matter of non-fundamental policy that: (i)
utility companies will be divided according to their services, for example, gas,
gas transmission, electric and telephone will each be considered a separate
industry; (ii) financial service companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; and (iii) asset
backed securities will be classified according to the underlying assets securing
such securities.
33-
<PAGE>
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, REIT, Aggressive Growth and U.S.
Growth 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 has qualified, or intends to
qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"). As such, a Series will not be subject to federal
income tax, or to any excise tax, to the extent its earnings are distributed as
provided in the Code and it satisfies other requirements relating to the sources
of its income and diversification of its assets.
In order to qualify as a regulated investment company for federal
income tax purposes, a Series must meet certain specific requirements,
including:
(i) The Series must maintain a diversified portfolio of securities,
wherein no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Series' total
assets, and, with respect to 50% of the Series' total assets, no investment
(other than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Series' total assets;
34-
<PAGE>
(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:
35-
<PAGE>
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 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. This simplified
procedure was not available until calendar year 1998.
36-
<PAGE>
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.
37-
<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.
38-
<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 and Cash
Reserve Series are declared daily from net investment income, dividends for
Global Bond Series are declared quarterly and dividends for Strategic Income
Series are declared annually. 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-year period, five-year
period and ten-year period or lifetime period, if applicable. 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.
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<PAGE>
The performance of the Series, as shown below, is the average annual
total return quotations through June 30, 1999. Securities prices fluctuated
during the periods covered and past results should not be considered as
representative of future performance.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------------------------------------------------------------------------
Series* 1 year ended 3 years ended 5 years ended 10 years ended Life of Fund
6/30/99 6/30/99 6/30/99 6/30/99
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Reserves 2.85% 5.98% 6.36% 6.45% 6.62%
(Inception 7/28/88)
- ----------------------------------------------------------------------------------------------------------------
Cash Reserve 4.81% 4.99% 5.02% 4.95% 5.23%
(Inception 7/28/88)
- ----------------------------------------------------------------------------------------------------------------
Convertible Securities (1.05%) N/A N/A N/A 7.98%
(Inception 5/1/97)
- ----------------------------------------------------------------------------------------------------------------
Delaware Balanced 8.63% 17.93% 17.25% 14.10% 13.64%
(Inception 7/28/88)
- ----------------------------------------------------------------------------------------------------------------
DelCap 18.23% 15.44% 19.10% N/A 13.63%
(Inception 7/12/91)
- ----------------------------------------------------------------------------------------------------------------
Delchester (5.91%) 6.96% 7.53% 9.05% 9.10%
(Inception 7/28/88)
- ----------------------------------------------------------------------------------------------------------------
Devon 10.81% N/A N/A N/A 23.41%
(Inception 5/1/97)
- ----------------------------------------------------------------------------------------------------------------
Emerging Markets 2.13% N/A N/A N/A (11.96%)
(Inception 5/1/97)
- ----------------------------------------------------------------------------------------------------------------
Global Bond 5.17% 5.55% N/A N/A 5.82%
(Inception 5/2/96)
- ----------------------------------------------------------------------------------------------------------------
Growth and Income 7.36% 20.24% 20.66% 13.31% 13.19%
(Inception 7/28/88)
- ----------------------------------------------------------------------------------------------------------------
International Equity 6.30% 11.83% 11.97% N/A 11.60%
(Inception 10/29/92)
- ----------------------------------------------------------------------------------------------------------------
REIT Series (2.76%) N/A N/A N/A (3.39%)
(Inception 5/4/98)
- ----------------------------------------------------------------------------------------------------------------
Small Cap Value (2.09%) 13.92% 15.47% N/A 13.91%
(Inception 12/27/93)
- ----------------------------------------------------------------------------------------------------------------
Social Awareness 5.21^% N/A N/A N/A 22.45%
(Inception 5/1/97)
- ----------------------------------------------------------------------------------------------------------------
Strategic Income (1.54%) N/A N/A N/A 3.00%
(Inception 5/1/97)
- ----------------------------------------------------------------------------------------------------------------
Trend 26.48% 17.84% 22.26% N/A 19.55%
(Inception 12/27/93)
- ----------------------------------------------------------------------------------------------------------------
</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 and
Sub-Advisory Agreements. In the absence of such voluntary waiver,
performance would have been affected negatively.
Delchester, Capital Reserves, Global Bond and Strategic Income Series
may also quote its current yield, calculated as described below, in
advertisements and investor communications.
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<PAGE>
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 June
30, 1999 using this formula were 8.86%, 5.61% and 8.10%, 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.
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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 June 30, 1999.
<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 10.00000000
===========
Net change in account value .00861710*
Base period return = net change in account value / beginning account value .000086171
Current yield [base period return x (365 / 7)] 4.49%**
=====
365/7
Effective yield (1 + base period) - 1 4.59%***
=====
Weighted average life to maturity of the portfolio on June 30, 1999 was 45 days.
</TABLE>
* This represents the net income per share for the seven calendar days ended
June 30, 1999.
** This represents the average of annualized net investment income per
share for the seven calendar days ended June 30, 1999.
*** This represents the current yield for the seven calendar days ended June
30, 1999 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.
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.
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<PAGE>
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 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.
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<PAGE>
Comparative information on the Consumer Price Index may also be
included in advertisements or other literature. The Consumer Price Index, as
prepared by the U.S. Bureau of Labor Statistics, is the most commonly used
measure of inflation. It indicates the cost fluctuations of a representative
group of consumer goods. It does not represent a return from an investment.
