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DELAWARE GROUP PREMIUM FUND
Technology and Innovation Series
Standard Class
1818 Market Street, Philadelphia, PA 19103
Prospectus
August 21, 2000
This Prospectus offers the Technology and Innovation Series. 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 objective and principal policies
of the Series are described in this Prospectus.
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
Overview ........................................................... page 1
Technology and Innovation Series ................................... 1
How we manage the Series ........................................... page 2
Our investment strategies .......................................... 2
The securities we typically invest in .............................. 2
The risks of investing in the Series ............................... 4
Investment manager ................................................. 5
Portfolio managers ................................................. 5
Fund administration (Who's who) .................................... 6
Important information about
the Series ......................................................... page 7
Share classes ...................................................... 7
Purchase and redemption of shares .................................. 7
Valuation of shares ................................................ 7
Dividends, distributions and taxes ................................. 8
Euro ............................................................... 8
Financial highlights ............................................... page 9
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Overview: Technology and Innovation Series
What is the Series' goal? Technology and Innovation Series seeks to provide
long-term capital growth. Although the Series will strive to meet its goal,
there is no assurance that it will.
What are the Series' main investment strategies? We invest primarily in stocks
we believe will benefit from technological advances and improvements. We strive
to identify companies that offer above-average opportunities for long-term price
appreciation because they are poised to benefit from the development,
advancement and use of technology or from innovations that may indirectly
benefit from technology. The stocks can be of any size or market capitalization,
including securities of emerging or other growth-oriented companies.
The Series uses a bottom-up approach to stock selection that seeks companies
that are market leaders, have strong product cycles,
innovative concepts or may benefit from industry trends. We look at estimated
growth rates, market capitalization and cash flows as we strive to determine how
attractive a company is relative to other companies.
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 value of your investment in the Series will increase and decrease
according to changes in the value of the securities in the Series' portfolio.
This Series will be affected by declines in stock prices. Although the Series
will not invest more than 25% of its net assets in any one industry, the Series
will be highly concentrated in the industries that are poised to benefit from
technology or from innovations that may indirectly benefit from technology.
Therefore, the Series may be particularly sensitive to changes in the general
market and economic conditions that affect those industries. Companies in the
rapidly changing field of technology and in the fields that may benefit from
innovation and technology often face special risks. For example, their products
may not prove commercially successful or may become obsolete quickly. Earnings
disappointments can result in sharp price declines. A portfolio focused
primarily on these stocks is likely to be much more volatile than one with
exposure to a greater variety of industries, especially in the short run.
In addition, the Series may invest in smaller companies that involve greater
risk than other companies due to their size, narrow product lines, limited
financial resources and greater sensitivity to economic conditions. Stocks of
smaller companies may experience more volatile price fluctuations, especially
over the short term.
Technology and Innovation Series is considered "non-diversified" under the
federal laws and rules that regulate mutual funds. That means the Series may
allocate more of its net assets to investments in single securities than a
"diversified" fund. Thus, adverse effects on an investment held by the Series
may affect a larger portion of overall assets and subject the Series to greater
risk.
For a more complete discussion of risk, please turn to page 4.
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.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
companies believed to benefit from technological advances and improvements.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
o Investors unwilling to accept the risks of a non-diversified, more
concentrated fund focusing on companies believed to benefit from
technological advances and improvements.
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How we manage the Series
Our investment strategies
We research individual companies and analyze economic and market conditions,
seeking to identify the securities or market sectors that we think are the best
investments for the Series. The following describes how the portfolio managers
pursue the Series' investment goal.
We strive to identify companies of any size that offer above-average
opportunities for long-term price appreciation. At least 65% of the Series'
assets will be invested in common stocks issued by companies that we believe are
poised to benefit from the development, advancement and use of technology or
from innovations that may indirectly benefit from technology. In striving to
identify such companies, we will evaluate a company's managerial skills,
strategic focus, product development, position in its industry or relevant
markets, and innovative concepts.
Some industries likely to be represented in the portfolio are:
o computer software and hardware;
o semiconductor, minicomputers and peripheral equipment;
o telecommunication, media and information services;
o environmental services, chemicals and synthetic materials;
o defense and commercial electronics;
o data storage and retrieval; and
o biotechnology, health care and medical supplies.
The Series uses a bottom-up approach to stock selection. We look at estimated
growth rates, market capitalization and cash flows of individual companies as we
strive to determine how attractive a company is relative to other companies.
We also rely on our own research in selecting companies for the portfolio. That
research might include one-on-one meetings with executives, company competitors,
industry experts and customers. Our goal is to select companies that are likely
to perform well over an extended time frame.
Technology and Innovation Series uses the same investment strategy as Delaware
Technology and Innovation Fund, a separate fund in the Delaware Investments
family, although performance may differ depending on such factors as the size of
the funds, the timing of investments and redemptions, and insurance contract
fees.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
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The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
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Securities How we use them
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Common stocks: Securities that represent We invest at least 65% of the Series' total assets
shares of ownership in a corporation. in equity securities (including common stocks and
Stockholders participate in the convertible securities). Generally, however, we
corporation's profits and losses, invest 90% to 100% of net assets in common stock.
proportionate to the number of shares The Series may invest in common stocks of any
they own. Stocks are often referred to market capitalization. Market capitalization is
as "equity securities" or "equities." the measure of the size of a company, determined
by multiplying the current market price of the
common stock by the number of shares held by
shareholders.
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Foreign securities and American Although the Series may invest up to 25% of its
Depositary Receipts (ADRs): Securities net assets in foreign securities, we have no
of foreign entities issued directly or, present intention of doing so. We may invest
in the case of ADRs, through a U.S. without limit in ADRs and will do so when we
bank. ADRs represent a bank's holdings believe they offer greater value and greater
of a stated number of shares of a appreciation potential than U.S. securities.
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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Convertible securities: Usually The Series may invest in convertible securities
preferred stocks or corporate bonds that and selects them on the basis of the common stock
can be exchanged for a set number of into which they can be converted, not on the basis
shares of common stock at a of the credit quality ratings of the convertible
predetermined price. Preferred stock has securities.
preference over common stock in the
payment of dividends and liquidation of
assets, and often pays dividends at a
fixed rate. Corporate bonds are debt
securities issued by a corporation which
typically make fixed periodic interest
payments and make full repayment on a
specified maturity date.
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Repurchase agreements: An agreement Typically, the Series uses repurchase agreements
between a buyer, such as the Series, and as a short-term investment for the Series' cash
seller of securities in which the seller position. In order to enter into these repurchase
agrees to buy the securities back within agreements, the Series must have collateral of at
a specified time at the same price the least 102% of the repurchase price. The Series may
buyer paid for them, plus an amount not have more than 10% of its assets in repurchase
equal to an agreed upon interest rate. agreements with maturities of over seven days. The
Repurchase agreements are often viewed Series will only enter into repurchase agreements
as equivalent to cash. in which the collateral is comprised of U.S.
government securities.
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Restricted securities: Privately placed We may invest in privately placed securities,
securities whose resale is restricted including those that are eligible for resale only
under securities law. among certain institutional buyers without
registration which are commonly known as "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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Securities How we use them
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Options and futures: Options represent a If we have stocks that appreciated in price, we
right to buy or sell a security at an may want to protect those gains when we anticipate
agreed upon price at a future date. The adverse conditions. We might use options or
purchaser of an option may or may not futures to neutralize the effect of any price
choose to go through with the declines, without selling the security. We might
transaction. also use options or futures to gain exposure to a
particular market segment without purchasing
Futures contracts are agreements for the individual securities in that segment. We might
purchase or sale of securities at a use this approach if we had excess cash that we
specified price, on a specified date. wanted to invest quickly.
Unlike an option, a futures contract
must be executed unless it is sold We might use covered call options if we
before the settlement date. believe that doing so would help the
Series to meet its investment objective.
Certain options and futures may be
considered to be derivative securities. Use of these strategies can increase the
operating costs of the Series and can
lead to loss of principal.
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Illiquid securities: Securities that do The Series may invest no more than 15% of net
not have a ready market, and cannot be assets in illiquid securities.
easily sold within seven days at
approximately the price that a fund has
valued them. Illiquid securities include
repurchase agreements maturing in more
than seven days.
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The Series may also invest in other securities including warrants, preferred
stocks, and bonds. Please see the Statement of Additional Information for
additional descriptions of these securities as well as other securities in which
the Series may invest.
Lending securities
The Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions. These
transactions will generate additional income for the Series.
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. The
Series will designate cash or securities in amounts sufficient to cover its
obligations, and will value the designated assets daily.
Temporary defensive positions
In response to unfavorable market conditions, the Series may make temporary
investments in bonds, cash or cash equivalents. To the extent that the Series
holds these securities, it may be unable to achieve its investment objective.
Portfolio turnover
We anticipate that the Series will have an annual portfolio turnover of more
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 rate
can result in higher brokerage costs.
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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 chart gives a brief
description of the chief risks of investing in the Series. Please see the
Statement of Additional Information for further discussion of these risks and
other risks not discussed here.
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Risks How we strive to manage them
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Market risk is the risk that all or a majority of We maintain a long-term approach and focus on
the securities in a certain market--like the stock securities that we believe can continue to provide
or bond market--will decline in value because of returns over an extended period of time regardless
factors such as economic conditions, future of interim market fluctuations. Generally, we do
expectations or investor confidence. not try to predict overall market movements or
trade for short-term purposes.
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Industry and security risk is the risk that the Although the Series will not invest more than 25%
value of securities in a particular industry or of its net assets in one industry, it will
the value of an individual stock or bond will concentrate its investments in companies that we
decline because of changing expectations for the believe will benefit from technological advances
performance of that industry or for the individual and innovation. As a result, the value of Series
company issuing the stock. shares can be expected to fluctuate in response to
factors affecting the industries in which these
companies operate, and may fluctuate more widely
than a fund that invests in a broader range of
industries. The Series may be more susceptible to
any single economic, political or regulatory
occurrence affecting these companies.
To seek to reduce these risks, we limit the amount
of the Series' assets invested in any one industry
and we follow a rigorous selection process before
choosing securities for the Series.
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Interest rate risk is the risk that securities, The Series can invest in small or medium-sized
particularly bonds with longer maturities, will companies and we seek to address the potential
decrease in value if interest rates rise and interest rate risks associated with those holdings
increase in value if interest rates fall. However, by analyzing each company's financial situation
investments in equity securities issued by small and its cash flow to determine the company's
and medium-sized companies, which often borrow ability to finance future expansion and
money to finance operations, may also be adversely operations. As appropriate, potential impact that
affected by rising interest rates. rising interest rates might have on a stock is
taken into consideration before a stock is
purchased.
