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DELAWARE GROUP
PREMIUM FUND
INVESTMENT MANAGERS
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
Delaware International Advisers Ltd.
Third Floor PART B
80 Cheapside
London, England EC2V 6EE STATEMENT OF
ADDITIONAL INFORMATION
SUB-ADVISERS
Lincoln Investment Management, Inc.
200 E. Berry Street May 1, 2000
Fort Wayne, Indiana 46802
Vantage Investment Advisors
405 Lexington Avenue
New York, NY 10174
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square DELAWARE(SM)
Philadelphia, PA 19103 INVESTMENTS
------------
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
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STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
DELAWARE GROUP PREMIUM FUND
1818 Market Street
Philadelphia, PA 19103
Delaware Group Premium Fund ("Premium Fund" or the "Trust") is a
diversified, open-end management investment company that is intended to meet a
wide range of investment objectives with its separate Portfolios ("Series").
Each Series is in effect a separate fund issuing its own shares. Each Series
offers Standard Class shares and Service Class shares.
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 Statement of Additional Information ("Part B" of the
registration statement) supplements the information contained in the current
Prospectuses of the Trust dated May 1, 2000, as they may be amended from time to
time. It should be read in conjunction with the prospectuses for the variable
contracts and the Trust. Part B is not itself a prospectus but is, in its
entirety, incorporated by reference into the Trust's Prospectuses. The Trust's
Prospectuses may be obtained by writing or calling your investment dealer or by
contacting the Series' national distributor, Delaware Distributors, L.P. (the
"Distributor"), 1818 Market Street, Philadelphia, PA 19103. The Trust's
financial statements, the notes relating thereto, the financial highlights and
the report of independent auditors are incorporated by reference from the Annual
Reports into this Part B. The Annual Reports will accompany any request for Part
B. The Annual Reports can be obtained, without charge, by calling 800-523-1918.
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page Page
<S> <C> <C> <C>
Cover Page 1 Taxes 55
Investment Objectives Investment Management Agreements and
and Policies 2 Sub-Advisory Agreements 56
Accounting and Tax Issues 37 Officers and Trustees 63
Performance Information 41 General Information 76
Trading Practices and Brokerage 50 Financial Statements 79
Offering Price 53 Appendix A--Description of Ratings 80
Dividends and Realized Securities
Profits Distributions 54
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Series are below. There can be no
assurance that the objectives of any Series will be realized.
Balanced Series (formerly Delaware Balanced Series) seeks a balance of
capital appreciation, income and preservation of capital. As a
"balanced" fund, the Series invests at least 25% of its assets in
fixed-income securities and the remaining primarily in equity
securities. This Series has the same objective and investment
disciplines as Delaware Balanced Fund, a separate fund in the Delaware
Investments family.
Capital Reserves Series seeks a high stable level of current income
while minimizing fluctuations in principal by investing in a
diversified portfolio of short- and intermediate-term securities.
Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term
money market instruments. This Series has the same objective and
investment disciplines as Delaware Cash Reserve Fund, a separate fund
in the Delaware Investments family.
Convertible Securities Series seeks a high level of total return on its
assets through a combination of capital appreciation and current
income. The Series intends to pursue its investment objective by
investing primarily in convertible securities. Under normal conditions,
the Series intends to invest at least 65% of its total assets in
convertible securities, which may include privately placed convertible
securities. In pursuit of its investment objective, the Series may
invest the balance of its assets in, among other things, preferred and
common stock, U.S. government securities, non-convertible fixed income
securities and money market securities.
Devon Series seeks current income and capital appreciation. The Series
will seek to achieve its objective by investing primarily in
income-producing common stocks, with a focus on common stocks that the
manager believes have the potential for above-average dividend
increases over time. Under normal circumstances, the Series will invest
at least 65% of its total assets in dividend paying common stocks. This
Series has the same objective and investment disciplines as Delaware
Devon Fund, a separate fund in the Delaware Investments family.
Emerging Markets Series seeks to achieve long-term capital
appreciation. The Series seeks to achieve its objective by investing
primarily in equity series of issuers located in emerging countries.
The Series is an international fund. As such, under normal market
conditions, at least 65% of the Series' assets will be invested in
equity securities of issuers organized or having a majority of their
assets or deriving a majority of their operating income in at least
three countries that are considered to be emerging or developing. This
Series has the same objective and investment disciplines as Delaware
Emerging Markets Fund, a separate fund in the Delaware Investments
family.
Global Bond Series seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that may
also provide the potential for capital appreciation. This Series is a
global fund, as such, at least 65% of the Series' assets will be
invested in fixed-income securities of issuers organized or having a
majority of their assets in or deriving a majority of their operating
income in at least three different countries, one of which may be the
United States. This Series has the same objective and investment
disciplines as Delaware Global Bond Fund, a separate fund in the
Delaware Investments family.
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Growth and Income Series seeks the highest possible total rate of
return by selecting issues that exhibit the potential for capital
appreciation while providing higher than average dividend income. This
Series has the same objective and investment disciplines as Delaware
Growth and Income Fund, a separate fund in the Delaware Investments
family, in that it invests generally, but not exclusively, in common
stocks and income-producing securities convertible into common stocks,
consistent with the Series' objective.
Growth Opportunities Series (formerly DelCap Series) seeks long-term
capital appreciation by investing its assets in a diversified portfolio
of securities exhibiting the potential for significant growth. This
Series has the same objective and investment disciplines as Delaware
Growth Opportunities Fund, a separate fund in the Delaware Investments
family, in that it invests in common stocks and other securities
including, but not limited to, convertible securities, warrants,
preferred stocks, bonds and foreign securities, consistent with the
Series' objective.
High Yield Series (formerly Delchester Series) seeks total return and,
as a secondary objective, high current income. It seeks to achieve its
objective by investing primarily in high-yield corporate bonds. These
are commonly known as junk bonds. An investment in the Series may
involve greater risks than an investment in a portfolio comprised
primarily of investment grade bonds.
International Equity Series seeks long-term growth without undue risk
to principal by investing primarily in equity securities of foreign
issuers providing the potential for capital appreciation and income.
This Series has the same objective and investment disciplines as
Delaware International Equity Fund, a separate fund in the Delaware
Investments family, in that it invests in a broad range of equity
securities of foreign issuers including common stocks, preferred
stocks, convertible securities and warrants, consistent with the
Series' objective.
REIT Series seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its
objective by investing in securities of companies primarily engaged in
the real estate industry. This Series has the same objective and
investment discipline as Delaware REIT Fund, a separate fund in the
Delaware Investments family, which also invests in securities of
companies primarily engaged in the real estate industry.
Select Growth Series (formerly Aggressive Growth Series) seeks
long-term capital appreciation which the Series attempts to achieve by
investing primarily in equity securities of companies which the manager
believes have the potential for high earnings growth. This Series has
the same objective and investment discipline as Delaware Select Growth
Fund, a separate fund in the Delaware Investments family.
Small Cap Value Series seeks capital appreciation by investing
primarily in small cap common stocks whose market value appears low
relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that
may be temporarily out of favor or whose value is not yet recognized by
the market. This Series has the same objective and investment
disciplines as Delaware Small Cap Value Fund, a separate fund in the
Delaware Investments family.
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Social Awareness Series seeks to achieve long-term capital
appreciation. The Series seeks to achieve its objective by investing
primarily in equity securities of medium- to large-sized companies
expected to grow over time that meet the Series' "Social Criteria"
strategy. This Series has the same objective and investment disciplines
as Delaware Social Awareness Fund, a separate fund in the Delaware
Investments family.
Strategic Income Series seeks high current income and total return. The
Series seeks to achieve its objective by using a multi-sector
investment approach, investing primarily in three sectors of the
fixed-income securities markets: high yield, higher risk securities;
investment grade fixed-income securities; and foreign government and
other foreign fixed-income securities. In addition, the Series may
invest in U.S. equity securities. This Series has the same objective
and investment disciplines as Delaware Strategic Income Fund, a
separate fund in the Delaware Investments family.
Trend Series seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of
emerging and other growth-oriented companies. These securities will
have been judged to be responsive to changes in the market place and to
have fundamental characteristics to support growth. Income is not an
objective. This Series has the same objective and investment
disciplines as Delaware Trend Fund, a separate fund in the Delaware
Investments family.
U.S. Growth Series seeks to maximize capital appreciation The Series
seeks to achieve its investment objective by investing in companies of
all sizes which have low dividend yields, strong balance sheets and
high expected earnings growth rates relative to their industry. This
Series has the same objective and investment disciplines as Delaware
U.S. Growth Fund, a separate fund in the Delaware Investments family.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions -- The Trust has adopted the
following restrictions for each Series which cannot be changed without approval
by the holders of a "majority" of the respective Series' outstanding shares,
which is a vote by the holders of the lesser of a) 67% or more of the voting
securities present in person or by proxy at a meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy; or b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time a Series purchases securities.
Each Series may not:
1. With respect to each Series, except the REIT Series, make
investments that will result in the concentration (as that term may be defined
in the Investment Company Act of 1940 ("1940 Act"), any rule or order
thereunder, or U.S. Securities and Exchange Commission ("SEC") staff
interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does not
limit the 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. The REIT Series will concentrate its investments in the
real estate industry. The REIT Series otherwise makes investments that will
result in the concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of its
investments in the securities of issuers primarily engaged in the same industry,
provided that this restriction does not limit the Series from investing in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or in tax-exempt securities or certificates of deposit. In
addition, the Cash Reserve Series may concentrate its investments in bankers'
acceptances of banks with over one billion dollars in assets or bank holding
companies whose securities are rated A-2 or better by Standard & Poor's ("S&P")
or P-2 or better by Moody's Investors Service, Inc. ("Moody's").
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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. With respect to each Series, purchase or sell real estate, unless
acquired as a result of ownership of securities or other instruments and
provided that this restriction does not prevent the Series from investing in
issuers which invest, deal or otherwise engage in transactions in real estate or
interests therein, or investing in securities that are secured by real estate or
interests therein.
5. Purchase or sell physical commodities, unless acquired as a result
of ownership of securities or other instruments and provided that this
restriction does not prevent the Series from engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities.
6. Make loans, provided that this restriction does not prevent the
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 Prospectuses, each Series
will be subject to the following investment restrictions, which are considered
non-fundamental and may be 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 are permitted to invest in other investment companies,
including open-end, closed-end or unregistered investment companies, either
within the percentage limits set forth in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof, or without regard to percentage
limits in connection with a merger, reorganization, consolidation or other
similar transaction. However, none of the Series, may operate as a "fund of
funds" which invests primarily in the shares of other investment companies as
permitted by Section 12(d)(1)(F) or (G) of the 1940 Act, if its own shares are
utilized as investments by such a "fund of funds."
2. A Series may not invest more than 15% of its net assets in
securities which it cannot sell or dispose of in the ordinary course of business
within seven days at approximately the value at which the Series has valued the
investment.
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Each Series (other than High Yield, Select Growth, Strategic Income,
Devon, Emerging Markets, Convertible Securities, Social Awareness, REIT and U.S.
Growth Series) may not:
1. Invest more than 5% of the value of its assets in securities of any
one issuer (other than obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities). This restriction shall apply to only 75% of
the assets of International Equity, Small Cap Value and Trend Series and to only
50% of the assets of Global Bond Series.
2. Purchase more than 10% of the voting securities of any company, or
invest in any company for the purpose of exercising control or management.
3. Purchase or retain securities of a company which has an officer or
trustee who is an officer or trustee of the Trust, or an officer or
director/trustee of its investment manager if such persons, each owning
beneficially more than 1/2 of 1% of the shares of the company, own in the
aggregate more than 5% thereof.
4. Purchase any security issued by any other investment company (except
in connection with a merger, consolidation or offer of exchange) if after such
purchase it would: (a) own more than 3% of the voting stock of such company, (b)
own securities of such company having a value in excess of 5% of a Series'
assets or (c) own securities of investment companies having an aggregate value
in excess of 10% of a Series' assets. Any such purchase shall be at the
customary brokerage commission. The limitations set forth in this restriction do
not apply to purchases by International Equity Series of securities issued by
closed-end investment companies, all of which must be at the customary brokerage
commission.
5. Make any investment in real estate unless necessary for office space
or the protection of investments already made. (This restriction does not
preclude a Series' purchase of securities secured by real estate or interests
therein, or securities issued by companies which invest in real estate or
interests therein, including real estate investment trusts.)
6. Purchase securities on margin, make short sales of securities or
maintain a net short position (except that a Series may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities). This restriction shall not prohibit the Series from satisfying
margin requirements with respect to futures transactions.
7. Invest in interests in oil, gas or other mineral exploration or
development programs, commodities or commodities contracts. This restriction
shall not prohibit International Equity, Small Cap Value and Trend Series from
entering into futures contracts or options thereon, to the extent that not more
than 5% of its assets are required as futures contract margin deposits and
premiums on options and only to the extent that obligations under such contracts
and transactions represent not more than 20% of the Series' assets.
8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to facilitate
redemptions. The Series have no intention of increasing their net income through
borrowing. Any borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of a Series' assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the Series shall, within three days thereafter (not including
Sunday and holidays) or such longer period as the SEC may prescribe by rules and
regulations, reduce the amount of its borrowings to an extent that the asset
coverage of such borrowings shall be at least 300%. A Series will not pledge
more than 15% of its net assets. A Series shall not issue senior securities as
defined in the 1940 Act, except for notes to banks.
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9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with each Series' investment
objective and policies are considered loans and except that each Series may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for their use relating to short sales or other security transactions.
10. Invest more than 5% of the value of its total assets in securities of
companies less than three years old. Such three-year period shall include the
operation of any predecessor company or companies.
11. Invest more than 25% of its total assets in any particular industry,
except that a Series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by S&P or P-2 or better by Moody's.
12. Act as an underwriter of securities of other issuers, except that a
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, a Series might be deemed to be
an underwriter for the purposes of the 1933 Act.
13. Invest in warrants valued at lower of cost or market exceeding 5% of a
Series' net assets. Included within that amount, but not to exceed 2% of a
Series' net assets, may be warrants not listed on the New York Stock Exchange or
American Stock Exchange. This restriction shall not apply to International
Equity Series.
14. The Money Market Series will not invest more than 25% of its assets in
foreign banks which are subject to the same regulation as United States banks or
to foreign branches of United States banks where such a bank is liable for the
obligations of the branch.
While such Series are permitted under certain circumstances to borrow
money, they do not normally do so. No investment securities will be purchased
while a Series has an outstanding borrowing. The Trust has undertaken, for so
long as required by California Regulatory Authority and so long as insurance
policy premiums or proceeds of contracts sold in California are used to purchase
Trust shares, each Series will not borrow money in excess of 25% of the value of
its net assets.
In addition, the Global Bond Series will not invest more than 10% of
its net assets in repurchase agreements maturing in more than seven days and
other illiquid assets. Securities of foreign issuers which are not listed on a
recognized domestic or foreign exchange or for which a bona fide market does not
exist at the time of purchase or subsequent valuation are included in the
category of illiquid assets.
Strategic Income, Devon, Emerging Markets, Convertible Securities and
Social Awareness Series may not:
1. Each such Series, other than Emerging Markets Series, will not with
respect to 75% of its total assets, purchase the securities of any issuer (other
than those of other investment companies or of the U.S. government or its
agencies or instrumentalities), if immediately thereafter the Series would (a)
have more than 5% of the value of its total assets in the securities of such
issuer or (b) own more than 10% of the outstanding voting securities of such
issuer.
2. Invest 25% or more of its total assets in any one industry provided
that there is no limitation with respect to investments in obligations issued or
guaranteed as to principal or interest by the U.S. government, its agencies or
instrumentalities.
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3. Make loans other than by the purchase of all or a portion of a
publicly or privately distributed issue of bonds, debentures or other debt
securities of the types commonly offered publicly or privately and purchased by
financial institutions (including repurchase agreements), whether or not the
purchase was made upon the original issuance of the securities, and except that
each Series may loan its assets to qualified broker/dealers or institutional
investors.
4. Engage in underwriting of securities of other issuers, except that
portfolio securities, including securities purchased in private placements, may
be acquired under circumstances where, if sold, the Series might be deemed to be
an underwriter under the 1933 Act. No limit is placed on the proportion of the
Series' assets which may be invested in such securities.
5. Borrow money or issue senior securities, except to the extent
permitted by the 1940 Act or any rule or order thereunder or interpretation
thereof. Subject to the foregoing, each Series may engage in short sales,
purchase securities on margin, and write put and call options.
6. Purchase or sell physical commodities or physical commodity
contracts, including physical commodity option or futures contracts in a
contract market or other futures market.
7. Purchase or sell real estate; provided that the Series may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
High Yield Series may not:
1. Invest in any company for the purpose of exercising control or
management.
2. Purchase or retain securities of a company which has an officer or
Trustee who is an officer or Trustee of the Trust, or an officer or Trustee of
its investment manager if such persons, each owning beneficially more than 1/2
of 1% of the shares of the company, own in the aggregate more than 5% thereof.
3. Purchase any security issued by any other investment company (except
in connection with a merger, consolidation or offer of exchange) if after such
purchase it would: (a) own more than 3% of the voting stock of such company, (b)
own securities of such company having a value in excess of 5% of the Series'
assets or (c) own securities of investment companies having an aggregate value
in excess of 10% of the Series' assets. Any such purchase shall be at the
customary brokerage commission.
4. Make any investment in real estate unless necessary for office space
or the protection of investments already made. (This restriction does not
preclude the Series' purchase of securities secured by real estate or interests
therein, or securities issued by companies which invest in real estate or
interests therein, including real estate investment trusts.)
5. Purchase securities on margin, make short sales of securities or
maintain a net short position (except that the Series may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities). This restriction shall not prohibit the Series from satisfying
margin requirements with respect to futures transactions.
7. Invest in interests in oil, gas or other mineral exploration or
development programs.
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8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to facilitate
redemptions. The Series has no intention of increasing its net income through
borrowing. Any borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of the Series' assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the Series shall, within three days thereafter (not including
Sunday and holidays) or such longer period as the SEC may prescribe by rules and
regulations, reduce the amount of its borrowings to an extent that the asset
coverage of such borrowings shall be at least 300%. The Series will not pledge
more than 15% of its net assets. The Series shall not issue senior securities as
defined in the 1940 Act, except for notes to banks.