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
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<PAGE>
relevance to a Series. In addition, selected indices may be used to illustrate
historic performance of selected asset classes. The Series may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings which illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, domestic and international stocks, and/or bonds, treasury bills and shares
of a Series. In addition, advertisements, sales literature, communications to
shareholders or other materials may include a discussion of certain attributes
or benefits to be derived by an investment in a Series and/or other mutual
funds, shareholder profiles and hypothetical investor scenarios, timely
information on financial management and tax planning and investment alternatives
to certificates of deposit and other financial instruments. Such sales
literature, 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.
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<PAGE>
The following table is an example, for purposes of illustration only,
of cumulative total return performance for the Series through June 30, 1999. 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>
- ------------------------------------------------------------------------------------------------------------------------------------
Series* 3 months 6 months 9 months 1 year 3 years 5 years 10 years Life of Fund
ended ended ended ended ended ended ended
6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth N/A N/A N/A N/A N/A N/A N/A 1.60%
(Inception 5/1/99)
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Reserves (0.79%) (0.63%) (0.07%) 2.85% 19.04% 36.10% 86.91% 101.44%
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Reserve 1.12% 2.26% 3.49% 4.81% 15.71% 27.72% 62.05% 74.59%
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Securities 3.77% 2.41% 10.74% (1.05%) N/A N/A N/A 18.11%
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Balanced 6.42% (0.14%) 15.74% 8.63% 64.02% 121.59% 274.02% 304.39%
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------------
DelCap 11.73% 13.06% 40.86% 18.23% 53.86% 139.64% N/A 177.01%
(Inception 7/12/91)
- ------------------------------------------------------------------------------------------------------------------------------------
Delchester (0.79%) 0.57% 1.39% (5.91%) 22.35% 43.76% 137.85% 158.94%
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------------
Devon 9.00% (0.10%) 20.69% 10.81% N/A N/A N/A 57.75%
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets 22.15% 26.56% 0.89% 2.13% N/A N/A N/A (24.12%)
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Global Bond (0.87%) (1.64%) 20.03% 5.17% 17.60% N/A N/A 19.60%
(Inception 5/2/96)
- ------------------------------------------------------------------------------------------------------------------------------------
Growth and Income 6.67% 5.79% 20.03% 7.36% 73.85% 155.71% 248.75% 287.17%
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity 5.89% 8.30% 23.95% 6.30% 39.87% 76.04% N/A 107.90%
(Inception 10/29/92)
- ------------------------------------------------------------------------------------------------------------------------------------
REIT 11.55% 5.25% 6.19% (2.76%) N/A N/A N/A (4.22%)
(Inception 5/4/98)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value 15.13% 3.69% 16.75% (2.09%) 47.82% 105.32% N/A 104.91%
(Inception 12/27/93)
- ------------------------------------------------------------------------------------------------------------------------------------
Social Awareness 4.91% 4.63% 27.07% 5.21% N/A N/A N/A 55.10%
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income (2.59%) (2.19%) (0.59%) (1.54%) N/A N/A N/A 6.61%
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------------
Trend 17.98% 20.97% 49.70% 26.48% 63.62% 173.21% N/A 167.47%
(Inception 12/27/93)
- ------------------------------------------------------------------------------------------------------------------------------------
</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 and Sub-Advisory Agreements. In the absence
of such voluntary waiver, performance would have been affected negatively.
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
46-
<PAGE>
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 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.
47-
<PAGE>
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.
48-
<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 execution. Best 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 the investment manager's trading department as to rates paid and
charged for similar transactions throughout the securities industry. In some
instances, the Fund pays a minimal share transaction cost when the transaction
presents no difficulty. Some trades are made on a net basis where the Fund
either buys the securities directly from the dealer or sells them to the dealer.
In these instances, there is no direct commission charged, but there is a spread
(the difference between the buy and sell price) which is in the equivalent of a
commission.
During the fiscal years ended December 31, 1996, 1997 and 1998, the
aggregate dollar amounts of brokerage commissions were paid by the Series noted
below:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Growth and Income Series $302,434 $518,762 $1,020,668
Delaware Balanced Series $83,262 $120,307 $165,591
DelCap Series $101,211 $270,393 $308,645
International Equity Series $110,181 $215,242 $121,978
Small Cap Value Series $53,113 $119,689 $198,194
Trend Series $80,172 $182,867 $269,355
Devon Series* N/A $21,022 $83,285
Emerging Markets Series* N/A $28,640 $21,763
Convertible Securities Series* N/A $5,517 $10,155
Social Awareness Series* N/A $7,416 $25,636
REIT Series** N/A N/A $13,326
</TABLE>
*Commenced operations on May 1, 1997.
**Commenced operations on May 4, 1998.
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.
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<PAGE>
During the fiscal year ended December 31, 1998, 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:
Portfolio Brokerage
Transactions Commissions
Amounts Amounts
------------ -----------
Growth and Income Series $327,836,919 $342,890
Delaware Balanced Series 65,237,810 96,002
DelCap Series 141,951,414 280,802
International Equity Series 4,692,866 9,996
Small Cap Value Series 61,036,311 169,029
Trend Series 96,415,713 228,844
Devon Series 30,028,617 45,396
Emerging Markets Series 20,266 151
Convertible Securities Series 819,288 2,532
Social Awareness Series 17,739,629 4,831
REIT Series* 974,654 2,902
*Commenced operations on May 4, 1998.
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.