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Foreign risk is the risk that foreign Currently, the Series intends to invest only a
securities may be adversely affected by political small portion its portfolio in ADRs. If we were to
instability, changes in currency exchange rates, purchase foreign securities, they would often be
foreign economic conditions or inadequate denominated in U.S. dollars. We also tend to avoid
regulatory and accounting standards. markets where we believe accounting principles or
the regulatory structure are underdeveloped.
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Company size risk is the risk that prices of small The Series seeks opportunities among companies of
and medium-sized companies may be more volatile all sizes. However, because the Series does not
than larger companies because of limited financial concentrate specifically on small or medium-sized
resources or dependence on narrow product lines. companies, this risk may be balanced by holdings
of larger companies.
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Risks How we strive to manage them
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Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold within seven days at
approximately the price that a fund values them.
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Risks How we strive to manage them
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Non-diversified funds risk: Non-diversified funds The Series is a non-diversified fund as defined by
have the flexibility to invest as much as 50% of the Investment Company Act of 1940. We perform
their assets in as few as two issuers with no extensive analysis on all securities, particularly
single issuer accounting for more than 25% of the those that represent a larger percentage of
portfolio. The remaining 50% of the portfolio must portfolio assets.
be diversified so that no more than 5% of a fund's
assets is invested in the securities of a single
issuer. Since a non-diversified fund may invest
its assets in fewer issuers, the value of its
shares may increase or decrease more rapidly than
if it were fully diversified because changes in
the price of any one portfolio security may affect
a larger portion of its overall assets.
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Futures and options risk is the possibility that a We will not use futures and options for
fund may experience a significant loss if it speculative reasons. We may use futures and
employs an options or futures strategy related to options to protect gains in the portfolio without
a security or a market index and that security or actually selling a security. We may also use
index moves in the opposite direction from what options and futures to quickly invest excess cash
the portfolio manager anticipated. Futures and so that the portfolio is generally fully invested.
options also involve additional expenses, which
could reduce any benefit or increase any loss to a
fund from using the strategy.
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Investment manager
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. The Series will pay Delaware
Management Company the following fee on an annual basis: 0.75% on the first $500
million of average daily net assets; 0.70% on the next $500 million; 0.65% on
the next $1.5 billion and 0.60% on assets in excess of $2.5 billion. Delaware
Management Company has elected voluntarily to waive its management fee and pay
expenses from the commencement of the Series' operations through April 30, 2001
in order to prevent total operating expenses (excluding taxes, interest,
brokerage fees and extraordinary expenses) from exceeding 0.85% of average daily
net assets.
Portfolio managers
Jeffrey W. Hynoski has primary responsibility for making day-to-day investment
decisions for Technology and Innovation Series. In making decisions for the
Series, Mr. Hynoski regularly consults with Gerald S. Frey, Senior Portfolio
Manager of the growth team.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he 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. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University. Mr. Hynoski has been managing the Series since its inception.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York.
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Who's who?
The following describes the various organizations involved with managing,
administering, and servicing the Series.
Board of trustees A mutual fund, such as Delaware Group Premium Fund, is
governed by a Board of Trustees, which has oversight responsibility for the
management of the business affairs of each series of the fund, such as the
Series. Trustees establish procedures and oversee and review the performance of
the investment manager, the distributor and others that perform services for
each series. At least 40% of the Board of Trustees must be independent of each
series' investment manager and distributor. These independent fund trustees, 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 June 30, 2000, Delaware Management Company
and its affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $44 billion in assets in
the various institutional or separately managed (approximately $25,511,940,000)
and investment company (approximately $19,472,230,000) accounts. Delaware
Management Company is a series of Delaware Management Business Trust, which is
an indirect, wholly owned subsidiary of Delaware Management Holdings, Inc.
Portfolio managers Portfolio managers are employed by the investment managers to
make investment decisions for individual portfolios on a day-to-day basis. See
"How we manage the Series" 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 custodian, typically a qualified bank custodian, who
segregates fund securities from other bank assets.
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Important information about the Series
Share classes
The Series has two classes of shares, Standard Class and Service Class. Each
class is identical except that Service Class has a distribution or "Rule 12b-1"
plan which is described in the prospectus offering Service Class shares.
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 that a separate account pays for shares will depend on when we receive
its purchase order. If we or an authorized agent receives a separate account's
order before the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) on a business day, it will pay that day's
closing share price which is based on the Series' net asset value. If we receive
a separate account's order after the close of regular trading, it 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 regular
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 in 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. Foreign securities, currencies and other assets
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate of these currencies against the U.S. dollar, as provided by an
independent pricing service. 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 Trustees. Any investments that have a
maturity of less than 60 days we price at amortized cost. For all other
securities, we use methods approved by the Board of Trustees that are designed
to price securities at their fair market value.
From time to time, the Series may also hold securities that are listed on
foreign exchanges. These foreign exchanges may trade on weekends or days when
the Series does not price its shares. As a result, the NAV of the Series may
change on days when you will not be able to purchase or redeem shares of the
Series.
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Dividends, distributions and taxes
Dividends and capital gain distributions, if any, are distributed to separate
accounts annually.
We automatically reinvest all dividends and any capital gains
distributed to separate accounts.
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. A separate account which is not
subject to tax on its income will not be required to pay tax on amounts
distributed to it. The Fund will inform separate accounts of the amount and
nature of income or gains.
Please refer to the prospectus for the variable insurance contract for
additional tax information relevant to such contracts.
EURO
Several European countries began participating in the European Economic and
Monetary Union, which has established a common currency for participating
countries. This currency is commonly known as the "Euro." The long-term
consequences of the Euro conversion for foreign exchange rates, interest rates
and the value of European securities in which the Series may invest are unclear.
The consequences may adversely affect the value and/or increase the volatility
of securities held by the Series.
Financial highlights
Financial highlights are not shown for the Series since it commenced operations
after the close of the fiscal year end.
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DELAWARE GROUP PREMIUM FUND
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 the 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 1818 Market Street, Philadelphia,
PA 19103, or call toll-free 800.523.1918.
You can find reports and other information about the Series on the EDGAR
Database on the SEC web site (http://www.sec.gov). You can also get copies of
this information, after payment of a duplicating fee, by e-mailing the SEC at
[email protected] or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. 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 1.202.942.8090.
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DELAWARE GROUP PREMIUM FUND
Technology and Innovation Series
Service Class
1818 Market Street, Philadelphia, PA 19103
Prospectus
August 21, 2000
This Prospectus offers the Service Class of Technology and Innovation Series.
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 objective and
principal policies of the Series are described in this Prospectus.
The Service Class shares of the Series are subject to annual 12b-1 plan fees.
The 12b-1 plan allows the Fund to pay distribution fees of up to 0.30%
(currently 0.15%) per year to those who sell and distribute Service Class shares
or provide services to shareholders and contract owners.
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
Overview page 1
Technology and Innovation Series 1
How we manage the Series page 2
Our investment strategies 2
The securities we typically invest in 2
The risks of investing in the Series 4
Investment manager 5
Portfolio managers 5
Fund administration (Who's who) 6
Important information about the Series page 7
Share classes 7
Purchase and redemption of shares 7
Valuation of shares 7
Dividends, distributions and taxes 8
Financial highlights page 9
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Overview: Technology and Innovation Series
What is the Series' goal? Technology and Innovation Series seeks to provide
long-term capital growth. Although the Series will strive to meet its goal,
there is no assurance that it will.
What are the Series' main investment strategies? We invest primarily in stocks
we believe will benefit from technological advances and improvements. We strive
to identify companies that offer above-average opportunities for long-term price
appreciation because they are poised to benefit from the development,
advancement and use of technology or from innovations that may indirectly
benefit from technology. The stocks can be of any size or market capitalization,
including securities of emerging or other growth-oriented companies.
The Series uses a bottom-up approach to stock selection that seeks companies
that are market leaders, have strong product cycles, innovative concepts or may
benefit from industry trends. We look at estimated growth rates, market
capitalization and cash flows as we strive to determine how attractive a company
is relative to other companies.
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 value of your investment in the Series will increase and decrease
according to changes in the value of the securities in the Series' portfolio.
This Series will be affected by declines in stock prices. Although the Series
will not invest more than 25% of its net assets in any one industry, the Series
will be highly concentrated in the industries that are poised to benefit from
technology or from innovations that may indirectly benefit from technology.
Therefore, the Series may be particularly sensitive to changes in the general
market and economic conditions that affect those industries. Companies in the
rapidly changing field of technology and in the fields that may benefit from
innovation and technology often face special risks. For example, their products
may not prove commercially successful or may become obsolete quickly. Earnings
disappointments can result in sharp price declines. A portfolio focused
primarily on these stocks is likely to be much more volatile than one with
exposure to a greater variety of industries, especially in the short run.
In addition, the Series may invest in smaller companies that involve greater
risk than other companies due to their size, narrow product lines, limited
financial resources and greater sensitivity to economic conditions. Stocks of
smaller companies may experience more volatile price fluctuations, especially
over the short term.
Technology and Innovation Series is considered "non-diversified" under the
federal laws and rules that regulate mutual funds. That means the Series may
allocate more of its net assets to investments in single securities than a
"diversified" fund. Thus, adverse effects on an investment held by the Series
may affect a larger portion of overall assets and subject the Series to greater
risk.
For a more complete discussion of risk, please turn to page 4.
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.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
companies believed to benefit from technological advances and improvements.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
o Investors unwilling to accept the risks of a non-diversified, more
concentrated fund focusing on companies believed to benefit from technological
advances and improvements.
3
<PAGE>
How we manage the Series
Our investment strategies
We research individual companies and analyze economic and market conditions,
seeking to identify the securities or market sectors that we think are the best
investments for the Series. The following describes how the portfolio managers
pursue the Series' investment goal.
We strive to identify companies of any size that offer above-average
opportunities for long-term price appreciation. At least 65% of the Series'
assets will be invested in common stocks issued by companies that we believe are
poised to benefit from the development, advancement and use of technology or
from innovations that may indirectly benefit from technology. In striving to
identify such companies, we will evaluate a company's managerial skills,
strategic focus, product development, position in its industry or relevant
markets, and innovative concepts.
