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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A File No. 33-14363
File No. 811-5162
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ____ / /
Post-Effective Amendment No. 30 /X/
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AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30 /X/
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DELAWARE GROUP PREMIUM FUND
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(Exact Name of Registrant as Specified in Charter)
1818 Market Street, Philadelphia, Pennsylvania 19103
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (215) 255-1255
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Eric E. Miller, Esquire, 1818 Market Street, Philadelphia, PA 19103
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(Name and Address of Agent for Service)
Approximate Date of Public Offering: May 1, 2000
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It is proposed that this filing will become effective:
______ immediately upon filing pursuant to paragraph (b)
______ on (date) pursuant to paragraph (b)
______ 60 days after filing pursuant to paragraph (a)(1)
___X__ on May 1, 2000 pursuant to paragraph (a)(1)
______ 75 days after filing pursuant to paragraph (a)(2)
______ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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--- C O N T E N T S ---
This Post-Effective Amendment No. 30 to Registration File No. 33-14363 includes
the following:
1. Facing Page
2. Contents Page
3. Part A - Prospectus
4. Part B - Statement of Additional Information
5. Part C - Other Information
6. Signatures
7. Exhibits
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DELAWARE GROUP PREMIUM FUND
Class 1
1818 Market Street, Philadelphia, PA 19103
Prospectus
May 1, 2000
This Prospectus offers 18 Portfolios. Each Portfolio (Series) is in effect a
separate fund issuing its own shares. The shares of the Series are sold only to
separate accounts of life insurance companies (life companies). The separate
accounts are used in conjunction with variable annuity contracts and variable
life insurance policies (variable contracts). The separate accounts invest in
shares of the various Series in accordance with allocation instructions received
from contract owners. The investment objectives and principal policies of the
Series are described below.
As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal offense.
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
remainder primarily in equity securities. This Series has the same objective and
investment disciplines as Delaware Balanced Fund of Delaware Group Equity Funds
I, 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--a money market fund which seeks the highest level of income
consistent with preservation of capital and liquidity through investments in
short-term money market instruments. This Series has the same objective and
investment disciplines as Delaware Cash Reserve Fund of Delaware Group Cash
Reserve, a separate fund in the Delaware Investments family. The shares of Cash
Reserve Series are neither insured nor guaranteed by the U.S. government and
there is no assurance that the Series will be able to maintain a stable net
asset value of $10.00 per share.
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.
Devon Series--seeks current income and capital appreciation. The Series will
seek to achieve its objective by investing primarily in income-producing common
stocks, with a focus on common stocks that the investment manager believes have
the potential for above-average dividend increases over time. This Series has
the same objective and investment disciplines as Delaware Devon Fund of Delaware
Group Equity Funds I, 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
securities of issuers located or operating in emerging countries. This Series
has the same objective and investment disciplines as Delaware Emerging Markets
Fund of Delaware Group Global & International Funds, 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. The Series will invest in
fixed-income securities of issuers from at least three different countries, one
of which may be the United States. This Series has the same objective and
investment disciplines as Delaware Global Bond Fund of Delaware Group Global &
International Funds, a separate fund in the Delaware Investments family.
1
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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 of
Delaware Group Equity Funds II, a separate fund in the Delaware Investments
family.
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 of
Delaware Group Equity Funds IV, a separate fund in the Delaware Investments
family.
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. This Series has the same objective and investment disciplines as
Delaware High Yield Opportunities Fund of Delaware Group Income Funds, a
separate fund in the Delaware Investments family. An investment in this 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
of Delaware Group Global & International Funds, a separate fund in the Delaware
Investments family.
REIT Series -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in the real estate
industry. This Series has the same objective and investment discipline as The
Real Estate Investment Trust Portfolio and The Real Estate Investment Trust
Portfolio II of Delaware Pooled Trust, separate funds in the Delaware
Investments family.
Select Growth Series (formerly Aggressive Growth Series) -- seeks long-term
capital appreciation. The Series attempts to achieve its investment objective 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 of Voyageur Mutual
Funds III, 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. This Series has the
same objective and investment disciplines as Delaware Small Cap Value Fund of
Delaware Group Equity Funds V, a separate fund in the Delaware Investments
family.
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 of Delaware Group
Equity Funds II, 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. This Series
has the same objective and investment disciplines as Delaware Strategic Income
Fund of Delaware Group Income Funds, a separate fund in the Delaware Investments
family.
Trend Series--seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. This Series has the same objective and investment
disciplines as Delaware Trend Fund of Delaware Group Equity Funds III, a
separate fund in the Delaware Investments family.
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U.S. Growth Series - seeks to maximize capital appreciation. The Series seeks to
achieve its objective by investing primarily in stocks of companies of all
sizes. We look for stocks with low dividend yields, strong balance sheets and
high expected earnings growth rates as compared to other companies in the same
industry. This Series has the same objective and investment disciplines as
Delaware U.S. Growth Fund of Delaware Group Adviser Funds, a separate fund in
the Delaware Investments family.
The Global Bond Series and the Convertible Securities Series are not
available in the Group Flexible Premium Variable Life Insurance
product.
3
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TABLE OF CONTENTS
Profiles How we manage the Series
(Strategies, Risks, Portfolio
Balanced Series managers, Financial highlights)
Capital Reserves Series Page Page
Cash Reserve Series
Convertible Securities Series
Devon Series
Emerging Markets Series
Global Bond Series
Growth and Income Series
Growth Opportunities Series
High Yield Series
International Equity Series
REIT Series
Select Growth Series
Small Cap Value Series
Social Awareness Series
Strategic Income Series
Trend Series
U.S. Growth Series
Important Information about all Series
Fund administration (Who's who) Page
Share classes
Purchase and redemption of shares
Valuation of shares
Dividends, distributions and taxes
4
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Profile: Balanced Series (formerly Delaware Balanced Series)
What are the Series' goals?
Balanced Series seeks a balance of capital appreciation, income and preservation
of capital. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
We invest primarily in common stocks of established companies we believe have
the potential for long-term capital appreciation. In addition, we invest at
least 25% of the Series' assets in various types of fixed-income securities,
including U.S. government securities and corporate bonds. Funds with this mix of
stocks and bonds are commonly known as balanced funds.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines in
stock and bond prices, which can be caused by a drop in the stock or bond
market, an adverse change in interest rates or poor performance in specific
industries or companies. For a more complete discussion of risk, please turn to
"The risks of investing in Balanced Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series o Investors with long-term financial goals.
o Investors looking for stocks and bonds combined in a single investment.
o Investors seeking a measure of capital preservation.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
5
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How has Balanced Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Balanced Series. We show how returns for Balanced Series have varied over the
past ten calendar years, as well as average annual returns for one, five and ten
years. The Series' past performance does not necessarily indicate how it will
perform in the future. The returns reflect applicable voluntary expense caps.
The returns would be lower without the voluntary caps. Moreover, the performance
presented does not reflect any separate account fees, which would reduce the
returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Balanced Series)
Year-by-year total return
Balanced Series
1990 -0.18%
1991 26.59%
1992 13.85%
1993 8.18%
1994 -0.15%
1995 26.58%
1996 15.91%
1997 26.40%
1998 18.62%
1999 -7.85%
As of March 31, 2000, Balanced Series had a year-to-date return of [0.00%].
During the periods illustrated in this bar chart, Balanced Series' highest
quarterly return was [15.89%] for the quarter ended [December 31, 1998] and its
lowest quarterly return was [-12.93%] for the quarter ended [September 30,
1990.]
Average annual returns for periods ending 12/31/99
Balanced Series S&P 500 Composite Lehman Brothers Aggregate
Stock Price Index Bond Index
1 year -7.85% [00.00%] [0.00%]
5 years 15.18% [00.00%] [0.00%]
10 years 12.16% [00.00%] [0.00%]
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index and the Lehman Brothers Aggregate Bond Index. The Standard &
Poor's 500 Composite Stock Price Index is an unmanaged index of 500 widely held
common stocks that is often used to represent performance of the U.S. stock
market. The Lehman Brothers Aggregate Bond Index is an index that measures the
performance of about 6,500 U.S. corporate and government bonds. Neither index is
a perfect comparison to Balanced Series since the S&P 500 Composite Stock Price
Index does not include fixed-income securities and the Lehman Brothers Aggregate
Bond Index does not include stocks. You should remember that unlike the Series,
the indexes are unmanaged and don't reflect the actual costs of operating a
mutual fund, such as the costs of buying, selling and holding securities.
6
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Profile: Capital Reserves Series
What are the Series' goals?
Capital Reserves Series seeks a high stable level of current income while
attempting to minimize fluctuations in principal and provide maximum liquidity.
Although the Series will strive to achieve its goal, there is no assurance that
it will.
What are the Series' main investment strategies?
Capital Reserves Series invests primarily in short- and intermediate-term
securities, including securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, instruments secured by U.S. government
securities and debt securities issued by U.S. corporations.
Capital Reserves Series is not a money market fund. A money market fund is
designed for stability of principal; consequently, the level of income
fluctuates. The Series is designed for greater stability of income at a
relatively higher level; consequently, the principal value will fluctuate over
time. The Series will attempt to provide investors with yields higher than those
available in money market vehicles by extending the average maturity of the
bonds in its portfolio beyond what is typically associated with money market
funds.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by adverse
changes in interest rates or, in the case of corporate bonds, by poor
performance in specific industries or companies. For a more complete discussion
of risk, please turn to "The risks of investing in Capital Reserves Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for relatively stable and high income flow.
o Investors looking for the security associated with a portfolio of high
quality fixed-income securities.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
7
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How has Capital Reserves Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Capital Reserves Series. We show how returns for Capital Reserves Series have
varied over the past ten calendar years, as well as average annual returns for
one, five and ten years. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN
(Capital Reserves Series)]
Year-by-year total return
Capital Reserves Series
1990 8.23%
1991 8.84%
1992 7.20%
1993 7.85%
1994 -2.68%
1995 14.08%
1996 4.05%
1997 7.60%
1998 6.78%
1999 [0.00%]
As of March 31, 2000, Capital Reserves Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Capital Reserves
Series' highest quarterly return was [4.35%] for the quarter ended [June 30,
1995] and its lowest quarterly return was [-2.21%] for the quarter ended [March
31, 1994].
Average annual returns for periods ending 12/31/99
Capital Reserves Series Lehman Brothers
Intermediate
Government Corporate
Index
1 year 0.28% [0.00%]
5 years 6.46% [0.00%]
10 years 6.13% [0.00%]
The Series returns are compared to the performance of the Lehman Brothers
Intermediate Government Corporate Index. Lehman Brothers Intermediate Government
Corporate Index is based on all publicly issued intermediate government and
corporate debt securities with an average maturity of 4 to 5 years. You should
remember that unlike the Series, the index is unmanaged and doesn't reflect the
actual costs of operating a mutual fund, such as the costs of buying, selling
and holding securities.
8
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Profile: Cash Reserve Series
What are the Series' goals?
Cash Reserve Series seeks to provide maximum current income, while preserving
principal and maintaining liquidity, by investing its assets in a diversified
portfolio of money market securities and managing the portfolio to maintain a
constant net asset value of $10 per share. Although the Series will strive to
achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
Cash Reserve Series invests primarily in short- term money market securities,
including securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities and short-term debt instruments of banks and corporations.
Cash Reserve Series is a money market fund. A money market fund is designed for
stability of principal; consequently, the level of income fluctuates.
We typically maintain an average maturity of 90 days or less. Also, we do not
purchase any instruments with an effective remaining maturity of more than 13
months. We intend to hold our investments until maturity, but we may sell them
prior to maturity in order to shorten or lengthen the average maturity of the
bonds in the portfolio, increase the yield, maintain the quality of the
portfolio or maintain a stable share value.
Cash Reserve Series uses the same investment strategy as Delaware Group Cash
Reserve, a separate fund in the Delaware Investments Family of Funds.
What are the main risks of investing in the Series?
Cash Reserve Series will be affected primarily by declines in interest rates
that would reduce the income provided by the Series. For a more complete
discussion of risk, please turn to "The risks of investing in Cash Reserve
Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the Series seeks to preserve the value of your
investment at $10 per share, it is possible to lose money by investing in the
Series.