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<PAGE>
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 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 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 Growth and Income,
International Equity, Global Bond, Strategic Income, Emerging Markets, Devon,
Social Awareness and REIT Series, 200% for the Capital Reserves, and Delaware
Balanced Series, and may exceed 100% for the DelCap, Delchester, Small Cap
Value, Trend and U.S. Growth Series and 200% for the Convertible Securities
Series. It is possible that in any particular year market conditions or other
factors might result in portfolio activity at a greater rate than anticipated.
The portfolio turnover rate of each Series is calculated by dividing the lesser
of purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Series
during the particular fiscal year, exclusive of securities whose maturities at
the time of acquisition are one year or less.
The degree of portfolio activity may affect brokerage costs incurred by
each Series. A turnover rate of 100% would occur, for example, if all the
investments in a Series' portfolio at the beginning of the year were replaced by
the end of the year. In investing to achieve their respective objective, a
Series may hold securities for any period of time. Portfolio turnover will also
be increased if a Series writes a large number of call options which are
subsequently exercised. The turnover rate also may be affected by cash
requirements from redemptions and repurchases of Series' shares.
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<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, 1998
------ ----------------- -----------------
<S> <C> <C>
Growth and Income Series 54% 81%
Delchester Series 121% 86%
Capital Reserves Series 120% 166%
Delaware Balanced Series 67% 94%
DelCap Series 134% 142%
International Equity Series 7% 5%
Small Cap Value Series 41% 45%
Trend Series 125% 121%
Global Bond Series 97% 79%
Strategic Income Series 70%* 143%
Devon Series 80%* 34%
Emerging Markets Series 48%* 38%
Convertible Securities Series 209%* 77%
Social Awareness Series 52%* 30%
REIT Series N/A 39%**
</TABLE>
* Annualized. Commenced operations on May 1, 1997.
** Annualized. Commenced operations on May 4, 1998.
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<PAGE>
OFFERING PRICE
The offering price of shares is the net asset value per share next to
be determined after an order is received. The purchase of shares becomes
effective at the close of business on the day on which the investment is
received from the life company and after any dividend is declared. Dividends, if
any, begin to accrue on the next business day. There is no sales charge.
The purchase will be effected at the net asset value next computed
after the receipt of Federal Funds provided they are received by the close of
regular trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern
time) on days when such exchange is open. The New York Stock Exchange is
scheduled to be open Monday through Friday throughout the year except for New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. When the New York
Stock Exchange is closed, the Fund will generally be closed, pricing
calculations will not be made and purchase and redemption orders will not be
processed. In the event of changes in SEC 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. 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 at
the mean between the bid and offer quotations of such currencies based on rates
in effect as of the close of the London Stock Exchange. 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 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.
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<PAGE>
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.
54-
<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Dividends for the Delchester and Capital Reserves 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 Growth and Income, Delaware Balanced 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 Aggressive Growth, Convertible Securities, DelCap, Devon,
International Equity, Small Cap Value, Trend, Emerging Markets, Social
Awareness, Strategic Income, REIT and U.S. Growth 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. 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.
55-
<PAGE>
TAXES
Each Series has qualified, or intends to qualify, as a regulated
investment company under Subchapter M of the Internal Revenue Code (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"), as revised by
the Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998
Act") and the Omnibus Consolidated and Emergency Supplemental Appropriations
Act, a Series is required to track its sales of portfolio securities and to
report its capital gain distributions to you according to the following
categories:
Long-term capital gains": gains on securities sold after December 31,
1997 and held for more than 12 months as capital assets in the hands of
the holder are taxed at the 20% rate when distributed to shareholders
(15% for individual investors in the 15% tax bracket.
"Short -term capital gains": Gains on securities sold by a Series that
do not meet the long-term holdings period are considered short term
capital gains and are taxable as ordinary income.
56-
<PAGE>
"Qualified 5-year gains": For individuals in the 15% bracket, qualified
five-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 five-year gains are net gains
on securities which are purchased after December 31, 2000 and are held
for more than five years. Taxpayers subject to tax at a higher rate
brackets may also make an election for shares held on January 1, 2001
to recognize gain on their shares in order to qualify such shares as
qualified five-year property. 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 five-year
holding period.
57-
<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 Growth and Income, Delchester, Capital
Reserves, Cash Reserve, DelCap, Delaware Balanced, Small Cap Value, Trend,
Strategic Income, Devon, Convertible Securities, Social Awareness, REIT,
Aggressive Growth and U.S. Growth 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 August 31, 1999, Delaware Management and its
affiliates within Delaware Investments, including Delaware International, were
supervising in the aggregate more than $46 billion in assets in the various
institutional or separately managed (approximately $27,183,690,000) and
investment company ($18,686,470,000) accounts. Delaware Management is a series
of Delaware Management Business Trust. Delaware Management changed its form of
organization from a corporation to a business trust on March 1, 1998.
The Investment Management Agreement for each Series(other than
International Equity, Global Bond and Emerging Market Series) is dated May 1,
1999, as amended October 15, 1999, was approved by shareholders of such Series
(other than Aggressive Growth Series and U.S. Growth Series) on March 17, 1999
The Investment management Agreement for the International Equity, Global Bond
and Emerging Markets Series is dated May 1, 1999 and was approved by
shareholders of such Series on March 17, 1999. Each Agreement will remain in
effect for an initial period of two years. The Investment Management Agreement
for Aggressive Growth Series was approved by the initial shareholder on May 1,
1999 and the Investment Management Agreement for U.S. Growth Series was approved
by the initial shareholder on October 15, 1999. The Agreement 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.