9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with the Series' investment
objective and policies are considered loans and except that the Series may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for its use relating to short sales or other security transactions.
10. Invest more than 25% of its total assets in any particular industry,
except that the Series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by S&P or P-2 or better by Moody's.
11. Act as an underwriter of securities of other issuers, except that the
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, the Series might be deemed to
be an underwriter for the purposes of 1933 Act.
The REIT Series may not:
1. The Series will concentrate its investments in the real estate
industry. The Series may not invest more than 25% of its total assets in any
other single industry, provided that there is no limitation with respect to
investments in obligations issued or guaranteed as to principal or interest by
the U.S. government, its agencies or instrumentalities.
2. Make loans other than by the purchase of all or a portion of a
publicly or privately distributed issue of bonds, debentures or other debt
securities of the types commonly offered publicly or privately and purchased by
financial institutions (including repurchase agreements and loan
participations), whether or not the purchase was made upon the original issuance
of the securities, and except that the Series may loan its assets to qualified
broker/dealers or institutional investors.
3. Engage in underwriting of securities of other issuers, except that
portfolio securities, including securities purchased in private placements, may
be acquired under circumstances where, if sold, the Series might be deemed to be
an underwriter under the 1933 Act. No limit is placed on the proportion of the
Series' assets which may be invested in such securities.
4. Borrow money or issue senior securities, except to the extent
permitted by the 1940 Act or any rule or order thereunder or interpretation
thereof. Subject to the foregoing, the Series may engage in short sales,
purchase securities on margin, and write put and call options.
5. Purchase or sell physical commodities or physical commodity
contracts, including physical commodity option or futures contracts in a
contract market or other futures market.
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6. Purchase or sell real estate; provided, that the Series may invest
in securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein; provided further, that the
Series may own real estate directly as a result of a default on securities the
Series owns.
7. Invest for the purpose of acquiring control of any company.
8. To the extent that the Series invests in securities of other
investment companies, it will only do so in accordance with the provisions of
the Investment Company Act in effect at the time of the investment.
9. Invest in interests in oil, gas and other mineral leases or other
mineral exploration or development programs.
10. Purchase securities on margin except short-term credits that may be
necessary for the clearance of purchases and sales of securities. This
restriction does not apply to the purchase of futures or options contracts.
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 a Series
invests will cause the net asset value of the Series to fluctuate.
Money Market Instruments
The Capital Reserves Series may, from time to time, invest all or part
of its available assets in money market instruments maturing in one year or
less. Cash Reserve Series will invest all of its available assets in instruments
which have a remaining maturity of 13 months or less at the time of acquisition
and which will otherwise meet the maturity, quality and diversification
conditions with which taxable money market funds must comply. The types of
instruments which these Series may purchase are described below:
1. U.S. Government Securities--Securities issued or guaranteed by the
U.S. government, including Treasury Bills, Notes and bonds.
2. U.S. Government Agency Securities--Obligations issued or guaranteed
by agencies or instrumentalities of the U.S. government whether supported by the
full faith and credit of the U.S. Treasury or the credit of a particular agency
or instrumentality.
3. Bank Obligations--Certificates of deposit, bankers' acceptances and
other short-term obligations of U.S. commercial banks and their overseas
branches and foreign banks of comparable quality, provided each such bank
combined with its branches has total assets of at least one billion dollars, and
certificates and issues of domestic savings and loan associations of one billion
dollars in assets whose deposits are insured by the Federal Deposit Insurance
Corporation. Any obligations of foreign banks shall be denominated in U.S.
dollars. Obligations of foreign banks and obligations of overseas branches of
U.S. banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. In particular, a foreign country could impose exchange
controls which might delay the release of proceeds from that country. Such
deposits are not covered by the Federal Deposit Insurance Corporation. Because
of conflicting laws and regulations, an issuing bank could maintain that
liability for an investment is solely that of the overseas branch which could
expose the Series to a greater risk of loss. The Series will only buy short-term
instruments in nations where these risks are minimal. The Series will consider
these factors along with other appropriate factors in making an investment
decision to acquire such obligations and will only acquire those which, in the
opinion of management, are of an investment quality comparable to other debt
securities bought by the Series. Either Series may invest more than 25% of its
assets in foreign banks except that this limitation shall not apply to United
States branches of foreign banks which are subject to the same regulations as
United States banks or to foreign branches of United States banks where such a
bank is liable for the obligations of the branch. This policy may be changed by
the Board of Trustees without shareholder approval.
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Cash Reserve Series is subject to certain maturity, quality and
diversification conditions applicable to taxable money market funds. Thus, if a
bank obligation or, as relevant, its issuer is considered to be rated at the
time of the proposed purchase, it or, as relevant, its issuer must be so rated
in one of the two highest rating categories by at least two
nationally-recognized statistical rating organizations or, if such security or,
as relevant, its issuer is not so rated, the purchase of the security must be
approved or ratified by the Board of Trustees in accordance with the maturity,
quality and diversification conditions with which taxable money market funds
must comply.
4. Commercial Paper--Short-term promissory notes issued by corporations
which at the time of purchase are rated A-2 or better by S&P or P-2 or better by
Moody's or which have received comparable ratings from a nationally-recognized
statistical rating organization approved by the Board of Trustees or, if not
rated, issued or guaranteed by a corporation with outstanding debt rated AA, Aa
or better by S&P or Moody's. Cash Reserve Series invests in commercial paper in
accordance with the restrictions set forth in the Prospectuses.
5. Short-term Corporate Debt--In addition to the other debt securities
described in the Prospectuses, corporate notes, bonds and debentures which at
the time of purchase are rated AA or better by S&P or Aa or better by Moody's or
which have received comparable ratings from a nationally-recognized statistical
rating organization approved by the Board of Trustees, provided such securities
have one year or less remaining to maturity. Such securities generally have
greater liquidity and are subject to considerably less market fluctuation than
longer issues. Cash Reserve Series invests in corporate notes, bonds and
debentures in accordance with the restrictions set forth in the Prospectuses.
The ratings of S&P, Moody's and other rating services represent their
opinions as to the quality of the money market instruments which they undertake
to rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. These ratings are the initial criteria for
selection of portfolio investments, but the Series will further evaluate these
securities. See Appendix A--Description of Ratings.
Additional Information on the Cash Reserve Series
Cash Reserve Series intends to achieve its objective by investing its
assets in a diversified portfolio of money market instruments. See Money Market
Instruments above and Appendix A--Description of Ratings.
The Series maintains its net asset value at $10 per share by valuing
its securities on an amortized cost basis. See Offering Price. The Series
maintains a dollar weighted average portfolio maturity of not more than 90 days
and does not purchase any issue having a remaining maturity of more than 13
months. In addition, the Series limits its investments, including repurchase
agreements, to those instruments which the Board of Trustees determines present
minimal credit risks and which are of high quality. The Series may sell
portfolio securities prior to maturity in order to realize gains or losses or to
shorten the average maturity if it deems such actions appropriate to maintain a
stable net asset value. While the Series will make every effort to maintain a
fixed net asset value of $10 per share, there can be no assurance that this
objective will be achieved.
While the Series intends to hold its investments until maturity when
they will be redeemable at their full principal value plus accrued interest, it
may attempt, from time to time, to increase its yield by trading to take
advantage of market variations. Also, revised evaluations of the issuer or
redemptions may cause sales of portfolio investments prior to maturity or at
times when such sales might otherwise not be desirable. The Series' right to
borrow to facilitate redemptions may reduce but does not guarantee a reduction
in the need for such sales. The Series will not purchase new securities while
any borrowings are outstanding. See Dividends and Realized Securities Profits
Distributions and Taxes for effect of any capital gains distributions.
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A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Series invests.
In the event of an increase in current interest rates, a national credit crisis
or if one or more of the issuers became insolvent prior to the maturity of the
instruments, principal values could be adversely affected. Investments in
obligations of foreign banks and of overseas branches of U.S. banks may be
subject to less stringent regulations and different risks than those of U.S.
domestic banks. The rate of return and the net asset value will be affected by
such other factors as sales of portfolio securities prior to maturity and the
Series' operating expenses.
Average Weighted Maturity
The Capital Reserves Series ordinarily maintains its average dollar
weighted portfolio maturity within the five to seven year range, but not in
excess of ten years. However, many of the securities in which the Series invests
will have remaining maturities in excess of seven years. The Series may purchase
individual securities with a remaining maturity of up to 15 years.
Some of the securities in the Series' portfolio may have periodic
interest rate adjustments based upon an index such as the 91-day Treasury Bill
rate. This periodic interest rate adjustment tends to lessen the volatility of
the security's price. With respect to securities with an interest rate
adjustment period of one year or less, the Series will, when determining average
weighted maturity, treat such a security's maturity as the amount of time
remaining until the next interest rate adjustment.
Instruments such as GNMA, FNMA and FHLMC securities and similar
securities backed by amortizing loans generally have shorter effective
maturities than their stated maturities. This is due to changes in amortization
caused by demographic and economic forces such as interest rate movements. These
effective maturities are calculated based upon historical payment patterns. For
purposes of determining the Series' average weighted maturity, the maturities of
such securities will be calculated based upon the issuing agency's payment
factors using industry-accepted valuation models.
Asset-Backed Securities
The Capital Reserves, Balanced, Cash Reserve, Strategic Income and
Devon Series may invest in securities which are backed by assets such as
receivables on home equity and credit loans, receivables regarding automobile,
mobile home and recreational vehicle loans, wholesale dealer floor plans and
leases (i.e., receivables on loans to car dealers for cars used in their
showrooms) or other loans or financial receivables currently available or which
may be developed in the future. For the Capital Reserves, Delaware, Strategic
Income and Devon Series, all such securities must be rated in one of the four
highest rating categories by a reputable rating agency (e.g., BBB or better by
S&P or Baa or better by Moody's). It is the Cash Reserve Series' current policy
to limit asset-backed investments to those rated in the highest rating category
by a reputable rating agency (e.g., AAA by S&P or Aaa by Moody's) and
represented by interests in credit card receivables, wholesale dealer floor
plans, home equity loans and automobile loans.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. The credit
quality of most asset-backed securities depends primarily on the credit quality
of the assets underlying such securities, how well the entities issuing the
securities are insulated from the credit risk of the originator or affiliated
entities, and the amount of credit support provided to the securities. Such
receivables are securitized in either a pass-through or a pay-through structure.
Pass-through securities provide investors with an income stream consisting of
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both principal and interest payments in respect of the receivables in the
underlying pool. Pay-through asset-backed securities are debt obligations issued
usually by a special purpose entity, which are collateralized by the various
receivables and in which the payments on the underlying receivables provide the
funds to pay the debt service on the debt obligations issued. To lessen the
effect of failures by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payments of the obligations on at
least some of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Series will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors such
as changes in interest rates or the concentration of collateral in a particular
geographic area. Therefore, the yield may be difficult to predict and actual
yield to maturity may be more or less than the anticipated yield to maturity.
Due to the shorter maturity of the collateral backing such securities, there
tends to be less of a risk of substantial prepayment than with mortgage-backed
securities but the risk of such a prepayment does exist. Such asset-backed
securities do, however, involve certain risks not associated with
mortgage-backed securities, including the risk that security interests cannot be
adequately or in many cases ever established, and other risks which may be
peculiar to particular classes of collateral. For example, with respect to
credit card receivables, a number of state and federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in a typical issuance and technical requirements
under state laws. Therefore, recoveries on repossessed collateral may not always
be available to support payments on the securities.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payments of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
Mortgage-Backed Securities
The Capital Reserves, Balanced, Strategic Income, Devon and REIT Series
may invest in mortgage-backed securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or government sponsored
corporations or those issued by certain private, non-government corporations,
such as financial institutions. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
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REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. The Series may
invest in such private-backed securities, but the REIT Series will do so (i)
only if the securities are 100% collateralized at the time of issuance by
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and (ii) currently, only if they are rated at the time of
purchase in the two highest grades by a nationally-recognized statistical rating
agency.
The Capital Reserves, Balanced, Strategic Income and Devon each may
invest up to 20% of its total assets in CMOs and REMICs issued by private
entities which are not collateralized by securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g., BBB
or better by S&P or Baa or better by Moody's) and (ii) represent interests in
whole-loan mortgages, multi-family mortgages, commercial mortgages and other
mortgage collateral supported by a first mortgage lien on real estate.
Non-agency mortgage-backed securities are subject to the interest rate and
prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are not
collateralized by securities issued or guaranteed by the U.S. government. In
addition, timely information concerning the loans underlying these securities
may not be as readily available and the market for these securities may be less
liquid than other CMOs and REMICs.
REITs
The REIT Series invests in, and the Balanced, Strategic Income and
Devon Series may invest in, REITs. REITs are pooled investment vehicles which
invest primarily in income-producing real estate or real estate related loans or
interests. REITs are generally classified as equity REITs, mortgage REITs or a
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. Like investment companies, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements in
the Code. REITs are subject to substantial cash flow dependency, defaults by
borrowers, self-liquidation, and the risk of failing to qualify for tax-free
pass-through of income under the 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.
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REITs (especially mortgage REITs) are also subject to interest rate
risks -- when interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently
and in a limited volume, and may be subject to more abrupt or erratic price
movements than other securities.
Convertible, Debt and Non-Traditional Equity Securities
In addition to the Convertible Securities Series, the Balanced, Devon,
Strategic Income, Emerging Markets, Social Awareness, REIT, Select Growth and
U.S. Growth Series may invest in convertible and debt securities of issuers in
any industry. A convertible security is a security which may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible 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
and debt securities provide a fixed-income stream and the opportunity, through
its conversion feature, to participate in the capital appreciation resulting
from a market price advance in the convertible security's underlying common
stock. 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.
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The Series may have difficulty disposing of such lower rated
convertible debentures because the trading market for such securities may be
thinner than the market for higher rated convertible debentures. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary trading market for higher rated securities. The lack of
a liquid secondary market as well as adverse publicity with respect to these
securities, may have an adverse impact on market price and the Series' ability
to dispose of particular issues in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Series to obtain accurate market quotations for purposes of pricing the Series'
portfolio and calculating its net asset value. The market behavior of
convertible securities in lower rating categories is often more volatile than
that of higher quality securities. Lower quality convertible securities are
judged by Moody's and S&P to have speculative elements or characteristics; their
future cannot be considered as well assured and earnings and asset protection
may be moderate or poor in comparison to investment grade securities.
In addition, such lower quality securities face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions,
which could lead to inadequate capacity to meet timely payments. The market
values of securities rated below investment grade tend to be more sensitive to
company specific developments and changes in economic conditions than higher
rated securities. Issuers of these securities are often highly leveraged, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. In
addition, such issuers may not have more traditional methods of financing
available to them, and may be unable to repay debt at maturity by refinancing.
These Series may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stock
("PERCS"), which provide an investor with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Upon the conversion date, most PERCS convert into common stock of the
issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after a predetermined number of years the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, each PERCS would convert to one share of common stock. If, however, the
issuer's common stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive less than one full
share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However, if called early, the issuer may pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The Series may also invest in other enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock. An investment in such securities may involve additional risks. Unlike
conventional convertible securities, enhanced convertible securities do not
usually have a fixed maturity (par) value. Rather, such securities generally
provide only for a mandatory conversion into cash or common stock. As a result,
a Series risks loss of principal if the cash received or the price of the
underlying common stock at the time of conversion is less than the price paid
for the enhanced convertible security. Such securities may be more or less
liquid than conventional convertible securities or non-convertible debt
securities.
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Private Placements
Private placement securities are securities which have not been
registered with the SEC and which are usually only sold to large, institutional
investors. For various reasons, an issuer may prefer or be required as a
practical matter to obtain private financing. Adverse conditions in the public
securities markets may preclude a public offering of an issuer's securities. An
issuer is often willing to provide more attractive features in securities issued
privately, because it has avoided the expense and delay involved in a public
offering. Private placements of debt securities have frequently resulted in
higher yields and restrictive covenants that provide greater protection for the
purchaser, such as longer call or refunding protection than would typically be
available with publicly offered securities of the same type. Securities acquired
through private placements may also have special features not usually
characteristic of similar securities offered to the public, such as contingent
interest or warrants for the purchase of the issuer's stock.
What portion of the Convertible Securities Series' portfolio is
invested in convertible securities purchased in private placements depends upon
the relative attractiveness of those securities compared to convertible
securities, which are publicly offered. Ordinarily, the Series expects that 50%
of its portfolio may be invested in convertible securities purchased in private
placements, but the percentage may be substantially greater or less than 50%,
depending upon prevailing market conditions.
The Series anticipates that substantially all of the private placements
it purchases will be subject to Rule 144A under the 1933 Act and therefore, may
be traded freely among qualified institutional buyers. Subject to procedures
approved by the Series' Board of Trustees, Rule 144A securities may be treated
as liquid and therefore not subject to the Series' 15% limitation on illiquid
securities. The private placements the Series purchases will typically include
registration rights for the convertible security and the underlying common
stock. This requires the underlying common stock to be registered with the SEC,
generally filed within one year of the private placement, consequently allowing
us to trade the underlying common stock upon conversion. Such trading may be
subject to certain contractual or legal restrictions.
Zero Coupon Bonds and Pay-In-Kind Bonds
The Global Bond, Strategic Income, Convertible Securities and REIT
Series may invest in zero coupon bonds. The market prices of zero coupon
securities are generally more volatile than the market prices of securities that
pay interest periodically and are likely to respond to changes in interest rates
to a greater degree than do non-zero coupon securities having similar maturities
and credit quality. Current federal income tax law requires that a holder of a
taxable zero coupon security report as income each year the portion of the
original issue discount of such security that accrues that year, even though the
holder receives no cash payments of interest during the year. The Series have
qualified as regulated investment companies under the Code. Accordingly, during
periods when the Series receive no interest payments on their zero coupon
securities, they will be required, in order to maintain their desired tax
treatment, to distribute cash approximating the income attributable to such
securities. Such distribution may require the sale of portfolio securities to
meet the distribution requirements and such sales may be subject to the risk
factor discussed above.