Who should invest in the Series
o Investors with short-term financial goals.
o Investors who want to own an investment whose value may fluctuate over the
short term.
o Investors who are looking for a short-term, relatively safe investment to
complement more long-term investments in their portfolio.
Who should not invest in the Series
o Investors with long-term financial goals.
o Investors looking for relatively high income flow.
9
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How has Cash Reserve Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Cash Reserve Series. We show how returns for Cash Reserve Series have varied
over the past ten calendar years, as well as average annual returns for one,
five and ten years. The Series' past performance does not necessarily indicate
how it will perform in the future. The returns reflect applicable voluntary
expense caps. The returns would be lower without the voluntary caps. Moreover,
the performance presented does not reflect any separate account fees, which
would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN
(Cash Reserve Series)]
Year-by-year total return
Cash Reserve Series
1990 7.56%
1991 5.58%
1992 3.25%
1993 2.48%
1994 3.68%
1995 5.48%
1996 4.93%
1997 5.10%
1998 5.08%
1999 [0.00%]
As of March 31, 2000, Cash Reserve Series had a year-to-date return of [0.00%].
During the periods illustrated in this bar chart, Cash Reserve Series' highest
quarterly return was [2.22%] for the quarter ended [June 30, 1989] and its
lowest quarterly return was [0.58%] for the quarter ended [June 30, 1993.]
Average annual returns for periods ending 12/31/99
Cash Reserve Series
1 year 4.81%
5 years 5.08%
10 years 4.79%
10
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Profile: Convertible Securities Series
What are the Series' goals?
Convertible Securities Series seeks a high level of total return on its assets
through a combination of current income and capital appreciation. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security which may be converted into a
prescribed amount of common stock of the same or a different issuer at a
specified price or using a specified pricing formula. A convertible security
entitles the holder to receive interest paid on convertible debt or the dividend
paid on a preferred stock until the convertible security matures, is redeemed or
is converted.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines in
convertible securities prices, which can be caused by a drop in the stock or
bond market, an adverse change in interest rates or poor performance in specific
industries or companies. Convertible securities are often rated below investment
grade and, as a result, are subject to a higher credit risk that the issuer will
be unable to meet payments of interest and principal, particularly under adverse
economic conditions. For a more complete discussion of risk, please turn to "The
risks of investing in Convertible Securities Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for appreciation potential combined with the potential for
current income which could act as a cushion for the portfolio's performance.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
11
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How has Convertible Securities Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Convertible Securities Series. We show how returns for Convertible Securities
Series have varied over the past two calendar years, as well as average annual
returns for one year and since inception. The Series' past performance does not
necessarily indicate how it will perform in the future. The returns reflect
applicable voluntary expense caps. The returns would be lower without the
voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR-BY-YEAR TOTAL RETURN (Convertible
Securities Series)]
Year-by-year total return
Convertible Securities Series
1998 -1.17%
1999 [0.00%]
As of March 31, 2000, Convertible Securities Series had a year-to-date return of
[-0.00%]. During the periods illustrated in this bar chart, Convertible
Securities Series' highest quarterly return was [8.14%] for the quarter ended
[December 31, 1998] and its lowest quarterly return was [-10.65%] for the
quarter ended [September 30, 1998.]
Average annual returns for periods ending 12/31/99
Merrill Lynch
Convertible Convertible Securities
Securities Series Index
1 year [0.00%] [0.00%]
Since Inception [0.00%] [0.00%]
(5/1/97)
The Series returns are compared to the performance of the Merrill Lynch
Convertible Securities Index. The Merrill Lynch Convertible Securities Index is
an unmanaged index representative of the convertible securities market. You
should remember that unlike the Series, the index is unmanaged and doesn't
reflect the actual costs of operating a mutual fund, such as the costs of
buying, selling and holding securities.
12
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Profile: Devon Series
What are the Series' goals?
Devon Series seeks current income and capital appreciation. Although the Series
will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in income-producing common stocks. We focus on common stocks
that we believe have the potential for above-average dividend increases over
time.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be particularly affected by changes
in stock prices. Stock prices may be negatively affected by declines in the
stock market or poor performance in specific industries or companies. For a more
complete discussion of risk, please turn to "The risks of investing in Devon
Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking long-term capital appreciation.
o Investors seeking an investment primarily in common stocks.
Who should not invest in the Series
o Investors seeking an investment primarily in fixed-income securities.
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
13
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How has Devon Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Devon Series. We show how returns for Devon Series have varied over the past
two calendar years as well as average annual returns for one year and since
inception. The Series' past performance does not necessarily indicate how it
will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Devon Series)]
Year-by-year Total return
Devon Series
1998 24.05%
1999 [0.00%]
As of March 31, 2000, Devon Series had a year-to-date return of [-0.00%.] During
the periods illustrated in this bar chart, Devon Series' highest quarterly
return was [20.81%] for the quarter ended [December 31, 1998] and its lowest
quarterly return was [-8.19%] for the quarter ended [September 30, 1998.]
Average annual returns for periods ending 12/31/99
Devon Series S&P 500 Composite
Stock Price Index
1 year [0.00%] [00.00%]
Since Inception [0.00%] [00.00%]
(5/1/97)
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index. The S&P 500 Composite Stock Price Index is an unmanaged index
of 500 widely held common stocks that is often used to represent performance of
the U.S. stock market. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
14
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Profile: Emerging Markets Series
What are the Series' goals?
The Emerging Markets Series seeks long-term capital appreciation. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
The Series invests primarily in equity securities of issuers from emerging
foreign countries. Under normal market conditions, at least 65% of the Series'
total assets will be invested in equity securities of issuers from at least
three different countries whose economies are considered to be emerging or
developing.
We may invest up to 35% of the Series' net assets in fixed-income securities
issued by companies in emerging countries or by foreign governments, their
agents, instrumentalities or political sub-divisions. We may invest in
fixed-income securities that are denominated in the currencies of emerging
market countries. All of these may be high-yield, high risk fixed-income
securities.
In selecting investments for the Series,
o We strive to identify well managed companies that are undervalued based on
such factors as assets, earnings, dividends or growth potential.
o In order to compare the value of different stocks, we consider whether the
future dividends on a stock are expected to increase faster than, slower
than, or in line with the level of inflation. We then estimate what we
think the value of those anticipated future dividends would be worth if
they were being paid today. We believe this gives us an estimate of the
stock's true value. Because many of the countries in which the Series
invests are emerging countries, there may be less information available for
us to use in making this analysis than is available for more developed
countries.
o We generally prefer to purchase securities in countries where the currency
is undervalued or fair-valued compared to other countries because these
securities may offer greater return potential. We attempt to determine
whether a particular currency is overvalued or undervalued by comparing the
amount of goods and services that a dollar will buy in the United States to
the amount of foreign currency required to buy the same amount of goods and
services in another country. When the dollar buys less, the foreign
currency may be overvalued, and when the dollar buys more, the foreign
currency may be undervalued.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
held in the Series' portfolio. These fluctuations can be even more pronounced
for funds like Emerging Markets Series, which invests in emerging countries.
This Series will be affected primarily by declines in stock prices, which can be
caused by a drop in foreign stock markets or poor performance in specific
industries or companies. The value of the Series' investments and, therefore,
the price of the Series' shares may be more volatile than investments in more
developed markets. Because the Series invests in international securities in
developing countries as well as established countries, it will be affected by
international investment risks related to currency valuations, political
instability, economic instability, or lax accounting and regulatory standards.
The Series may invest up to 35% of its net assets in high-yield, high risk
foreign fixed-income securities, which are subject to substantial risks,
particularly during periods of economic downturns or rising interest rates.
The Series is considered "non-diversified" under federal laws that regulate
mutual funds. Thus, adverse effects on the Fund's investments may affect a
larger portion of its overall assets and subject the Fund to greater risks. For
a more complete discussion of risk, please turn to "The risks of investing in
Emerging Markets Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
15
<PAGE>
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for a portfolio of securities of emerging markets
which may offer high return potential but can be substantially more
risky than investments in either the U.S. or established foreign
countries.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may
fluctuate, sometimes significantly, over the short term.
o Investors who do not understand or are unwilling to accept the
significant risks associated with investing in emerging markets.
16
<PAGE>
How has Emerging Markets Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Emerging Markets Series. We show how returns for Emerging Markets Series have
varied over the past two calendar years, as well as average annual returns for
one year and since inception. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Emerging Markets
Series)]
Year-by-Year total return (Emerging Markets Series)
Emerging Markets Series
1998 -32.48%
1999 48.28%
As of March 31, 2000, Emerging Markets Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Emerging Markets
Series highest quarterly return was [7.61%] for the quarter ended [March 31,
1998] and its lowest quarterly return was [-22.25%] for the quarter ended [June
30, 1998.]
Average annual returns for periods ending 12/31/99
Emerging Markets Morgan Stanley
Series International
Emerging Markets
Free Index
1 year 48.28% [00.00%]
Since inception -4.31% [00.00%]
(5/1/97)
The Series returns are compared to the performance of the Morgan Stanley
International Emerging Markets Free Index. The Morgan Stanley International
Emerging Markets Free Index is a U.S. dollar dominated index comprised of stocks
of countries with below average per capita GDP as defined by the World Bank,
foreign ownership restrictions, a tax regulatory environment, and greater
perceived market risk than in the developed countries. Within this index, MSCI
aims to capture an aggregate of 60% of local market capitalization. You should
remember that unlike the Series, the index is unmanaged and doesn't reflect the
actual costs of operating a mutual fund, such as the costs of buying, selling
and holding securities.
17
<PAGE>
Profile: Global Bond Series
What are the Series' goals?
Global Bond Series seeks current income consistent with preservation of
principal. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
The Series invests primarily in fixed-income securities that may also provide
the potential for capital appreciation. The Series is a global fund. Therefore,
at least 65% of the Series' total assets will be invested in fixed-income
securities of issuers from at least three different countries, one of which may
be the United States. An issuer is considered to be from the country where it is
located, where the majority of its assets are or where it generates the majority
of its operating income.
In selecting investments for the Series,
o We strive to identify fixed-income securities that provide high income
potential.
o In order to compare the value of different fixed-income securities, even
those issued in different countries, we look at the value of anticipated
future interest and principal payments, taking into consideration what we
think the inflation rate in that country will be. We then estimate what we
think the value of those anticipated future payments would be worth if they
were being paid today. We believe this gives us an estimate of a bond's
true value.
o We generally prefer to purchase securities in countries where the currency
is undervalued or fair-valued compared to other countries because these
securities may offer greater return potential. We attempt to determine
whether a particular currency is overvalued or undervalued by comparing the
amount of goods and services that a dollar will buy in the United States to
the amount of foreign currency required to buy the same amount of goods and
services in another country. When the dollar buys less, the foreign
currency may be overvalued, and when the dollar buys more, the foreign
currency may be undervalued.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
held in the Series' portfolio. These fluctuations can be even more pronounced
for funds like Global Bond Series, which invests in developing countries. The
Series' investments normally decrease when there are declines in bond prices,
which can be caused by a drop in the bond market, an adverse change in interest
rates or an adverse situation affecting the issuer of the bond. Because the
Series invests in international securities in both established and developing
countries, it will be affected by international investment risks related to
currency valuations, political instability, economic instability, or lax
accounting and regulatory standards. The Series may invest in high-yield, high
risk foreign fixed-income securities, which are subject to substantial risks,
particularly during periods of economic downturns or rising interest rates.
The Series is considered "non-diversified" under federal laws that regulate
mutual funds. Thus, adverse effects on the Series' investments may affect a
larger portion of its overall assets and subject the Series to greater risks.
For a more complete discussion of risk, please turn to "The risks of investing
in Global Bond Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for a portfolio that includes both U.S. and foreign
fixed-income securities.
o Investors seeking a measure of capital appreciation.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept risks of investing in foreign
fixed-income securities.