58-
<PAGE>
Under the Investment Management Agreement, Delaware Management or
Delaware International is entitled to receive an annual fee equal to the
following percentage rates of the average daily net assets of a Series:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Series Management Fee Rate
- ----------------------------------------------------------------------------------------------------
<S> <C>
Capital Reserves Series 0.50% on the first $500 million
0.475% on the next $500 million
0.45% on the next $1.5 billion
0.425% on assets in excess of $2.5 billion
- ----------------------------------------------------------------------------------------------------
Cash Reserve Series 0.45% on the first $500 million
0.40% on the next $500 million
0.35% on the next $1.5 billion
0.30% on assets in excess of $2.5 billion
- ----------------------------------------------------------------------------------------------------
Aggressive Growth Series 0.75% on the first $500 million
Convertible Securities Series 0.70% on the next $500 million
DelCap Series 0.65% in the next $1.5 billion
Global Bond Series 0.60% on assets in excess of $2.5 billion
REIT Series
Small Cap Value Series
Social Awareness Series
Trend Series
- ----------------------------------------------------------------------------------------------------
Growth and Income Series* 0.65% on the first $500 million
Delaware Balanced Series 0.60% on the next $500 million
Delchester Series 0.55% in the next $1.5 billion
Devon Series 0.50% on assets in excess of $2.5 billion
Strategic Income Series
U.S. Growth Series
- ----------------------------------------------------------------------------------------------------
Emerging Markets Series 1.25% on the first $500 million
1.20% on the next $500 million
1.15% in the next $1.5 billion
1.10% on assets in excess of $2.5 billion
- ----------------------------------------------------------------------------------------------------
International Equity Series 0.85% on the first $500 million
0.80% on the next $500 million
0.75% in the next $1.5 billion
0.70% on assets in excess of $2.5 billion
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Delaware Management has agreed to voluntarily waive its management fee
so as not to exceed an annual rate of 0.60% of average daily net
assets.
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.
59-
<PAGE>
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 Investment Advisors ("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 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 on the next $30
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.
Lynch & Mayer, Inc. is an indirect, wholly owned subsidiary of Lincoln
National and an affiliate of the Delaware Management, and acts as sub-adviser to
Delaware Management with respect to U.S. Growth Series. Lynch & Mayer 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 Lynch & Mayer's performance of such services. For the services
provided to Delaware Management, Delaware Management pays Lynch & Mayer an fee
equal to 60% of the management fees paid to Delaware Management. Lynch & Mayer
was established 1976 and provides investment advice to pension funds,
foundations, endowments, trusts and high net worth individuals and families. The
firm also manages a closed-end convertible securities fund which is traded on
the New York Stock Exchange. Lynch & Mayer's investment expertise is in equities
and convertible securities. Lynch & Mayer's address is 350 Park Avenue, New
York, NY 10022.
60-
<PAGE>
On December 31, 1998, the total net assets of the Fund were
$1,790,408,316, broken down as follows:
Growth and Income Series $579,906,697
Delchester Series $120,708,272
Capital Reserves Series $41,711,484
Cash Reserve Series $42,893,055
DelCap Series $130,547,699
Delaware Balanced Series $201,855,524
International Equity Series $243,536,041
Small Cap Value Series $103,989,424
Trend Series $168,251,210
Global Bond Series $21,711,170
Strategic Income Series $20,570,764
Devon Series $68,714,265
Convertible Securities Series $8,132,953
Social Awareness Series $26,961,898
Emerging Markets Series $5,356,068
REIT Series $5,561,792
Aggressive Growth and U.S. Growth Series did not publicly offer shares
as of December 31, 1998.
61-
<PAGE>
Investment management fees were incurred for the last three fiscal
years for the following Series:
<TABLE>
<CAPTION>
Series December 31, 1998 December 31, 1997 December 31, 1996
- ------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Growth and Income Series $3,018,521 paid $1,640,377 paid $765,301 paid
Delchester Series $689,099 paid $483,877 paid $348,693 paid
Capital Reserves Series $208,577 paid $166,300 paid $164,296 paid
Cash Reserve Series $212,479 paid $149,023 paid $110,155 paid
DelCap Series $846,793 earned $716,228 earned $505,739 earned
$781,882 paid $646,908 paid $491,404 paid
$64,911 waived $69,320 waived $14,335 waived
Delaware Balanced Series $968,768 paid 595,126 paid $402,509 paid
International Equity Series $1,679,911 earned $1,304,340 earned $768,150 earned
$1,651,181 paid $1,207,677 paid $650,392 paid
$28,730 waived $96,663 waived $117,758 waived
Small Cap Value Series $706,066 earned $380,405 earned $117,000 earned
$680,359 paid $328,056 paid $87,687 paid
$25,707 waived $252,349 waived $29,313 waived
Trend Series $1,025,600 earned $622,149 earned $247,520 earned
$977,521 paid $558,331 paid $205,501 paid
$48,079 waived $63,818 waived $42,019 waived
Global Bond Series* $141,939 earned $109,310 earned $26,503 earned
$125,844 paid $68,076 paid $12,597 paid
$16,095 waived $41,234 waived $13,906 waived
Strategic Income Series** $101,453 earned $21,320 earned N/A
$100,002 paid $7,271 paid
$1,451 waived $14,049 waived
Devon Series** $218,772 earned $31,110 earned N/A
$216,267 paid $25,236 paid
$2,505 waived $5,8874 waived
Emerging Markets Series** $71,160 earned $26,327 earned N/A
$61,148 paid $8,587 paid
$10,012 waived $27,740 waived
Convertible Securities Series** $46,042 earned $14,026 earned N/A
$46,042 paid -0- paid
-0- waived $14,026 waived
</TABLE>
62-
<PAGE>
<TABLE>
<CAPTION>
Series December 31, 1998 December 31, 1997 December 31, 1996
- ------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Social Awareness Series** $117,271 earned $20,293 earned N/A
$108,502 paid $3,692 paid
$8,769 waived $16,601 waived
REIT Series*** $15,449 earned N/A N/A
$11,895 paid
$3,554 waived
</TABLE>
* Commenced operations on May 2, 1996.