The Strategic Income Series may invest in pay-in-kind ("PIK") bonds.
PIK bonds pay interest through the issuance to holders of additional securities.
PIK bonds are generally considered to be more interest-sensitive than income
bearing bonds, to be more speculative than interest-bearing bonds, and to have
certain tax consequences similar to zero coupon bonds which could, under certain
circumstances, be adverse to the Series.
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Interest Rate and Index Swaps
Balanced Series and Strategic Income Series may invest in interest rate
and index swaps to the extent consistent with their respective investment
objectives and strategies. Capital Reserves Series and Global Bond Series may
invest in interest rate swaps to the extent consistent with their respective
investment objectives and strategies. A Series will only invest in swaps in
which all the reference rates are related to or derived from instruments or
markets in which the Series is otherwise eligible to invest, and subject to the
investment limitations on the instruments to which the purchased reference rate
relates.
Swaps are agreements to exchange payment streams over a period of time
with another party, called a counterparty. Each payment stream is based on a
specified rate, which could be a fixed or variable interest rate, the rate of
return on an index, or some other reference rate. The payment streams are
calculated with reference to a hypothetical principal amount, called the
notional principal or the notional amount. For example, in an interest rate swap
one party may agree to pay a fixed interest rate to a counterparty and to
receive in return variable interest rate payments from the counterparty. The
amount that each party pays is calculated by multiplying the fixed and variable
rates, respectively, by the notional amount. The payment streams may thus be
thought of as interest payments on the notional amount. The notional amount does
not actually change hands at any point in the swap transaction; it is used only
to calculate the value of the payment streams.
When two counterparties each wish to swap interest rate payments, they
typically each enter into a separate interest rate swap contract with a
broker/dealer intermediary, who is the counterparty in both transactions, rather
than entering into a swap contract with each other directly. The broker/dealer
intermediary enters into numerous transactions of this sort, and attempts to
mange its portfolio of swaps so as to match and offset its payment receipts and
obligations.
The typical minimum notional amount is $5 million. Variable interest
rates are usually set by reference to the London Inter-Bank Offered Rate
(LIBOR). The typical maximum term of an interest rate swap agreement ranges from
one to twelve years. Index swaps tend to be shorter term, often for one year.
The investment manager presently intends to purchase swaps with maturities of
six to twelve months, and in no event greater than two years.
The Balanced and Strategic Income Series may also engage in index
swaps, also called total return swaps. In an index swap, a Series may enter into
a contract with a counterparty in which the counterparty will make payments to
the Series based on the positive returns of an index, such as a corporate bond
index, in return for the Trust paying to the counterparty a fixed or variable
interest rate, as well as paying to the counterparty any negative returns on the
index. In a sense, the Series is purchasing exposure to an index in the amount
of the notional principal in return for making interest rate payments on the
notional principal. As with interest rate swaps, the notional principal does not
actually change hands at any point in the transaction. The counterparty,
typically an investment bank, manages its obligations to make total return
payments by maintaining an inventory of the fixed income securities that are
included in the index.
Swap transactions provide several benefits to the Series. Interest rate
swaps may be used as a duration management tool. Duration is a measure of a
bond's interest-rate sensitivity, expressed in terms of years because it is
related to the length of time remaining on the life of a bond. In general, the
longer a bond's duration, the more sensitive the bond's price will be to changes
in interest rates. The average duration of a fund is the weighted average of the
durations of the fund's fixed income securities.
If a Series wishes to shorten the duration of certain of its assets,
longer term assets could be sold and shorter term assets acquired, but these
transactions have potential tax and return differential consequences. By using
an interest rate swap, the Series could agree to make semi-annual fixed rate
payments and receive semi-annual floating rate LIBOR payments adjusted every six
months. The duration of the floating rate payments received by the fund will now
be six months. In effect, a Series has reduced the duration of the notional
amount invested from a longer term to six months over the life of the swap
agreement.
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The Series may also use swaps to gain exposure to specific markets. For
example, suppose bond dealers have particularly low inventories of corporate
bonds, making it difficult for a fixed income fund to increase its exposure to
the corporate bond segment of the market. It is generally not possible to
purchase exchange-traded options on a corporate bond index. A Series could
replicate exposure to the corporate bond market, however, by engaging in an
index swap in which the Series gains exposure to a corporate bond index in
return for paying a LIBOR-based floating interest rate.
Other uses of swaps could help permit the Series to preserve a return
or spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities the Series anticipates purchasing
at a later date. Interest rate swaps may also be considered as a substitute for
interest rate futures in many cases where the hedging horizon is longer than the
maturity of the typical futures contract, and may be considered to provide more
liquidity than similar forward contracts, particularly long-term forward
contracts.
The primary risk of swap transactions is the creditworthiness of the
counterparty, since the integrity of the transaction depends on the willingness
and ability of the counterparty to maintain the agreed upon payment stream. This
risk is often referred to as counterparty risk. If there is a default by a
counterparty in a swap transaction, the Series' potential loss is the net amount
of payments the Series is contractually entitled to receive for one payment
period (if any - the Series could be in a net payment position), not the entire
notional amount, which does not change hands in a swap transaction. Swaps do not
involve the delivery of securities or other underlying assets or principal as
collateral for the transaction. The Series will have contractual remedies
pursuant to the swap agreement but, as with any contractual remedy, there is no
guarantee that the Series would be successful in pursuing them -- the
counterparty may be judgement proof due to insolvency, for example. The Series
thus assume the risk that they will be delayed or prevented from obtaining
payments owed to them. The standard industry swap agreements do, however, permit
the Series to terminate a swap agreement (and thus avoid making additional
payments) in the event that a counterparty fails to make a timely payment to the
Series.
In response to this counterparty risk, several securities firms have
established separately capitalized subsidiaries that have a higher credit
rating, permitting them to enter into swap transactions as a dealer. The Series
will not be permitted to enter into any swap transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the actual
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or is determined to be of equivalent credit quality by the Manager.
In addition, the Manager will closely monitor the ongoing creditworthiness of
swap counterparties in order to minimize the risk of swaps.
In addition to counterparty risk, the use of swaps also involves risks
similar to those associated with ordinary portfolio security transactions. If
the portfolio manager is incorrect in his or her forecast of market values or
interest rates, the investment performance of a Series which has entered into a
swap transaction could be less favorable than it would have been if this
investment technique were not used. It is important to note, however, that there
is no upper limit on the amount the Series might theoretically be required to
pay in a swap transaction.
In order to ensure that a Series will only engage in swap transactions
to the extent consistent with its investment objectives and strategies, the
Series will only engage in a swap transaction if all of the reference rates used
in the swap are related to or derived from securities, instruments or markets
that are otherwise eligible investments for the Series. Similarly, the extent to
which the Series may invest in a swap, as measured by the notional amount, will
be subject to the same limitations as the eligible investments to which the
purchased reference rate relates.
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A Series will, consistent with industry practice, segregate and
mark-to-market daily cash or other liquid assets having an aggregate market
value at least equal to the net amount of the excess, if any, of the Series'
payment obligations over its entitled payments with respect to each swap
contract. To the extent that the Series is obligated by a swap to pay a fixed or
variable interest rate, the Series may segregate securities that are expected to
generate income sufficient to meet the Series' net payment obligations. For
example, if a Series holds interest rate swaps and is required to make payments
based on variable interest rates, it will have to make increased payments if
interest rates rise, which will not be necessarily be offset by the fixed-rate
payments it is entitled to receive under the swap agreement.
There is not a well developed secondary market for interest rate or
index swaps. Most interest rate swaps are nonetheless relatively liquid because
they can be sold back to the counterparty/dealer relatively quickly at a
determinable price. Most index swaps, on the other hand, are considered to be
illiquid because the counterparty/dealer will typically not unwind an index swap
prior to its termination (and, not surprisingly, index swaps tend to have much
shorter terms). A Series will therefore treat all swaps as subject to its
limitation on illiquid investments. For purposes of calculating these percentage
limitations, a Series will refer to the notional amount of the swap.
Swaps will be priced using fair value pricing. The income provided by a
swap should be qualifying income for purposes of Subchapter M of the Internal
Revenue Code. Swaps should not otherwise result in any significant
diversification or valuation issues under Subchapter M.
When-Issued, "When, As and If Issued" and Delayed Delivery Securities and
Forward Commitments
Consistent with their respective objectives, the Series may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. The Series may also purchase
securities on a "when, as and if issued" basis under which the issuance of the
security depends upon the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring. When such transactions
are negotiated, the price is fixed at the time of commitment, but delivery and
payment can take place a month or more after the date of the commitment. A
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 a Series makes the commitment to purchase or
sell securities on a when-issued, "when, as and if issued," delayed delivery or
forward commitment basis, it will record the transaction and thereafter reflect
the value, each day, of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.
Liquidity and Rule 144A Securities
In order to assure that each Series has sufficient liquidity, no Series
may invest more than 10% of its net assets in illiquid assets (except
Convertible Securities, High Yield, REIT, Select Growth and U.S. Growth Series,
which may invest up to 15% of their net assets in illiquid securities). For all
Series, other than the International Equity, Small Cap Value, Trend, Global
Bond, High Yield, Strategic Income, Emerging Markets, Convertible Securities,
REIT, Select Growth and U.S. Growth Series, this policy shall extend to all
restricted securities, including securities eligible for resale without
registration pursuant to Rule 144A ("Rule 144A Securities") (described below),
and repurchase agreements maturing in more than seven days. With respect to the
International Equity, Small Cap Value, Trend, Global Bond, High Yield, Strategic
Income, Emerging Markets, Convertible Securities, REIT, Select Growth and U.S.
Growth Series and subject to the following paragraphs, this policy shall not
limit the acquisition of securities purchased in reliance upon Rule 144A of the
1933 Act. Rule 144A permits many privately placed and legally restricted
securities to be freely traded among certain institutional buyers such as the
Series. Investing in Rule 144A Securities could have the effect of increasing
the level of illiquidity of a Series to the extent that qualified institutional
buyers become uninterested, for a time, in purchasing these securities.
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While maintaining oversight, the Board of Trustees has delegated to the
respective investment manager the day-to-day functions of determining whether or
not individual Rule 144A Securities are liquid for purposes of the 10%
limitation on investments in illiquid assets (15% in the case of Convertible
Securities, High Yield, REIT, Select Growth and U.S. Growth Series). The Board
has instructed the managers to consider the following factors in determining the
liquidity of a Rule 144A Security: (i) the frequency of trades and trading
volume for the security; (ii) whether at least three dealers are willing to
purchase or sell the security and the number of potential purchasers; (iii)
whether at least two dealers are making a market in the security; (iv) the
nature of the security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer).
If the respective manager determines that a Rule 144A Security which
was previously determined to be liquid is no longer liquid and, as a result, the
applicable Series' holdings of illiquid securities exceed the Series' 10% limit
on investment in such securities (15% in the case of Convertible Securities,
High Yield, REIT, Select Growth and U.S. Growth Series), the respective manager
will determine what action shall be taken to ensure that the Series continues to
adhere to such limitation.
Repurchase Agreements
Each Series may, from time to time, enter into repurchase agreement
transactions which are at least 102% collateralized by U.S. government
securities, except that the International Equity, Global Bond and Emerging
Markets Series may accept as collateral any securities in which such Series may
invest. Repurchase agreements are instruments under which securities are
purchased from a bank or securities dealer with an agreement by the seller to
repurchase the securities. Under a repurchase agreement, the purchaser acquires
ownership of the security but the seller agrees, at the time of sale, to
repurchase it at a mutually agreed-upon time and price. The Series will take
custody of the collateral under repurchase agreements. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred. The resale price is in excess of the purchase
price and reflects an agreed-upon market rate unrelated to the coupon rate or
maturity of the purchase security. Such transactions afford an opportunity for
the Series to invest temporarily available cash. The Series' risk is limited to
the seller's ability to buy the security back at the agreed-upon sum at the
agreed-upon time, since the repurchase agreement is secured by the underlying
obligation. Should such an issuer default, the investment managers believe that,
barring extraordinary circumstances, the Series will be entitled to sell the
underlying securities or otherwise receive adequate protection for its interest
in such securities, although there could be a delay in recovery. The Series
consider the creditworthiness of the bank or dealer from whom it purchases
repurchase agreements. The Series will monitor such transactions to assure that
the value of the underlying securities subject to repurchase agreements is at
least equal to the repurchase price. The underlying securities will be limited
to those described above.
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the Investment
Company Act of 1940 to allow the funds in the Delaware Investments family
jointly to invest cash balances. Each Series of the Trust (other than
International Equity, Global Bond and Emerging Markets 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.
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Portfolio Loan Transactions
Each Series, except for Cash Reserve Series, may loan up to 25% of its
assets to qualified broker/dealers or institutional investors for their use
relating to short sales or other security transactions.
It is the understanding of the Series' respective investment manager
that the staff of the 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 a Series would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, a Series will only enter into loan arrangements
after a review of all pertinent facts by the Series' respective investment
manager, under the supervision of the Board of 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' respective
investment manager.
Foreign Securities
To the extent that each Series is authorized and intends to invest in
foreign securities, investors should recognize that investing in securities of
foreign issuers involves certain considerations, including those described in
the Prospectuses, which are not typically associated with investing in United
States issuers. Since the stocks of foreign companies are frequently denominated
in foreign currencies, and since the Series may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the Series will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The investment policies of certain of the Series permit them to
enter into forward foreign currency exchange contracts and various related
currency transactions in order to hedge the Series' holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by a Series. Payment of
such interest equalization tax, if imposed, would reduce such Series' rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Series by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
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and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non-equity options are
generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts a Series may make or enter into will
be subject to the special currency rules described above.
Supranational Entities. A supranational entity is an entity established
or financially supported by the national governments of one or more countries to
promote reconstruction or development. Examples of supranational entities
include, among others, the World Bank, the European Economic Community, the
European Bank for Reconstruction and Development, the European Investment Bank,
the Inter-American Development Bank, the Export-Import Banks, the Nordic
Investment Bank and the Asian Development Bank.
Emerging Markets. Compared to the United States and other developed
countries, emerging countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade a
small number of securities. Prices on these exchanges tend to be volatile and,
in the past, securities in these countries have offered greater potential for
gain (as well as loss) than securities of companies located in developed
countries. Further, investments by foreign investors (such as the Series) are
subject to a variety of restrictions in many emerging countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which a Series invests. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including, in
some cases, the need for certain governmental consents. Although these
restrictions may in the future make it undesirable to invest in emerging
countries, Delaware International does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which a Series may invest have historically experienced and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations or currency depreciation, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and unemployment.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies and the political constraints to which a government
debtor may be subject.
With respect to investment in debt issues of foreign governments,
including Brady Bonds, the ability of a foreign government or government-related
issuer to make timely and ultimate payments on its external debt obligations
will also be strongly influenced by the issuer's balance of payments, including
export performance, its access to international credits and investments,
fluctuations in interest rates and the extent of its foreign reserves. A country
whose exports are concentrated in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to fluctuations in international
prices of these commodities or imports. To the extent that a country receives
payment for its exports in currencies other than dollars, its ability to make
debt payments denominated in dollars could be adversely affected.
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The issuers of the emerging market country government and
government-related high yield securities in which a Series may invest have in
the past experienced substantial difficulties in servicing their external debt
obligations, which have led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance interest
payments. Holders of certain foreign government and government-related high
yield securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign government and
government-related high yield securities in which a Series may invest will not
be subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
Depositary Receipts. Each Series (other than Cash Reserve 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.
Foreign Currency Transactions
In connection with a Series' investment in foreign securities, a Series
may purchase or sell currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of portfolio transactions and to
minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A Series will account for
forward contracts by marking to market each day at daily exchange rates.
When a Series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of that Series' assets
denominated in such foreign currency, the Series' custodian bank or subcustodian
will place cash or liquid high grade debt securities in a separate account of
the Series in an amount not less than the value of such Series' total assets
committed to the consummation of such forward contracts. If the additional cash
or securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Series' commitments with respect to
such contracts.
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Futures Contracts and Options on Futures Contracts
Futures Contracts--Each of International Equity, Small Cap Value,
Trend, Global Bond, Strategic Income, Devon, Emerging Markets, Convertible
Securities, Social Awareness, REIT, Select Growth and U.S. Growth Series may
enter into futures contracts relating to securities, securities indices or
interest rates. In addition, International Equity, Global Bond, Devon, Strategic
Income, Emerging Markets, Convertible Securities and Social Awareness Series may
enter into foreign currency futures contracts. (Unless otherwise specified,
interest rate futures contracts, securities and securities index futures
contracts and foreign currency futures contracts are collectively referred to as
"futures contracts.") Such investment strategies will be used as a hedge and not
for speculation.
Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Series may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When a Series is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be closed
out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
Series' current or intended investments in fixed-income securities. For example,
if a Series owned long-term bonds and interest rates were expected to increase,
that Series might sell interest rate futures contracts. Such a sale would have
much the same effect as selling some of the long-term bonds in that Series'
portfolio. However, since the futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique allows
a Series to hedge its interest rate risk without having to sell its portfolio
securities. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Series' interest rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the net asset value of that Series from declining as much as it
otherwise would have. On the other hand, if interest rates were expected to
decline, interest rate futures contracts could be purchased to hedge in
anticipation of subsequent purchases of long-term bonds at higher prices.
Because the fluctuations in the value of the interest rate futures contracts
should be similar to those of long-term bonds, a Series could protect itself
against the effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became available or the
market had stabilized. At that time, the interest rate futures contracts could
be liquidated and that Series' cash reserve could then be used to buy long-term
bonds on the cash market.