Some industries likely to be represented in the portfolio are:
o computer software and hardware;
o semiconductor, minicomputers and peripheral equipment;
o telecommunication, media and information services;
o environmental services, chemicals and synthetic materials;
o defense and commercial electronics;
o data storage and retrieval; and
o biotechnology, health care and medical supplies.
The Series uses a bottom-up approach to stock selection. We look at estimated
growth rates, market capitalization and cash flows of individual companies as we
strive to determine how attractive a company is relative to other companies.
We also rely on our own research in selecting companies for the portfolio. That
research might include one-on-one meetings with executives, company competitors,
industry experts and customers. Our goal is to select companies that are likely
to perform well over an extended time frame.
Technology and Innovation Series uses the same investment strategy as Delaware
Technology and Innovation Fund, a separate fund in the Delaware Investments
family, although performance may differ depending on such factors as the size of
the funds, the timing of investments and redemptions, and insurance contract
fees.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
4
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
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Securities How we use them
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Common stocks: Securities that represent We invest at least 65% of the Series'
shares of ownership in a corporation. total assets in equity securities
Stockholders participate in the (including common stocks and convertible
corporation's profits and losses, securities). Generally, however, we
proportionate to the number of shares invest 90% to 100% of net assets in
they own. Stocks are often referred to common stock. The Series may invest in
as "equity securities" or "equities." common stocks of any market
capitalization. Market capitalization is
the measure of the size of a company,
determined by multiplying the current
market price of the common stock by the
number of shares held by shareholders.
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Foreign securities and American Although the Series may invest up to 25%
Depositary Receipts (ADRs): Securities of its net assets in foreign securities,
of foreign entities issued directly or, we have no present intention of doing
in the case of ADRs, through a U.S. so. We may invest without limit in ADRs
bank. ADRs represent a bank's holdings and will do so when we believe they
of a stated number of shares of a offer greater value and greater
foreign corporation. An ADR entitles the appreciation potential than U.S.
holder to all dividends and capital securities.
gains earned by the underlying foreign
shares. ADRs are bought and sold the
same as U.S. securities.
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Convertible securities: Usually The Series may invest in convertible
preferred stocks or corporate bonds that securities and selects them on the basis
can be exchanged for a set number of of the common stock into which they can
shares of common stock at a be converted, not on the basis of the
predetermined price. Preferred stock has credit quality ratings of the
preference over common stock in the convertible securities.
payment of dividends and liquidation of
assets, and often pays dividends at a
fixed rate. Corporate bonds are debt
securities issued by a corporation which
typically make fixed periodic interest
payments and make full repayment on a
specified maturity date.
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Repurchase agreements: An agreement Typically, the Series uses repurchase
between a buyer, such as the Series, and agreements as a short-term investment
seller of securities in which the seller for the Series' cash position. In order
agrees to buy the securities back within to enter into these repurchase
a specified time at the same price the agreements, the Series must have
buyer paid for them, plus an amount collateral of at least 102% of the
equal to an agreed upon interest rate. repurchase price. The Series may not
Repurchase agreements are often viewed have more than 10% of its assets in
as equivalent to cash. repurchase agreements with maturities of
over seven days. The Series will only
enter into repurchase agreements in
which the collateral is comprised of
U.S. government securities.
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Restricted securities: Privately placed We may invest in privately placed
securities whose resale is restricted securities, including those that are
under securities law. eligible for resale only among certain
institutional buyers without
registration which are commonly known as
"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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5
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Securities How we use them
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Options and futures: Options represent a If we have stocks that appreciated in
right to buy or sell a security at an price, we may want to protect those
agreed upon price at a future date. The gains when we anticipate adverse
purchaser of an option may or may not conditions. We might use options or
choose to go through with the futures to neutralize the effect of any
transaction. price declines, without selling the
security. We might also use options or
Futures contracts are agreements for the futures to gain exposure to a particular
purchase or sale of securities at a market segment without purchasing
specified price, on a specified date. individual securities in that segment.
Unlike an option, a futures contract must We might use this approach if we had
be executed unless it is sold before the excess cash that we wanted to invest
settlement date. quickly.
Certain options and futures may be We might use covered call options if we
considered to be derivative securities. believe that doing so would help the
Series to meet its investment objective.
Use of these strategies can increase the
operating costs of the Series and can
lead to loss of principal.
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Illiquid securities: Securities that do The Series may invest no more than 15% of
not have a ready market, and cannot be net assets in illiquid securities.
easily sold within seven days at
approximately the price that a fund has
valued them. Illiquid securities include
repurchase agreements maturing in more
than seven days.
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The Series may also invest in other securities including warrants, preferred
stocks, and bonds. Please see the Statement of Additional Information for
additional descriptions of these securities as well as other securities in which
the Series may invest.
Lending securities
The Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions. These
transactions will generate additional income for the Series.
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. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Temporary defensive positions
In response to unfavorable market conditions, the Series may make temporary
investments in bonds, cash or cash equivalents. To the extent that the Series
holds these securities, it may be unable to achieve its investment objective.
Portfolio turnover
We anticipate that the Series will have an annual portfolio turnover of more
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 rate
can result in higher brokerage costs.
6
<PAGE>
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 chart gives a brief
description of the chief risks of investing in the Series. Please see the
Statement of Additional Information for further discussion of these risks and
other risks not discussed here.
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Risks How we strive to manage them
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<S> <C>
Market risk is the risk that all or a We maintain a long-term approach and
majority of the securities in a certain focus on securities that we believe can
market--like the stock or bond continue to provide returns over an
market--will decline in value because of extended period of time regardless of
factors such as economic conditions, interim market fluctuations. Generally,
future expectations or investor we do not try to predict overall market
confidence. movements or trade for short-term
purposes.
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Industry and security risk is the risk Although the Series will not invest more
that the value of securities in a than 25% of its net assets in one
particular industry or the value of an industry, it will concentrate its
individual stock or bond will decline investments in companies that we believe
because of changing expectations for the will benefit from technological advances
performance of that industry or for the and innovation. As a result, the value
individual company issuing the stock. of Series shares can be expected to
fluctuate in response to factors
affecting the industries in which these
companies operate, and may fluctuate
more widely than a fund that invests in
a broader range of industries. The
Series may be more susceptible to any
single economic, political or regulatory
occurrence affecting these companies.
To seek to reduce these risks, we limit
the amount of the Series' assets
invested in any one industry and we
follow a rigorous selection process
before choosing securities for the
Series.
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Interest rate risk is the risk that The Series can invest in small or
securities, particularly bonds with medium-sized companies and we seek to
longer maturities, will decrease in address the potential interest rate
value if interest rates rise and risks associated with those holdings by
increase in value if interest rates analyzing each company's financial
fall. However, investments in equity situation and its cash flow to determine
securities issued by small and the company's ability to finance future
medium-sized companies, which often expansion and operations. As
borrow money to finance operations, may appropriate, potential impact that
also be adversely affected by rising rising interest rates might have on a
interest rates. stock is taken into consideration before
a stock is purchased.
------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign Currently, the Series intends to invest
securities may be adversely affected by only a small portion its portfolio in
political instability, changes in ADRs. If we were to purchase foreign
currency exchange rates, foreign securities, they would often be
economic conditions or inadequate denominated in U.S. dollars. We also
regulatory and accounting standards. tend to avoid markets where we believe
accounting principles or the regulatory
structure are underdeveloped.
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Company size risk is the risk that The Series seeks opportunities among
prices of small and medium-sized companies of all sizes. However, because
companies may be more volatile than the Series does not concentrate
larger companies because of limited specifically on small or medium-sized
financial resources or dependence on companies, this risk may be balanced by
narrow product lines. holdings of larger companies.
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7
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Risks How we strive to manage them
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<S> <C>
Liquidity risk is the possibility that We limit exposure to illiquid
securities cannot be readily sold within securities.
seven days at approximately the price
that a fund values them.
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Non-diversified funds risk: The Series is a non-diversified fund as
Non-diversified funds have the defined by the Investment Company Act of
flexibility to invest as much as 50% of 1940. We perform extensive analysis on
their assets in as few as two issuers all securities, particularly those that
with no single issuer accounting for represent a larger percentage of
more than 25% of the portfolio. The portfolio assets.
remaining 50% of the portfolio must be
diversified so that no more than 5% of a
fund's assets is invested in the
securities of a single issuer. Since a
non-diversified fund may invest its
assets in fewer issuers, the value of
its shares may increase or decrease more
rapidly than if it were fully
diversified because changes in the price
of any one portfolio security may affect
a larger portion of its overall assets.
------------------------------------------------------------------------------------------------
Futures and options risk is the We will not use futures and options for
possibility that a fund may experience a speculative reasons. We may use futures
significant loss if it employs an and options to protect gains in the
options or futures strategy related to a portfolio without actually selling a
security or a market index and that security. We may also use options and
security or index moves in the opposite futures to quickly invest excess cash so
direction from what the portfolio that the portfolio is generally fully
manager anticipated. Futures and options invested.
also involve additional expenses, which
could reduce any benefit or increase any
loss to a fund from using the strategy.
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9
<PAGE>
Investment manager
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. The Series will pay Delaware
Management Company the following fee on an annual basis: 0.75% on the first $500
million of average daily net assets; 0.70% on the next $500 million; 0.65% on
the next $1.5 billion and 0.60% on assets in excess of $2.5 billion. Delaware
Management Company has elected voluntarily to waive its management fee and pay
expenses from the commencement of the Series' operations through April 30, 2001
in order to prevent total operating expenses (excluding any 12b-1 plan expenses,
taxes, interest, brokerage fees and extraordinary expenses) from exceeding 0.85%
of average daily net assets.
Portfolio managers
Jeffrey W. Hynoski has primary responsibility for making day-to-day investment
decisions for Technology and Innovation Series. In making decisions for the
Series, Mr. Hynoski regularly consults with Gerald S. Frey, Senior Portfolio
Manager of the growth team.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he 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. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University. Mr. Hynoski has been managing the Series since its inception.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York.
10
<PAGE>
Who's who?
The following describes the various organizations involved with managing,
administering, and servicing the Series.
Board of Trustees A mutual fund, such as Delaware Group Premium Fund, is
governed by a Board of Trustees, which has oversight responsibility for the
management of the business affairs of each series of the fund, such as the
Series. Trustees establish procedures and oversee and review the performance of
the investment manager, the distributor and others that perform services for the
series. At least 40% of the Board of Trustees must be independent of each
series' investment manager and distributor. These independent fund trustees, 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 June 30, 2000, Delaware Management Company
and its affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $44 billion in assets in
the various institutional or separately managed (approximately $25,511,940,000)
and investment company (approximately $19,472,230,000) accounts. Delaware
Management Company is a series of Delaware Management Business Trust, which is
an indirect, wholly owned subsidiary of Delaware Management Holdings, Inc.