18
<PAGE>
How has Global Bond Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Global Bond Series. We show how returns varied for Global Bond Series for the
past three calendar years, as well as average annual returns for one year and
since inception. The Series' past performance does not necessarily indicate how
it will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Global Bond
Series)]
Year-by-year total return (Global Bond Series)
Global Bond Series
1997 0.88%
1998 7.82%
1999 -3.60%
As of March 31, 2000, Global Bond Series had a year-to-date return of [0.00%].
During the periods illustrated in this bar chart, Global Bond Series' highest
quarterly return was [4.25%] for the quarter ended [September 30, 1998] and its
lowest quarterly return was [-3.07%] for the quarter ended [March 31, 1997.]
Average annual returns for periods ending 12/31/99
Salomon Smith
Barney World
Government Bond
Global Bond Series Index
1 year -3.60% [00.00%]
Since inception
(5/2/96) 4.43% [0.00%]
The Series returns are compared to the performance of the Salomon Smith Barney
World Government Bond Index. Salomon Smith Barney World Government Bond Index is
a market-capitalization weighted benchmark that tracks the performance of the 18
Government bond markets of Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal,
Spain, Sweden, Switzerland, the United Kingdom, and the United States. You
should remember that unlike the Series, the index is unmanaged and doesn't
reflect the actual costs of operating a mutual fund, such as the costs of
buying, selling and holding securities.
19
<PAGE>
Profile: Growth and Income Series
What are the Series' goals?
The 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. Although the Series will strive
to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in dividend-paying stocks of large, well-established
companies. Typically, we consider buying a stock when its dividend yield is
higher than the average of the unmanaged S&P 500 Composite Stock Price Index.
The manager then considers the financial strength of the company, the nature of
its management and any developments affecting the security, the company or its
industry. If the yield on a stock already in the portfolio falls below the
average of the S&P 500 Index, we generally sell that stock.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices, which could be caused by a drop in the stock market or poor performance
from particular companies or industries. For a more complete discussion of risk,
please turn to "The risks of investing in Growth and Income Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking long-term capital appreciation.
o Investors seeking an investment primarily in common stocks.
o Investors seeking moderate quarterly income with the opportunity for inflation
protection.
Who should not invest in the Series
o Investors seeking an investment primarily in fixed-income securities.
o Investors with short-term financial goals.
o Investors who are unwilling to accept that the value of their investment may
fluctuate, sometimes significantly over the short term.
20
<PAGE>
How has Growth and Income Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Growth and Income Series. We show how returns for Growth and Income Series
have varied over the past ten calendar years, as well as average annual returns
for one, five and ten years. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Growth and Income
Series)]
Year-by-year total return
Growth and Income Series
1990 -13.31%
1991 22.32%
1992 8.83%
1993 15.45%
1994 -0.20%
1995 36.12%
1996 20.72%
1997 31.00%
1998 11.35%
1999 -2.98%
As of March 31, 2000, Growth and Income Series had a year-to-date return of
[-0.00%.] During the periods illustrated in this bar chart, Growth and Income
Series' highest quarterly return was [13.46%] for the quarter ended [December
31, 1998] and its lowest quarterly return was [-15.79%] for the quarter ended
[September 30, 1990.]
<TABLE>
<CAPTION>
Average annual return for periods ending 12/31/99
Growth and Income S&P 500 Composite
Series Stock Price Index
<S> <C> <C>
1 year -2.98% [00.00%]
5 years 18.39% [00.00%]
10 years 11.95% [00.00%]
</TABLE>
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index. The S&P 500 Composite Stock Price Index is an unmanaged index
of 500 widely held common stocks that is often used to represent performance of
the U.S. stock market. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
21
<PAGE>
Profile: Growth Opportunities Series (formerly DelCap Series)
What are the Series' goals?
Growth Opportunities Series seeks long-term capital appreciation. Although the
Series will strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in common stocks of medium-size companies. These are
generally considered to be stocks with market capitalizations between $2 billion
and $10 billion. We may also invest in securities that are convertible into
common stock. In selecting stocks for the portfolio, we typically look for
companies that have established themselves within their industry, but still have
growth potential.
We use a bottom-up approach to select stocks, evaluating individual companies
rather than trends in the economy or the investment markets. Researching each
company, its products, services, competitors and management team helps us to
select stocks of companies that we think will provide high and consistent
earnings growth with a reasonable level of risk.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Growth Opportunities Series' portfolio. This Series will be affected by
declines in stock prices, which could be caused by a drop in the stock market or
poor performance from particular companies or industries. In addition, Growth
Opportunities Series invests in medium-size or small companies. These companies
may involve greater risk due to their size, narrow product lines and limited
financial resources. For a more complete discussion of risk, please turn to "The
risks of investing in Growth Opportunities Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
medium-sized, growth oriented companies.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
22
<PAGE>
How has Growth Opportunities Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Growth Opportunities Series. We show how returns for Growth Opportunities
Series have varied over the past eight calendar years, as well as average annual
returns for one and five years and since inception. The Series' past performance
does not necessarily indicate how it will perform in the future. The returns
reflect applicable voluntary expense caps. The returns would be lower without
the voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN
(Growth Opportunities Series)]
Year-by-year total return
Growth Opportunities Series
1992 1.99%
1993 11.56%
1994 -3.54%
1995 29.53%
1996 14.46%
1997 14.90%
1998 18.81%
1999 [0.00%]
As of March 31, 2000, Growth Opportunities Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Growth Opportunities
Series' highest quarterly return was [24.58%] for the quarter ended December 31,
1998 and its lowest quarterly return was [-16.07%] for the quarter ended
[September 30, 1998.]
Average annual returns for periods ending 12/31/99
Growth Opportunities Russell 2000 Index Russell Midcap
Series Growth Index
1 year [0.00%] [0.00%] [0.00%]
5 years [0.00%] [0.00%] [0.00%]
Since Inception [0.00%] [0.00%] [0.00%]
(7/12/91)
The Series returns are compared to the performance of the Russell 2000 Index and
the Russell Midcap Growth Index. The Russell 2000 Index measures the performance
of the 2000 smallest companies in the Russell 3000 Index. Russell Midcap Growth
Index contains Russell Midcap (800) securities with a greater-than-average
growth orientation. Companies in this index tend to exhibit higher price-to-book
and price-earnings ratios, lower dividend yields and higher forecasted growth
values than the value universe. You should remember that unlike the Series, the
index is unmanaged and doesn't reflect the actual costs of operating a mutual
fund, such as the costs of buying, selling and holding securities.
23
<PAGE>
Profile: High Yield Series (formerly Delchester Series)
What are the Series' goals?
High Yield seeks total return and, as a secondary objective, high current
income. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
We invest primarily in corporate bonds rated BB or lower by S&P or similarly
rated by another NRSO. These are commonly known as high-yield bonds or junk
bonds and involve greater risks than investment grade bonds. The Series will
also invest in unrated bonds we judge to be of comparable quality. Unrated bonds
may be more speculative in nature than rated bonds. The Series may also invest
in U.S. and foreign government securities and corporate bonds of foreign
issuers. In selecting bonds for the portfolio, we evaluate the income provided
by the bond and the bond's appreciation potential as well as the issuer's
ability to make income and principal payments.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Fund will be affected primarily by declines in
bond prices, which can be caused by adverse changes in interest rates, adverse
economic conditions or poor performance from specific industries or bond
issuers. High-yield bonds are rated below investment grade and are subject to
greater risk that the issuer will be unable to make payments on interest and
principal. Bonds of foreign issuers are also subject to certain risks such as
political and economic instability, currency fluctuations and less stringent
regulatory standards. For a more complete discussion of risk, please turn to
"The risks of investing in High Yield Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking a fixed-income investment that offers a combination of
total return with high current income.
o Investors who want a total return-oriented income investment as a
diversification tool for long-term, equity-oriented portfolios.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may
fluctuate, sometimes significantly, over the short term.
24
<PAGE>
How has High Yield Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in High Yield Series. We show how returns for High Yield Series have varied over
the past ten calendar years, as well as average annual returns for one, five and
ten years. The Series' past performance does not necessarily indicate how it
will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns. On ________, 2000, the Series' name was changed from
Delchester Series 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.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN
(High Yield Series)]
Year-by-year total return
High Yield Series
1990 -7.13%
1991 37.54%
1992 13.44%
1993 16.36%
1994 -2.87%
1995 15.50%
1996 12.79%
1997 13.63%
1998 -1.83%
1999 -2.64%
As of March 31, 2000, High Yield Series had a year-to-date return of [0.00%.]
During the periods illustrated in this bar chart, High Yield Series' highest
quarterly return was [15.95%] for the quarter ended [March 31, 1991] and its
lowest quarterly return was [-7.20%] for the quarter ended [September 30, 1998.]
Average annual returns for periods ending 12/31/99
High Yield Series Salomon Smith
Barney Cash Pay
High-Yield Index
1 year -2.64% [0.00%]
5 years 7.19% [0.00%]
10 years 8.37% [00.00%]
The Series returns are compared to the performance of the Salomon Smith Barney
Cash Pay High-Yield Index. The Salomon Smith Barney Cash Pay High-Yield Index
includes a mix of non-investment grade corporate bonds that pay cash interest,
it excludes both corporate bonds that pay deferred-interest and bankrupt bonds.
You should remember that unlike the Series, the index is unmanaged and doesn't
reflect the actual costs of operating a mutual fund, such as the costs of
buying, selling and holding securities.
25
<PAGE>
Profile: International Equity Series
What are the Series' goals?
The International Equity Series seeks long-term growth without undue risk to
principal. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
The Series invests primarily in foreign equity securities that provide the
potential for capital appreciation and income. At least 65% of the Series' total
assets will be invested in equity securities of issuers from at least three
foreign countries. An issuer is considered to be from the country where it is
located, where the majority of its assets are located or where it generates the
majority of its operating income.
In selecting investments for the Series,
o We strive to identify well managed companies that are undervalued based on
such factors as assets, earnings, dividends or growth potential.
o In order to compare the value of different stocks, we consider whether the
future dividends on a stock are expected to increase faster than, slower
than, or in line with the level of inflation. We then estimate what we think
the value of those anticipated future dividends would be worth if they were
being paid today. We believe this gives us an estimate of the stock's true
value.
o We generally prefer to purchase securities in countries where the currency is
undervalued or fair-valued compared to other countries because these
securities may offer greater return potential. We attempt to determine
whether a particular currency is overvalued or undervalued by comparing the
amount of goods and services that a dollar will buy in the United States to
the amount of foreign currency required to buy the same amount of goods and
services in another country. When the dollar buys less, the foreign currency
may be overvalued, and when the dollar buys more, the foreign currency may be
undervalued.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines in
stock prices, which can be caused by a drop in foreign stock markets or poor
performance in specific industries or companies. Because the Series invests in
international securities in both established and developing countries, it will
be affected by international investment risks related to currency valuations,
political instability, economic instability, and lax accounting and regulatory
standards. For a more complete discussion of risk, please turn to "The risks of
investing in International Equity Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals
o Investors looking for a portfolio of equity securities from foreign
countries.
o Investors seeking a measure of capital appreciation and income.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept the risks of investing in
foreign securities.
o Investors looking for an investment that provides a high level of
income.
26
<PAGE>
How has International Equity Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in International Equity Series. We show how returns for International Equity
Series have varied over the past seven calendar years, as well as average annual
returns for one and five years and since inception. The Series' past performance
does not necessarily indicate how it will perform in the future. The returns
reflect applicable voluntary expense caps. The returns would be lower without
the voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (International
Equity Series)]
Year-by-year total return
International Equity Series
1993 15.97%
1994 2.57%
1995 13.98%
1996 20.03%
1997 6.60%
1998 10.33%
1999 15.76%
As of March 31, 2000, International Equity Series had a year-to-date return of
[0.00%.] During the periods illustrated in this bar chart, International Equity
Series' highest quarterly return was [14.44%] for the quarter ended [December
31, 1998] and its lowest quarterly return was [-14.24%] for the quarter ended
[September 30, 1998.]