International Equity, Global Bond, Strategic Income, Emerging Markets
and Convertible Securities Series may each purchase and sell foreign currency
futures contracts for hedging purposes to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. Each of International Equity, Global
Bond, Strategic Income, Emerging Markets and Convertible Securities Series may
sell futures contracts on a foreign currency, for example, when a Series holds
securities denominated in such currency and it anticipates a decline in the
value of such currency relative to the dollar. In the event such decline occurs,
the resulting adverse effect on the value of foreign-denominated securities may
be offset, in whole or in part, by gains on the futures contracts. However, if
the value of the foreign currency increases relative to the dollar, the Series'
loss on the foreign currency futures contract may or may not be offset by an
increase in the value of the securities because a decline in the price of the
security stated in terms of the foreign currency may be greater than the
increase in value as a result of the change in exchange rates.
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Conversely, each of International Equity, Global Bond, Strategic
Income, Emerging Markets and Convertible Securities Series could protect against
a rise in the dollar cost of foreign-denominated securities to be acquired by
purchasing futures contracts on the relevant currency, which could offset, in
whole or in part, the increased cost of such securities resulting from a rise in
the dollar value of the underlying currencies. When a Series purchases futures
contracts under such circumstances, however, and the price of securities to be
acquired instead declines as a result of appreciation of the dollar, the Series
will sustain losses on its futures position which could reduce or eliminate the
benefits of the reduced cost of portfolio securities to be acquired.
The Series may also engage in currency "cross hedging" when, in the
opinion of the Series' investment manager, the historical relationship among
foreign currencies suggests that a Series may achieve protection against
fluctuations in currency exchange rates similar to that described above at a
reduced cost through the use of a futures contract relating to a currency other
than the U.S. dollar or the currency in which the foreign security is
denominated. Such "cross hedging" is subject to the same risks as those
described above with respect to an unanticipated increase or decline in the
value of the subject currency relative to the dollar.
Options on Futures Contracts--Each of Devon, International Equity,
Small Cap Value, Trend, Global Bond, Strategic Income, Emerging Markets,
Convertible Securities, REIT, Select Growth, Social Awareness and U.S. Growth
Series may purchase and write options on the types of futures contracts that
Series could invest in.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in the Series'
portfolio. If the futures price at expiration of the option is below the
exercise price, a Series will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Series' portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the futures contract. If
the futures price at expiration of the put option is higher than the exercise
price, a Series will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities which
the Series intends to purchase. If a put or call option a Series has written is
exercised, the Series will incur a loss which will be reduced by the amount of
the premium it receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value of its options
on futures positions, a Series' losses from exercised options on futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Series may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected marketwide decline or changes in interest or exchange
rates, a Series could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. If the market decline does not
occur, the Series will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Series will increase
prior to acquisition, due to a market advance or changes in interest or exchange
rates, a Series could purchase call options on futures contracts, rather than
purchasing the underlying futures contracts. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Series will suffer a loss equal to
the price of the call, but the securities which the Series intends to purchase
may be less expensive.
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Options on Foreign Currencies
International Equity, Global Bond, Strategic Income, Emerging Markets,
Convertible Securities, REIT and U.S. Growth Series may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Series may purchase put options on the foreign currency. If the value of the
currency does decline, the Series will have the right to sell such currency for
a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movement in exchange rates. As in the case of other types of options,
however, the benefit to the Series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Series could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types
of hedging purposes. For example, where the Series anticipate a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, they could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution in the value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against the
anticipated increase in the dollar cost of securities to be acquired, the Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series to hedge such
increased costs up to the value of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Series would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Series also may be required to forego all or
a portion of the benefit which might otherwise have been obtained from favorable
movements in exchange rates.
Each Series intends to write covered call options on foreign
currencies. A call option written on a foreign currency by a Series is "covered"
if the Series owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by the Series' custodian bank) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Series has a call on the same foreign currency and in the same principle amount
as the call written where the exercise price of the call held (a) is equal to
less than the exercise price of the call written, or (b) is greater than the
exercise price of the call written if the difference is maintained by the Series
in cash, U.S. government securities or other high-grade liquid debt securities
in a segregated account with its custodian bank.
With respect to writing put options, at the time the put is written, a
Series will establish a segregated account with its custodian bank consisting of
cash, U.S. government securities or other high-grade liquid debt securities in
an amount equal in value to the amount the Series will be required to pay upon
exercise of the put. The account will be maintained until the put is exercised,
has expired, or the Series has purchased a closing put of the same series as the
one previously written.
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Options
Each Series, except for Cash Reserve Series, may write call options and
purchase put options on a covered basis only. International Equity, Global Bond,
Emerging Markets, Convertible Securities, REIT, Select Growth and U.S. Growth
Series may also purchase call options. These Series also may enter into closing
transactions with respect to such options transactions. No Series will engage in
option transactions for speculative purposes.
To the extent authorized to engage in option transactions, the Series
may invest in options that are Exchange listed and Devon, International Equity,
Global Bond, Emerging Markets, Convertible Securities, REIT, Select Growth,
Social Awareness and U.S. Growth Series may also invest in options that are
traded over-the-counter. The other Series reserve the right to invest in
over-the-counter options upon written notice to their shareholders. 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 a Series' ability to effectively hedge its securities. The
Devon, International Equity, Global Bond, Emerging Markets, Convertible
Securities, REIT, Select Growth, Social Awareness and U.S. Growth Series will
only enter into such options to the extent consistent with its limitation on
investments in illiquid securities.
A. Covered Call Writing--A Series may write covered call options from
time to time on such portion of its portfolio, without limit, as the respective
investment manager determines is appropriate in seeking to obtain the Series'
investment objective. A call option gives the purchaser of such option the right
to buy, and the writer, in this case the Series, has the obligation to sell the
underlying security at the exercise price during the option period. The
advantage to a Series of writing covered calls is that the Series receives a
premium which is additional income. However, if the security rises in value, the
Series may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to such options, the Series may enter into closing
purchase transactions. A closing purchase transaction is one in which the
Series, when obligated as a writer of an option, terminates its obligation by
purchasing an option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether the
net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part by a decline in the market value of the underlying security.
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If a call option expires unexercised, the Series will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Series will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
A Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Series will normally have expiration dates between one
and nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
B. Purchasing Put Options--A Series may invest up to 2% of its total
assets in the purchase of put options. The Series will, at all times during
which it holds a put option, own the security covered by such option.
A put option purchased by the Series gives it the right to sell one of
its securities for an agreed price up to an agreed date. The Series intend to
purchase put options in order to protect against a decline in market value of
the underlying security below the exercise price less the premium paid for the
option ("protective puts"). The ability to purchase put options will allow a
Series to protect unrealized gain in an appreciated security in its portfolio
without actually selling the security. If the security does not drop in value,
the Series will lose the value of the premium paid. A Series may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option. Such sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions. A
closing sale transaction is one in which a Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
C. Purchasing Call Options--International Equity, Global Bond, Emerging
Markets, Convertible Securities, REIT, Select Growth and U.S. Growth Series may
purchase call options to the extent that premiums paid by the Series do not
aggregate more than 2% of the Series' total assets. When the Series purchases a
call option, in return for a premium paid by the Series to the writer of the
option, the Series obtains the right to buy the security underlying the option
at a specified exercise price at any time during the term of the option. The
writer of the call option, who receives the premium upon writing the option, has
the obligation, upon exercise of the option, to deliver the underlying security
against payment of the exercise price. The advantage of purchasing call options
is that the Series may alter portfolio characteristics and modify portfolio
maturities without incurring the cost associated with portfolio transactions.
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The Series may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased. The
Series will realize a profit from a closing sale transaction if the price
received on the transaction is more than the premium paid to purchase the
original call option; the Series will realize a loss from a closing sale
transaction if the price received on the transaction is less than the premium
paid to purchase the original call option.
Although the Series will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on an
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the result that the Series would have
to exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any value
to the Series.
D. Options on Stock Indices--The Devon, Growth Opportunities,
International Equity, Small Cap Value, Trend, Global Bond, Emerging Markets,
Convertible Securities, REIT, Select Growth, Social Awareness and U.S. Growth
Series also may write call options and purchase put options on certain stock
indices and enter into closing transactions in connection therewith. The Devon,
International Equity, Global Bond, Emerging Markets, Convertible Securities,
REIT, Select Growth, Social Awareness and U.S. Growth 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, Devon, Growth Opportunities, International
Equity, Small Cap Value, Trend, Global Bond, Emerging Markets, Convertible
Securities, REIT, Select Growth, Social Awareness and U.S. Growth Series may
offset positions in stock index options prior to expiration by entering into a
closing transaction on an Exchange or may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
so included. Some stock index options are based on a broad market index such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on stock indices are currently
traded on the following Exchanges among others: The Chicago Board Options
Exchange, New York Stock Exchange and American Stock Exchange.
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The Series' ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the Series' portfolio securities. Since the Series' portfolio will
not duplicate the components of an index, the correlation will not be exact.
Consequently, the Series bear the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an Exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on the Series' ability to effectively
hedge its securities. The Series will enter into an option position only if
there appears to be a liquid secondary market for such options.
A Series will not engage in transactions in options on stock indices
for speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets.
E. Writing Covered Puts--Convertible Securities, REIT, Select Growth
and U.S. Growth Series may purchase or sell (write) put options on securities as
a means of achieving additional return or of hedging the value of the Series'
portfolio. A put option is a contract that gives the holder of the option the
right to sell to the writer (seller), in return for a premium, the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying security
upon exercise, at the exercise price during the option period. The Series will
write only "covered" options. In the case of a put option written (sold) by the
Series, the Series will, through its custodian, deposit and maintain cash and
short-term U.S. Treasury obligations with a securities depository or the
custodian having a value equal to or greater than the exercise price of the
underlying security.
F. Closing Transactions-- If a Series has written an option, it may
terminate its obligation by effecting a closing purchase transaction. This is
accomplished by purchasing an option of the same series as the option previously
written. There can be no assurance that either a closing purchase or sale
transaction can be effected when a Series so desires. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Series will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option.
A Series will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; a Series will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Series.
If a Series purchases a put option, the loss to the Series is limited to the
premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit a Series realizes on the sale of the security will be reduced
by the premium paid for the put option less any amount (net of transaction
costs) for which the put may be sold.
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Investment Company Securities
Any investments that International Equity, Strategic Income, Emerging
Markets, Select Growth and Social Awareness Series make in either closed-end or
open-end investment companies (in the case of Emerging Markets, Select Growth
and Social Awareness Series) will be limited by the 1940 Act, and would involve
an indirect payment of a portion of the expenses, including advisory fees, of
such other investment companies. Under the 1940 Act's current limitations, a
Series may not (1) own more than 3% of the voting stock of another investment
company; (2) invest more than 5% of its total assets in the shares of any one
investment company; nor (3) invest more than 10% of its total assets in shares
of other investment companies. If a Series elects to limit its investment in
other investment companies to closed-end investment companies, the 3% limitation
described above is increased to 10%. These percentage limitations also apply to
the Emerging Markets and Social Awareness Series' investments in unregistered
investment companies.
Unseasoned Companies
Social Awareness Series may invest in relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid growth
is expected to be above average. Securities of unseasoned companies present
greater risks than securities of larger, more established companies. The
companies in which the Series may invest may have relatively small revenues,
limited product lines, and may have a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing or favorable
terms, or they may be developing or marketing new products or services for which
markets are not yet established and may never become established. Due these and
other factors, small companies may suffer significant losses as well as realize
substantial growth, and investments in such companies tend to be volatile and
are therefore speculative.
In addition, as a matter of non-fundamental policy, Social Awareness
Series will adhere to a Social Criteria strategy:
Vantage Investment Advisors ("Vantage"), the Series sub-adviser, will
utilize the Social Investment Database published by Kinder, Lyndberg, Domini &
Company, Inc. ("KLD") in determining whether a company is engaged in any
activity precluded by the Series' Social Criteria. The Social Investment
Database reflects KLD's determination of the extent to which a company's
involvement in the activities prohibited by the Social Criteria is significant
enough to merit a concern or a major concern. Significance may be determined on
the basis of percentage of revenue generated by, or the size of the operations
attributable to, activities related to such Social Criteria, or other factors
selected by KLD. The social screening undergoes continual refinement and
modification.
Pursuant to the Social Criteria presently in effect, the Series will
not knowingly invest in or hold securities of companies which engage in:
1. Activities which result or are likely to result in damage to the
natural environment;
2. The production of nuclear power, the design or construction of
nuclear power plants, or the manufacture of equipment for the
production of nuclear power;
3. The manufacture of, or contracting for, military weapons;
4. The liquor, tobacco or gambling industries; or
5. Animal testing for cosmetic or personal care products.
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Because of its Social Criteria, the Series may not be able to take the
same advantage of certain investment opportunities as do funds which do not have
Social Criteria. Only securities of companies not excluded by any of the Social
Criteria will be eligible for consideration for purchase by the Series according
to its objective and policies described in the Prospectus.
The Series will commence the orderly sale of securities of a company
when it is determined by Vantage that such company no longer adheres to the
Social Criteria. The Series will sell such securities in a manner so as to
minimize any adverse affect on the Series' assets. Typically, such sales will be
made within 90 days from the date of Vantage's determination, unless a sale
within the 90 day period would produce a significant loss to the overall value
of the Series' assets.
Lower-Rated Debt Securities
U.S. Growth, High Yield, Strategic Income, Convertible Securities and
Emerging Markets Series may purchase high yield, high risk securities, commonly
known as "junk bonds." These securities are rated lower than Baa by Moody's or
lower than BBB by S&P and are often considered to be speculative and involve
significantly higher risk of default on the payment of principal and interest or
are more likely to experience significant price fluctuation due to changes in
the issuer's creditworthiness. Market prices of these securities may fluctuate
more than higher-rated debt securities and may decline significantly in periods
of general economic difficulty which may follow periods of rising interest
rates. While the market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
market in recent years has experienced a dramatic increase in the large-scale
use of such securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high yield bond market, especially
during periods of economic recession. See Appendix A - Description of Ratings in
this Part B.
The market for lower-rated securities may be less active than that for
higher-rated securities, which can adversely affect the prices at which these
securities can be sold. If market quotations are not available, these securities
will be valued in accordance with procedures established by the Board of
Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing high yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by the Series to value
its portfolio securities and the Series' ability to dispose of these lower-rated
debt securities.
Since the risk of default is higher for lower-quality securities, the
investment manager's and/or sub-adviser's research and credit analysis is an
integral part of managing any securities of this type held by the Series. In
considering investments for the Series, the investment manager and/or
sub-adviser will attempt to identify those issuers of high-yielding securities
whose financial condition is adequate to meet future obligations, has improved,
or is expected to improve in the future. The investment manager's and/or
sub-adviser's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer. There can be no assurance that
such analysis will prove accurate.
The Series may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of shareholders.
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Mortgage Dollar Rolls
U.S. Growth Series may enter into mortgage "dollar rolls" in which the
Series sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. Dollar roll transactions
consist of the sale by the Series of mortgage-backed securities, together with a
commitment to purchase similar, but not necessarily identical, securities at a
future date. Any difference between the sale price and the purchase price is
netted against the interest income foregone on the securities to arrive at an
implied borrowing (reverse repurchase) rate. Alternatively, the sale and
purchase transactions which constitute the dollar roll can be executed at the
same price, with the Series being paid a fee as consideration for entering into
the commitment to purchase. Dollar rolls may be renewed prior to cash settlement
and initially may involve only a firm commitment agreement by the Trust to buy a
security. If the broker/dealer to whom the Series sells the security becomes
insolvent, the Series' right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Series is required to repurchase may be worth
less than the security that the Series originally held, and the return earned by
the Series with the proceeds of a dollar roll may not exceed transaction costs.
The Series will place U.S. government or other liquid, high quality assets in a
segregated account in an amount sufficient to cover its repurchase obligation.
Combined Transactions
U.S. Growth Series may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single transaction, as
part of a single or combined strategy when, in the opinion of the investment
manager, it is in the best interests of the Series to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the investment manager's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
U.S. Growth Series may enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. The Series
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Series anticipates
purchasing at a later date. The Series intends to use these transactions as
hedges and not speculative investments and will not sell interest rate caps or
floors where it does not own securities or other instruments providing the
income stream the Series may be obligated to pay. Interest rate swaps involve
the exchange by the Series with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a nominal amount of principal. A currency swap is
an agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them and an index swap
is an agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Series will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Series receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
investment manager and the Series believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Series will not enter into any
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swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or is determined to
be of equivalent credit quality by the investment manager and/or sub-adviser. If
there is a default by the counterparty, the Series may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agent utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
Eurodollar Instruments
U.S. Growth Series may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Series might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
Reverse Repurchase Agreements
U.S. Growth Series is authorized to enter into reverse repurchase
agreements. A reverse repurchase agreement is the sale of a security by the
Series and its agreement to repurchase the security at a specified time and
price. The Series will maintain in a segregated account with the Custodian cash,
cash equivalents or U.S. government securities in an amount sufficient to cover
its obligations under reverse repurchase agreements with broker/dealers (but no
collateral is required on reverse repurchase agreements with banks). Under the
1940 Act, reverse repurchase agreements may be considered borrowings by the
Series; accordingly, the Series will limit its investments in reverse repurchase
agreements, together with any other borrowings, to no more than one-third of its
total assets. The use of reverse repurchase agreements by the Series creates
leverage which increases the Series' investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the costs of the agreements, the Series' earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or net asset value would decline faster
than otherwise would be the case.
"Roll" Transactions
U.S. Growth Series may engage in "roll" transactions. A "roll"
transaction is the sale of securities together with a commitment (for which the
Series may receive a fee) to purchase similar, but not identical, securities at
a future date. Under the 1940 Act, these transactions may be considered
borrowings by the Series; accordingly, the Series will limit its use of these
transactions, together with any other borrowings, to no more than one-fourth of
its total assets. The Series will segregate liquid assets such as cash, U.S.
government securities or other high grade debt obligations in an amount
sufficient to meet its payment obligations in these transactions. Although these
transactions will not be entered into for leveraging purposes, to the extent the
Series' aggregate commitments under these transactions exceed its holdings of
cash and securities that do not fluctuate in value (such as short-term money
market instruments), the Series temporarily will be in a leveraged position
(i.e., it will have an amount greater than its net assets subject to market
risk). Should the market value of the Series' portfolio securities decline while
the Series is in a leveraged position, greater depreciation of its net assets
would likely occur than were it not in such a position. As the Series' aggregate
commitments under these transactions increase, the opportunity for leverage
similarly increases.