Portfolio managers Portfolio managers are employed by the investment managers to
make investment decisions for individual portfolios on a day-to-day basis. See
"How we manage the Series" 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 custodian, typically a qualified bank custodian, who
segregates fund securities from other bank assets.
11
<PAGE>
Important information about the Series
Share classes
The Series has two classes of shares, Standard Class and Service Class. Each
class is identical except that Service Class has a distribution or "Rule 12b-1"
plan. The 12b-1 plan allows the Fund to pay distribution fees of up to 0.30%
(currently 0.15%) per year to those who sell and distribute Service Class shares
or provide services to shareholders and contract owners. Because these fees are
paid out of Service Class' assets on an ongoing basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
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 that a separate account pays for shares will depend on when we receive
its purchase order. If we or an authorized agent receives a separate account's
order before the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) on a business day, it will pay that day's
closing share price which is based on the Series' net asset value. If we receive
a separate account's order after the close of regular trading, it 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 regular
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 in 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. Foreign securities, currencies and other assets
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate of these currencies against the U.S. dollar, as provided by an
independent pricing service. 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 Trustees. Any investments that have a
maturity of less than 60 days we price at amortized cost. For all other
securities, we use methods approved by the Board of Trustees that are designed
to price securities at their fair market value.
From time to time, the Series may also hold securities that are listed on
foreign exchanges. These foreign exchanges may trade on weekends or days when
the Series does not price its shares. As a result, the NAV of the Series may
change on days when you will not be able to purchase or redeem shares of the
Series.
12
<PAGE>
Dividends, distributions and taxes
Dividends and capital gain distributions, if any, are distributed, to separate
accounts annually.
We automatically reinvest all dividends and any capital gains distributed to
separate accounts.
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. A separate account which is not
subject to tax on its income will not be required to pay tax on amounts
distributed to it. The Fund will inform separate accounts of the amount and
nature of income or gains.
Please refer to the prospectus for the variable insurance contract for
additional tax information relevant to such contracts.
Euro
Several European countries began participating in the European Economic and
Monetary Union, which has established a common currency for participating
countries. This currency is commonly known as the "Euro." The long-term
consequences of the Euro conversion for foreign exchange rates, interest rates
and the value of European securities in which the Series may invest are unclear.
The consequences may adversely affect the value and/or increase the volatility
of securities held by the Series.
Financial highlights
Financial highlights are not shown for the Series since it commenced operations
after the close of the fiscal year end.
13
<PAGE>
DELAWARE GROUP PREMIUM FUND
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 the 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 1818 Market Street, Philadelphia,
PA 19103, or call toll-free 800.523.1918.
You can find reports and other information about the Series on the EDGAR
Database on the SEC web site (http://www.sec.gov). You can also get copies of
this information, after payment of a duplicating fee, by e-mailing the SEC at
[email protected] or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. 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 1.202.942.8090.
Investment Company Act File No. 811-5162
<PAGE>
-----------------------------------
DELAWARE GROUP PREMIUM FUND
-----------------------------------
Technology and Innovation Series
-----------------------------------
INVESTMENT MANAGER
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING, PART B
DIVIDEND DISBURSING,
ACCOUNTING SERVICES STATEMENT OF
AND TRANSFER AGENT ADDITIONAL INFORMATION
Delaware Service Company, Inc. -----------------------------------
1818 Market Street
Philadelphia, PA 19103 AUGUST 21, 2000
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
DELAWARE(SM)
INVESTMENTS
============
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 21, 2000
DELAWARE GROUP PREMIUM FUND
Technology and Innovation Series
1818 Market Street
Philadelphia, PA 19103
Delaware Group Premium Fund ("Premium Fund" or the "Trust") is an
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. Each series offers Standard Class
shares and Service Class shares. This Statement of Additional Information ("Part
B" of the registration statement) describes the Technology and Innovation Series
(the "Series").
The shares of the Trust 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 Part B supplements the information contained in the current
Prospectus of the Series dated August 21, 2000, as it may be amended from time
to time. It should be read in conjunction with the prospectus for the variable
contracts and the Series. Part B is not itself a prospectus but is, in its
entirety, incorporated by reference into the Series' Prospectuses. The Series'
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 Series'
financial statements, the notes relating thereto, the financial highlights and
the report of independent auditors will be 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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TABLE OF CONTENTS Page Page
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Investment Objectives and Policies 1 Taxes 25
Accounting and Tax Issues 14 Investment Management Agreement 26
Performance Information 18 Officers and Trustees 29
Trading Practices and Brokerage 22 General Information 43
Offering Price 24 Financial Statements 45
Dividends and Realized Securities
Profits Distributions 25
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of the Series are below. There
can be no assurance that the objective of the Series will be realized.
Technology and Innovation Series seeks to provide long-term capital
growth. This Series has the same objective and investment disciplines
as Delaware Technology and Innovation Fund, a separate fund in the
Delaware Investments family.
Investment Restrictions
Fundamental Investment Restrictions--The Trust has adopted the
following restrictions for the Series which cannot be changed without approval
by the holders of a "majority" of the 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
the Series purchases securities.
The Series may not:
1. 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 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.
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 Series
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 (the "1933 Act").
4. 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
Series 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.
Non-fundamental Investment Restrictions--In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus, the Series will be subject to
the following investment restrictions, which are considered non-fundamental and
may be
1
<PAGE>
changed by the Board of Trustees without shareholder approval. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time of purchase of securities.
1. The Series is 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, the Series may not 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. The 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.
Certain additional investment information about the types of securities
in which the Series may invest as well as the Series' investment policies is
provided below.
Equity Securities
Equity securities represent ownership interests in a company and
consist of common stocks, preferred stocks, warrants to acquire common stock and
securities convertible into common stock. Investments in equity securities in
general are subject to market risks that may cause their prices to fluctuate
over time. The value of convertible equity securities is also affected by
prevailing interest rates, the credit quality of the issuer and any call
provisions. Fluctuations in the value of equity securities in which the Series
invests will cause the net asset value of the Series to fluctuate.
REITs
The 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 Internal Revenue 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.
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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.
Convertible Securities
The Series may invest in convertible 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 securities rank
ahead of common stock in a corporation's capital structure and therefore entail
less risk than the corporation's common stock. However, convertible securities
typically rank behind non-convertible securities of the same issuer. Convertible
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. A
convertible security's price depends on both its "investment value" (its value
with the conversion privilege), and its "conversion value" (its market value if
it were exchanged for the underlying security according to its conversion
privilege). When a convertible security's investment value is greater than its
conversion value, its price will primarily reflect its investment value. In this
scenario, price will probably be most affected by interest rate changes,
increasing when interest rates fall and decreasing when interest rates rise,
similar to a fixed-income security. Additionally, the credit standing of the
issuer and other factors may also have an effect on the convertible security's
value. Conversely, when the conversion value approaches or exceeds the
investment value, the price of the convertible security will rise above its
investment value. The higher the convertible security's price relative to its
investment value, the more direct the relationship between the changes in its
price and changes in the price of the underlying equity security.
A convertible security's price will typically provide a premium over
the conversion value. This represents the additional price investors are willing
to pay for a security that offers income, ranks ahead of common stock in a
company's capital structure and also has the possibility of capital appreciation
due to the conversion privilege.
Because a convertible security has fixed interest or dividend payments,
when the underlying stock declines, the convertible security's price is
increasingly determined by its yield. For this reason, the convertible security
may not decline as much as the underlying common stock. The extent of the price
decline will also depend on the amount of the premium over its conversion value.
Common stock acquired 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
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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.
When-Issued, "When, As and If Issued" and Delayed Delivery Securities and
Forward Commitments
The Series may purchase securities on a when-issued or delayed delivery
basis or may purchase or sell securities on a forward commitment basis. The
Series may also purchase securities on a "when, as and if issued" basis under
which the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization or debt
restructuring. When such transactions are negotiated, the price is fixed at the
time of commitment, but delivery and payment can take place a month or more
after the date of the commitment. The Series will designate cash or securities
in amounts sufficient to cover its obligations, and will value the designated
assets daily.
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 the 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 the Series has sufficient liquidity, the Series
may not invest more than 15% of its net assets in illiquid assets. Subject to
the following paragraphs, this policy shall not limit the acquisition of
securities purchased in reliance upon Rule 144A of the 1933 Act. Rule 144A
permits many privately placed and legally restricted securities to be freely
traded among certain institutional buyers such as the Series. Investing in Rule
144A Securities could have the effect of increasing the level of illiquidity of
the Series to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
While maintaining oversight, the Board of Trustees has delegated to the
investment manager the day-to-day functions of determining whether or not
individual Rule 144A Securities are liquid for purposes of the 15% limitation on
investments in illiquid assets. The Board has instructed the manager 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 manager determines that a Rule 144A Security which was
previously determined to be liquid is no longer liquid and, as a result, the
Series' holdings of illiquid securities exceed the Series' 15% limit on
investment in such securities, the manager will determine what action shall be
taken to ensure that the Series continues to adhere to such limitation.
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Repurchase Agreements
The Series may, from time to time, enter into repurchase agreement
transactions which are at least 102% collateralized by U.S. government
securities. 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 manager believes 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
considers 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.
Certain funds in the Delaware Investments family have obtained an
exemption from the joint-transaction prohibitions of Section 17(d) of the 1940
Act to allow the funds in the Delaware Investments family jointly to invest cash
balances. The Series may invest cash balances in a joint repurchase agreement in
accordance with the terms of the Order and subject generally to the conditions
described above.
Portfolio Loan Transactions
The Series may loan up to 25% of its assets to qualified broker/dealers
or institutional investors for its use relating to short sales or other security
transactions.
It is the understanding of the Series' 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
Trust 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
Trustees of the Trust 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
Trustees to vote the proxy.
The major risk to which the Series would be exposed on a loan
transaction is the risk that the borrower would go bankrupt at a time when the
value of the security goes up. Therefore, the Series will only enter into loan
arrangements after a review of all pertinent facts by the Series' investment
manager, under the supervision of the Board of Trustees, 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' investment
manager.