Average annual returns for period ending 12/31/99
International Equity Morgan Stanley Capital
Series International EAFE (Europe,
Australia, Far East) Index
1 year 15.76% [00.00%]
5 years 13.24% [0.00%]
Since inception
(10/29/92) 11.77% [00.00%]
The Series returns are compared to the performance of the Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) Index. Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) Index is an international index
including stocks traded on 16 exchanges in Europe, Australia and the Far East,
weighted by capitalization. You should remember that unlike the Series, the
index is unmanaged and doesn't reflect the actual costs of operating a mutual
fund, such as the costs of buying, selling and holding securities.
27
<PAGE>
Profile: REIT Series
What are the Series' Goals?
The REIT Series seeks maximum long-term total return, with capital appreciation
as a secondary objective. Although the Series will strive to achieve its goal,
there is no assurance that it will.
What are the Series' main investment strategies?
The REIT Series invests in securities of companies principally engaged in the
real estate industry. Under normal circumstances, we will invest at least 65% of
the Series' total assets in equity securities of real estate investment trusts,
commonly known as REITs. The REIT Series is considered "non-diversified" under
the federal laws and regulations that regulate mutual funds. That means that
with respect to 50% of its assets, the Series may invest more than 5% of net
assets in a single security. Thus, adverse effects on an investment held by the
Series may affect a larger portion of overall assets and subject the Series to
greater risks.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the REIT
Series will increase and decrease according to changes in the value of the
securities held in the portfolio. The Series' value and yields will fluctuate in
response to movements in stock prices.
Because we concentrate our investments in the real estate industry, the Series
may be subject to certain risks associated with direct ownership of real estate
and with the real estate industry in general. See "The risks of investing in
REIT Series" for further information about these and other risks.
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Series is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Series with your financial adviser to
determine whether it is an appropriate investment for you.
Who should invest in the Series
o Investors seeking a high level of total return.
o Investors willing to invest in equity securities of companies
principally engaged in the real estate industry.
o Investors looking to diversify their equity holdings by adding
exposure to the real estate markets.
Who should not invest in the Series
o Investors seeking current income.
o Investors unwilling to accept the risks of investing in the real
estate industry as well as in a non-diversified fund.
o Investors who are unwilling to accept that the value of their
investment may fluctuate, sometimes significantly, over the short
term.
28
<PAGE>
How has REIT Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in REIT Series. We show returns for REIT Series for the past calendar year, as
well as average annual returns for one year and since inception. The Series'
past performance does not necessarily indicate how it will perform in the
future. The returns reflect applicable voluntary expense caps. The returns would
be lower without the voluntary caps. Moreover, the performance presented does
not reflect any separate account fees, which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (REIT Series)]
Total return
REIT Series
1999
As of March 31, 2000, REIT Series had a year-to-date return of [-0.00%.] During
the periods illustrated in this bar chart, REIT Series' highest quarterly return
was [00.00%] for the quarter ended [___________, 1999] and its lowest quarterly
return was [0.00%] for the quarter ended [____________, 1999.]
Average annual return for period ending 12/31/99
REIT NAREIT Equity REIT
Index
1 year [0.00%] [0.00%]
Since inception [0.00%] [0.00%]
(5/4/98)
The Series returns are compared to the performance of the NAREIT Equity REIT
Index. The NAREIT Equity REIT Index is a benchmark of real estate investment
trusts that invest in many types of U.S. property. You should remember that
unlike the Series, the index is unmanaged and doesn't reflect the actual costs
of operating a mutual fund, such as the costs of buying, selling and holding
securities.
29
<PAGE>
Profile: Select Growth Series (formerly Aggressive Growth Series)
What are the Series' goals?
Select Growth Series seeks long-term capital appreciation. Although the Series
will strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in common stocks of companies that we believe have the
potential for high earnings growth based on our analysis of their historic or
projected earnings growth rate, price to earnings ratio and cash flows. We
consider companies of any size, as long as they are larger than $300 million in
market capitalization. We look for companies that are undervalued, but still
have the potential for high earnings growth.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices. The Series may be subject to greater investment risk than assumed by
other funds because the companies the Series invests in are subject to greater
changes in earnings and business prospects than companies with more earnings
patterns. For a more complete discussion of risk, please turn to "The risks of
investing in Select Growth Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities across a
broad range of industry sectors and company sizes.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
30
<PAGE>
Profile: Small Cap Value Series
What are the Series' goals?
Small Cap Value Series seeks capital appreciation. Although the Series will
strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of small companies whose stock prices appear low
relative to their underlying value or future potential. Among other factors, we
consider the financial strength of a company, its management, the prospects for
its industry and any anticipated changes within the company, which might suggest
a more favorable outlook going forward.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices. In addition, the companies that Small Cap Value Series invests in may
involve greater risk due to their size, narrow product lines and limited
financial resources. For a more complete discussion of risk, please turn to "The
risks of investing in Small Cap Value Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of small
companies.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
31
<PAGE>
How has Small Cap Value Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Small Cap Value Series. We show how returns for Small Cap Value Series have
varied over the past six calendar years, as well as average annual returns for
one and five years and since inception. The Series' past performance does not
necessarily indicate how it will perform in the future. The returns reflect
applicable voluntary expense caps. The returns would be lower without the
voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Small Cap Value
Series)]
Year-by-year total return
Small Cap Value Series
1994 0.78%
1995 23.85%
1996 22.55%
1997 32.91%
1998 -4.79%
1999 -4.86%
As of March 31, 2000, Small Cap Value Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Small Cap Value
Series' highest quarterly return was [12.59%] for the quarter ended [December
31, 1998] and its lowest quarterly return was [-16.13%] for the quarter ended
[September 30, 1998.]
Average annual returns for period ending 12/31/99
Small Cap Value Series Russell 2000 Index
1 year -4.86% [0.00%]
5 years 12.81% [0.00%]
Since inception
(12/27/93) 11.07% [0.00%]
The Series returns are compared to the performance of the Russell 2000 Index.
The Russell 2000 Index measures the performance of the 2000 smallest companies
in the Russell 3000 Index. You should remember that unlike the Series, the index
is unmanaged and doesn't reflect the actual costs of operating a mutual fund,
such as the costs of buying, selling and holding securities.
32
<PAGE>
Profile: Social Awareness Series
What is the Series' goal?
Social Awareness Series seeks long-term capital appreciation. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of medium to large-sized companies that meet
certain socially responsible criteria and which we expect to grow over time. Our
socially responsible criteria exclude companies that:
o engage in activities likely to result in damage to the natural environment
o produce nuclear power, design or construct nuclear power plants or
manufacture equipment for the production of nuclear power
o manufacture or contract for military weapons
o are in the liquor, tobacco or gambling industries
o conduct animal testing for cosmetic or personal care products.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of an investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices, which can be caused by a drop in the stock market or poor performance in
specific industries or companies. Because the Series avoids certain companies
not considered socially responsible, it could miss out on strong performance
from those companies. For a more complete discussion of risk, please turn to
"The risks of investing in Social Awareness Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for capital growth potential.
o Investors who would like an investment that incorporates social
responsibility into its security selection process.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly, over the short term.
o Investors whose primary goal is to receive current income.
33
<PAGE>
How has Social Awareness Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Social Awareness Series. We show how returns for Social Awareness Series have
varied over the past two calendar years, as well as average annual returns for
one year and since inception. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN
(Social Awareness Series)]
Year-by-year total return
Social Awareness Series
1998 15.45%
1999 [0.00%]
As of March 31, 2000, Social Awareness Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Social Awareness
Series' highest return was [21.45%] for the quarter ended [December 31, 1998]
and its lowest quarterly return was [-17.21%] for the quarter ended [September
30, 1998.]
Average annual returns for periods ending 12/31/99
Social Awareness Series S&P 500 Composite
Stock Price Index
1 year [0.00%] [00.00%]
Since Inception [0.00%] [00.00%]
(5/1/97)
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index. The S&P 500 Composite Stock Price Index is an unmanaged index
of 500 widely held common stocks that is often used to represent performance of
the U.S. stock market. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
34
<PAGE>
Profile: Strategic Income Series
What are the Series' goals?
Strategic Income Series seeks high current income and total return. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in bonds allocated among three sectors of the fixed-income
market. These include:
o the High-Yield Sector, consisting of high-yielding, higher risk,
lower-rated or unrated fixed-income securities that we believe to be
similarly rated issued by U.S. companies. (These involve higher risks and
are commonly known as junk bonds).
o the Investment Grade Sector, consisting of investment grade debt
obligations of U.S. companies and those issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or by U.S. companies.
o the International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other fixed-income
securities of issuers in foreign countries and denominated in foreign
currencies. (An issuer is considered to be from the country where it is
located, where the majority of its assets are or where it generates the
majority of its operating income.)
We determine the amount of the Series' assets that will be allocated to each of
the three sectors based on our analysis of economic and market conditions and
our assessment of the returns and potential for appreciation from each sector.
We will periodically reallocate the Series' assets.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines
bond prices, which can be caused by an adverse change in interest rates, adverse
economic conditions or poor performance from specific industries or bond
issuers. The Series is also subject to the special risks associated with
high-yield bond investing and with foreign investing. In particular, high-yield
bonds are rated below investment grade and are subject to a higher risk that
issuers will be unable to make interest or principal payments, particularly
under adverse economic conditions. For a more complete discussion of risk,
please turn to "The risks of investing in Strategic Income Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for an investment that offers professional allocation among
key types of fixed-income securities.
o Investors looking for a fixed-income investment that offers potential for
high current income and total return.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
35
<PAGE>
How has Strategic Income Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Strategic Income Series. We show how returns for Strategic Income Series have
varied over the past two calendar years, as well as average annual returns for
one year and since inception. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN
(Strategic Income Series)]
Year-by-year total return
Strategic Income Series
1998 2.63%
1999 [0.00%]
As of March 31, 2000, Strategic Income Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Strategic Income
Series' highest quarterly return was [2.05%] for the quarter ended [March 31,
1998] and its lowest quarterly return was [-0.95%] for the quarter ended
September 30, 1998.
Average annual returns for periods ending 12/31/99
Strategic Income Series Lehman Brothers
Aggregate Bond Index
1 year [0.00%] [0.00%]
Since Inception [0.00%] [0.00%]
(5/1/97)
The Series returns are compared to the performance of the Lehman Brothers
Aggregate Bond Index. Lehman Brothers Aggregate Bond Index is comprised of
approximately 6000 publicly traded bonds including U.S. government,
mortgage-backed, corporate and Yankee bonds with an average maturity of
approximately 10 years. The index is weighted by the market value of the bonds
weighted in the index. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
36
<PAGE>
Profile: Trend Series
What are the Series' goals?
Trend Series seeks long-term capital appreciation. Although the Series will
strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of small, growth-oriented or emerging companies
that we believe are responsive to changes within the marketplace and which we
believe have the fundamental characteristics to support continued growth.
The Fund uses a bottom-up approach to stock selection that seeks market leaders,
strong product cycles, innovative concepts and industry trends. We look at
price-to-earnings ratios, estimated growth rates, market capitalization and
cashflow as we strive to determine how attractive a company is relative to other
companies.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices. In addition, the companies that Trend Series invests in may involve
greater risk due to their size, narrow product lines and limited financial
resources. For a more complete discussion of risk, please turn to "The risks of
investing in Trend Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
small, growth-oriented companies.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
37
<PAGE>
How has Trend Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Trend Series. We show how returns for Trend Series have varied over the past
six calendar years, as well as average annual returns for one and five years and
since inception. The Series' past performance does not necessarily indicate how
it will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Trend Series)]
Year-by-year total return
Trend Series
1994 -0.39%
1995 39.21%
1996 11.00%
1997 21.37%
1998 16.04%
1999 70.45%
As of March 31, 2000, Trend Series had a year-to-date return of [0.00%]. During
the periods illustrated in this bar chart, Trend Series' highest quarterly
return was [23.75%] for the quarter ended [December 31, 1998] and its lowest
quarterly return was [-15.51%] for the quarter ended [September 30, 1998.]