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<PAGE>
Variable and Floating Rate Notes
Variable rate master demand notes, in which U.S. Growth Series may
invest, are unsecured demand notes that permit the indebtedness thereunder to
vary and provide for periodic adjustments in the interest rate according to the
terms of the instrument. The Series will not invest over 5% of its assets in
variable rate master demand notes. Because master demand notes are direct
lending arrangements between the Series and the issuer, they are not normally
traded. Although there is no secondary market in the notes, the Series may
demand payment of principal and accrued interest at any time. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail, financial, and
other business concerns) must satisfy the same criteria as set forth above for
commercial paper. In determining average weighted portfolio maturity, a variable
amount master demand note will be deemed to have a maturity equal to the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Series will be determined by
the Series' investment manager under guidelines established by the Series' Board
of Trustees to be of comparable quality at the time of purchase to rated
instruments eligible for purchase under the Series' investment policies. In
making such determinations, the investment manager will consider the earning
power, cash flow and other liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by the Series, the Series may re-sell the note at any time to a
third party. The absence of such an active secondary market, however, could make
it difficult for the Series to dispose of the variable or floating rate note
involved in the event the issuer of the note defaulted on its payment
obligations, and the Series could, for this or other reasons, suffer a loss to
the extent of the default. Variable or floating rate notes may be secured by
bank letters of credit.
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Series' total assets only if such notes
are subject to a demand feature that will permit the Series to demand payment of
the principal within seven days after demand by the Series. If not rated, such
instruments must be found by the Series' investment manager under guidelines
established by the Trust's Board of Trustees, to be of comparable quality to
instruments that are rated high quality. A rating may be relied upon only if it
is provided by a nationally recognized statistical rating organization that is
not affiliated with the issuer or guarantor of the instruments. See Appendix A
for a description of the rating symbols of S&P and Moody's. The Series may also
invest in Canadian Commercial Paper, which is commercial paper issued by a
Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper which is U.S. dollar denominated commercial paper of a foreign issuer.
Concentration
In applying a 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.
36
<PAGE>
ACCOUNTING AND TAX ISSUES
When a Series writes a call, or purchases a put option, an amount equal
to the premium received or paid by it is included in the Series' assets and
liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently "marked
to market" to reflect the current market value of the option written. The
current market value of a written option is the last sale price on the principal
Exchange on which such option is traded or, in the absence of a sale, the mean
between the last bid and asked prices. If an option which a Series has written
expires on its stipulated expiration date, a Series recognizes a capital gain.
If a Series enters into a closing purchase transaction with respect to an option
which a Series has written, a Series realizes a gain (or loss if the cost of the
closing transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which a
Series has written is exercised, a Series realizes a capital gain or loss from
the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received.
The premium paid by a Series for the purchase of a put option is
recorded in the Series' assets and liabilities as an investment and subsequently
adjusted daily to the current market value of the option. For example, if the
current market value of the option exceeds the premium paid, the excess would be
unrealized appreciation and, conversely, if the premium exceeds the current
market value, such excess would be unrealized depreciation. The current market
value of a purchased option is the last sale price on the principal Exchange on
which such option is traded or, in the absence of a sale, the mean between the
last bid and asked prices. If an option which a Series has purchased expires on
the stipulated expiration date, a Series realizes a short-term or long-term
capital loss for federal income tax purposes in the amount of the cost of the
option. If a Series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
Options on Certain Stock Indices--Accounting for options on certain
stock indices will be in accordance with generally accepted accounting
principles. The amount of any realized gain or loss on closing out such a
position will result in a realized gain or loss for tax purposes. Such options
held by the Devon, Growth Opportunities, International Equity, Small Cap Value,
Trend, Global Bond, Emerging Markets, Convertible Securities, REIT, Select
Growth, Social Awareness and U.S. Growth Series at the end of each fiscal year
will be required to be "marked to market" for federal income tax purposes. Sixty
percent of any net gain or loss recognized on such deemed sales or on any actual
sales will be treated as long-term capital gain or loss, and the remainder will
be treated as short-term capital gain or loss.
Other Tax Requirements--Each Series has qualified, or intends to
qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"). As such, a Series will not be subject to federal
income tax, or to any excise tax, to the extent its earnings are distributed as
provided in the Code and it satisfies other requirements relating to the sources
of its income and diversification of its assets.
In order to qualify as a regulated investment company for federal
income tax purposes, a Series must meet certain specific requirements,
including:
(i) The Series must maintain a diversified portfolio of securities,
wherein no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Series' total
assets, and, with respect to 50% of the Series' total assets, no investment
(other than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Series' total assets;
37
<PAGE>
(ii) The Series must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) The Series must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its fiscal
years, and
(iv) The Series must realize less than 30% of its gross income for each
fiscal year from gains from the sale of securities and certain other assets that
have been held by the Series for less than three months ("short-short income").
The Taxpayer Relief Act of 1997 (the "1997 Act") repealed the 30% short-short
income test for tax years of regulated investment companies beginning after
August 5, 1997; however, this rule may have continuing effect in some states for
purposes of classifying the Series as a regulated investment company.
The Code requires the Series to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain net
income earned during the 12 month period ending October 31 (in addition to
amounts from the prior year that were neither distributed nor taxed to the
Series) to you by December 31 of each year in order to avoid federal excise
taxes. The Series intends as a matter of policy to declare and pay sufficient
dividends in December or January (which are treated by you as received in
December) but does not guarantee and can give no assurances that its
distributions will be sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the year that unrealized losses exceed unrealized gains.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, a Series must recognize gain (but not loss) on any constructive
sale of an appreciated financial position in stock, a partnership interest or
certain debt instruments. The Series will generally be treated as making a
constructive sale when it: 1) enters into a short sale on the same or
substantially identical property; 2) enters into an offsetting notional
principal contract; or 3) enters into a futures or forward contract to deliver
the same or substantially identical property. Other transactions (including
certain financial instruments called collars) will be treated as constructive
sales as provided in Treasury regulations to be published. There are also
certain exceptions that apply for transactions that are closed before the end of
the 30th day after the close of the taxable year.
Investment in Foreign Currencies and Foreign Securities--A Series is
authorized to invest a limited amount in foreign securities. Such investments,
if made, will have the following additional tax consequences to a Series:
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.
38
<PAGE>
If the Series' Section 988 losses exceed the Series' other net
investment company taxable income during a taxable year, the Series generally
will not be able to make ordinary dividend distributions to you for that year,
or distributions made before the losses were realized will be recharacterized as
return of capital distributions of federal income tax purposes, rather than as
an ordinary dividend or capital gain distribution. If a distribution is treated
as a return of capital, your tax basis in your Series shares will be reduced by
a like amount (to the extent of such basis), and any excess of the distribution
over your tax basis in your Series shares will be treated as capital gain to
you.
The 1997 Act generally requires that foreign income be translated into
U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than two
years after the taxable year to which they relate. This new law may require the
Series to track and record adjustments to foreign taxes paid on foreign
securities in which it invests. Under the Series' current reporting procedure,
foreign security transactions are recorded generally at the time of each
transaction using the foreign currency spot rate available for the date of each
transaction. Under the new law, the Series will be required to record a fiscal
year end (and at calendar year end for excise tax purposes) an adjustment that
reflects the difference between the spot rates recorded for each transaction and
the year-end average exchange rate for all of the Series' foreign securities
transactions. There is a possibility that the mutual fund industry will be given
relief from this new provision, in which case no year-end adjustments will be
required.
The Series may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of the
Series at the end of its fiscal year are invested in securities of foreign
corporations, the Series may elect to pass-through to you your pro rata share of
foreign taxes paid by the Series. If this election is made, you will be: (i)
required to include in your gross income your pro rata share of foreign source
income (including any foreign taxes paid by the Series) and (ii) entitled to
either deduct your share of such foreign taxes in computing your taxable income
or to claim a credit for such taxes against your U.S. income tax, subject to
certain limitations under the Code. You will be informed by the 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 investors
who pay foreign taxes of $300 or less on a single return or $600 or less on a
joint return during any year (all of which must be reported on IRS Form 1099-DIV
from the Series to the investor) to claim a tax credit against their U.S.
federal income tax for the amount of foreign taxes paid by the Series. This
process will allow you, if you qualify, to bypass the burdensome and detailed
reporting requirements on the foreign tax credit schedule (Form 1116) and report
your foreign taxes paid directly on page 2 of Form 1040. This simplified
procedure was not available until calendar year 1998.
Investment in Passive Foreign Investment Company Securities--The Series
may invest in shares of foreign corporations which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a Series receives an "excess distribution" with
39
<PAGE>
respect to PFIC stock, the Series itself may be subject to U.S. federal income
tax on a portion of the distribution, whether or not the corresponding income is
distributed by the Series to you. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Series held the PFIC shares. The Series itself will be subject to tax
on the portion, if any, of an excess distribution that is so allocated to prior
Series taxable years, and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
Series. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain distribution might have been classified as capital gain. This may
have the effect of increasing Series distributions to you that are treated as
ordinary dividends rather than long-term capital gain dividends.
A Series may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Series generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market the Series' PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. The Series would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction would be
limited to the amount of any net mark-to-market gains previously included with
respect to that particular PFIC security. If the Series were to make this second
PFIC election, tax at the Series level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the
amount of tax payable by the Series (if any), the amounts distributable to you
by the Series, the time at which these distributions must be made, and whether
these distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares
of a foreign corporation are acquired to ascertain that the foreign corporation
is a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the Series acquires shares in that corporation. While
the Series will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so and
it reserves the right to make such investments as a matter of its fundamental
investment policy.
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.
40
<PAGE>
PERFORMANCE INFORMATION
Contract owners and prospective investors will be interested in
learning from time to time the current yield of High Yield, Capital Reserves,
Global Bond and Strategic Income Series and, in addition, the effective
compounded yield of Cash Reserve Series. Advertisements of performance of the
underlying Series, if any, will be accompanied by a statement of performance of
the separate account. As explained under Dividends and Realized Securities
Profits Distributions, dividends for Capital Reserves and Cash Reserve Series
are declared daily from net investment income, dividends for Global Bond Series
are declared quarterly and dividends for High Yield and Strategic Income Series
are declared annually. Yield will fluctuate as income earned fluctuates. On May
1, 2000, the Delchester Series' name was changed to High Yield Series and the
Series' investment objective changed from high current income to total return
and, as a secondary objective, high current income.
The Service Class shares of the Series are subject to an annual 12b-1
fee of not more than 0.30% (currently set at 0.15%). Performance shown in this
section is the performance of the Standard Class shares of the Series, which do
not carry a 12b-1 fee. Performance of the Service Class shares will be lower
than the Standard Class and will differ from the Standard Class to the extent of
the 12b-1 fee.
From time to time, the Trust may state each Series' total return in
advertisements and other types of literature. Any statements of total return
performance data will be accompanied by information on the Series' average
annual total rate of return over the most recent one-year period, five-year
period and ten-year period or lifetime period, if applicable. Each Series may
also advertise aggregate and average total return information over additional
periods of time.
Each Series' average annual total rate of return is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000;
T = average annual total return;
n = number of years;
ERV = redeemable value of the hypothetical $1,000
purchase at the end of the period.
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes all distributions are
reinvested at net asset value.
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<PAGE>
The performance, as shown below, is the average annual total return
quotations through December 31, 1999. Securities prices fluctuated during the
periods covered and past results should not be considered as representative of
future performance. The average annual total return performance is the
performance of the Standard Class shares of the Series, which do not carry a
12b-1 fee. Performance of the Service Class shares will be lower than the
Standard Class and will differ from the Standard Class to the extent of the
12b-1 fee noted above.
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------------------------------------------------------------------------------------------
Series* 1 year ended 3 years ended 5 years ended 10 years ended Life of Fund
12/31/99 12/31/99 12/31/99 12/31/99
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balanced
(Inception 7/28/88) -7.85% 11.38% 15.18% 12.16% 12.21%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Capital Reserves
(Inception 7/28/88) 0.28% 4.83% 6.46% 6.13% 6.40%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Cash Reserve
(Inception 7/28/88) 4.81% 5.00% 5.08% 4.79% 5.22%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Convertible Securities
(Inception 5/1/97) 6.97% N/A N/A N/A 8.18%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Devon
(Inception 5/1/97) -10.13% N/A N/A N/A 14.00%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Emerging Markets
(Inception 5/1/97) 48.28% N/A N/A N/A -4.31%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Global Bond
(Inception 5/2/96) -3.60% 1.59% N/A N/A 4.43%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Growth and Income
(Inception 7/28/88) -2.98% 12.27% 18.39% 11.95% 11.73%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Growth Opportunities**
(Inception 7/12/91) 62.94% 30.54% 26.95% N/A 17.75%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
High Yield
(Inception 7/28/88) -2.64% 2.79% 7.19% 8.77% 8.37%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
International Equity
(Inception 10/29/92) 15.76% 10.83% 13.24% N/A 11.77%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
REIT Series
(Inception 5/4/98) -2.61% N/A N/A N/A -7.00%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Small Cap Value
(Inception 12/27/93) -4.86% 6.38% 12.81% N/A 11.07%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Social Awareness
(Inception 5/1/97) 12.91% N/A N/A N/A 21.27%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Strategic Income
(Inception 5/1/97) -3.29% N/A N/A N/A 1.99%
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Trend **
(Inception 12/27/93) 70.45% 33.89% 29.97% N/A 24.68%
----------------------------------------------------------------------------------------------------------------
</TABLE>
* The respective investment manager elected to waive voluntarily the
portion of its annual compensation under its Investment Management
Agreement with each Series to limit operating expenses of the Series to
the amounts noted under Investment Management Agreements and
Sub-Advisory Agreements. In the absence of such voluntary waiver,
performance would have been affected negatively.
** Returns for 1999 were highly unusual and cannot be sustained. Investors
should be aware that recent returns were primarily achieved during
favorable market conditions, especially within the technology sector.
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<PAGE>
High Yield, Capital Reserves, Global Bond and Strategic Income Series
may also quote its current yield, calculated as described below, in
advertisements and investor communications.
The yield computation for High Yield, Capital Reserves, Global Bond and
Strategic Income Series is determined by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period and annualizing the resulting figure, according to the
following formula:
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends;
d = the maximum offering price per share on the last
day of the period.
The above formula will be used in calculating quotations of yield,
based on specific 30-day periods identified in advertising by the Series. The
yields of High Yield, Capital Reserves and Strategic Income Series as of
December 31, 1999 using this formula were 11.72%, 6.39% and 8.37%, respectively.
The yield shown is that of the Standard Class shares of the Series, which do not
carry a 12b-1 fee. Performance of the Service Class shares will be lower than
the Standard Class and will differ from the Standard Class to the extent of the
12b-1 fee noted above.
Yield quotations are based on the offering price determined by the
Series' net asset value on the last day of the period and will fluctuate
depending on the period covered.
Cash Reserve Series may also quote its current yield in advertisements
and investor communications.
Yield calculation for Cash Reserve Series begins with the value of a
hypothetical account of one share at the beginning of a seven-day period; this
is compared with the value of that same account at the end of the same period
(including shares purchased for the account with dividends earned during the
period). The net change in the account value is generally the net income earned
per share during the period, which consists of accrued interest income plus or
minus amortized purchase discount or premium, less all accrued expenses
(excluding expenses reimbursed by the investment manager) but does not include
realized gains or losses or unrealized appreciation or depreciation.
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<PAGE>
The current yield of Cash Reserve Series represents the net change in
this hypothetical account annualized over 365 days. In addition, a shareholder
may achieve a compounding effect through reinvestment of dividends which is
reflected in the effective yield shown below.
The following is an example, for purposes of illustration only, of the
current and effective yield calculations for Cash Reserve Series for the
seven-day period ended December 31, 1999. Yield shown below is that of the
Standard Class shares of the Series, which do not carry a 12b-1 fee. Performance
of the Service Class shares will be lower than the Standard Class and will
differ from the Standard Class to the extent of the 12b-1 fee noted above.
<TABLE>
<CAPTION>
<S> <C>
Value of a hypothetical account with one share at the beginning of the period $10.00000000
Value of the same account at the end of the period 10.01010474
===========
Net change in account value .01010474*
Base period return = net change in account value/beginning account value .001010474
Current yield [base period return x (365/7)] 5.27%**
=====
365/7
Effective yield (1 + base period) - 1 5.41%***
=====
</TABLE>
Weighted average life to maturity of the portfolio on December 31, 1999 was 48
days.
* This represents the net income per share for the seven calendar days ended
December 31, 1999.
** This represents the average of annualized net investment income per share
for the seven calendar days ended December 31, 1999.
*** This represents the current yield for the seven calendar days ended
December 31, 1999 compounded daily.
The yield quoted at any time represents the amount being earned on a
current basis and is a function of the types of instruments in Cash Reserve
Series' portfolio, their quality and length of maturity and the Series'
operating expenses. The length of maturity for the portfolio is the average
dollar weighted maturity of the portfolio. This means that the portfolio has an
average maturity of a stated number of days for its issues. The calculation is
weighted by the relative value of the investment.
The yield will fluctuate daily as the income earned on the investments
of Cash Reserve Series fluctuates. Accordingly, there is no assurance that the
yield quoted on any given occasion will remain in effect for any period of time.
It should also be emphasized that the Trust is an open-end investment company
and that there is no guarantee that the net asset value or any stated rate of
return will remain constant. Investment performance is not insured. Investors
comparing results of Cash Reserve Series with investment results and
44
<PAGE>
yields from other sources such as banks or savings and loan associations should
understand these distinctions. Historical and comparative yield information may,
from time to time, be presented by Cash Reserve Series. Although Cash Reserve
Series determines the yield on the basis of a seven-calendar-day period, it may,
from time to time, use a different time span.
Other funds of the money market type may calculate their yield on a
different basis and the yield quoted by the Series could vary upward or downward
if another method of calculation or base period were used.