Foreign Securities
The Series may invest up to 25% of its net assets in foreign
securities, although it does not presently intend to invest in these securities.
Investors should recognize that investing in securities of foreign issuers
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involves certain considerations, including those described below, 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 the Series. Payment of
such interest equalization tax, if imposed, would reduce such Series' rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Series by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non-equity options are
generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts the Series may make or enter into
will be subject to the special currency rules described above.
Depositary Receipts. The Series may make foreign investments through
the purchase and sale of sponsored or unsponsored American, European and Global
Depositary Receipts ("Depositary Receipts"). Depositary Receipts are receipts
typically issued by a U.S. or foreign bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. "Sponsored"
Depositary Receipts are issued jointly by the issuer of the underlying security
and a depository, whereas "unsponsored" Depositary Receipts are issued without
participation of the issuer of the deposited security. Holders of unsponsored
Depositary Receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts in
respect of the deposited securities. Therefore, there may not be a correlation
between information concerning the issuer of the security and the market value
of an unsponsored Depositary Receipt.
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Foreign Currency Transactions
In connection with the Series' investment in foreign securities, the
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. The Series will account for
forward contracts by marking to market each day at daily exchange rates.
When the 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 the 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--The Series may enter into futures contracts relating
to securities, securities indices or interest rates. In addition, the 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 the Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, the
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 the Series is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be closed
out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on
the Series' current or intended investments in fixed-income securities. For
example, if the Series owned long-term bonds and interest rates were expected to
increase, the 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 the
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 the 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 the Series' interest
rate futures contracts would be expected to increase at approximately the same
rate, thereby keeping the net asset value of the 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, the 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 the Series' cash reserve could then be used to buy long-term
bonds on the cash market.
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The Series may 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. The Series may sell futures contracts on a foreign currency, for
example, when the 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, the 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 the 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, the historical relationship among
foreign currencies suggests that the Series may achieve protection against
fluctuations in currency exchange rates similar to that described above at a
reduced cost through the use of a futures contract relating to a currency other
than the U.S. dollar or the currency in which the foreign security is
denominated. Such "cross hedging" is subject to the same risks as those
described above with respect to an unanticipated increase or decline in the
value of the subject currency relative to the dollar.
Options on Futures Contracts--The Series may purchase and write options
on the types of futures contracts the 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, the 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, the 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 the 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, the 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, the 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 the Series will
increase prior to acquisition, due to a market advance or changes in interest or
exchange rates, the 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.
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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
The Series may purchase and write options on foreign currencies for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, will be utilized. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Series may purchase put
options on the foreign currency. If the value of the currency does decline, the
Series will have the right to sell such currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movement in exchange rates. As in the case of other types of options,
however, the benefit to the Series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Series could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types
of hedging purposes. For example, where the Series anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution in the value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against the
anticipated increase in the dollar cost of securities to be acquired, the Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series to hedge such
increased costs up to the value of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Series would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Series also may be required to forego all or
a portion of the benefit which might otherwise have been obtained from favorable
movements in exchange rates.
The Series intends to write covered call options on foreign currencies.
A call option written on a foreign currency by the Series is "covered" if the
Series owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by the Series' custodian bank) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Series has a call on the same foreign currency and in the same principle amount
as the call written where the exercise price of the call held (a) is equal to
less than the exercise price of the call written, or (b) is greater than the
exercise price of the call written if the difference is maintained by the Series
in cash, U.S. government securities or other high-grade liquid debt securities
in a segregated account with its custodian bank.
With respect to writing put options, at the time the put is written,
the Series will establish a segregated account with its custodian bank
consisting of cash, U.S. government securities or other high-grade liquid debt
securities in an amount equal in value to the amount the Series will be required
to pay upon exercise of the put.
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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
The Series may write call options and purchase put options on a covered
basis only. The Series may also purchase call options. The Series also may enter
into closing transactions with respect to such options transactions. The Series
will not engage in option transactions for speculative purposes.
To the extent authorized to engage in option transactions, the Series
may invest in options that are Exchange listed and may also invest in options
that are traded over-the-counter. Certain over-the-counter options may be
illiquid. 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 the Series'
ability to effectively hedge its securities. The Series will only enter into
such options to the extent consistent with its limitation on investments in
illiquid securities.
A. Covered Call Writing--The Series may write covered call options from
time to time on such portion of its portfolio, without limit, as the 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 the 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.
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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.
The 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--The 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 intends 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 the
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. The 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 the 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--The 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
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commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any value
to the Series.
D. Options on Stock Indices--The Series also may write call options and
purchase put options on certain stock indices and enter into closing
transactions in connection therewith. The Series also may purchase call options
on stock indices and enter into closing transactions in connection therewith. 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, the 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 bears 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.
The 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.
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E. Writing Covered Puts--The 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 the 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 the 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.
The 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; the 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 the 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 the 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.
Securities of Companies in the Financial Services Industry
Certain provisions of the federal securities laws permit investment
portfolios to invest in companies engaged in securities-related activities only
if certain conditions are met. Purchases of securities of a company that derived
15% or less of gross revenues during its most recent fiscal year from
securities-related activities (i.e., broker, dealer, underwriting, or investment
advisory activities) are subject only to the same percentage limitations as
would apply to any other securities the Series may purchase.
The Series may also purchase securities (not limited to equity or debt
individually) of an issuer that derived more than 15% of its gross revenues in
its most recent fiscal year from securities-related activities if the following
conditions are met: (1) immediately after the purchase of any securities
issuer's equity and debt securities, the purchase cannot cause more than 5% of
the Series' total assets to be invested in securities of that securities issuer;
(2) immediately after a purchase of equity securities of a securities issuer,
the Series may not own more than 5% of the outstanding securities of that class
of the securities issuer's equity securities; and (3) immediately after a
purchase of debt securities of a securities issuer, the Series may not own more
than 10% of the outstanding principal amount of the securities issuer's debt
securities.
In applying the gross revenue test, an issuer's gross revenues from its
own securities-related activities should be combined with its ratable share of
the securities-related activities of enterprises of which its owns a 20% or
greater voting or equity interest. All of the above percentage limitations are
applicable at the time of purchase as well as the issuer's gross revenue test.
With respect to warrants, rights, and convertible securities, a determination of
compliance with the above limitations must be made as though such warrant,
right, or conversion privilege had been exercised.
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The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends on
securities acquired in compliance with the conditions described above; (ii)
receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal securities
laws; (iv) conversion of convertible securities acquired in compliance with the
conditions described above; (v) the acquisition of demand features or guarantees
(puts) under certain circumstances.
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.
ACCOUNTING AND TAX ISSUES
When the 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 the Series has written
expires on its stipulated expiration date, the Series recognizes a capital gain.
If the Series enters into a closing purchase transaction with respect to an
option which the Series has written, the 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
the Series has written is exercised, the 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 the 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 the Series has purchased expires
on the stipulated expiration date, the 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 the Series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
Options on Certain Stock Indices--Accounting for options on certain
stock indices will be in accordance with generally accepted accounting
principles. The amount of any realized gain or loss on closing out such a
position will result in a realized gain or loss for tax purposes. Such options
held by the Series at the end of each fiscal year will be required to be "marked
to market" for federal income tax purposes. Sixty percent of any net gain or
loss recognized on such deemed sales or on any actual sales will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
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Other Tax Requirements--The Series intends to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code").
As such, the Series will not be subject to federal income tax, 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, the Series must meet certain specific requirements,
including:
(i) The Series must maintain a diversified portfolio of securities as
defined in the Code, wherein no security (other than U.S. government securities
and securities of other regulated investment companies) can exceed 25% of the
Series' total assets, and, with respect to 50% of the Series' total assets, no
investment (other than cash and cash items, U.S. government securities and
securities of other regulated investment companies) can exceed 5% of the Series'
total assets;
(ii) The Series must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) The Series must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its fiscal
years, and
(iv) The Series must realize less than 30% of its gross income for each
fiscal year from gains from the sale of securities and certain other assets that
have been held by the Series for less than three months ("short-short income").
The Taxpayer Relief Act of 1997 (the "1997 Act") repealed the 30% short-short
income test for tax years of regulated investment companies beginning after
August 5, 1997; however, this rule may have continuing effect in some states for
purposes of classifying the Series as a regulated investment company.
The Code requires the Series to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain net
income earned during the 12 month period ending October 31 (in addition to
amounts from the prior year that were neither distributed nor taxed to the
Series) to you by December 31 of each year in order to avoid federal excise
taxes. The Series intends as a matter of policy to declare and pay sufficient
dividends in December or January (which are treated by you as received in
December) but does not guarantee and can give no assurances that its
distributions will be sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the year that unrealized losses exceed unrealized gains.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, the 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.
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Investment in Foreign Currencies and Foreign Securities--The Series is
authorized to invest a limited amount in foreign securities. Such investments,
if made, will have the following additional tax consequences to the Series:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Series accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the Series actually collects such income or pays such
expenses 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. 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 Trust 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
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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.
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 the 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.
The 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.
Most foreign exchange gains are classified as ordinary income which
will be taxable to you as such when distributed. Similarly, you should be aware
that any foreign exchange losses realized by the Series, including any losses
realized on the sale of foreign debt securities, are generally treated as
ordinary losses for federal income tax purposes. This treatment could increase
or reduce the Series' income available for distribution to you, and may cause
some or all of the Series' previously distributed income to be classified as a
return of capital.
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PERFORMANCE INFORMATION
Advertisements of performance of the underlying Series, if any, will be
accompanied by a statement of performance of the separate account.
From time to time, the Trust may state the 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. The Series may
also advertise aggregate and average total return information over additional
periods of time.
The Series' average annual total rate of return will be 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.
Comparative Information
From time to time, the 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 the Series may be compared to data prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., or to the S&P 500 Index or
the Dow Jones Industrial Average. 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 the 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 the 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
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indices of generally-conservative securities used for measuring general market
performance. The total return performance reported for these indices will
reflect the reinvestment of all distributions on a quarterly basis and 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.
The performance of multiple indices compiled and maintained by
statistical research firms, such as 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 the 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 the Series), as well as the views as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the 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 the 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 the 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.
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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. The Series may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Series may include
information regarding the background and experience of its portfolio managers.