** Commenced operations on May 1, 1997.
*** Commenced operations on May 4, 1998.
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 for the
fiscal year ended December 31, 1998, Delaware International received $33,334 for
such services. During the period May 1, 1997 (date of commencement of
operations) through December 31, 1997, Vantage received $5,449 from Delaware
Management for serving as Sub-Adviser to the Social Awareness Series and for the
fiscal year ended December 31, 1998, Vantage received $39,620 for such services.
During the period May 4, 1998 (date of commencement of operations through
December 31, 1998, Lincoln received $4,635 from Delaware Management for serving
as Sub-Adviser to the REIT 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.
63-
<PAGE>
Beginning May 1, 1998 (May 1, 1999 for Aggressive Growth Series and
October 15, 1999 for U.S. Growth Series), 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 April 30, 2000:
Growth and Income Series 0.80%
Delchester Series 0.80%
Capital Reserves Series 0.80%
Cash Reserve Series 0.80%
DelCap Series 0.85%
Delaware Balanced 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%
Aggressive Growth Series 0.85%
U.S. Growth Series 0.75%
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 April 30, 2000:
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 Growth and Income, Delaware Balanced 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
64-
<PAGE>
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., located at 1818 Market Street,
Philadelphia, PA 19103, serves as the Fund's national distributor under
Distribution Agreements for each Series dated as follows:
Aggressive Growth Series May 1, 1999
Capital Reserves Series April 3, 1995
Cash Reserve Series April 3, 1995
Convertible Securities Series May 1, 1997
Delaware Balanced Series April 3, 1995
DelCap Series April 3, 1995
Delchester Series April 3, 1995
Devon Series April 3, 1995
Emerging Markets Series May 1, 1997
Global Bond Series May 1, 1996
Growth and Income Series April 3, 1995
International Equity Series April 3, 1995
REIT Series May 1, 1998
Small Cap Value Series April 3, 1995
Social Awareness Series May 1, 1997
Strategic Income Series May 1, 1997
Trend Series April 3, 1995
U.S. Growth Series October 15, 1999
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. (the "Transfer Agent"), another
affiliate of Delaware Management and Delaware International, is the Fund's
shareholder servicing, dividend disbursing and transfer agent for the Growth and
Income, Delchester, Capital Reserves, Delaware Balanced, DelCap, International
Equity, Small Cap Value, Trend, Global Bond, Strategic Income, Devon, Emerging
Markets, Convertible Securities, Social Awareness, REIT, Aggressive Growth and
U.S. Growth Series pursuant to the Amended and Restated Shareholders Services
Agreement dated October 15, 1999 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.
65-
<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 Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Management Company, Inc., Delaware Investment Advisers (a series of Delaware
Management Business Trust), 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 Retirement
Financial 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. 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.
66-
<PAGE>
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Director and Officer Business Experience
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
*Wayne A. Stork (62) Chairman, Director/Trustee of the Fund and each of the other 32 investment companies in
the Delaware Investments family.
Chairman and Director of Delaware Management Holdings, Inc.
Director of Delaware International Advisers Ltd.
Prior to January 1, 1999, Mr. Stork was Director of Delaware Capital Management, Inc.;
Chairman, President and Chief Executive Officer and Director/Trustee of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.; Chairman, President, Chief
Executive Officer, Chief Investment Officer and Director/Trustee of Delaware Management
Company, Inc. and Delaware Management Business Trust; Chairman, President, Chief
Executive Officer and Chief Investment Officer of Delaware Management Company (a series
of Delaware Management Business Trust); Chairman, Chief Executive Officer and Chief
Investment Officer of Delaware Investment Advisers (a series of Delaware Management
Business Trust); Chairman and Chief Executive Officer of Delaware International Advisers
Ltd.; Chairman, Chief Executive Officer and Director of Delaware International Holdings
Ltd.; Chief Executive Officer of Delaware Management Holdings, Inc.; President and Chief
Executive Officer of Delvoy, Inc.; Chairman of Delaware Distributors, L.P.; Director of
Delaware Service Company, Inc. and Retirement Financial Services, Inc.
In addition, during the five years prior to January 1, 1999, 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.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
67-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Director and Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
*David K. Downes (59) President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Director/Trustee of the Fund and each of the other 32 investment
companies in the Delaware Investments family.
President and Director of Delaware Management Company, Inc.
President of Delaware Management Company (a series of Delaware Management Business
Trust)
President, Chief Executive Officer and Director of Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer and Director of Delaware Service Company,
Inc.
President, Chief Operating Officer, Chief Financial Officer and Director of Delaware
International Holdings Ltd.
Chairman and Director of Delaware Management Trust Company and Retirement Financial
Services, Inc.
Executive Vice President, Chief Operating Officer, Chief Financial Officer of Delaware
Management Holdings, Inc., Founders CBO Corporation, Delaware Investment Advisers (a
series of Delaware Management Business Trust) and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director
of DMH Corp., Delaware Distributors, Inc., Founders Holdings, Inc. and Delvoy, Inc.