Investors should note that income earned and dividends paid by High
Yield, Capital Reserves, Global Bond and Strategic Income Series will also vary
depending upon fluctuations in interest rates and performance of each Series'
portfolio. The net asset value of each Series may change. Unlike Cash Reserve
Series, High Yield, Capital Reserves, Global Bond and Strategic Income Series
invest in longer-term securities that fluctuate in value and do so in a manner
inversely correlated with changing interest rates. The Series' net asset values
will tend to rise when interest rates fall. Conversely, the Series' net asset
values will tend to fall as interest rates rise. Normally, fluctuations in
interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held in the Series will vary from day to day and
investors should consider the volatility of the Series' net asset values as well
as their yields before making a decision to invest.
Comparative Information
From time to time, each Series may also quote its actual total return
performance, dividend results and other performance information in advertising
and other types of literature. This information may be compared to that of other
mutual funds with similar investment objectives and to stock, bond and other
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of a Series may be compared to data prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., or to the S&P 500 Index,
the Dow Jones Industrial Average, the Morgan Stanley Capital International
(MSCI), Europe, Australia and Far East (EAFE) Index, the MSCI Emerging Markets
Free Index, or the Salomon Brothers World Government Bond Index. Performance
also may be compared to the performance of unmanaged indices compiled or
maintained by statistical research firms such as Lehman Brothers or Salomon
Brothers, Inc.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well as
unmanaged indices compiled and maintained by these firms, will be used in
preparing comparative illustrations. In addition, the performance of multiple
indices compiled and maintained by these firms may be combined to create a
blended performance result for comparative purposes. Generally, the indices
selected will be representative of the types of securities in which a Series may
invest and the assumptions that were used in calculating the blended performance
will be described.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare a Series'
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The S&P 500 and
the Dow Jones Industrial Average are industry-accepted unmanaged
45
<PAGE>
indices of generally-conservative securities used for measuring general market
performance. Similarly, the MSCI EAFE Index, the MSCI Emerging Markets Free
Index, and the Salomon Brothers World Government Bond Index are
industry-accepted unmanaged indices of equity securities in developed countries
and global debt securities, respectively, used for measuring general market
performance. The total return performance reported for these indices will
reflect the reinvestment of all distributions on a quarterly basis and market
price fluctuations. The indices do not take into account any sales charges or
other fees. A direct investment in an unmanaged index is not possible.
Comparative information on the Consumer Price Index may also be
included in advertisements or other literature. The Consumer Price Index, as
prepared by the U.S. Bureau of Labor Statistics, is the most commonly used
measure of inflation. It indicates the cost fluctuations of a representative
group of consumer goods. It does not represent a return from an investment.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. As well, current industry rate and yield
information on all industry available fixed-income securities, as reported
weekly by The Bond Buyer, may also be used in preparing comparative
illustrations.
Each Series may also promote its yield and/or total return performance
and use comparative performance information computed by and available from
certain industry and general market research and publications, such as Lipper
Analytical Services, Inc., IBC/Donoghue's Money Market Report and Morningstar,
Inc.
The performance of multiple indices compiled and maintained by
statistical research firms, such as Morgan Stanley, Salomon Brothers and Lehman
Brothers, may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the types of
securities in which the Series may invest and the assumptions that were used in
calculating the blended performance will be described.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Series may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Series. The Series may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
46
<PAGE>
The Series may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Series (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments or global or international investments),
economic and political conditions, the relationship between sectors of the
economy and the economy as a whole, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements, sales literature,
communications to shareholders or other materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Series), as well as the views as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Series. In addition, selected indices may be used to illustrate
historic performance of selected asset classes. The Series may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings which illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, domestic and international stocks, and/or bonds, treasury bills and shares
of a Series. In addition, advertisements, sales literature, communications to
shareholders or other materials may include a discussion of certain attributes
or benefits to be derived by an investment in a Series and/or other mutual
funds, shareholder profiles and hypothetical investor scenarios, timely
information on financial management and tax planning and investment alternatives
to certificates of deposit and other financial instruments. Such sales
literature, communications to shareholders or other materials may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the Series and may
illustrate how to find the listings of the Series in newspapers and periodicals.
Materials may also include discussions of other Series, products, and services.
The Series may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Series may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Series may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Series may include information
regarding the background and experience of its portfolio managers.
47
<PAGE>
The following table is an example, for purposes of illustration only,
of cumulative total return performance through December 31, 1999. For these
purposes, the calculations assume the reinvestment of any realized securities
profits distributions and income dividends paid during the indicated periods.
Cumulative total return is based on the Standard Class shares of the Series,
which do not carry a 12b-1 fee. Performance of the Service Class shares will be
lower than the Standard Class and will differ from the Standard Class to the
extent of the 12b-1 fee noted above.
<TABLE>
<CAPTION>
Cumulative Total Return
- ------------------------------------------------------------------------------------------------------------------------------
Series* 3 months 6 months 9 months 1 year 3 years 5 years 10years Life of Fund
ended ended ended ended ended ended ended
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced
(Inception 7/28/88) 1.52% -7.73% -1.81% -7.85% 38.16% 102.71% 214.98% 273.14%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Capital Reserves
(Inception 7/28/88) 0.12% 0.91% 0.11% 0.28% 15.21% 36.75% 81.24% 103.28%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Cash Reserve
(Inception 7/28/88) 1.29% 2.49% 3.64% 4.81% 15.75% 28.12% 59.60% 78.94%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Convertible Securities
(Inception 5/1/97) 8.70% 4.45% 8.40% 6.97% N/A N/A N/A 23.37%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Devon
(Inception 5/1/97) 2.33% -10.04% -1.94% -10.13% N/A N/A N/A 41.91%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Emerging Markets
(Inception 5/1/97) 22.99% 17.16% 43.10% 48.28% N/A N/A N/A -11.10%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Global Bond
(Inception 5/2/96) -2.19% -1.99% -2.84% -3.60% 4.86% N/A N/A 17.22%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Growth and Income
(Inception 7/28/88) 1.50% -8.29% -2.17% -2.98% 41.52% 132.55% 209.19% 255.07%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Growth Opportunities**
(Inception 7/12/91) 46.48% 44.12% 61.03% 62.94% 122.44% 229.78% N/A 299.23%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
High Yield
(Inception 7/28/88) 0.04% -3.18% -3.95% -2.64% 8.61% 41.49% 131.70% 150.69%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
International Equity
(Inception 10/29/92) 8.76% 6.88% 13.18% 15.76% 36.14% 86.25% N/A 122.21%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
REIT
(Inception 5/4/98) 0% -7.47% 3.22% -2.61% N/A N/A N/A -11.38%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Select Growth **
(Inception 5/3/99) 42.47% 40.65% N/A N/A N/A N/A N/A 42.90%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Small Cap Value
(Inception 12/27/93) 1.45% -8.24% 5.64% -4.86% 20.39% 82.72% N/A 88.02%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Social Awareness
(Inception 5/1/97) 14.81% 7.92% 13.22% 12.91% N/A N/A N/A 67.38%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Strategic Income
(Inception 5/1/97) -0.21% -1.13% -3.69% -3.29% N/A N/A N/A 5.41%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
Trend **
(Inception 12/27/93) 34.16% 40.90% 66.22% 70.45% 140.04% 270.92% N/A 276.86%
- ------------------------ ----------- ---------- ----------- ------------ ------------ ------------ ----------- ---------------
U.S. Growth Series
(Inception 11/15/99) N/A N/A N/A N/A N/A N/A N/A 5.90%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The respective investment manager elected to waive voluntarily the portion
of its annual compensation under its Investment Management Agreement with
each Series to limit operating expenses of the Series to the amounts noted
under Investment Management Agreements and Sub-Advisory Agreements. In the
absence of such voluntary waiver, performance would have been affected
negatively.
** Returns for 1999 were highly unusual and cannot be sustained. Investors
should be aware that recent returns were primarily achieved during favorable
market conditions, especially within the technology sector.
48
<PAGE>
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
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of a Series.
49
<PAGE>
The Power of Compounding
As part of your Variable Annuity contract, any earnings from your
investment selection are automatically reinvested to purchase additional shares
of a Series. This gives your investment yet another opportunity to grow. It's
called the Power of Compounding. Each Series may included illustrations showing
the Power of Compounding in advertisements and other types of literature.
TRADING PRACTICES AND BROKERAGE
The Trust or, in the case of International Equity, Global Bond and
Emerging Markets Series, Delaware International, selects banks, brokers or
dealers to execute transactions on behalf of the Series for the purchase or sale
of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have banks,
brokers or dealers execute transactions at best execution. Best execution refers
to many factors, including the price paid or received for a security, the
commission charged, the promptness and reliability of execution, the
confidentiality and placement accorded the order and other factors affecting the
overall benefit obtained by the account on the transaction. The 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.
During the fiscal years ended December 31, 1997, 1998 and 1999, the
aggregate dollar amounts of brokerage commissions were paid by the Series noted
below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------------------ ----------------- ------------------- -------------------
<S> <C> <C> <C>
Balanced Series $120,307 $165,591 $393,756
------------------------------------------ ----------------- ------------------- -------------------
Convertible Securities Series(1) $5,517 $10,155 $4,891
------------------------------------------ ----------------- ------------------- -------------------
Devon Series(1) $21,022 $83,285 $244,079
------------------------------------------ ----------------- ------------------- -------------------
Emerging Markets Series(1) $28,640 $21,763 $15,994
------------------------------------------ ----------------- ------------------- -------------------
Growth and Income Series $518,762 $1,020,668 $1,371,136
------------------------------------------ ----------------- ------------------- -------------------
Growth Opportunities Series $270,393 $308,645 $262,630
------------------------------------------ ----------------- ------------------- -------------------
International Equity Series $215,242 $121,978 $143,149
------------------------------------------ ----------------- ------------------- -------------------
REIT Series(2) N/A $13,326 $24,542
------------------------------------------ ----------------- ------------------- -------------------
Select Growth Series(3) N/A N/A $35,470
------------------------------------------ ----------------- ------------------- -------------------
Small Cap Value Series $119,689 $198,194 $194,772
------------------------------------------ ----------------- ------------------- -------------------
Social Awareness Series(1) $7,416 $25,636 $18,920
------------------------------------------ ----------------- ------------------- -------------------
Trend Series $182,867 $269,355 $233,253
------------------------------------------ ----------------- ------------------- -------------------
U.S. Growth Series(4) N/A N/A $3,285
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on May 1, 1997.
(2) Commenced operations on May 4, 1998.
(3) Commenced operations on May 3, 1999.
(4) Commenced operations on November 15, 1999.
The respective investment manager may allocate out of all commission
business generated by all of the funds and accounts under management by the
respective investment manager, brokerage business to brokers or dealers who
provide brokerage and research services. These services include advice, either
directly or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; furnishing of
analyses and reports concerning issuers; securities or industries; providing
information on economic factors and trends; assisting in determining portfolio
strategy; providing computer software and hardware used in security analyses;
and providing portfolio performance evaluation and technical market analyses.
Such services are used by the respective investment manager in connection with
its investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
50
<PAGE>
During the fiscal year ended December 31, 1998, portfolio transactions
of the following Series in the amounts listed below, resulting in brokerage
commissions in the amounts listed below were directed to brokers for brokerage
and research services provided:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Portfolio Brokerage
Transactions Commissions
Amounts Amounts
------- -------
----------------------------------- -------------------- ---------------------
<S> <C> <C>
Balanced Series $102,012,726 $152,619
----------------------------------- -------------------- ---------------------
Convertible Securities Series $814,380 $1,333
----------------------------------- -------------------- ---------------------
Devon Series $60,928,285 $94,548
----------------------------------- -------------------- ---------------------
Growth and Income Series $262,429,255 $322,247
----------------------------------- -------------------- ---------------------
Growth Opportunities Series $10,190,304 $17,292
----------------------------------- -------------------- ---------------------
International Equity Series $2,868,580 $5,717
----------------------------------- -------------------- ---------------------
REIT Series $4,172,451 $10,160
----------------------------------- -------------------- ---------------------
Small Cap Value Series $41,069,657 $116,137
----------------------------------- -------------------- ---------------------
Social Awareness Series $2,795,366 $5,581
----------------------------------- -------------------- ---------------------
Trend Series $4,595,581 $6,702
----------------------------------- -------------------- ---------------------
U.S. Growth Series (1) $1,973,176 $1,773
------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on November 15, 1999.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreements, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the 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 respective investment manager which constitute in some part brokerage and
research services used by the respective investment manager in connection with
its investment decision-making process and constitute in some part services used
by the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In such cases,
the respective investment manager will make a good faith allocation of brokerage
and research services and will pay out of its own resources for services used by
the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the 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.
51
<PAGE>
The respective investment manager may place a combined order for two or
more accounts or funds engaged in the purchase or sale of the same security if,
in its judgment, joint execution is in the best interest of each participant and
will result in best execution. Transactions involving commingled orders are
allocated in a manner deemed equitable to each account or fund. When a combined
order is executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is believed that the ability of the accounts to participate
in volume transactions will generally be beneficial to the accounts and funds.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or fund may obtain, it is the opinion of the respective investment
manager and the 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 each Series. Given the respective
Series' investment objectives, the Trust anticipates that the annual portfolio
turnover rates are not expected to exceed 100% for the Convertible Securities,
Growth and Income, International Equity, Emerging Markets, Small Cap Value,
Social Awareness and REIT Series, 200% for the Capital Reserves Series, and may
exceed 100% for the Balanced, Devon, Global Bond, Growth Opportunities, High
Yield, Select Growth, Strategic Income, Trend and U.S. Growth Series. It is
possible that in any particular year market conditions or other factors might
result in portfolio activity at a greater rate than anticipated. The portfolio
turnover rate of each Series is calculated by dividing the lesser of purchases
or sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Series during the
particular fiscal year, exclusive of securities whose maturities at the time of
acquisition are one year or less.
The degree of portfolio activity may affect brokerage costs incurred by
each Series. A turnover rate of 100% would occur, for example, if all the
investments in a Series' portfolio at the beginning of the year were replaced by
the end of the year. In investing to achieve their respective objective, a
Series may hold securities for any period of time. Portfolio turnover will also
be increased if a Series writes a large number of call options which are
subsequently exercised. The turnover rate also may be affected by cash
requirements from redemptions and repurchases of Series' shares.
52
<PAGE>
The portfolio turnover rates for the Series noted below for the past
two fiscal years were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Year Ended Year Ended
Series December 31, 1999 December 31, 1998
------ ----------------- -----------------
-------------------------------------- -------------------------- -------------------------
<S> <C> <C>
Balanced Series 107% 94%
-------------------------------------- -------------------------- -------------------------
Capital Reserves Series 129% 166%
-------------------------------------- -------------------------- -------------------------
Convertible Securities Series 35% 77%
-------------------------------------- -------------------------- -------------------------
Devon Series 101% 34%
-------------------------------------- -------------------------- -------------------------
Emerging Markets Series 20% 38%
-------------------------------------- -------------------------- -------------------------
Global Bond Series 100% 79%
-------------------------------------- -------------------------- -------------------------
Growth and Income Series 92% 81%
-------------------------------------- -------------------------- -------------------------
Growth Opportunities Series 132% 142%
-------------------------------------- -------------------------- -------------------------
High Yield Series 110% 86%
-------------------------------------- -------------------------- -------------------------
International Equity Series 9% 5%
-------------------------------------- -------------------------- -------------------------
REIT Series 33% 39%*
-------------------------------------- -------------------------- -------------------------
Select Growth Series 174%** N/A
-------------------------------------- -------------------------- -------------------------
Small Cap Value Series 47% 45%
-------------------------------------- -------------------------- -------------------------
Social Awareness Series 22% 30%
-------------------------------------- -------------------------- -------------------------
Strategic Income Series 101% 143%
-------------------------------------- -------------------------- -------------------------
Trend Series 82% 121%
-------------------------------------- -------------------------- -------------------------
U.S. Growth Series 0%*** N/A
-------------------------------------------------------------------------------------------
</TABLE>
* Annualized. Commenced operations on May 4, 1998.
** Annualized. Commenced operations on May 3, 1999.
*** Commenced operations on November 15, 1999.
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 is
included in the Series' financial statements which are incorporated by reference
into this Part B.
53
<PAGE>
The net asset value per share is computed by adding the value of all
securities and other assets in a Series' portfolio, deducting any liabilities of
that Series and dividing by the number of that Series' shares outstanding.
Expenses and fees are accrued daily. Each Series' net asset value per share is
computed by adding the value of all the securities and other assets in the
Series' portfolio, deducting any liabilities of the Series, and dividing by the
number of Trust shares outstanding. Expenses and fees are accrued daily. In
determining a Series' total net assets, portfolio securities primarily listed or
traded on a national or foreign securities exchange, except for bonds, are
valued at the last sale price on that exchange. Exchange traded options are
valued at the last reported sale price or, if no sales are reported, at the mean
between bid and asked prices. Non-exchange traded options are valued at fair
value using a mathematical model. Futures contracts are valued at their daily
quoted settlement price. Securities not traded on a particular day,
over-the-counter securities, and government and agency securities are valued at
the mean value between bid and asked prices. Money market instruments having a
maturity of less than 60 days are valued at amortized cost. Debt securities
(other than short-term obligations) are valued on the basis of valuations
provided by a pricing service when such prices are believed to reflect the fair
value of such securities. Foreign securities, 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 a Series of securities owned by it is not reasonably
practical, or it is not reasonably practical for a Series fairly to value its
assets, or in the event that the Securities and Exchange Commission has provided
for such suspension for the protection of shareholders, the 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.
Money Market Series
The Board of Trustees has adopted certain procedures to monitor and
stabilize the price per share of Cash Reserve Series. Calculations are made each
day to compare part of the Series' value with the market value of instruments of
similar character. At regular intervals all issues in the portfolio are valued
at market value. Securities maturing in more than 60 days are valued more
frequently by obtaining market quotations from market makers. The portfolio will
also be valued by market makers at such other times as is felt appropriate. In
the event that a deviation of more than 1/2 of 1% exists between the Series' $10
per share offering and redemption prices and the net asset value calculated by
reference to market quotations, or if there is any other deviation which the
Board of Trustees believes would result in a material dilution to shareholders
or purchasers, the Board of Trustees will promptly consider what action, if any,
should be initiated, such as changing the price to more or less than $10 per
share.