Because every investor's goals and risk threshold are different,
certain advertising and other related literature may provide general information
about investment alternatives and scenarios that will allow investors to assess
their personal goals. This information will include general material about
investing as well as materials reinforcing various industry-accepted principles
of prudent and responsible personal financial planning. One typical way of
addressing these issues is to compare an individual's goals and the length of
time the individual has to attain these goals to his or her risk threshold. In
addition, information may be provided discussing the respective investment
manager's overriding investment philosophy and how that philosophy affects
investment disciplines of the Series and other funds in the Delaware Investments
family employed in meeting their objectives.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Prices of securities such as stocks and bonds tend to move up and down over
various market cycles and are generally intended for longer term investing.
Money market funds, which typically maintain stable prices, are generally
intended for your short-term investment needs and can often be used as a basis
for building a long-term investment plan.
Though logic says to invest when prices are low, even experts can't
always pick the highs and the lows. By using a strategy known as dollar-cost
averaging, you schedule your investments ahead of time. If you invest a set
amount on a regular basis, that money will always buy more shares when the price
is low and fewer when the price is high. You can choose to invest at any regular
interval--for example, monthly or quarterly--as long as you stick to your
regular schedule.
Dollar-cost averaging looks simple and it is, but there are important
things to remember. Dollar-cost averaging works best over longer time periods,
and it doesn't guarantee a profit or protect against losses in declining
markets. If you need to sell your investment when prices are low, you may not
realize a profit no matter what investment strategy you utilize. That's why
dollar-cost averaging can make sense for long-term goals. Since the potential
success of a dollar-cost averaging program depends on continuous investing, even
through periods of fluctuating prices, you should 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
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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 the Series. Dollar-cost averaging may not be
available in all variable insurance contracts that offer the Series.
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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 the Series. This gives your investment yet another opportunity to grow. It's
called the Power of Compounding. The Series may included illustrations showing
the Power of Compounding in advertisements and other types of literature.
TRADING PRACTICES AND BROKERAGE
The Trust 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 Trust 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 Trust
pays a minimal share transaction cost when the transaction presents no
difficulty. Some trades are made on a net basis where the Trust 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.
The investment manager may allocate out of all commission business
generated by all of the funds and accounts under management by the 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 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.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreement, 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 Trust 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 investment manager which constitute in some part brokerage and research
services used by the 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 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
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 Trust and to other funds in the Delaware Investments
family. Subject to best 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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The 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 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 investment manager and the
Trust's Board of Trustees that the advantages of combined orders outweigh the
possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the NASD Regulation,
Inc., and subject to seeking best execution, the Trust 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 the Series. Given the Series'
investment objective, the Trust anticipates that the annual portfolio turnover
rate of the Series is expected to exceed 100%. 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 the
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
the Series. A turnover rate of 100% would occur, for example, if all the
investments in the Series' portfolio at the beginning of the year were replaced
by the end of the year. In investing to achieve their respective objective, the
Series may hold securities for any period of time. Portfolio turnover will also
be increased if the 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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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 front-end or
contingent deferred 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 Trust 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 or the Trust's change in time of
closing, the Trust 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 will
be included in the Series' financial statements which will be 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 the Series' portfolio, deducting any liabilities
of the Series and dividing by the number of the Series' shares outstanding.
Expenses and fees are accrued daily. The 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 Trust shares outstanding. Expenses and fees are accrued daily. In
determining the 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, currencies and other assets
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate of these currencies against the U.S. dollar, as provided by an
independent pricing service. Use of a pricing service has been approved by the
Board of Trustees. 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. For all other securities, we use methods
approved by the Board of Trustees that are designed to price securities at their
fair market value.
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 the Series of securities owned by it is not reasonably
practical, or it is not reasonably practical for the 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 Trust 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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DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
The Trust will make payments from the Series' net income and net
realized securities profits, if any, once a year.
All dividends and distributions are automatically reinvested in
additional Series shares.
TAXES
The Series intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). As such, the Series will
not be subject to federal income tax to the extent its earnings are distributed
and it satisfies other requirements relating to the sources of its income and
diversification of its assets.
Each series of the Trust 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 Trust 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, the Series is required to track its sales of portfolio securities and to
report its capital gain distributions to you according to the following
categories:
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
(10% for individual investors in the 15% tax bracket).
"Short-term capital gains": Gains on securities sold by the Series that
do not meet the long-term holdings period are considered short term
capital gains and are taxable as ordinary income.
"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.
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INVESTMENT MANAGEMENT AGREEMENT
Delaware Management Company ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to the Series. Such services are provided subject
to the supervision and direction of the Trust's Board of Trustees.
Delaware Management and its predecessors have been managing the funds
in Delaware Investments since 1938. On June 30, 2000, Delaware Management and
its affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were supervising in the aggregate more than $44 billion in assets
in the various institutional or separately managed (approximately
$25,511,940,000) and investment company ($19,472,230,000) 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 is dated December 15, 1999 and was
amended on August 21, 2000 to add the Technology and Innovation Series. The
amendment adding the Series was approved by the initial shareholder on August
21, 2000 and will remain in effect for an initial period of two years. The
Agreement may be renewed only if such renewal and continuance are specifically
approved at least annually by the Board of Trustees 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 Trustees of
the Trust 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 Agreement is terminable without penalty on 60 days' notice by the Trustees
of the Trust or by the investment manager. The Agreement will terminate
automatically in the event of its assignment.
Under the Investment Management Agreement, Delaware Management is
entitled to receive an annual fee equal to the following percentage rates of the
average daily net assets of the Series:
-----------------------------------------
Management Fee Rate
-----------------------------------------
0.75% on the first $500 million
0.70% on the next $500 million
0.65% in the next $1.5 billion
0.60% on assets in excess of $2.5 billion
-----------------------------------------
Delaware Management elected voluntarily to waive its management fee and
pay the expenses of the Series to the extent necessary to ensure that the
Series' annual operating expenses, exclusive of 12b-1 Plan fees, taxes,
interest, brokerage commissions and extraordinary expenses, do not exceed 0.85%
from the commencement of the Series' operation through April 30, 2001.
The investment manager administers the affairs of and is ultimately
responsible for the investment management of the Series. In addition, Delaware
Management pays the salaries of all Trustees, officers and employees who are
affiliated with both it and the Trust.
Except for those expenses borne by the investment manager under the
Investment Management Agreement and the Distributor under the Distribution
Agreement, the 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.
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Distribution and Service
Delaware Distributors, L.P., located at 1818 Market Street,
Philadelphia, PA 19103, serves as the Trust's national distributor pursuant to a
Distribution Agreement.
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.
Plan under Rule 12b-1 - Pursuant to Rule 12b-1 under the 1940 Act, the
Trust has adopted a plan for the Service Class shares of the Series (the
"Plan"). The Plan permits the Trust to pay for certain distribution, promotional
and related expenses involved in the marketing of only the Class of shares to
which the Plan applies. The Plan is designed to benefit the Trust and its
shareholders and, ultimately the Trust's beneficial contract owners.
The Plan permits the Trust, pursuant to its Distribution Agreement, to
pay out of the assets of Service Class shares monthly fees to the Distributor
for its services and expenses in distributing and promoting sales of shares of
such classes. These expenses include, among other things, preparing and
distributing advertisements, sales literature, and prospectuses and reports used
for sales purposes, compensating sales and marketing personnel and paying
distribution and maintenance fees to insurance company sponsors, brokers,
dealers and others. In addition, the Trust may make payments from the 12b-1 Plan
fees of Service Class shares directly to others, such as insurance company
sponsors, who aid in the distribution of Class shares or provide services in
respect of the Class, pursuant to service agreements with the Trust.
The maximum aggregate fee payable by the Trust under the Plan, and the
Trust's Distribution Agreement, is on an annual basis, up to 0.30% of average
daily net assets of Service Class shares (up to 0.25% of which are service fees
to be paid to the Distributor, insurance company sponsors, dealers and others
for providing personal service and/or maintaining shareholder accounts). The
Trust's Board of Trustees has initially set the fee at an annual rate of 0.15%
of Service Class' average daily net assets.
While payments pursuant to the Plan currently may not exceed 0.15%
annually (and may never exceed 0.30% annually) with respect to Service Class
shares, the Plan does not limit fees to amounts actually expended by the
Distributor. It is therefore possible that the Distributor may realize a profit
in any particular year. However, the Distributor currently expects that its
distribution expenses will likely equal or exceed payments to it under the Plan.
The Distributor may, however, incur such additional expenses and make additional
payments to dealers from its own resources to promote the distribution of shares
of the Class. The monthly fees paid to the Distributor under the Plan are
subject to the review and approval of Trust's unaffiliated trustees, who may
reduce the fees or terminate the Plan at any time.
All of the distribution expenses incurred by the Distributor and
others, such as insurance company sponsors or broker/dealers, in excess of the
amount paid on behalf of Service Class shares would be borne by such persons
without any reimbursement from such Class.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plan and the Distribution Agreement, as amended, have been approved
by the Board of Trustees of the Trust, including a majority of the trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust and who
have no direct or indirect financial interest in the Plan by vote cast in person
at a meeting duly called for the purpose of voting on the Plan and such
Agreement. Continuation of the Plan and the Distribution Agreement, as amended,
must be approved annually by the Board of Trustees in the same manner as
specified above.
Each year, the trustees must determine whether continuation of the Plan
is in the best interest of shareholders of Service Class shares and that there
is a reasonable likelihood of the Plan providing a benefit to
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that Class. The Plan and the Distribution Agreement, as amended, may be
terminated with respect to a Class at any time without penalty by a majority of
those trustees who are not "interested persons" or by a majority vote of the
Class' outstanding voting securities. Any amendment materially increasing the
percentage payable under the Plans must likewise be approved by a majority vote
of the Class' outstanding voting securities, as well as by a majority vote of
those trustees who are not "interested persons." Also, any other material
amendment to the Plan must be approved by a majority vote of the trustees
including a majority of the noninterested trustees of the Trust having no
interest in the Plans. In addition, in order for the Plan to remain effective,
the selection and nomination of trustees who are not "interested persons" of the
Trust must be made by the trustees who themselves are not "interested persons"
and who have no direct or indirect financial interest in the Plan. Persons
authorized to make payments under the Plan must provide written reports at least
quarterly to the Board of Trustees for their review.
Delaware Service Company, Inc. (the "Transfer Agent"), another
affiliate of Delaware Management, is the Trust's shareholder servicing, dividend
disbursing and transfer agent for the Series pursuant to a Shareholders Services
Agreement. The Transfer Agent also provides accounting services to the Series
pursuant to the terms of a separate Fund Accounting Agreement. The Transfer
Agent is also an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc.