Executive Vice President and Trustee of Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Downes 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.
- ------------------------------------------------------------------------------------------------------------------------------------
68
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Director Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Walter P. Babich (72) Director/Trustee the Fund and each of the other 32 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.
- ------------------------------------------------------------------------------------------------------------------------------------
John H. Durham (62) Director/Trustee of the Fund and 18 other investment companies in the
Delaware Investments family
Private Investor.
P.O. Box 819, Gwynedd Valley, PA 19437
Mr. Durham served as Chairman of the Board of each fund in the Delaware Investments
family from 1986 to 1991; President of each fund from 1977 to 1990; and Chief Executive
Officer of each fund from 1984 to 1990. Prior to 1992, with respect to Delaware
Management Holdings, Inc., Delaware Management Company, Delaware Distributors, Inc. and
Delaware Service Company, Inc., Mr. Durham served as a director and in various executive
capacities at different times. He was also a Partner of Complete Care Services from 1995
to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr (60) Director/Trustee of the Fund and each of the 32 other 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 (58) Director/Trustee of the Fund and each of the other 32 other 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.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Director Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison (63) Director/Trustee of the Funds and each of the other 32 investment companies
in the Delaware Investments family
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402
President and Chief Executive Officer, MLM Partners, Inc.
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 (73) Director/Trustee of the Fund and each of the other 32 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans (51) Director/Trustee of the Fund and 32 other investment companies in the
Delaware Investments family.
Building 220-13W-37, St. Paul, MN 55144
Vice President and Treasurer, 3M Corporation.
From 1987-1994, Ms. Yeomans was Director of Benefit Funds and Financial Markets for the
3M Corporation; Manager of Benefit Fund Investments for the 3M Corporation, 1985-1987;
Manager of Pension Funds for the 3M Corporation, 1983-1985; Consultant--Investment
Technology Group of Chase Econometrics, 1982-1983; Consultant for Data Resources,
1980-1982; Programmer for the Federal Reserve Bank of Chicago, 1970-1974.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Richard G. Unruh, Jr. (60) Executive Vice President and Chief Investment Officer, Equity of the Fund,
each of the other 32 investment companies in the Delaware Investments family
Chief Executive Officer/Chief Investment Officer of Delaware Investment Advisers (a
series of Delaware Management Business Trust)
Executive Vice President of Delaware Management Holdings, Inc. and Delaware Capital
Management, Inc.
Executive Vice President/Chief Investment Officer of Delaware Management Company (a
series of Delaware Management Business Trust)
Executive Vice President and Trustee of Delaware Management Business Trust
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.
- ------------------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin (46) Executive Vice President and Chief Investment Officer, Fixed Income of the
Fund and each of the other 32 investment companies in the Delaware
Investments family.
Director of Delaware Management Holdings, Inc. and Founders CBO Corporation.
Executive Vice President/Chief Investment Officer, DMC-Fixed Income of Delaware
Management Company (a series of Delaware Management Business Trust)
Executive Vice President/Chief Investment Officer, DIA-Fixed Income of Delaware
Investment Advisers (a series of Delaware Management Business Trust)
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Management Business Trust and Delaware Capital
Management, Inc.
Mr. McMeekin joined Delaware Investments in 1999. During the past five years, he has
also served in various executive capacities for Lincoln National Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard J. Flannery (42) Executive Vice President/General Counsel of the Fund and each of the other 32 investment
companies in the Delaware Investments family, Delaware Management Holdings, Inc.,
Delaware Distributors, L.P., Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Founders CBO Corporation.
Executive Vice President/General Counsel and Director of Delaware International Holdings
Ltd., Founders Holdings, Inc., Delvoy, Inc., DMH Corp., Delaware Management Company,
Inc., Delaware Service Company, Inc., Delaware Capital Management, Inc., Retirement
Financial Services, Inc., Delaware Distributors, Inc. and Delaware Management Trust
Company.
Executive Vice President and Trustee of Delaware Management Business Trust.
Director of Delaware International Advisers Ltd.
Director of HYPPCO Finance Company Ltd.
During the past five years, Mr. Flannery has served in various executive capacities at
different times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Eric E. Miller (46) Senior Vice President/Deputy General Counsel and Secretary of the Fund and
each of the other 32 investment companies in Delaware Investments.
Senior Vice President/Deputy General Counsel and Assistant Secretary of Delaware
Management Holdings, Inc., DMH Corp., Delvoy, Inc., Delaware Management Company, Inc.,
Delaware Management Business Trust, Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust), Delaware Service Company, Inc., Delaware Capital Management,
Inc., Retirement Financial Services, Inc., Delaware Distributors, Inc., Delaware
Distributors, L.P. and Founders Holdings, Inc.
During the past five years, Mr. Miller has served in various executive capacities at
different times within Delaware Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph H. Hastings (49) Senior Vice President/Corporate Controller of the Fund and each of the other
32 investment companies in the Delaware Investments family and Delaware
Investment Advisers (a series of Delaware Management Business Trust)
Senior Vice President/Corporate Controller and Treasurer of Delaware Management
Holdings, Inc., DMH Corp., Delvoy , Inc., Delaware Management Company, Inc., Delaware
Management Business Trust, Delaware Management Company (a series of Delaware Management
Business Trust), Delaware Distributors, L.P., Delaware Distributors, Inc., Delaware
Service Company, Inc., Delaware Capital Management, Inc., Delaware International
Holdings Ltd., Founders Holdings, Inc. and Delaware Management Business Trust
Executive Vice President/Chief Financial Officer/Treasurer of Delaware Management Trust
Company
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
Chief Financial Officer of Retirement Financial Services, Inc.