Average annual returns for period ending 12/31/99
Trend Series Russell 2000 Growth Index
1 year 70.45% 0.00%
5 years 29.97% 00.00%
Since inception
(12/27/93) 24.68% 00.00%
The Series returns are compared to the performance of the Russell 2000 Growth
Index. The Russell 2000 Growth Index measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth
values. You should remember that unlike the Series, the index is unmanaged and
doesn't reflect the actual costs of operating a mutual fund, such as the costs
of buying, selling and holding securities.
38
<PAGE>
Profile: U.S. Growth Series
What is the Series' goal?
U.S. Growth Series seeks to maximize capital appreciation. Although the Series
will strive to achieve its investment goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of companies of all sizes. We look for stocks with
low dividend yields, strong balance sheets and high expected earnings growth
rates as compared to other companies in the same industry. Our strategy is to
identify companies whose earnings are expected to grow faster than the U.S.
economy in general. Whether companies provide dividend income and how much
income they provide will not be a primary factor in the Series' selection
decisions.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The price of Series shares will increase
and decrease according to changes in the value of the Series' investments. This
Series will be particularly affected by changes in stock prices, which tend to
fluctuate more than bond prices. Stock prices may be negatively affected by
declines in the stock market or poor performance in specific industries or
companies. Stocks of companies with high growth expectations may be more
susceptible to price declines if they do not meet those high expectations. For a
more complete discussion of risk, please turn to "The risks of investing in the
Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Series is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Series with your financial adviser to
determine whether it is an appropriate choice for you.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for capital growth potential.
o Investors looking for a fund that can be a complement to income-producing or
value-oriented investments.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly, over the short term.
o Investors whose primary goal is to receive current income.
39
<PAGE>
Information about individual Series
Balanced Series
Our investment strategies
Balanced Series is a type of total return fund that invests in both stocks and
bonds to pursue a three-pronged investment objective: capital appreciation,
current income and preservation of principal. We blend several investment
strategies to manage this Series.
Balanced Series uses the same investment strategy as Delaware Balanced Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
We seek capital appreciation by investing primarily in common stocks of
companies we believe have:
o Reasonably priced equity securities with strong, consistent and
predictable earnings growth rates.
o Strong, capable management teams and competitive products or services.
o An attractive debt to capitalization ratio or strong cash flow.
To seek current income and help preserve capital, we generally invest at least
25% of the Series' net assets in various types of fixed-income securities,
including U.S. government and government agency securities and corporate bonds.
Each bond in the portfolio will have a maturity between five and 30 years, and
the average maturity of the portfolio will typically be between five and ten
years.
We conduct ongoing analysis of the different markets to determine the
appropriate mix of stocks and bonds for the current economic and investment
environment.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
40
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Balanced Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest up to 75% of net assets in common stocks.
in a corporation. Stockholders participate in the
corporation's profits and losses, proportionate to the
number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible securities: Usually preferred stocks or The Series may invest in convertible securities; however, we will
corporate bonds that can be exchanged for a set number of not invest more than 10% of the net assets of the Series in
shares of common stock at a predetermined price. These convertible securities that are rated below investment grade by an
securities offer higher appreciation potential than NRSRO or in securities that are unrated but deemed equivalent to
nonconvertible bonds and greater income potential than non-investment grade.
nonconvertible preferred stocks.
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities: Fixed-income securities that There is no limit on government-related mortgage-backed securities
represent pools of mortgages, with investors receiving or on fully collateralized privately issued mortgage-backed
principal and interest payments as the underlying mortgage securities.
loans are paid back. Many are issued and guaranteed against
default by the U.S. government or its agencies or We may invest up to 20% of net assets in mortgage-backed
instrumentalities, such as the Federal Home Loan Mortgage securities issued by private companies whether or not the
Corporation, Fannie Mae and the Government National Mortgage securities are 100% collateralized. However, these securities must
Association. Others are issued by private financial be rated at the time of purchase in one of the four highest
institutions, with some fully collateralized by certificates categories by an NRSRO. The privately issued securities we invest
issued or guaranteed by the government or its agencies or in are either CMOs or REMICs (see below).
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations (CMOs): Privately issued See mortgage-backed securities above.
mortgage-backed bonds whose underlying value is the
mortgages that are grouped into different pools according to
their maturity.
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage investment conduits (REMICs): Privately See mortgage-backed securities above.
issued mortgage-backed bonds whose underlying value is a
fixed pool of mortgages secured by an interest in real
property. Like CMOs, REMICs offer different pools.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
Securities we typically invest in (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Balanced Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities: Bonds or notes backed by accounts We invest only in asset-backed securities rated in one of the four
receivables including home equity, automobile or credit highest categories by an NRSRO.
loans.
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by a corporation. We focus on bonds rated in one of the four highest categories by
an NRSRO (or, if unrated, deemed equivalent), with maturities
between five and 30 years.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities. (The Series may not have more than 10% of
its total assets in repurchase agreements with maturities of over
seven days.)
- ------------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts (ADRs): Certificates issued by We may invest without limitation in ADRs.
a U.S. bank that represent the bank's holding of a stated
number of shares of a foreign corporation. An ADR entitles
the holder to all dividends and capital gains earned by the
underlying foreign shares. An ADR is bought and sold the
same as U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate swap and index swap agreements: In an interest We may use interest rate swaps to adjust the Series' sensitivity
rate swap, a series receives payments from another party to interest rates, or to hedge against changes in interest rates.
based on a floating interest rate in return for making
payments based on a fixed interest rate. An interest rate Index swaps may be used to gain exposure to markets that the Fund
swap can also work in reverse, with a series receiving invests in or as a substitute for futures options or forward
payments based on a fixed interest rate and making payments contracts if such contracts are not directly available to the
based on a floating interest rate. In an index swap, a fund Series on favorable terms.
receives gains or incurs losses based on the total return of
an index, in exchange for making fixed or floating interest Interest rate swaps and index swaps will be considered illiquid
rate payments to another party. securities (see below).
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities. For
are privately placed securities whose resale is restricted this Series, the 10% limit includes restricted securities such as
under securities law. Illiquid securities are securities privately placed securities that are eligible for resale only
that do not have a ready market, and cannot be easily sold among certain institutional buyers without registration, which are
within seven days at approximately the price that the Series commonly known as "Rule 144A Securities" and repurchase agreements
has valued them. with maturities of over seven days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in other securities including real estate investment
trusts, rights and warrants to purchase common stock, futures contracts,
options, U.S. Treasury securities, Yankee and Euro bonds. Please see the
Statement of Additional Information for additional descriptions on these
securities as well as those listed in the table above.
42
<PAGE>
Lending securities
Balanced Series may lend up to 25% of its assets to qualified brokers, dealers
and institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Balanced Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
Balanced Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
Portfolio turnover
The Series modified its investment strategy in April, 2000 to become more
growth-oriented. As a result, portfolio turnover may be relatively higher than
in past years, and may exceed 100%. A turnover rate of 100% would occur if the
Series sold and replaced securities valued at 100% of its net assets within one
year. High turnover can result in increased transaction costs and tax liability.
43
<PAGE>
The risks of investing in Balanced Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Balanced Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Balanced Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market--like the stock or bond believe can appreciate over an extended time frame regardless of
market--will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor stock market movements and generally do not trade for short-term
confidence. purposes.
We may hold a substantial part of Balanced Series' assets in cash
or cash equivalents as a temporary defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be unable
to achieve its investment objective.
We diversify the Series' assets among two major categories of
investments--stocks and bonds--which tend to increase and decline
in value in different economic or investment conditions.
In evaluating the use of an index swap, we carefully consider how
market changes could affect the swap and how that compares to us
investing directly in the market the swap is intended to
represent.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Balanced Series' assets invested in any one
securities in a particular industry or the value of an industry and in any individual security. We also follow a rigorous
individual stock or bond will decline because of changing selection process before choosing securities for the portfolio.
expectations for the performance of that industry or for the
individual company issuing the stock or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, particularly We do not try to increase return by predicting and aggressively
bonds with longer maturities, will decrease in value if capitalizing on interest rate moves. Instead, we aim to keep the
interest rates rise. interest rate risk similar to the Lehman Brothers Aggregate Bond
Index.
Swaps may be particularly sensitive to interest rates. We will not invest in swaps with maturities of more than two
Depending on the actual movements of interest rates and how years. Each business day we calculate the amount the Fund must pay
well the portfolio manager anticipates them, a fund could for swaps it holds and will segregate cash or other liquid
experience a higher or lower return that anticipated. securities to cover that amount.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of the Series' portfolio
adversely affected by political instability, changes in in foreign securities. When we do purchase foreign securities,
currency exchange rates, foreign economic conditions or they are often denominated in U.S. dollars. We also tend to avoid
inadequate regulatory and accounting standards. markets where we believe accounting principles or the regulatory
structure are underdeveloped.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold within seven days at approximately the price
that the Series values them. Swap agreements will be treated as illiquid securities, but most
swap dealers will be willing to repurchase interest rate swaps.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
44
<PAGE>
Portfolio managers
John Jares and Gary A. Reed have primary responsibility for making day-to-day
investment decisions for the Balanced Series.
John Jares, Vice President/Senior Portfolio Manager, holds a BS degree in
finance and an MBA from the University of Colorado. He joined Delaware
Investments in March, 2000. Mr. Jares came to Delaware from Berger Funds, where
he served as a portfolio manager and securities analyst specializing in the
consumer and technology sectors. Prior to joining Berger, Mr. Jares was a senior
equity analyst at Founders Asset Management, with responsibility for large
capitalization companies. He began his career at Lipper Analytical Services,
Inc. in 1992. Mr. Jares is a CFA charterholder.
Gary A. Reed, Vice President/Senior Portfolio Manager, holds an AB in Economics
from the University of Chicago and an MA in Economics from Columbia University.
He began his career in 1978 with the Equitable Life Assurance Company in New
York City, where he specialized in credit analysis. Prior to joining Delaware
Investments in 1989, Mr. Reed was Vice President and Manager of the fixed-income
department at Irving Trust Company in New York. Mr. Reed has been Balanced
Series' senior portfolio manager for fixed-income since 1989.
45
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- --------------------------------------------------------
Balanced Series Year Ended 12/31
(formerly Delaware Series)
----------- ---------- ---------- ----------- ----------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $19.050 $16.640 $15.500 $12.680
Income (loss) from investment operations
Net investment income 0.349 0.435 0.530 0.509
Net realized and unrealized gain (loss) on investments 2.831 3.575 1.765 2.761
----- ----- ----- -----
Total from investment operations 3.180 4.010 2.295 3.270
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.420) (0.530) (0.500) (0.450)
Distributions from net realized gain on investments (1.770) (1.070) (0.655) none
------- ------- ------- ----
Total dividends and distributions (2.190) (1.600) (1.155) (0.450)
------- ------- ------- -------
Net asset value, end of year $20.040 $19.050 $16.640 $15.500
======= ======= ======= =======
Total return(1) 18.62% 26.40% 15.91% 26.58%
Ratios and supplemental data
Net assets, end of period (000 omitted) $201,856 $127,675 $75,402 $63,215
Ratio of expenses to average net assets 0.70% 0.67% 0.68% 0.69%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.70% 0.67% 0.68% 0.69%
Ratio of net investment income to average net assets 2.20% 2.85% 3.56% 3.75%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 2.20% 2.85% 3.56% 3.75%
Portfolio turnover 94% 67% 92% 106%
- ----------------------------------------------------------------- ----------- ---------- ---------- ----------- ----------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
46
<PAGE>
Capital Reserves Series
Our investment strategies
Capital Reserves Series is a type of current income fund that invests in high
quality fixed-income securities. The Series will invest in a variety of high
quality fixed-income securities which provide high income potential.