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OFFICERS AND TRUSTEES
The business and affairs of the Trust are managed under the direction
of its Board of Trustees.
Certain officers and Trustees of the Trust 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., Retirement
Financial Services, Inc. and Delaware General Management, Inc. are direct or
indirect, wholly owned subsidiaries of Delaware Management Holdings, Inc.
("DMH"). DMH, Delaware Management and Delaware International are indirect,
wholly owned subsidiaries, and subject to the ultimate control, of Lincoln
National Corporation. Lincoln National Corporation, with headquarters in
Philadelphia, PA, is a diversified organization with operations in many aspects
of the financial services industry, including insurance and investment
management.
Trustees and principal officers of the Trust 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 Trustee is One Commerce Square,
Philadelphia, PA 19103.
<TABLE>
<CAPTION>
------------------------------------------- -------------------------------------------------------------------------------
Trustee and Officer Business Experience
------------------------------------------- -------------------------------------------------------------------------------
<S> <C>
*Wayne A. Stork (63) Chairman, Trustee/Director of the Trust and each of the other 32 investment
companies in the Delaware Investments family.
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.
Prior to January 1, 2000, Mr. Stork was Chairman and Director of Delaware
Management Holdings, Inc. and a Director of Delaware International Advisers
Ltd.
In addition, during the five years prior to January 1, 2000, Mr. Stork
has served in various executive capacities at different times within
Delaware Investments.
------------------------------------------- --------------------------------------------------------------------------------
</TABLE>
----------------------
* Trustee affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
29
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------- -------------------------------------------------------------------------------
Trustee and Officer Business Experience
------------------------------------------- -------------------------------------------------------------------------------
<S> <C>
*David K. Downes (60) President, Chief Executive Officer, Chief Financial Officer and
Trustee/Director of the Trust 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.
President, Chief Operating Officer and Director of Delaware General
Management, Inc.
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
Distributors, L.P. and Delaware Investment Advisers (a series of Delaware
Management Business Trust)
Executive Vice President, Chief Financial Officer, Chief Operating Officer
and Trustee of Delaware Management Business Trust
Executive Vice President, Chief Operating Officer, Chief Financial Officer
and Director of DMH Corp., Delaware Distributors, Inc., Founders Holdings,
Inc. and Delvoy, Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Downes has served in various executive
capacities at different times within Delaware Investments.
------------------------------------------- -------------------------------------------------------------------------------
</TABLE>
----------------------
* Trustee affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
30
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------- ------------------------------------------------------------------------------
Trustee Business Experience
------------------------------------------- ------------------------------------------------------------------------------
<S> <C>
Walter P. Babich (72) Trustee/Director the Trust 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 (63) Trustee/Director of the Trust each of the 32 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 (61) Trustee/Director of the Trust 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 (59) Trustee/Director of the Trust and each of the other 32 other investment
companies in the Delaware Investments family
785 Park Avenue, New York, NY 10021
Retired Treasurer, National Gallery of Art
From 1994 to 1999, Ms. Leven was the Treasurer of the National Gallery of
Art and from 1990 to 1994, Ms. Leven was Deputy Treasurer of the National
Gallery of Art. In addition, 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>
31
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------- -------------------------------------------------------------------------------
Director Business Experience
------------------------------------------- -------------------------------------------------------------------------------
<S> <C>
Thomas F. Madison (64) Trustee/Director of the Trust 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 (74) Trustee/Director of the Trust 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 (52) Trustee/Director of the Trust 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>
32
<PAGE>
<TABLE>
<CAPTION>
------------------------------------ -------------------------------------------------------------------------------------------
Officer Business Experience
------------------------------------ -------------------------------------------------------------------------------------------
<S> <C>
Richard G. Unruh, Jr. (60) Executive Vice President and Chief Investment Officer, Fixed-Income of the Trust and each
of the other 32 investment companies in the Delaware Investments family.
Executive Vice President/Chief Investment Officer of Delaware Management Company (a series
of Delaware Management Business Trust)
Executive Vice President of Delaware Management Holdings, Inc. and Delaware Capital
Management, Inc.
Chief Executive Officer/Chief Investment Officer of Delaware Investment Advisers (a series
of Delaware Management Business Trust)
Executive Vice President and Director/Trustee of Delaware Management Company, Inc. and
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 Delaware Investments.
------------------------------------ -------------------------------------------------------------------------------------------
William E. Dodge (51) Executive Vice President and Chief Investment Officer, Equity of the Trust and each of the
other 32 investment companies in the Delaware Investments family and Delaware Management
Company (a series of Delaware Management Business Trust)
Executive Vice President of Delaware Management Business Trust and Delaware Capital
Management, Inc.
President and Chief Investment Officer, Equity of Delaware Investment Advisers (a series
of Delaware Management Business Trust)
Prior to joining Delaware Investments in 1999, Mr. Dodge was President, Director
of Marketing, and Senior Portfolio Manager for Marvin & Palmer Associates.
------------------------------------ -------------------------------------------------------------------------------------------
Richard J. Flannery (42) Executive Vice President/General Counsel of the Trust and each of the other 32 investment
companies in the Delaware Investments family, Delaware Management Holdings, Inc., Delaware
Management Company (a series of Delaware Management Business Trust), Delaware Investment
Advisers (a series of Delaware Management Business Trust), Delaware Distributors, L.P. 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., Delaware General Management, Inc. and
Delaware Management Business Trust Company.
Executive Vice President/General Counsel 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 Delaware Investments.
------------------------------------ -------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------------------------------------------------------
Officer Business Experience
---------------------------------------- ---------------------------------------------------------------------------------
<S> <C>
Joseph H. Hastings (50) Senior Vice President/Corporate Controller of the Trust 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., Delaware Management Company, Inc., 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., Delvoy,
Inc., Founders Holdings, Inc., Delaware General Management, Inc. and Delaware
Management Business Trust
Chief Financial Officer of Retirement Financial Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
During the past five years, Mr. Hastings has served in various executive
capacities at different times within Delaware Investments.
---------------------------------------- ----------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------------------------------------------------------
Officer Business Experience
---------------------------------------- ---------------------------------------------------------------------------------
<S> <C>
Michael P. Bishof (38) Senior Vice President and Treasurer of the Trust and each of the other 32
investment companies in the Delaware Investments family.
Senior Vice President/Investment Accounting of Delaware Service Company, Inc.
and Delaware Capital Management, Inc., Delaware Distributors, L.P., Delaware
Management Company (a series of Delaware Management Business Trust) and Founders
Holdings, Inc.
Senior Vice President and Treasurer/ Investment Accounting of 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
Prior to 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>
35
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------------------------------------------------------
Officer Business Experience
---------------------------------------- ---------------------------------------------------------------------------------
<S> <C>
Gerald S. Frey (54) Senior Vice President/Senior Portfolio Manager of the Trust and each of 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).
Prior to joining Delaware Investments in 1996, Mr. Frey was a Senior Trustee
with Morgan Grenfell Capital Management, New York, NY from 1986 to 1995.
---------------------------------------- ---------------------------------------------------------------------------------
Jeffrey W. Hynoski (37) Vice President/Portfolio Manager of the Trust and each of 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.
---------------------------------------- ---------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
The following is a compensation table listing for each Trustee entitled
to receive compensation, the aggregate compensation received from the Trust and
the total compensation received from all Delaware Investments funds for the
fiscal year ended December 31, 1999 and an estimate of annual benefits to be
received upon retirement under the Delaware Investments Retirement Plan for
Directors/Trustees as of December 31, 1999. Only the independent Trustees of the
Trust receive compensation from the Trust.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated from the
Aggregate Benefits Accrued Annual Investment
Compensation as Part of Benefits Companies
received from Trust Upon in Delaware
Name(3) the Trust Expenses Retirement(1) Investments(2)
--------------------------- ----------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Ann R. Leven $4,807 None $38,000 $66,001
Walter P. Babich $4,226 None $38,000 $57,691
Anthony D. Knerr $4,713 None $38,000 $65,001
Charles E. Peck $4,634 None $38,000 $64,168
Thomas F. Madison $4,713 None $38,000 $65,001
John H. Durham $4,147 None $32,180 $43,038
Janet L. Yeomans (4) $3,348 None $38,000 $50,501
--------------------------- ----------------- ------------------ ------------------ --------------------
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested trustee/director 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 trustee or director for a period equal to
the lesser of the number of years that such person served as a trustee or
director or the remainder of such person's life. The amount of such
payments will be equal, on an annual basis, to the amount of the annual
retainer that is paid to trustees/directors of each investment company at
the time of such person's retirement. If an eligible trustee/director
retired as of December 31, 1999, 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 trustee or director, based on the number of investment
companies in the Delaware Investments family as of that date.
(2) Each independent trustee/director currently receives a total annual
retainer fee of $38,000 for serving as a trustee or director for all 33
investment companies in Delaware Investments, plus $3,143 for each Board
Meeting attended. Prior to May 1, 2000, John H. Durham served as a
trustee/director for 19 investment companies in Delaware Investments and
received a total annual retainer fee of $32,180 plus $1,810 for each Board
Meeting attended. Ann R. Leven, Charles E. Peck, Anthony D. Knerr and
Thomas F. Madison serve on the Trust'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) W. Thacher Longstreth served as an independent Trustee of the Trust during
the period January 1, 1999 through March 17, 1999, the date on which he
retired. For this period, Mr. Longstreth received $989 from the Trust and
$12,643 from all investment companies in the Delaware Investments family.
(4) Janet 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.
37
<PAGE>
In addition to the Series, the Trust offers 18 other series. As of
August 21, 2000, management believes the following accounts held 5% of record or
more of the outstanding shares of each series of the Trust. Management has no
knowledge of beneficial ownership of the Trust's shares.