During the past five years, Mr. Hastings has served in various executive capacities at
different times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof (37) Senior Vice President and Treasurer of the Fund and each of the other 32
investment companies in the Delaware Investments family.
Senior Vice President/Investment Accounting of Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Service Company, Inc. and Delaware Capital
Management, Inc. and Founders Holdings, Inc.
Senior Vice President and Treasurer/ Investment Accounting of Delaware Distributors,
L.P. and Delaware Investment Advisers (a series of Delaware Management Business Trust)
Senior Vice President/Manager of Investment Accounting of Delaware International
Holdings, Inc.
Senior Vice President and 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.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Gerald S. Frey (53) Senior Vice President/Senior Portfolio Manager of the Fund, of the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Delaware Capital Management, 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Frank X. Morris (38) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of Delaware
Management Business Trust)
Before joining Delaware Investments in 1997, he served as vice president and director of
equity research at PNC Asset Management. Mr. Morris is president of the Financial
Analysis Society of Philadelphia and is a member of the Association of Investment
Management and Research and the National Association of Petroleum Investment Analysts.
- ------------------------------------------------------------------------------------------------------------------------------------
John B. Fields (54) Senior Vice President/Senior Portfolio Manager of the Fund, the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Delaware Capital Management, Inc.
Trustee of Delaware Management Business Trust.
During the past five years, Mr. Fields has served in various capacities within the
Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Gary A. Reed (44) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust), Delaware Investment Advisers
(a series of series of Delaware Management Business Trust) and Delaware
Capital Management, Inc.
During the past five years, Mr. Reed has served in such capacities within the Delaware
organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Gerald T. Nichols (41) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Vice President/Senior Portfolio Manager t of Founders Holdings, Inc.
Treasurer/Assistant Secretary 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.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Paul A. Matlack (39) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Vice President/Senior Portfolio Manager 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 (41) Vice President/Senior Portfolio Manager of the Fund, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a series of
Delaware Management Business Trust) and Delaware Investment Advisers (a series of series
of Delaware Management Business Trust).
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.
- ------------------------------------------------------------------------------------------------------------------------------------
Damon J. Andres (29) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust) and Delaware Capital Management, Inc.
Prior to joining Delaware Investments in 1994, Mr. Andres performed investment
counseling services as a Consulting Associate with Cambridge Associates, Inc. in
Arlington Virginia.
- ------------------------------------------------------------------------------------------------------------------------------------
Marshall T. Bassett (45) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior to joining Delaware Investments in 1997m Mr. Basset served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small growth
companies. Prior to that, he was a trust officer at Sovran Bank and Trust Company.
- ------------------------------------------------------------------------------------------------------------------------------------
John A. Heffern (38) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior to joining Delaware Investments in 1997, Mr. Heffern was a Senior Vice President,
Equity Research at NatWest Securities Corporation's Specialty Finance Services unit.
Prior to that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown &
Sons.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey W. Hynoski (37) Vice President/Portfolio Manager of the Fund, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust).
Prior to joining Delaware Investments in 1998, Mr. Hynoski served as a Vice President at
Bessemer Trust Company in the mid and large capitalization growth group, where he
specialized in the areas of science, technology, and telecommunications. Prior to that,
Mr. Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management.
- ------------------------------------------------------------------------------------------------------------------------------------
Lori P. Wachs (30) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
During the past five years, Ms. Wachs has served in various capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Paul Grillo (40) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of series of Delaware
Management Business Trust) and Delaware Capital Management, Inc.
During the past five years, Mr. Grillo has served in various capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Trotman (48) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior joining Delaware Investments in 1995, he was Vice President and Director of
Investment Research at Independence Capital Management. Before that, he held
credit-related positions at Marine Midland Bank, U.S. Steel Corporation, and Amerada
Hess.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<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, 1998 and an estimate of annual benefits to be
received upon retirement under the Delaware Investments Retirement Plan for
Directors/Trustees as of December 31, 1998. Only the independent directors of
the Fund receive compensation from the Fund.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual from the Investment
Compensation as Part of Benefits Companies
received from Fund Upon in Delaware
Name(4) the Fund Expenses Retirement(1) Investments(2)
------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Ann R. Leven $4,051 None $38,000 $66,463
Walter P. Babich $3,975 None $38,000 $65,463
Anthony D. Knerr $3,975 None $38,000 $65,463
Charles E. Peck $3,595 None $38,000 $60,463
Thomas F. Madison $3,817 None $38,000 $63,380
John H. Durham (3) $2,792 None $32,180 $34,854
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director/trustee who, at the
time of his or her retirement from the Board, has attained the age of
70 and served on the Board for at least five continuous years, is
entitled to receive payments from each investment company in the
Delaware Investments family for which he or she serves as a director or
trustee for a period equal to the lesser of the number of years that
such person served as a director or trustee 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/trustees of each investment company at the time of such
person's retirement. If an eligible director/trustee retired as of
December 31, 1998, he or she would be entitled to annual payments
totaling the amounts noted above, in the aggregate, from all of the
investment companies in the Delaware Investments family for which he or
she serves as a director or trustee, based on the number of investment
companies in the Delaware Investments family as of that date.
(2) Each independent director/trustee (other than John H. Durham)
currently receives a total annual retainer fee of $38,000 for serving
as a director or trustee for all 33 investment companies in Delaware
Investments, plus $3,145 for each Board Meeting attended. John H.