We will strive to reduce the effects of interest rate volatility on principal by
maintaining an intermediate average maturity for the Series. The average
weighted maturity of the Series' portfolio will normally range from five to
seven years. It will not exceed ten years. We will decide where to position the
portfolio within this permissible maturity range based on our perception of the
direction of interest rates and the risks in the fixed-income markets. If, in
our judgment, interest rates are relatively high and borrowing requirements in
the economy are weakening, we will generally extend the average weighted
maturity of the Series. Conversely, if we believe interest rates are relatively
low and borrowing requirements appear to be strengthening, we may shorten the
average weighted maturity. We have the ability to purchase individual securities
with a remaining maturity of up to 15 years.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
47
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
----------------------------------------------------------------------
Capital Reserves Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Direct U.S. Treasury obligations include Treasury We may invest without limit in U.S. Treasury securities, though they
bills, notes and bonds of varying maturities. U.S. are typically not our largest holding because they generally do not
Treasury securities are backed by the "full faith and offer as high a level of current income as other fixed-income
credit" of the United States. securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities: Fixed-income securities There is no limit on government-related mortgage-backed securities or
that represent pools of mortgages, with investors on fully collateralized privately issued mortgage-backed securities.
receiving principal and interest payments as the
underlying mortgage loans are paid back. Many are We may invest up to 20% of net assets in mortgage-backed securities
issued and guaranteed against default by the U.S. issued by private companies whether or not the securities are 100%
government or its agencies or instrumentalities, such collateralized. However, these securities must be rated at the time
as the Federal Home Loan Mortgage Corporation, Fannie of purchase in one of the four highest categories by a nationally
Mae and the Government National Mortgage Association. recognized statistical rating organization such as S&P or Moody's.
Others are issued by private financial institutions, They must also represent interests in whole-loan mortgages,
with some fully collateralized by certificates issued multi-family mortgages, commercial mortgages and other mortgage
or guaranteed by the U.S. government or its agencies or collateral supported by a first mortgage lien on real estate. The
instrumentalities. privately issued securities we invest in are either CMOs or REMICs
(see below).
- -----------------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations (CMOs): Privately See mortgage-backed securities above.
issued mortgage-backed bonds whose underlying value is
the mortgages that are grouped into different pools
according to their maturity.
- -----------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage investment conduits (REMICs): See mortgage-backed securities above.
Privately issued mortgage-backed bonds whose underlying
value is a fixed pool of mortgages secured by an
interest in real property. Like CMOs, REMICs offer
different pools.
- -----------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities: Bonds or notes backed by We invest only in asset-backed securities rated in one of the four
accounts receivables including home equity, automobile highest categories by a nationally recognized statistical ratings
or credit loans. organization (NRSRO).
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by a We focus on bonds with investment grade ratings, that is bonds rated
corporation. BBB or better by S&P or Baa or better by Moody's. We may invest in
bonds that are unrated, if we believe the quality of the securities
is comparable to the ratings above.
- -----------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit and obligations of both U.S. We may invest in certificates of deposit from banks that have assets
and foreign banks: Debt instruments issued by a bank, of at least one billion dollars.
that pay interest.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate commercial paper: Short-term debt obligations We may invest in commercial paper that is rated P-1 or P-2 by Moody's
with maturities ranging from 2 to 270 days, issued by and/or A-1 or A-2 by S&P.
companies.
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term investment
such as the Series, and seller of securities in which for the Series' cash position. In order to enter into these
the seller agrees to buy the securities back within a repurchase agreements, the Series must have collateral of at least
specified time at the same price the buyer paid for 102% of the repurchase price. The Series will only enter into
them, plus an amount equal to an agreed upon interest repurchase agreements in which the collateral is composed of U.S.
rate. Repurchase agreements are often viewed as government securities.
equivalent to cash.
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate swap agreements: In an interest rate Interest rate swaps may be used to adjust the Series' sensitivity to
swap, a series receives payments from another party interest rates by changing its duration. We may also use interest
based on a floating interest rate in return for making rate swaps to hedge against changes in interest rates.
payments based on a fixed interest rate. An interest
rate swap can also work in reverse, with a series Interest rate swaps will be considered illiquid securities.
receiving payments based on a fixed interest rate and
making payments based on a floating interest rate.
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted and illiquid securities: Restricted We may invest up to 10% of net assets in illiquid securities. For
securities are privately placed securities whose resale this Series, the 10% limit includes restricted securities such as
is restricted under securities law. privately placed securities that are eligible for resale only among
certain institutional buyers without registration, which are commonly
Illiquid securities are securities that do not have a known as "Rule 144A Securities" and repurchase agreements with
ready market, and cannot be easily sold within seven maturities of over seven days.
days at approximately the price that the Series has
valued them.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities as well as those listed in the table above.
Lending securities
Capital Reserves Series may lend up to 25% of its assets to qualified brokers,
dealers and institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Capital Reserves Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Borrowing from banks
Capital Reserves Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. It will not
borrow money in excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Capital Reserves Series' annual portfolio turnover will be
greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
49
<PAGE>
The risks of investing in Capital Reserves Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Capital Reserves Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Capital Reserves Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on fixed-income
securities in a certain market--like the stock or bond securities that we believe can continue to make interest and
market--will decline in value because of factors such principal payments over an extended time frame regardless of interim
as economic conditions, future expectations or investor market fluctuations. We do not try to predict overall bond market
confidence. movements and do not trade for short-term purposes.
- -----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value We diversify the Series' portfolio. We also follow a rigorous
of securities in a particular industry or the value of selection process before choosing securities for the portfolio.
an individual stock or bond will decline because of
changing expectations for the performance of that
industry or for the individual company issuing the
stock or bond.
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, We do not try to increase return by predicting and aggressively
particularly bonds with longer maturities, will capitalizing on interest rate moves.
decrease in value if interest rates rise. Swaps may be
particularly sensitive to interest rate changes. The Series will not invest in interest rate swaps with maturities of
Depending on the actual movements of interest rates and more than two years. Each business day we will calculate the amount
how well the portfolio manager anticipates them, a the Series must pay for any swaps it holds and will segregate enough
series could experience a higher or lower return than cash or other liquid securities to cover that amount.
anticipated. 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
necessarily be offset by the fixed-rate payments it is
entitled to receive under the swap agreement.
- -----------------------------------------------------------------------------------------------------------------------------------
Credit risk is the risk that there is the possibility We may hold securities rated in the fourth category of investment
that a bond's issuer (or an entity that insures the grade; however, we carefully evaluate their creditworthiness before
bond) will be unable to make timely payments of purchasing the security. When selecting dealers with whom we would
interest and principal. make interest rate or index swap agreements, we focus on those with
high quality ratings and do careful credit analysis before investing.
- -----------------------------------------------------------------------------------------------------------------------------------
Debt securities rated in the fourth category of If the rating of a corporate debt security held by the Series falls
investment grade (e.g., BBB by S&P or Baa by Moody's) below the fourth rating grade or if we determine that an unrated
may have speculative characteristics. Changes in security is no longer of comparable quality, we will dispose of the
economic conditions or other circumstances are more security as soon as practical, unless we think that would be
likely to affect issuers ability to make principal and detrimental in light of market conditions.
interest payments.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Capital Reserves Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prepayment risk is the risk that homeowners will prepay We take into consideration the likelihood of prepayment when we
mortgages during periods of low interest rates, forcing select mortgages. We may look for mortgage securities that have
an investor to reinvest their money at interest rates characteristics that make them less likely to be prepaid, such as low
that might be lower than those on the prepaid mortgage. outstanding loan balance or below-market interest rates.
- -----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold, within seven days at
approximately the price that the Series values them. Swap agreements will be treated as illiquid securities, but most swap
dealers will be willing to repurchase interest rate swaps.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
Portfolio manager
Gary A. Reed has primary responsibility for making day-to-day investment
decisions for the Capital Reserves Series.
Gary A. Reed, Vice President/Senior Portfolio Manager, holds an AB in Economics
from the University of Chicago and an MA in Economics from Columbia University.
He began his career in 1978 with the Equitable Life Assurance Company in New
York City, where he specialized in credit analysis. Prior to joining Delaware
Investments in 1989, Mr. Reed was Vice President and Manager of the fixed-income
department at Irving Trust Company in New York. Mr. Reed has been Capital
Reserves Series' senior portfolio manager since 1989.
51
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ -------------------------------------------------------
Capital Reserves Series Year Ended 12/31
---------- ---------- ---------- ----------- ----------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.790 $9.690 $9.930 $9.300
Income (loss) from investment operations
Net investment income 0.556 0.613 0.623 0.643
Net realized and unrealized gain (loss) on investments 0.090 0.100 (0.240) 0.630
----- ----- ------- -----
Total from investment operations 0.646 0.713 0.383 1.273
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.556) (0.613) (0.623) (0.643)
Distributions from net realized gain on investments none none none none
---- ---- ---- ----
Total dividends and distributions (0.556) (0.613) (0.623) (0.643)
------- ------- ------- -------
Net asset value, end of year $9.880 $9.790 $9.690 $9.930
====== ====== ====== ======
Total return(1) 6.78% 7.60% 4.05% 14.08%
Ratios and supplemental data
Net assets, end of period (000 omitted) $41,711 $29,177 $27,768 $27,935
Ratio of expenses to average net assets 0.79% 0.75% 0.72% 0.71%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.79% 0.75% 0.72% 0.71%
Ratio of net investment income to average net assets 5.62% 6.31% 6.43% 6.64%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.62% 6.31% 6.43% 6.64%
Portfolio turnover 166% 120% 122% 145%
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------- ----------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
52
<PAGE>
Cash Reserve Series
The securities we typically invest in
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Cash Reserves Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Direct U.S. Treasury obligations include Treasury We may invest without limit in U.S. Treasury securities. We would
bills, notes and bonds of varying maturities. U.S. typically invest in Treasury bills or longer term Treasury securities
Treasury securities are backed by the "full faith and whose remaining effective maturity is less than 13 months.
credit" of the United States.
- -----------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit and obligations of both U.S. We may invest in certificates of deposit from banks that have assets
and foreign banks: Debt instruments issued by a bank of at least one billion dollars.
that pay interest.
Investments in foreign banks and overseas branches of U.S. banks may
be subject to less stringent regulations and different risks than
U.S. domestic banks.
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate commercial paper: Short-term debt obligations We may invest in commercial paper that is rated P-1 or P-2 by Moody's
with maturities ranging from 2 to 270 days, issued by and/or A-1 or A-2 by S&P. The Series will not invest more than 5% of
companies. its total assets in securities rated in the second highest category
by a ratings organization.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities as well as those listed in the table above.
Cash Reserve Series uses the same investment strategy as Delaware Cash Reserve
Fund, a separate fund in the Delaware Investments Family of Funds, although
performance may differ depending on such factors as the size of the funds and
the timing of investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
Borrowing from banks
Cash Reserve Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
53
<PAGE>
The risks of investing in Cash Reserve Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. The following are the chief risks you assume when
investing in the Cash Reserve Series. Please see the Statement of Additional
Information for further discussion of these risks and the other risks not
discussed here.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Cash Reserves Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest rate risk is the risk that securities, Because Cash Reserve Series invests in short-term securities, the
particularly bonds with longer maturities, will value of its investments is generally not affected by interest rate
decrease in value if interest rates rise. risk. However, a decline in interest rates would adversely affect the
level of income provided by the Series.
- -----------------------------------------------------------------------------------------------------------------------------------
Credit risk is the risk that there is the possibility Cash Reserve Series holds only high quality short-term securities.
that a bond's issuer (or an entity that insures the Therefore it is generally not subject to significant credit risk.
bond) will be unable to make timely payments of
interest and principal. We limit our investments to those which the Board of Trustees has
determined to involve minimal credit risks and to be of high quality
and which will otherwise meet the maturity, quality and
diversification conditions with which taxable money market funds must
comply.
If there were a national credit crisis or an issuer were to become
insolvent, principal values could be adversely affected.