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Dividends for the Capital Reserves Series are declared daily and paid
monthly. Short-term capital gains distributions, if any, may be paid with the
dividend; otherwise, any distributions from net realized securities profits
normally will be distributed following the close of the fiscal year. The Trust's
fiscal year ends on December 31.
54
<PAGE>
For the Balanced and Growth and Income Series, the Trust will make
payments from the Series' net investment income quarterly. Distributions from
the respective Series' net realized securities profits, if any, normally will be
made following the close of the fiscal year.
For the Select Growth, Convertible Securities, Global Bond, Growth
Opportunities, Devon, High Yield, International Equity, Small Cap Value, Trend,
Emerging Markets, Social Awareness, Strategic Income, REIT and U.S. Growth
Series, 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.
Cash Reserve Series
The Trust declares a dividend of this Series' net investment income on
a daily basis, to shareholders of record at the time of the previous calculation
of the Series' net asset value, each day that the Trust is open for business.
Payment of dividends will be made monthly. The amount of net investment income
will be determined at the time the offering price and net asset value are
determined (see Offering Price), and shall include investment income accrued,
less the estimated expenses of the Series incurred since the last determination
of net asset value. Gross investment income consists principally of interest
accrued and, where applicable, net pro-rata amortization of premiums and
discounts since the last determination. The dividend declared at the time the
offering price and net asset value are determined, as noted above, will be
deducted immediately before the net asset value calculation is made. See
Offering Price. Net investment income earned on days when the Trust is not open
will be declared as a dividend on the next business day. An investor begins
earning dividends when payments for shares purchased are converted into Federal
Funds and are available for investment.
To the extent necessary to maintain a $10 per share net asset value,
the Board of Trustees will consider temporarily reducing or suspending payment
of daily dividends, or making a distribution of realized securities profits or
other distributions at the time the net asset value per share has changed.
TAXES
Each Series has qualified, or intends to qualify, as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code").
As such, a Series will not be subject to federal income tax to the extent its
earnings are distributed and it satisfies other requirements relating to the
sources of its income and diversification of its assets.
Each Series of the 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.
55
<PAGE>
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), as revised by
the Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998
Act") and the Omnibus Consolidated and Emergency Supplemental Appropriations
Act, a Series is required to track its sales of portfolio securities and to
report its capital gain distributions to you according to the following
categories:
Long-term capital gains": gains on securities sold after December 31,
1997 and held for more than 12 months as capital assets in the hands of
the holder are taxed at the 20% rate when distributed to shareholders
(10% for individual investors in the 15% tax bracket).
"Short-term capital gains": Gains on securities sold by a Series that
do not meet the long-term holdings period are considered short term
capital gains and are taxable as ordinary income.
"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.
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-ADVISORY AGREEMENTS
Delaware Management Company ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to Growth and Income, High Yield, Capital
Reserves, Cash Reserve, Growth Opportunities, Balanced, Small Cap Value, Trend,
Strategic Income, Devon, Convertible Securities, Social Awareness, REIT, Select
Growth and U.S. Growth Series. Delaware International Advisers Ltd. ("Delaware
International"), located at Third Floor, 80 Cheapside, London, England EC2V 6EE,
furnishes investment management services to International Equity, Global Bond
and Emerging Markets Series. Such services are provided subject to the
supervision and direction of the Trust's Board of Trustees. Delaware
International is affiliated with Delaware Management.
Delaware Management and its predecessors have been managing the funds in
Delaware Investments since 1938. On December 31, 1999, Delaware Management and
its affiliates within Delaware Investments, including Delaware International,
were supervising in the aggregate more than $47 billion in assets in the various
institutional or separately managed (approximately $27,783,710,000) and
investment company ($19,579,950,000) 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.
56
<PAGE>
The Investment Management Agreements for each Series are dated December
15, 1999 and were approved the initial shareholder on that date. The Agreements
will remain in effect for an initial period of two years. The Agreements may be
renewed only if such renewal and continuance are specifically approved at least
annually by the Board of 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 Agreements
are terminable without penalty on 60 days' notice by the Trustees of the Trust
or by the respective investment manager. The Agreements will terminate
automatically in the event of their assignments.
Under the Investment Management Agreement, Delaware Management or
Delaware International is entitled to receive an annual fee equal to the
following percentage rates of the average daily net assets of a Series:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Series Management Fee Rate
----------------------------------------------------- ------------------------------------------------
<S> <C> <C>
Capital Reserves Series 0.50% on the first $500 million
0.475% on the next $500 million
0.45% in the next $1.5 billion
0.425% on assets in excess of $2.5 billion
----------------------------------------------------- ------------------------------------------------
Cash Reserve Series 0.45% on the first $500 million
0.40% on the next $500 million
0.35% on the next $1.5 billion
0.30% on assets in excess of $2.5 billion
----------------------------------------------------- ------------------------------------------------
Convertible Securities Series 0.75% on the first $500 million
Global Bond Series 0.70% on the next $500 million
Growth Opportunities Series 0.65% in the next $1.5 billion
REIT Series 0.60% on assets in excess of $2.5 billion
Select Growth Series
Small Cap Value Series
Social Awareness Series
Trend Series
----------------------------------------------------- ------------------------------------------------
Balanced Series 0.65% on the first $500 million
Devon Series 0.60% on the next $500 million
Growth and Income Series* 0.55% in the next $1.5 billion
High Yield Series 0.50% on assets in excess of $2.5 billion
Strategic Income Series
U.S. Growth Series
----------------------------------------------------- ------------------------------------------------
Emerging Markets Series 1.25% on the first $500 million
1.20% on the next $500 million
1.15% in the next $1.5 billion
1.10% on assets in excess of $2.5 billion
----------------------------------------------------- ------------------------------------------------
International Equity Series 0.85% on the first $500 million
0.80% on the next $500 million
0.75% in the next $1.5 billion
0.70% on assets in excess of $2.5 billion
------------------------------------------------------------------------------------------------------
</TABLE>
* Delaware Management has agreed to voluntarily waive its management fee
so as not to exceed an annual rate of 0.60% of average daily net
assets.
57
<PAGE>
The respective investment manager administers the affairs of and is
ultimately responsible for the investment management of each of the Series to
which it provides investment management services. In addition, Delaware
Management pays the salaries of all Trustees, officers and employees who are
affiliated with both it and the Trust.
Subject to the overall supervision of Delaware Management, Delaware
International manages the international sector of Strategic Income Series'
portfolio and furnishes Delaware Management with investment recommendations,
asset allocation advice, research and other investment services with respect to
foreign securities. For the services provided to Delaware Management, Delaware
Management pays the Sub-Adviser a fee equal to one-third of the fee paid to
Delaware Management under the terms of Strategic Income Series' Investment
Management Agreement.
Pursuant to the terms of a Sub-Advisory Agreement with Delaware
Management, Vantage Investment Advisors ("Vantage") participates in the
management of Social Awareness Series' assets. Vantage is responsible for
day-to-day investment management of the Series, makes investment decisions for
the Series in accordance with the Series' investment objectives and stated
policies and places orders on behalf of the Series to effect the investment
decisions made. Delaware Management continues to have ultimate responsibility
for all investment advisory services in connection with the management of the
Series pursuant to the Investment Management Agreement and supervises Vantage's
performance of such services. For the services provided to Delaware Management,
Delaware Management pays Vantage a fee equal to (i) 0.25% of average daily net
assets up to $20 million; (ii) 0.35% of average daily net assets on the next $30
million; and (iii) 0.40% of average daily net assets over $50 million. Vantage's
address is 405 Lexington Avenue, New York, NY 10174.
Lincoln Investment Management, Inc. ("Lincoln"), a wholly owned
subsidiary of Lincoln National Corporation ("Lincoln National"), acts as
sub-adviser to Delaware Management with respect to REIT Series. In its capacity
as sub-adviser, Lincoln furnishes Delaware Management with investment
recommendations, asset allocation advice, research, economic analysis and other
investment services with respect to the securities in which the Series may
invest. Lincoln receives 30% of the advisory fee paid to Delaware Management for
acting as sub-adviser to Delaware Management with respect to the Series.
Lincoln's address is 200 E. Berry Street, Fort Wayne, Indiana 46802.
On December 31, 1999, the total net assets of the Trust were
$2,241,511,798, broken down as follows:
---------------------------------------------------------------
Balanced Series $172,002,302
---------------------------------------- ----------------------
Capital Reserves Series $36,701,085
---------------------------------------- ----------------------
Cash Reserve Series $57,420,796
---------------------------------------- ----------------------
Convertible Securities Series $9,636,517
---------------------------------------- ----------------------
Devon Series $77,929,317
---------------------------------------- ----------------------
Emerging Markets Series $13,348,843
---------------------------------------- ----------------------
Global Bond Series $20,230,856
---------------------------------------- ----------------------
Growth and Income Series $501,928,454
---------------------------------------- ----------------------
Growth Opportunities Series $216,061,845
---------------------------------------- ----------------------
High Yield Series $102,633,484
---------------------------------------- ----------------------
International Equity Series $304,060,051
---------------------------------------- ----------------------
REIT Series $11,623,505
---------------------------------------- ----------------------
Select Growth Series $53,528,553
---------------------------------------- ----------------------
Small Cap Value Series $95,424,882
---------------------------------------- ----------------------
Social Awareness Series $36,738,618
---------------------------------------- ----------------------
Strategic Income Series $19,841,819
---------------------------------------- ----------------------
Trend Series $503,657,291
---------------------------------------- ----------------------
U.S. Growth Series $8,743,580
---------------------------------------------------------------
58
<PAGE>
Investment management fees were incurred for the last three fiscal
years for the following Series:
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Series December 31, 1999 December 31, 1998 December 31, 1997
- ------ ----------------- ----------------- -----------------
- ---------------------------------------- ------------------------- -------------------------- -------------------------
- ---------------------------------------- ------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Balanced Series $1,236,740 paid $968,768 paid 595,126 paid
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Capital Reserves Series $216,148 paid $208,577 paid $166,300 paid
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Cash Reserve Series $246,155 paid $212,479 paid $149,023 paid
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Convertible Securities Series(1) $65,656 paid $46,042 earned $14,026 earned
$46,042 paid -0- paid
-0- waived $14,026 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Devon Series(1) $533,852 paid $218,772 earned $31,110 earned
$216,267 paid $25,236 paid
$2,505 waived $5,8874 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Emerging Markets Series(1) $98,475 earned $71,160 earned $26,327 earned
$93,686 paid $61,148 paid $8,587 paid
$4,789 waived $10,012 waived $27,740 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Global Bond Series(2) $163,185 paid $141,939 earned $109,310 earned
$125,844 paid $68,076 paid
$16,095 waived $41,234 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Growth and Income Series $3,414,163 paid $3,018,521 paid $1,640,377 paid
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Growth Opportunities Series $1,088,438 paid $846,793 earned $716,228 earned
$781,882 paid $646,908 paid
$64,911 waived $69,320 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
High Yield Series $739,669 paid $689,099 paid $483,877 paid
- ---------------------------------------- ------------------------- -------------------------- -------------------------
International Equity Series $2,071,821 earned $1,679,911 earned $1,304,340 earned
$2,028,030 paid $1,651,181 paid $1,207,677 paid
$43,791 waived $28,730 waived $96,663 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
REIT Series(3) $64,478 earned $15,449 earned N/A
$55,268 paid $11,895 paid
$9,210 waived $3,554 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Select Growth Series(4) $97,202 earned N/A N/A
$96,242 paid
$960 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Small Cap Value Series $727,190 paid $706,066 earned $380,405 earned
$680,359 paid $328,056 paid
$25,707 waived $252,349 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Social Awareness Series(1) $241,011 earned $117,271 earned $20,293 earned
$226,354 paid $108,502 paid $3,692 paid
$14,657 waived $8,769 waived $16,601 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Strategic Income Series(1) $138,695 paid $101,453 earned $21,320 earned
$100,002 paid $7,271 paid
$1,451 waived $14,049 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
Trend Series $1,858,141 earned $1,025,600 earned $622,149 earned
$1,848,151 paid $977,521 paid $558,331 paid
$9,990 waived $48,079 waived $63,818 waived
- ---------------------------------------- ------------------------- -------------------------- -------------------------
U.S. Growth Series (5) $4,141 earned N/A N/A
$3,889 paid
$252 waived
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on May 1, 1997.
(2) Commenced operations on May 2, 1996.
(3) Commenced operations on May 4, 1998.
(4) Commenced operations on May 3, 1999.
(5) Commenced operations on November 15, 1999.
59
<PAGE>
During the period May 1, 1997 (date of commencement of operations)
through December 31, 1997, Delaware International received $2,424 from Delaware
Management for serving as Sub-Adviser to the Strategic Income Series and for the
fiscal years ended December 31, 1998 and 1999, Delaware International received
$33,334 and $46,533, respectively, for such services. During the period May
1, 1997 (date of commencement of operations) through December 31, 1997, Vantage
received $5,449 from Delaware Management for serving as Sub-Adviser to the
Social Awareness Series and for the fiscal years ended December 31, 1998 and
1999, Vantage received $39,620 and $92,408, respectively, for such services.
During the period May 4, 1998 (date of commencement of operations) through
December 31, 1998, Lincoln received $4,635 from Delaware Management for serving
as Sub-Adviser to the REIT Series and for the fiscal year ended December 31,
1999, Lincoln received $19, 263 for such services.
Except for those expenses borne by the respective investment manager
under the Investment Management Agreements and the Distributor under the
Distribution Agreement, each Series is responsible for all of its own expenses.
Among others, these include the Series' proportionate share of rent and certain
other administrative expenses; the investment management fees; transfer and
dividend disbursing agent fees and costs; custodian expenses; federal securities
registration fees; proxy costs; and the costs of preparing prospectuses and
reports sent to shareholders.
Beginning May 1, 1998 (May 1, 1999 for Select Growth Series and October
15, 1999 for U.S. Growth Series) through April 30, 2001, Delaware Management
elected voluntarily to waive its fee and pay the expenses of a Series to the
extent necessary to ensure that a Series' annual operating expenses, exclusive
of 12b-1 Plan fees, taxes, interest, brokerage commissions and extraordinary
expenses, do not exceed the following percentages of average daily net assets:
--------------------------------------------------------
Balanced Series 0.80%
------------------------------------------ -------------
Capital Reserves Series 0.80%
------------------------------------------ -------------
Cash Reserve Series 0.80%
------------------------------------------ -------------
Convertible Securities Series 0.85%
------------------------------------------ -------------
Devon Series 0.80%
------------------------------------------ -------------
Growth and Income Series 0.80%
------------------------------------------ -------------
Growth Opportunities Series 0.85%
------------------------------------------ -------------
High Yield Series 0.80%
------------------------------------------ -------------
REIT Series 0.85%
------------------------------------------ -------------
Select Growth Series 0.85%
------------------------------------------ -------------
Small Cap Value Series 0.85%
------------------------------------------ -------------
Social Awareness Series 0.85%
------------------------------------------ -------------
Strategic Income Series 0.80%
------------------------------------------ -------------
Trend Series 0.85%
------------------------------------------ -------------
U.S. Growth Series 0.75%
--------------------------------------------------------
Beginning May 1, 1998 through April 30, 2001, Delaware International
elected voluntarily to waive its fee and pay the expenses of a Series to the
extent necessary to ensure that a Series' annual operating expenses, exclusive
of 12b-1 Plan fees, taxes, interest, brokerage commissions and extraordinary
expenses, do not exceed the following percentages of average daily net assets:
--------------------------------------------------------
Emerging Markets Series 1.50%
------------------------------------------ -------------
Global Bond Series 0.85%
------------------------------------------ -------------
International Equity Series 0.95%
--------------------------------------------------------
60
<PAGE>
Prior to May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of a Series to the extent necessary to ensure that
a Series' annual operating expenses, exclusive of taxes, interest, brokerage
commissions and extraordinary expenses, did not exceed 0.80% of average daily
net assets from the commencement of operations through April 30, 1998 for the
High Yield, Capital Reserves, Cash Reserve, Small Cap Value, Trend, Strategic
Income, Devon, Convertible Securities and Social Awareness Series.
Prior to May 1, 1998, Delaware Management elected voluntarily to waive
its fee and pay the expenses of Growth and Income, Balanced and Growth
Opportunities Series to the extent necessary to ensure that a Series' annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, did not exceed 0.80% of average daily net assets for the
period July 1, 1992 through April 30, 1998.
Prior to May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of International Equity and Global Bond
Series to the extent necessary to ensure that a Series' annual operating
expenses, exclusive of taxes, interest, brokerage commissions and extraordinary
expenses, did not exceed 0.80% of average daily net assets from the commencement
of operations through June 30, 1997. The waiver and payment commitment was
extended through April 30, 1998 for Global Bond Series. Beginning July 1, 1997,
Delaware International elected voluntarily to waive its fee and pay the expenses
of International Equity to the extent necessary to ensure that the Series'
annual operating expenses, exclusive of taxes, interest, brokerage commissions
and extraordinary expenses, did not exceed 0.95% of average daily net assets
through April 30, 1998.
Prior to May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of the Emerging Markets Series to the extent
necessary to ensure that the Series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses, did not
exceed 1.50% of average daily net assets from the commencement of operations
through April 30, 1998.
Distribution and Service
Delaware Distributors, L.P., 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 Service Class shares of each 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.
61
<PAGE>
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 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 and Delaware International, is the Trust's
shareholder servicing, dividend disbursing and transfer agent for each 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.
62
<PAGE>
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"). On April 3, 1995, a merger between DMH and a wholly owned subsidiary of
Lincoln National Corporation ("Lincoln National") was completed. DMH, Delaware
Management and Delaware International are now indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National. Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management.
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 (62) 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 the Delaware
organization.
- ---------------------------------------------------------------------------------------------------------------------------
- ----------------------
* Trustee affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<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.
Chairman and Director of Delaware Management Trust Company and Retirement
Financial Services, Inc.