Durham currently receives a total annual retainer fee of $32,180 for
serving as a director or trustee for 19 investment companies in
Delaware Investments, plus $1,810 for each Board Meeting attended. Ann
R. Leven, Anthony D. Knerr and Thomas F. Madison 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 investment companies, in the aggregate, with the exception of
the chairperson, who receives $6,000.
(3) John H. Durham joined the Board of Directors of the Fund and 18 other
investment companies in Delaware Investments on April 16, 1998.
(4) W. Thacher Longstreth served as an independent director of the Fund
during its last fiscal year ended December 31, 1998. For this period,
Mr. Longstreth received $3,595 from the Fund and $60,463 for all
investment companies in the Delaware Investments family. Mr. Longstreth
retired from the Boards of the investment companies in the Delaware
Investments family on March 17, 1999. Jan L. Yeomans joined the Boards
of all investment companies in the Delaware Investments family in March
1999 for some funds and in April 1999 for other funds.
76-
<PAGE>
As of September 23, 1999, 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>
Growth and Income Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 21,573,143.421 68.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 7,845,666.824 24.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Delchester Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 13,130,168.322 90.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Reserves Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 3,972,829.406 93.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Balanced Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 10,316,910.210 95.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Reserve Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 5,455,402.608 91.53%
- ------------------------------------------------------------------------------------------------------------------------------------
DelCap Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 7,001,391.422 96.15%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 13,665,424.749 95.59%
- ------------------------------------------------------------------------------------------------------------------------------------
Trend Series Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 6,877,046.638 61.51%
- ------------------------------------------------------------------------------------------------------------------------------------
SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 3,715,121.462 33.23%
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 5,491,267.359 88.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Global Bond Series Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 1,521,362.836 69.87%
- ------------------------------------------------------------------------------------------------------------------------------------
SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 626,066.103 28.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 2,262,670.088 99.99%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
78-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Devon Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 5,704,375.750 90.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln Life Variable Annuity
Account N
1300 S. Clinton Street
Fort Wayne, IN 46801 596,178.861 9.46%
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 836,451.154 65.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 211,672,780 16.55%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln Life Variable Annuity
Account N
1300 S Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
118,073.183 9.23%
- ----------------------------------------------------------------------------------------------------------------------------------
Convertible Securities Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 573,152.190 68.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 214,738.232 25.60%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
79-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Securities Series Chicago Trust Company
For the Sole Benefit of
Lincoln National Corp
Employee Ret. Plan
C/o Marshall and Ilsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201 50,715.361 6.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Social Awareness Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 1,873,514.059 83.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 367,974.054 16.41%
- ------------------------------------------------------------------------------------------------------------------------------------
REIT Series The Travelers SEP Acct. TM2 for
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183 480,496.094 41.42%
- ------------------------------------------------------------------------------------------------------------------------------------
SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 256,122.824 22.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801 204,439.252 17.62%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
80-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REIT Series The Travelers SEP Acct. ABD2 for
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183 117,877.159 10.16%
- ------------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653 1,810,360.712 98.66%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
81-
<PAGE>
GENERAL INFORMATION
The Fund, which was organized as a Maryland corporation in 1987, is an
open-end registered management investment company. With the exception of Global
Bond, Emerging Markets and REIT Series, each Series operates as a diversified
fund as defined by the Investment Company Act of 1940 (the "1940 Act"). Global
Bond, Emerging Markets and REIT Series operate as nondiversified funds as
defined by the 1940 Act.
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 by certain covered persons in certain securities 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 at a flat dollar amount each year and is 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.
82-
<PAGE>
The initial public offering date for the Growth and Income, Delchester,
Capital Reserves, Cash Reserve and Delaware Balanced 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 commenced on May 4, 1998. Aggressive Growth
Series commenced operations on May 1, 1999. U.S. Growth Series did not commence
operations prior to the date of this Part B.
EURO
Several European countries are participating in the European Economic
and Monetary Union, which established a common European currency for
participating countries. This currency is commonly known as the "Euro." Each
participating country replaced its previous currency with the Euro on January 1,
1999. Additional European countries may elect to participate after that date. In
addition, full implementation of the Euro will extend over a period of several
years. Initial implementation of the Euro occurred on January 1, 1999 without
disruption of services provided to each Series. Each Series' service providers
cooperated over the implementation weekend and following weeks to reconcile
their records and procedures. Going forward, if a Series is invested in
securities of participating countries or countries that elect to participate at
a later date, it could be adversely affected if the computer systems used by its
applicable service providers are not properly prepared to handle the
implementation of this single currency through completion of the process or the
adoption of the Euro by additional countries in the future.
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.
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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
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pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
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FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for Delaware Group
Premium Fund, Inc. and, in its capacity as such, audits the annual financial
statements contained in the Series' Annual Reports. Each Series', other than
Aggressive Growth Series' and U.S. Growth 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, 1998 are
included in the Series' 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. Each Series', other than U.S. Growth Series', unaudited
financial statements and the notes relating thereto for the six-month period
ended June 30, 1999 are also incorporated into this Part B by reference from the
Fund's Semi-Annual Report. U.S. Growth Series did not commence operations prior
to the date of this Part B.
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INVESTMENT MANAGERS
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
Delaware International Advisers Ltd.
Third Floor
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
Lynch & Mayer, Inc.
350 Park Avenue
New York, NY 10022
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
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
<PAGE>
DELAWARE GROUP
PREMIUM FUND, INC
PART B
STATEMENT OF
ADDITIONAL INFORMATION
October 15, 1999
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DELAWARE(SM)
INVESTMENTS
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