- -----------------------------------------------------------------------------------------------------------------------------------
Inflation risk is the risk that the return from your Cash Reserve Series is designed for short-term investment goals and
investments will be less than the increase in the cost therefore may not outpace inflation over longer time periods. For
of living due to inflation, thus preventing you from this reason, Cash Reserve Series is not recommended as a primary
reaching your financial goals. investment for people with long-term goals.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
54
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Cash Reserve Series Year Ended 12/31
-----------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.000 $10.000 $10.000 $10.000
Income from investment operations
Net investment income 0.497 0.497 0.482 0.535
----- ----- ----- -----
Total from investment operations 0.497 0.497 0.482 0.535
----- ----- ----- -----
Less dividends
Dividends from net investment income (0.497) (0.497) (0.482) (0.535)
------- ------- ------- -------
Total dividends (0.497) (0.497) (0.482) (0.535)
------- ------- ------- -------
Net asset value, end of year $10.000 $10.000 $10.000 $10.000
======= ======= ======= =======
Total return(1) 5.08% 5.10% 4.93% 5.48%
Ratios and supplemental data
Net assets, end of period (000 omitted) $42,893 $30,711 $26,479 $16,338
Ratio of expenses to average net assets 0.59% 0.64% 0.61% 0.62%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.59% 0.64% 0.61% 0.62%
Ratio of net investment income to average net assets 4.96% 4.98% 4.82% 5.35%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.96% 4.98% 4.82% 5.35%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
55
<PAGE>
Convertible Securities Series
Our investment strategies
Convertible Securities Series is a type of total return fund that invests in
convertible securities to pursue a two-pronged investment objective: capital
appreciation and current income.
We invest primarily in convertible securities. Our strategy is based on the
belief that characteristics of these securities make them particularly
appropriate investments in seeking both capital appreciation and current income.
These characteristics include:
o the potential for capital appreciation as the value of the underlying common
stock increases,
o the relatively high yield received from interest or dividend payments on
convertible securities as compared to common stock dividends; and,
o reduced price decline risk relative to the underlying common stock due to the
income features of a convertible security.
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.
We may also invest in preferred and common stock, warrants, U.S. government
securities, non-convertible fixed-income securities and money market securities.
Securities or assets obtained upon the conversion of convertible securities may
be retained, subject to the Series' investment objective. There are no size
limits on corporations in whose securities the Series may invest.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
56
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation.
Convertible securities often blend the potential benefits of stocks and
fixed-income securities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Convertible Securities Series
- -------------------------------------------------------------- ------------------------------------------------------------------
<S> <C>
Convertible securities: Usually preferred Under normal conditions, the Series intends to invest at
stocks or corporate bonds that can be least 65% of its total assets in convertible securities, which
exchanged for a set number of shares of may include privately placed convertible securities.
common stock at a predetermined price. These
securities offer higher appreciation potential We will invest in convertible securities without regard to
than nonconvertible bonds and greater income rating categories. To the extent that securities we hold are
potential than nonconvertible preferred stocks. not investment grade or are not rated, there may be a
greater risk as to the timely payment of interest and principal.
Convertible securities rank ahead of common
stock in a corporation's capital structure and If a convertible security held by the Series is called for
therefore entail less risk than the redemption, the Series will be required to redeem the security,
corporation's common stock. However, convert it into the underlying common stock or sell it to a third
convertible securities typically rank behind party.
non-convertible securities of the same issuer.
Convertible securities may be rated below
investment grade, that is, not rated within
the four highest categories by S&P and
Moody's. Debt securities rated below
investment grade are often referred to as
"high-yield bonds" or "junk bonds," although
these terms are not generally used in
reference to convertible debt securities.
A convertible security may be subject to
redemption at the option of the issuer at a
price established in the instrument under
which the convertible security was issued.
- -------------------------------------------------------------- ------------------------------------------------------------------
Zero coupon bonds and pay-in-kind bonds: Zero The Series may invest in zero coupon bonds and payment in kind
coupon securities are debt obligations which bonds, though this is not expected to be a significant component
do not entitle the holder to any periodic of its strategy. The market prices of these bonds are generally
payments of interest prior to maturity or a more volatile than the market prices of securities that pay
specified date when the securities begin interest periodically and are likely to react changes in interest
paying current interest. Therefore, they are rates to a greater degree than interest-paying bonds having
issued and traded at a discount from their similar maturities and credit quality. They may have certain tax
face amounts or par value. Payment-in-kind consequences which, under certain conditions, could be adverse to
bonds pay interest or dividends in the form of the Series.
additional bonds or preferred stock.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Convertible Securities Series
- -------------------------------------------------------------- ------------------------------------------------------------------
<S> <C>
Private placements: For various reasons, an What portion of the Series' portfolio is invested in convertible
issuer may prefer or be required as a securities purchased in private placements depends upon the
practical matter to obtain private financing. relative attractiveness of those securities compared to
Adverse conditions in the public securities convertible securities, which are publicly offered. Ordinarily,
markets may preclude a public offering of an the Series expects that 50% of its portfolio may be invested in
issuer's securities. An issuer is often convertible securities purchased in private placements, but the
willing to provide more attractive features in percentage may be substantially greater or less than 50%,
securities issued privately, because it has depending upon prevailing market conditions.
avoided the expense and delay involved in a
public offering. Private placements of debt We anticipate that substantially all of the private placements we
securities have frequently resulted in higher purchase will be subject to Rule 144A under the 1933 Act and
yields and restrictive covenants that provide therefore, may be traded freely among qualified institutional
greater protection for the purchaser, such as buyers. Subject to procedures approved by the Series' Board of
longer call or refunding protection than would Trustees, we may treat Rule 144A securities as liquid and
typically be available with publicly offered therefore not subject to the 15% limitation on illiquid
securities of the same type. Securities securities described below. The private placements we purchase
acquired through private placements may also will typically include registration rights for the convertible
have special features not usually security and the underlying common stock. This requires the
characteristic of similar securities offered underlying common stock to be registered with the SEC, generally
to the public, such as contingent interest or filed within one year of the private placement, consequently
warrants for the purchase of the issuer's allowing us to trade the underlying common stock upon conversion.
stock. Such trading may be subject to certain contractual or legal
restrictions.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Convertible Securities Series
- -------------------------------------------------------------- ------------------------------------------------------------------
<S> <C>
Equity linked securities: Convertible We may invest in equity linked securities when we believe they
securities that offer enhanced yield features, offer suitable income and capital appreciation potential in
such as PRIDES (Preferred Redeemable Increased keeping with the Series' investment objective.
Dividend Equity Securities) and DECS (Dividend
Enhanced Convertible Securities). These We may also invest in other types of convertible securities
securities typically have the following similar to those described here.
features: (a) the issuer's common stock will
be received in the event the convertible An investment in an equity-linked security may involve additional
preferred stock is converted; (b) they do not risks. Unlike conventional convertible securities, equity-linked
have a capital appreciation limit; (c) they securities do not usually have a fixed maturity (par) value.
seek to provide the investor with high current Rather, equity-linked securities generally provide only for a
income with some prospect of future capital mandatory conversion into cash or common stock. As a result, the
appreciation; (d) they are typically issued Series risks loss of principal if the cash received or the price
with three to four year maturities; (e) they of the underlying common stock at the time of conversion is less
typically have some built-in call protection than the price paid for the equity-linked security. Equity-linked
for the first two to three years; (f) securities may be more or less liquid than conventional
investors have the right to convert them into convertible securities or non-convertible debt securities. We
shares of common stock at a preset conversion primarily intend to acquire liquid equity-linked securities since
formula or hold them until maturity; and (g) any purchases of illiquid equity-linked securities would be
upon maturity they will automatically convert subject to the Series' 15% limit on illiquid securities described
into either cash or a specified number of below.
shares of common stock.
Preferred Equity Redemption Cumulative Stock
("PERCS") is a preferred stock convertible
into common stock of the issuer which
generally features a mandatory conversion date
(typically three years) as well as a capital
appreciation limit usually expressed in terms
of a stated price.
- -------------------------------------------------------------- ------------------------------------------------------------------
Repurchase agreements: An agreement between a Typically, we use repurchase agreements as a short-term
buyer, such as the Series, and a seller of investment for the Series' cash position. In order to enter into
securities in which the seller agrees to buy these repurchase agreements, the Series must have collateral of
the securities back within a specified time at at least 102% of the repurchase price. The Series will only enter
the same price the buyer paid for them, plus into repurchase agreements in which the collateral is composed of
an amount equal to an agreed upon interest U.S. government securities.
rate. Repurchase agreements are often viewed
as equivalent to cash.
- -------------------------------------------------------------- ------------------------------------------------------------------
Foreign securities, Eurodollar convertible The Series may invest in securities of foreign issuers, including
securities and American Depositary Receipts: issuers located in emerging markets. Such foreign securities may
Securities of foreign entities issued directly be traded on a foreign exchange, or they may be in the form of
or, in the case of American Depositary depositary receipts or notes, such as American Depositary
Receipts, through a U.S. bank. ADRs represent Receipts (ADRs), American Depositary Notes (ADNs), European
the bank's holding of a stated number of Depositary Receipts (EDRs), European Depositary Notes (EDNs),
shares of a foreign corporation. An ADR Global Depositary Receipts (GDRs) or Global Depositary Notes
entitles the holder to all dividends and (GDNs). The Series may also invest in Eurodollar securities.
capital gains earned by the underlying foreign
shares. ADRs are bought and sold the same as
U.S. securities.
Eurodollar convertible securities are
fixed-income securities of a U.S. issuer which
are convertible into equity securities of that
issuer. These Eurodollar securities are
payable in U.S. dollars outside of the United
States.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Convertible Securities Series
- -------------------------------------------------------------- ------------------------------------------------------------------
<S> <C>
Restricted securities: Privately placed We may invest in privately placed securities that are eligible
securities whose resale is restricted under for resale only among certain institutional buyers without
securities law. registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 15% limit on illiquid securities, which is
described below.
- -------------------------------------------------------------- ------------------------------------------------------------------
Illiquid securities: Securities that do not We may invest up to 15% of net assets in illiquid securities,
have a ready market, and cannot be easily sold including repurchase agreements with maturities of over seven
within seven days at approximately the price days.
that the Series has valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities as well as those listed in the table above.
Lending securities
Convertible Securities Series may lend up to 25% of its assets to qualified
brokers, dealers and institutional investors for their use in security
transactions.
Purchasing securities on a when-issued or delayed delivery basis
Convertible Securities Series may buy or sell securities on a when-issued or
delayed delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that Convertible Securities Series' annual portfolio turnover will
be less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
Borrowing from banks
Convertible Securities Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Short sales against the box The Series may engage in short sales "against the
box." While a short sale is made by selling a security the Series does not own,
a short sale is "against the box" if the Series contemporaneously owns or has
the right to obtain securities identical to those sold short, at no added cost.
60
<PAGE>
The risks of investing in Convertible Securities Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Convertible Securities Series. Please see the
Statement of Additional Information for further discussion of these risks and
the other risks not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
How we strive to manage them
Risks Convertible Securities Series
- -------------------------------------------------------------- ------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority We maintain a long-term investment approach and focus on
of the securities in a certain market--like securities we believe can continue to pay income and appreciate
the stock or bond market--will decline in over an extended time frame regardless of interim market
value because of factors such as economic fluctuations. We do not try to predict overall stock market
conditions, future expectations or investor movements and though we may hold securities for any period of
confidence. time, we do not typically trade for short-term purposes.
We may hold a substantial part of Convertible Securities Series'
assets in cash or cash equivalents as a temporary defensive
strategy. To the extent it holds Cash or Cash equivalents, the
Series may be unable to achieve its investment objective.
- -------------------------------------------------------------- ------------------------------------------------------------------
Industry and security risk is the risk that We limit the amount of Convertible Securities Series' assets
the value of securities in a particular invested in any one industry and in any individual security. We
industry or the value of an individual stock also follow a rigorous selection process before choosing
or bond will decline because of changing securities for the portfolio.
expectations for the performance of that
industry or for the individual company issuing
the security.
- -------------------------------------------------------------- ------------------------------------------------------------------
Credit risk The possibility that a security's This risk may be reduced because of the ability to convert these
issuer (or an entity that insures the securities into common stock.
security) will be unable to make timely
payments of interest, dividends and principal.
Investing in securities rated below investment
grade entails greater risk of principal loss
than associated with investment grade bonds.
It is likely that protracted periods of
economic uncertainty would cause increased
volatility in the market prices of
non-investment grade securities and
corresponding volatility in the Series' net
asset value.