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Growth and Income Series - Allmerica Financial Life Insurance and Annuity 17,932,601.195 70.55%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln National Life Company 5,415,151.627 21.30%
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Growth and Income Series - Lincoln National Life Company 413.131 40.12%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Delaware Management Business Trust - DIA 343.861 33.39%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life and Annuity 272.851 26.49%
New York Separate Account - N
1300 South Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
High Yield Series - Allmerica Financial Life Insurance and Annuity 9,224,686.060 84.01%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life Variable Annuity 1,113,922.895 10.14%
Account N
1300 South Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
High Yield Series - Lincoln National Life Company 911.278 40.32%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Delaware Management Business Trust - DIA 747.384 33.07%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life and Annuity 601.504 26.61%
New York Separate Account - N
1300 South Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Capital Reserves Series - Allmerica Financial Life Insurance and Annuity 2,876,396.663 92.31%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Capital Reserves Series - Delaware Management Business Trust - DIA 550.668 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Balanced Series - Allmerica Financial Life Insurance and Annuity 8,312,493.749 95.70%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Balanced Series - Delaware Management Business Trust - DIA 332.424 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Cash Reserve Series - Allmerica Financial Life Insurance and Annuity 5,013,718.739 94.41%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Cash Reserve Series - Delaware Management Business Trust - DIA 506.504 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Growth Opportunities Series - Allmerica Financial Life Insurance and Annuity 7,729,754.074 95.70%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Growth Opportunities Series - Allmerica Financial Life Insurance and Annuity 232,258.348 99.32%
Service Class Company and First Allmerica Financial Life
Insurance Company
Separate Accounts
Attn: Jay Burke S-310
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
International Equity Series - Allmerica Financial Life Insurance and Annuity 15,575,077.188 95.33%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
International Equity Series - Delaware Management Business Trust - DIA 297.974 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Trend Series - Lincoln National Life Company 15,950,185.151 69.41%
Standard Class Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Allmerica Financial Life Insurance and Annuity 4,908,914.533 21.36%
Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Trend Series - Lincoln Life Variable Annuity 1,198,840.855 5.22%
Standard Class Account N
1300 South Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Trend Series - Lincoln Life National Life 159.139 39.20%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Delaware Management Business Trust - DIA 141.804 34.93%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life and Annuity 105.042 25.87%
New York Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Small Cap Value Series - Allmerica Financial Life Insurance and Annuity 4,521,385.210 76.03%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
The Travelers Sep Account ABD 400,309.067 6.73%
For Variable Annuities of
The Travelers Insurance Company
One Tower Square 5MS
Hartford, CT 06183
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life Variable Annuity 337,560.378 5.68%
Account N
1300 South Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Small Cap Value Series - Lincoln Life National Life 409.039 40.27%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Delaware Management Business Trust - DIA 336.474 33.12%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life and Annuity 270.270 26.61%
New York Separate Account - N
1300 South Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Global Bond Series - Lincoln National Life Company 1,246,067.370 70.16%
Standard Class Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Allmerica Financial Life Insurance and Annuity 504,032.376 28.38%
Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Global Bond Series - Delaware Management Business Trust - DIA 544.662 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Strategic Income Series - Allmerica Financial Life Insurance and Annuity 1,722,832.072 89.70%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Allmerica Financial Life Insurance and Annuity 197,877.179 10.30%
Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Strategic Income Series - Delaware Management Business Trust - DIA 595.948 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Devon Series - Allmerica Financial Life Insurance and Annuity 3,357,583.266 82.33%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life Variable Annuity 526,938.806 12.92%
Account N
1300 S. Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Devon Series - Delaware Management Business Trust - DIA 379.363 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Emerging Markets Series - Allmerica Financial Life Insurance and Annuity 1,466,914.025 73.15%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life Variable Annuity 276,119.456 13.78%
Account N
1300 S Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Emerging Markets Series - Lincoln National Life Company 799.293 40.16%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Delaware Management Business Trust - DIA 663.130 33.32%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life and Annuity 527.704 26.52%
New York Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Convertible Securities Series - Allmerica Financial Life Insurance and Annuity 607,847.512 69.72%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln National Life Company 223,221.943 25.60%
Separate Account - C - Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Convertible Securities Series - Delaware Management Business Trust - DIA 434.028 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Social Awareness Series - Allmerica Financial Life Insurance and Annuity 1,660,112.035 75.67%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln National Life Company 496,059.258 22.61%
Separate Account N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Social Awareness Series - Lincoln National Life Company 362.874 40.03%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Delaware Management Business Trust - DIA 304.136 33.55%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Lincoln Life and Annuity 239.521 26.42%
New York Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
REIT Series - The Travelers SEP Acct. ABD2 for 985,617.457 34.72%
Standard Class Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln National Life Company 951,296.413 33.51%
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Allmerica Financial Life Insurance and Annuity 331,370.386 11.67%
Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
REIT Series - Lincoln Life Variable Annuity 222,931.157 7.85%
Standard Class Account N
1300 S Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln National Life Company 211,237.822 7.44%
Separate Account - C - Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
REIT Series - Lincoln National Life Company 592.660 38.77%
Service Class Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Delaware Management Business Trust - DIA 544.662 35.63%
Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life and Annuity 391.389 25.60%
New York Separate Account - N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
Select Growth Series - Allmerica Financial Life Insurance and Annuity 6,080,273.857 88.52%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln Life Variable Annuity 580,337.153 8.45%
Account N
1300 S Clinton Street
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------------------ ----------------- ---------------
Series Name and Address of Account Share Amount Percentage
------------------------------- ------------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Select Growth Series - Allmerica Financial Life Insurance and Annuity 1,075,993.345 99.89%
Service Class Company and First Allmerica Financial Life
Insurance Company
Separate Accounts
Attn: Jay Burke S-310
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
U.S. Growth Series - Allmerica Financial Life Insurance and Annuity 2,302,737.771 88.21%
Standard Class Company and First Allmerica Financial Life
Insurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
------------------------------- ------------------------------------------------------ ----------------- ---------------
Lincoln National Life Company 250,238.923 9.57%
Separate Account - C - Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
------------------------------- ------------------------------------------------------ ----------------- ---------------
U.S. Growth Series - Delaware Management Business Trust - DIA 458.295 100.00%
Service Class Attention: Joseph Hastings
1818 Market Street 7th Floor
Philadelphia, PA 19103
------------------------------- ------------------------------------------------------ ----------------- ---------------
</TABLE>
44
<PAGE>
GENERAL INFORMATION
The Trust, which was organized as a Maryland corporation in 1987 and
reorganized as a Delaware business trust on December 15, 1999, is an open-end
registered management investment company. The Series operates as a
nondiversified fund as defined by the 1940 Act.
Delaware Management is the investment manager of the Series. Delaware
Management or its affiliate, Delaware International Advisers Ltd., also manage
the other funds in the Delaware Investments family. While investment decisions
for the 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.
The Delaware Investments Family of Funds, Delaware Management and the
Distributor, in compliance with SEC Rule 17j-1 under the 1940 Act, have adopted
Codes of Ethics which govern personal securities transactions. Under the Codes
of Ethics, persons subject to the Codes are permitted to engage in personal
securities transactions, including securities that may be purchased or held by
the Series, subject to the requirements set forth in Rule 17j-1 and certain
other procedures set forth in the applicable Code of Ethics. The Codes of Ethics
for the Delaware Investments Family of Funds, Delaware Management and the
Distributor are on public file with, and are available from, the SEC.
Delaware Distributors, L.P. acts as national distributor for the Trust
and for the other mutual funds in the Delaware Investments family.
In addition, Delaware Service Company, Inc. (the Transfer Agent"), an
affiliate of Delaware Management, acts as shareholder servicing, dividend
disbursing and transfer agent for the Trust and for the other mutual funds in
the Delaware Investments family. The Transfer Agent is paid an annual fee equal
to 0.01% of the average daily net assets of each series of the Trust.
Compensation is approved each year by the Board of Trustees, including a
majority of the disinterested Trustees. 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%
45
<PAGE>
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 Trust's advisory
relationship with Delaware Management or its distribution relationship with
Delaware Distributors, L.P., Delaware Management and its affiliates could cause
the Trust to delete the words "Delaware Group" from the Trust's name.
EURO
On January 1, 1999, the European Economic and Monetary Union
implemented a new currency unit, the Euro, for eleven participating European
countries. The countries that initially converted or tied their currencies to
the Euro are Austria, Belgium, France, Germany, Luxembourg, the Netherlands,
Ireland, Finland, Italy, Portugal and Spain. Each participating country is
currently phasing in use of the Euro for major financial transactions. In
addition, each participating country will begin using the Euro for currency
transactions beginning July 1, 2002. Implementation of this plan means that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Participating governments will issue their bonds in Euros, and monetary policy
for participating countries will be uniformly managed by a new central bank, the
European Central Bank. The transition to the Euro is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world.
Although it is not possible to predict the impact of the Euro
implementation plan on the Trust, the transition to the Euro presents unique
uncertainties, including: (i) the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the Euro; (ii) the establishment and maintenance of exchange rates
for currencies being converted into the Euro; (iii) the fluctuation of the Euro
relative to non-Euro currencies during the transition period from January 1,
1999 to December 31, 2001 and beyond; (iv) whether the interest rate, tax and
labor regimes of European countries participating in the Euro will converge over
time; and (iv) whether the conversion of the currencies of other countries in
the European Union ("EU"), such as the United Kingdom and Denmark, into the Euro
and the admission of other non-EU countries such as Poland, Latvia and Lithuania
as members of the EU may have an impact on the Euro or on the computer systems
used by the Trust's service providers to process the Trust's transactions.
Further, the process of implementing the Euro may adversely affect
financial markets outside of Europe and may result in changes in the relative
strength and value of the U.S. dollar or other major currencies. The transition
to the Euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These resulting uncertainties could create increased
volatility in financial markets world-wide.
These or other factors could cause market disruptions, and could
adversely affect the value of securities held by the Trust. Because of the
number of countries using this single currency, a significant portion of the
assets of the Trust may be denominated in the Euro.
46
<PAGE>
Capitalization
The Series offers two classes of shares, Standard Class and Service
Class. Additional classes of shares may be offered in the future.
The Trust has a present unlimited authorized number of shares of
beneficial interest with no par value allocated to each Class. While all shares
have equal voting rights on matters affecting the entire Trust, each series of
the Trust would vote separately on any matter which affects only that series,
such as certain material changes to investment advisory contracts or as
otherwise prescribed by the 1940 Act. Shares of the Series have a priority in
that series' assets, and in gains on and income from the portfolio of that
series. Each class of each series represents a proportionate interest in the
assets of that series, and each has the same voting and other rights and
preferences, except the Standard Class of a series may not vote on any matter
affecting the Plan under Rule 12b-1 that applies to the Service Class 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 Trust voting for the election of
Trustees can elect all the Trustees if they choose to do so, and, in such event,
the holders of the remaining shares will not be able to elect any Trustees.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC. Shareholders may obtain a
copy of the Registration Statement by contacting the SEC in Washington, DC.
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditors for Delaware Group
Premium Fund and, in its capacity as such will audit the annual financial
statements of the Series.
47