Executive Vice President, Chief Operating Officer, Chief Financial Officer of
Delaware Management Holdings, Inc., Founders CBO Corporation, Delaware
Investment Advisers (a series of Delaware Management Business Trust) and
Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial Officer
and Director of DMH Corp., Delaware Distributors, Inc., Founders Holdings,
Inc. and Delvoy, Inc.
Executive Vice President and Trustee of Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
President/Chief Operating Officer and Director of Delaware General
Management, Inc.
During the past five years, Mr. Downes has served in various executive
capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
- ----------------------
* Trustee affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<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 (62) Trustee/Director of the Trust and 18 other investment companies in the
Delaware Investments family
Private Investor.
P.O. Box 819, Gwynedd Valley, PA 19437
Mr. Durham served as Chairman of the Board of each fund in the Delaware
Investments family from 1986 to 1991; President of each fund from 1977 to
1990; and Chief Executive Officer of each fund from 1984 to 1990. Prior to
1992, with respect to Delaware Management Holdings, Inc., Delaware
Management Company, Delaware Distributors, Inc. and Delaware Service
Company, Inc., Mr. Durham served as a director and in various executive
capacities at different times. He was also a Partner of Complete Care
Services from 1995 to 1999.
- --------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr (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>
65
<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 (51) 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>
66
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard G. Unruh, Jr. (60) Executive Vice President and Chief Investment Officer, Equity of the Trust,
each of the other 32 investment companies in the Delaware Investments family
Chief Executive Officer/Chief Investment Officer of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Executive Vice President of Delaware Management Holdings, Inc. and Delaware
Capital Management, Inc.
Executive Vice President/Chief Investment Officer of Delaware Management
Company (a series of Delaware Management Business Trust)
Executive Vice President and Trustee of Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin (46) Executive Vice President/Chief Investment Officer, Fixed Income of the Trust
and each of the other 32 investment companies in the Delaware Investments
family
Director of Founders CBO Corporation.
Executive Vice President/Chief Investment Officer, DMC-Fixed Income of Delaware
Management Company (a series of Delaware Management Business Trust)
Executive Vice President/Chief Investment Officer, DIA-Fixed Income of Delaware
Investment Advisers (a series of Delaware Management Business Trust)
Executive Vice President and Director of Delaware Management Holdings, Inc. and
Founders Holdings, Inc.
Executive Vice President of Delaware Management Business Trust and Delaware
Capital Management, Inc.
Mr. McMeekin joined Delaware Investments in 1999. During the past five years,
he has also served in various executive capacities for Lincoln National
Corporation.
- ---------------------------------------------------------------------------------------------------------------------------
Richard J. Flannery (42) Executive Vice President/General Counsel of the Trust and each of the other 32
investment companies in the Delaware Investments family, Delaware Management
Holdings, Inc., Delaware Distributors, L.P., Delaware Management Company (a
series of Delaware Management Business Trust), Delaware Investment Advisers (a
series of Delaware Management Business Trust) and Founders CBO Corporation
Executive Vice President/General Counsel and Director of Delaware International
Holdings Ltd., Founders Holdings, Inc., Delvoy, Inc., DMH Corp., Delaware
Management Company, Inc., Delaware Service Company, Inc., Delaware Capital
Management, Inc., Retirement Financial Services, Inc., Delaware Distributors,
Inc., Delaware General Management, Inc. and Delaware Management Trust Company
Executive Vice President and Trustee of Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
Director of HYPPCO Finance Company Ltd.
During the past five years, Mr. Flannery has served in various executive
capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Eric E. Miller (46) Senior Vice President/Deputy General Counsel and Secretary of the Trust and
each of the other 32 investment companies in the Delaware Investments family
Senior Vice President/Deputy General Counsel and Assistant Secretary of
Delaware Management Holdings, Inc., DMH Corp., Delvoy, Inc., Delaware
Management Company, Inc., Delaware Management Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Investment Advisers (a series of Delaware Management Business Trust), Delaware
Service Company, Inc., Delaware Capital Management, Inc., Retirement Financial
Services, Inc., Delaware Distributors, Inc., Delaware Distributors, L.P.,
Delaware General Management, Inc. and Founders Holdings, Inc.
During the past five years, Mr. Miller has served in various executive
capacities at different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Joseph H. Hastings (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., Delvoy , Inc., Delaware Management Company, Inc.,
Delaware Management Business Trust, Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware Capital
Management, Inc., Delaware International Holdings Ltd., Founders Holdings,
Inc., Delaware General Management, Inc. and Delaware Management Business Trust
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
Chief Financial Officer of Retirement Financial Services, Inc.
During the past five years, Mr. Hastings has served in various executive
capacities at different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof (37) Senior Vice President and Treasurer of the Trust and each of the other 32
investment companies in the Delaware Investments family
Senior Vice President/Investment Accounting of Delaware Management Company (a
series of Delaware Management Business Trust), Delaware Service Company, Inc.,
Delaware Capital Management, Inc., Delaware Distributors, L.P. and Founders
Holdings, Inc.
Senior Vice President/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/Assistant Treasurer of Founders CBO Corporation
Before joining Delaware Investments in 1995, Mr. Bishof was a Vice President
for Bankers Trust, New York, NY from 1994 to 1995, a Vice President for CS
First Boston Investment Management, New York, NY from 1993 to 1994 and an
Assistant Vice President for Equitable Capital Management Corporation, New
York, NY from 1987 to 1993.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Gerald S. Frey (54) Senior Vice President/Senior Portfolio Manager of the Trust, of the other 32
investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust), Delaware Investment
Advisers (a series of Delaware Management Business Trust) and Delaware Capital
Management, Inc.
Before joining Delaware Investments in 1996, Mr. Frey was a Senior Director
with Morgan Grenfell Capital Management, New York, NY from 1986 to 1995.
- ---------------------------------------------------------------------------------------------------------------------------
Frank X. Morris (39) Vice President/Senior Portfolio Manager of the Trust, the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment Advisers
(a series of Delaware Management Business Trust)
Before joining Delaware Investments in 1997, Mr. Morris served as Vice
President and Director of Equity Research at PNC Asset Management.
- ---------------------------------------------------------------------------------------------------------------------------
John B. Fields (54) Senior Vice President/Senior Portfolio Manager of the Trust, the other 32
investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust), Delaware Investment
Advisers (a series of Delaware Management Business Trust) and Delaware Capital
Management, Inc.
Trustee of Delaware Management Business Trust
During the past five years, Mr. Fields has served in various capacities within
the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Gerald T. Nichols (42) Vice President/Senior Portfolio Manager of the Trust, the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust), Delaware Investment Advisers (a
series of series of Delaware Management Business Trust) and Founders Holdings,
Inc.
Treasurer/Assistant Secretary and Director of Founders CBO Corporation
During the past five years, Mr. Nichols has served in various capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Paul A. Matlack (40) Vice President/Senior Portfolio Manager of the Trust, the other 32
investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust), Delaware
Investment Advisers (a series of series of Delaware Management Business
Trust) and Founders Holdings, Inc.
President and Director of Founders CBO Corporation
During the past five years, Mr. Matlack has served in various capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Christopher S. Beck (42) Vice President/Senior Portfolio Manager of the Trust, and the other 32
investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust) and Delaware
Investment Advisers (a series of series of Delaware Management Business
Trust)
Before joining Delaware Investments in 1997, Mr. Beck managed the Small Cap
Fund for two years at Pitcairn Trust Company. Prior to 1995, he was Director
of Research at Cypress Capital Management in Wilmington and Chief Investment
Officer of the University of Delaware Endowment Fund.
- ---------------------------------------------------------------------------------------------------------------------------
Damon J. Andres (30) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust) and
Delaware Capital Management, Inc.
Prior to joining Delaware Investments in 1994, Mr. Andres performed
investment counseling services as a Consulting Associate with Cambridge
Associates, Inc. in Arlington Virginia.
- ---------------------------------------------------------------------------------------------------------------------------
Marshall T. Bassett (46) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust)
Prior to joining Delaware Investments in 1997, Mr. Bassett served as Vice
President in Morgan Stanley Asset Management's Emerging Growth Group. Prior to
that, he was a trust officer at Sovran Bank and Trust Company.
- ---------------------------------------------------------------------------------------------------------------------------
John A. Heffern (38) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust)
Prior to joining Delaware Investments in 1997, Mr. Heffern was a Senior Vice
President, Equity Research at NatWest Securities Corporation's Specialty
Finance Services unit. Prior to that, he was a Principal and Senior
Regional Bank Analyst at Alex. Brown & Sons.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Jeffrey W. Hynoski (37) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust)
Prior to joining Delaware Investments in 1998, Mr. Hynoski served as a Vice
President at Bessemer Trust Company. Prior to that, Mr. Hynoski held
positions at Lord Abbett & Co. and Cowen Asset Management.
- ---------------------------------------------------------------------------------------------------------------------------
Lori P. Wachs (31) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust)
During the past five years, Ms. Wachs has served in various capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Paul Grillo (40) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust), Delaware Investment Advisers
(a series of series of Delaware Management Business Trust) and Delaware
Capital Management, Inc.
During the past five years, Mr. Grillo has served in various capacities at
different times within the Delaware organization.
- ---------------------------------------------------------------------------------------------------------------------------
Thomas J. Trotman (49) Vice President/Portfolio Manager of the Trust, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of series of Delaware Management Business Trust)
Prior joining Delaware Investments in 1995, Mr. Trotman was Vice President
and Director of Investment Research at Independence Capital Management.
Before that, he held credit-related positions at Marine Midland Bank, U.S.
Steel Corporation, and Amerada Hess.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<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>
--------------------------------------------------------------------------------------------------------
Pension or
Aggregate Retirement Total
Compensation Benefits Accrued Estimated Compensation
received from as Part of Annual from the Investment
the Trust Trust Benefits Companies
-------- Expenses Upon in Delaware
Name(3) -------- 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 (other than John H. Durham) 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. John H. Durham currently receives a
total annual retainer fee of $32,180 for serving as a trustee or director
for 19 investment companies in Delaware Investments, 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.
72
<PAGE>
As of April 10, 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 20,196,855.865 70.89%
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 6,100,335.862 21.41%
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
High Yield Series Allmerica Financial Life Insurance and Annuity 10,699,411.033 86.73%
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 982,194.211 7.96%
Annuity Account N
1300 South Clinton Street
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
Capital Reserves Series Allmerica Financial Life Insurance and Annuity 3,084,521.988 92.57%
Company and First Allmerica Financial Life Insurance
Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- ------------------------------------------------------------------------------------------------------------------------
Balanced Series Allmerica Financial Life Insurance and Annuity 9,155,815.279 95.80%
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 Allmerica Financial Life Insurance and Annuity 4,907,646.618 92.47%
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 8,120,475.924 96.00%
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 Allmerica Financial Life Insurance and Annuity 16,430,473.350 95.67%
Company and First Allmerica Financial Life Insurance
Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trend Series Lincoln National Life Company 14,657,205.625 69.47%
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
Allmerica Financial Life Insurance and Annuity 4,895,923.025 23.20%
Company and First Allmerica Financial Life Insurance
Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- ------------------------------------------------------------------------------------------------------------------------
Small Cap Value Series Allmerica Financial Life Insurance and Annuity 5,067,313.240 80.72%
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 TM2 323,934.733 5.16%
For Variable Annuities of
The Travelers Insurance Company
One Tower Square 5MS
Hartford, CT 06183
- ------------------------------------------------------------------------------------------------------------------------
Global Bond Series Lincoln National Life Company 1,330,016.140 70.05%
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
Allmerica Financial Life Insurance and Annuity 542,631.100 28.58%
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 Allmerica Financial Life Insurance and Annuity 1,817,131.952 89.92%
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 203,684.663 10.08%
Company and First Allmerica Financial Life Insurance
Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- ------------------------------------------------------------------------------------------------------------------------
Devon Series Allmerica Financial Life Insurance and Annuity 4,000,316.046 83.89%
Company and First Allmerica Financial Life Insurance
Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- ------------------------------------------------------------------------------------------------------------------------
Devon Series Lincoln Life Variable Annuity 588,985.180 12.35%
Account N
1300 S. Clinton Street
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Series Allmerica Financial Life Insurance and Annuity 1,408,501.495 75.61%
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 Account N 235,058.062 12.62%
1300 S Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
Convertible Securities Series Allmerica Financial Life Insurance and Annuity 604,463.824 69.08%
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 25.51%
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
Chicago Trust Company 47,269.883 5.40%
For the Sole Benefit of
Lincoln National Corp
Employee Ret. Plan
c/o Marshall and lsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201
- ------------------------------------------------------------------------------------------------------------------------
Social Awareness Series Allmerica Financial Life Insurance and Annuity 1,719,729.217 76.94%
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 477,007.436 21.34%
Separate Account N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
REIT Series The Travelers SEP Acct. TM2 for 671,989.869 44.80%
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183
- ------------------------------------------------------------------------------------------------------------------------
Allmerica Financial Life Insurance and Annuity 268,149.159 17.88%
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 211,237.822 14.08%
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Series Name and Address of Account Share Amount Percentage
- ------ --------------------------- ------------ ----------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REIT Series The Travelers SEP Acct. ABD2 for 141,400.393 9.43%
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183
- ------------------------------------------------------------------------------------------------------------------------
Lincoln Life Variable Annuity Account N 132,835.938 8.86%
1300 S Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
Select Growth Series Allmerica Financial Life Insurance and Annuity 5,508,687.878 92.66
Company and First Allmerica Financial Life Insurance
Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- ------------------------------------------------------------------------------------------------------------------------
U.S. Growth Series Allmerica Financial Life Insurance and Annuity 2,020,553.901 86.88%
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 10.76%
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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. With the exception of Global Bond,
Emerging Markets and REIT Series, each Series operates as a diversified fund as
defined by the 1940 Act. Global Bond, Emerging Markets and REIT Series operate
as nondiversified funds as defined by the 1940 Act.
Delaware Management is the investment manager of each Series of the Trust
other than International Equity, Global Bond and Emerging Markets Series.
Delaware International is the investment manager of International Equity, Global
Bond and Emerging Markets Series. Delaware Management or its affiliate, Delaware
International, also manages the other funds in the Delaware Investments family.
While investment decisions for each Series are made independently from those of
the other funds and accounts, investment decisions for such other funds and
accounts may be made at the same time as investment decisions for the Series.
Access persons and advisory persons of the Delaware Investments family of
funds, as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who
provide services to Delaware Management, Delaware International or their
affiliates, are permitted to engage in personal securities transactions subject
to the exceptions set forth in Rule 17j-1 and the following general restrictions
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and procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions by certain covered persons in certain securities may only
be closed-out at a profit after a 60-day holding period has elapsed; and (5) the
Compliance Officer must be informed periodically of all securities transactions
and duplicate copies of brokerage confirmations and account statements must be
supplied to the Compliance Officer.
Delaware Distributors, L.P. acts as national distributor for the 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. 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% 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.
The initial public offering date for the Growth and Income, High Yield,
Capital Reserves, Cash Reserve and Balanced Series was July 28, 1988. The
initial public offering date for Growth Opportunities Series was July 2, 1991.
International Equity Series commenced operations on October 29, 1992. Small Cap
Value and Trend Series commenced operations on December 27, 1993. The initial
public offering date for Global Bond Series was May 1, 1996 and for Strategic
Income, Devon, Emerging Markets, Convertible Securities and Social Awareness
Series was May 1, 1997. REIT Series commenced on May 4, 1998. Select Growth
Series commenced operations on May 3, 1999. U.S. Growth Series commenced
operations on November 15, 1999.
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.
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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.
Capitalization
Each 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 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 each 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.
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FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditors for Delaware Group
Premium Fund and, in its capacity as such, audits the annual financial
statements of the Series. Each Series' Statement of Net Assets, Statement of
Assets and Liabilities (as applicable), Statement of Operations, Statement of
Changes in Net Assets, Financial Highlights and Notes to Financial Statements,
as well as the report of Ernst & Young LLP, for the fiscal year ended December
31, 1999 are included in each Series' Annual Report to shareholders. The
financial statements and financial highlights, the notes relating thereto and
the reports of Ernst & Young LLP listed above are incorporated by reference from
the Annual Reports into this Part B.
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APPENDIX A--DESCRIPTION OF RATINGS
Bonds
Excerpts from Moody's description of its bond ratings: Aaa--judged to
be the best quality. They carry the smallest degree of investment risk;
Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations; Baa--considered
as medium grade obligations. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; Ba--judged to
have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B--generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small; Caa--are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest; Ca--represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C--the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
For rating categories Aa to Caa, Moody's includes a 1, 2 or 3 following the
rating to designate a high, medium or low rating, respectively
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations; extremely strong capacity to pay principal and interest; AA--also
qualify as high grade obligations, and in the majority of instances differ from
AAA issues only in a small degree; very strong capacity to pay principal and
interest; A--strong ability to pay interest and repay principal; somewhat more
susceptible to the adverse effects of changing circumstances and economic
conditions although more susceptible to changes in circumstances; BBB--regarded
as having an adequate capacity to pay interest and repay principal; normally
exhibit adequate protection parameters, but adverse economic conditions or
changing circumstances more likely to lead to weakened capacity to pay principal
and interest than for higher-rated bonds. BB, B, CCC, CC, C--regarded, on
balance, as having significant speculative characteristics. BB indicates the
least degree of speculation and CC the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions;
D--in default.
Plus (+) or minus (-) may be added to ratings from AA to CCC to show
relative standing within the major rating categories.
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Commercial Paper
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1 -- degree of safety regarding timely payment is strong; a plus (+)
sign denotes extremely strong safety characteristics; A-2--capacity for timely
payment is satisfactory; the relative degree of safety is not as high as for
issuers designated A-1.
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1-- superior quality; P-2--strong quality.
Excerpts from Duff and Phelps' description of its two highest ratings:
Category 1--High Grade: D-1+ -- Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or ready access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations. D-1--Very high certainty of timely
payment. Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor. D-1- -- High certainty of timely
payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small. Category 2--Good Grade:
D-2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Excerpts from Fitch IBCA, Inc.'s description of its highest ratings: F-1+
- --Exceptionally strong quality; F-1 --Very strong quality; F-2 --Good credit
quality.
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