- -------------------------------------------------------------- ------------------------------------------------------------------
Interest rate risk is the risk that We will monitor interest rate trends and their potential impact
securities, particularly bonds with longer on the Series. Though convertible securities may be sensitive to
maturities, will decrease in value if interest interest rate movements, an individual security's link to the
rates rise. underlying common stock may reduce that sensitivity.
- -------------------------------------------------------------- ------------------------------------------------------------------
Foreign risk is the risk that foreign Most of the foreign securities that we invest in are denominated
securities may be adversely affected by in U.S. dollars.
political instability, changes in currency
exchange rates, foreign economic conditions or
inadequate regulatory and accounting
standards.
- -------------------------------------------------------------- ------------------------------------------------------------------
Liquidity risk is the possibility that We limit exposure to illiquid securities.
securities cannot be readily sold within seven
days at approximately the price that the
Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.00% of average daily net assets for the last
fiscal year.
Portfolio manager
Damon Andres has primary responsibility for making day-to-day investment
decisions for the Convertible Securities Series.
Damon Andres, Vice President/Portfolio Manager, earned a BS in Business
Administration with an emphasis in Finance and Accounting from the University of
Richmond. Prior to joining Delaware Investments in 1994, Mr. Andres performed
investment consulting services as a Consulting Associate with Cambridge
Associates, Inc. in Arlington, Virginia. Mr. Andres has been managing the
Convertible Securities Series since February 1999.
62
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Period
Convertible Securities Series Year Ended 12/31 5/1/97(1)
----------------------------------------- through
1999 1998 12/31/97
- ------------------------------------------------------------------ -------------------- -------------------- -----------
<S> <C> <C>
Net asset value, beginning of period $11.660 $10.000
Income (loss) from investment operations
Net investment income 0.386 0.318
Net realized and unrealized gain (loss) on investments (0.511) 1.342
------- -----
Total from investment operations (0.125) 1.660
------- -----
Less dividends and distributions
Dividends from net investment income (0.305) none
Distributions from net realized gain on investments (0.070) none
------- ----
Total dividends and distributions (0.375) none
------- ----
Net asset value, end of period $11.160 $11.660
======= =======
Total return(2) (1.17%) 16.60%(3)
Ratios and supplemental data
Net assets, end of period (000 omitted) $8,133 $3,921
Ratio of expenses to average net assets 0.82% 0.80%
Ratio of expenses to average net assets
prior to expense limitation as expenses paid indirectly 0.82% 2.30%
Ratio of net investment income to average net assets 4.78% 5.68%
Ratio of net investment income to average net assets
prior to expense limitation as expenses paid indirectly 4.78% 4.18%
Portfolio turnover 77% 209%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or
to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown.
(3) Total return reflects expense limitations in effect for the Series.
63
<PAGE>
Devon Series
Our investment strategies
Devon Series is a total return fund but it invests the majority of its assets in
stocks. This Series has a dual objective of capital appreciation and current
income, but since it invests primarily in stocks, its shareholders should be
comfortable accepting fluctuations of principal.
We invest primarily in common stocks that we believe have the potential for
above-average dividend increases over time. Generally, at least 65% of the
Series' assets will be invested in dividend-paying stocks.
In selecting stocks for Devon Series, we consider factors such as how much the
stock's dividend has grown in the past, the frequency of the stock's prior
dividend increases, the company's potential for strong positive cash flow, and
the price/earnings ratio of the stock compared to other stocks in the market. We
avoid stocks that we think are overvalued. We seek stocks that we believe have
the potential for above-average dividend growth.
Devon Series uses the same investment strategy as Delaware Devon Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
64
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
How we use them
Securities Devon Series
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stocks: Securities that represent shares of Generally, 90% to 100% of the Series' assets will
ownership in a corporation. Stockholders be invested in common stocks. Under normal market
participate in the corporation's profits and conditions we will invest at least 65% of total
losses, proportionate to the number of shares they assets in dividend-paying stocks.
own.
- -------------------------------------------------------------------------------------------------------------------
Convertible securities: Usually preferred stocks Devon Series may invest in convertible securities;
or corporate bonds that can be exchanged for a set however, we will not invest more than 5% of net
number of shares of common stock at a assets in convertible securities that are rated
predetermined price. These securities offer higher below investment grade by an NRSRO or in
appreciation potential than nonconvertible bonds securities that are unrated but deemed equivalent
and greater income potential than nonconvertible to non-investment grade.
preferred stocks.
- -------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a Typically, we use repurchase agreements as a
buyer, such as the Series, and a seller of short-term investment for the Series' cash
securities in which the seller agrees to buy the position. In order to enter into these repurchase
securities back within a specified time at the agreements, the Series must have collateral of at
same price the buyer paid for them, plus an amount least 102% of the repurchase price. The Series
equal to an agreed upon interest rate. Repurchase will only enter into repurchase agreements in
agreements are often viewed as equivalent to cash. which the collateral is composed of U.S.
government securities.
- -------------------------------------------------------------------------------------------------------------------
American Depositary Receipts (ADRs): Certificates We may invest without limitation in ADRs.
issued by a U.S. bank that represent the bank's
holdings of a stated number of shares of a foreign
corporation. An ADR entitles the holder to all
dividends and capital gains earned by the
underlying foreign shares. An ADR is bought and
sold the same as U.S. securities.
- -------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid securities: Restricted We may invest up to 10% of net assets in illiquid
securities are privately placed securities whose securities. For this Series, the 10% limit
resale is restricted under securities law. includes restricted securities such as privately
Illiquid securities are securities that do not placed securities that are eligible for resale
have a ready market, and cannot be easily sold only among certain institutional buyers without
within seven days at approximately the price that registration, which are commonly known as "Rule
the Series has valued them. 144A Securities" and repurchase agreements with
maturities of over seven days.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Devon Series may also invest in other securities including real estate
investment trusts, rights and warrants to purchase common stock, fixed-income
securities [or mention the list] futures contracts and options. Please see the
Statement of Additional Information for additional descriptions on these
securities as well as those listed in the table above.
65
<PAGE>
Lending securities
Devon Series may lend up to 25% of its assets to qualified brokers, dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Devon Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
Devon Series may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Devon Series' annual portfolio turnover will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
66
<PAGE>
The risks of investing in Devon Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Devon Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
- --------------------------------------------------------------------------------
Risks How we strive to manage them
Devon Series
- --------------------------------------------------------------------------------
Market risk is the risk that We maintain a long-term investment
all or a majority of the approach and focus on stocks we believe
securities in a certain can appreciate over an extended time
market--like the stock or bond frame regardless of interim market
market--will decline in value fluctuations. We do not try to predict
because of factors such as overall stock market movements and do
economic conditions, future not trade for short-term purposes.
expectations or investor
confidence. We may hold a substantial part of Devon
Series' assets in cash or cash
equivalents as a temporary defensive
strategy. To the extent it holds cash or
cash equivalents, the Series may be
unable to achieve its investment
objective.
- --------------------------------------------------------------------------------
Industry and security risk is We limit the amount of Devon Series'
the risk that the value of assets invested in any one industry and
securities in a particular in any individual security. We also
industry or the value of an follow a rigorous selection process
individual stock or bond will before choosing securities for the
decline because of changing portfolio.
expectations for the
performance of that industry
or for the individual company
issuing the stock or bond.
- --------------------------------------------------------------------------------
Foreign risk is the risk that We typically invest only a small portion
foreign securities may be of Devon Series' portfolio in foreign
adversely affected by securities. When we do purchase foreign
political instability, changes securities, they are often denominated
in currency exchange rates, in U.S. dollars. We also tend to avoid
foreign economic conditions or markets where we believe accounting
inadequate regulatory and principles or the regulatory structure
accounting standards. are underdeveloped.
- --------------------------------------------------------------------------------
Liquidity risk is the We limit exposure to illiquid securities.
possibility that securities
cannot be readily sold within
seven days at approximately
the price that the Series
values them.
- --------------------------------------------------------------------------------
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.00% of average daily net assets for the last
fiscal year.
Portfolio manager
Frank X. Morris has primary responsibility for making day-to-day investment
decisions for the Devon Series. In making investment decisions for the Series,
Mr. Morris regularly consults with Christopher Driver and Michael S. Morris.
Frank X. Morris, Vice President/Senior Portfolio Manager, holds a bachelor's
degree in finance from Providence College in Rhode Island and an MBA from
Widener University in Pennsylvania. Mr. Morris has been managing institutional
equity portfolios at Delaware Investments since 1997. He has 16 years of
investment management experience. He came to Delaware Investments from PNC Asset
Management where he served as a securities analyst from 1983 to 1991 and
portfolio manager from 1991 to 1994. He was subsequently named Director of
Equity Research at PNC. He is a past president of the Philadelphia Society of
Financial Analysts. Mr. Morris has been a member of Devon Series' management
team since March 1999.
67
<PAGE>
Christopher Driver, Assistant Vice President/Equity Analyst, holds a BS in
Finance from the University of Delaware. Prior to joining Delaware Investments
in 1998, he was a Research Analyst in the Equity Value group at Blackrock, Inc.
Prior to Blackrock, he was a partner at Cashman Farrell & Associates. Mr. Driver
is a CFA charterholder.
Michael S. Morris, Assistant Vice President/Equity Analyst, holds a BS from
Indiana University with a major in finance. Previously he served as equity
analyst at Walnut Asset Management where he covered a variety of industries. He
has also worked at Pilgrim Baxter as a Senior Research Analyst covering
financials and began his career at The State Teachers Retirement System of Ohio.
Mr. Morris is a CFA charterholder.
68
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Devon Series Period
Year Ended 12/31 5/1/97(1)
------------------------------------------- through
1999 1998 12/31/97
- ------------------------------------------------------------------ --------------------- --------------------- ----------
<S> <C> <C>
Net asset value, beginning of period $12.730 $10.000
Income from investment operations
Net investment income 0.106 0.080
Net realized and unrealized gain on investments 2.889 2.650
----- -----
Total from investment operations 2.995 2.730
----- -----
Less dividends and distributions
Dividends from net investment income (0.080) none
Distributions from net realized gain on investments (0.205) none
------- ----
Total dividends and distributions (0.285) none
------- ----
Net asset value, end of period $15.440 $12.730
======= =======
Total return(2) 24.05% 27.30%(3)
Ratios and supplemental data
Net assets, end of period (000 omitted) $68,714 $16,653
Ratio of expenses to average net assets 0.66% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.66% 0.91%
Ratio of net investment income to average net assets 1.30% 2.01%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.30% 1.90%
Portfolio turnover 34% 80%
- ------------------------------------------------------------------ --------------------- --------------------- ----------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown.
(3) Total return reflects expense limitations in effect for the Series.
69
<PAGE>
Emerging Markets Series
Our investment strategies
Emerging Markets Series seeks long-term capital appreciation. The Series may
invest in a broad range of equity securities, including common stocks. Our
primary emphasis will be on the stocks of companies located in or having their
principal business in an emerging country.
We consider an "emerging country" to be any country that is
o generally recognized to be an emerging or developing country by the
international financial community, including the World Bank and the
International Finance Corporation,
o any country that is classified by the United Nations as developing, or
o any country that is included in the International Finance Corporation
Free Index or the Morgan Stanley Capital International Emerging Markets
Free Index.
Developing or emerging countries include almost every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western and Northern Europe. A representative list of the countries
where we may invest includes: Argentina, Botswana, Brazil, Chile, China,
Colombia, Czech Republic, Estonia, Ghana, Greece, Hong Kong, Hungary, India,
Indonesia, Ivory Coast, Jamaica, Jordan, Kenya, Korea, Latvia, Lithuania,
Malaysia, Mauritius, Mexico, Morocco, Nigeria, Pakistan, Peru, the Philippines,
Poland, Portugal, Russia, Slovenia, South Africa, Sri Lanka, Taiwan, Thailand,
Turkey, Venezuela and Zimbabwe. We may invest in other countries, particularly
as markets in other emerging countries develop. More than 25% of the Series'
total assets may be invested in the securities of issuers located in the same
country.
In deciding whether a company is from an emerging country, we evaluate publicly
available information and question individual companies to determine if the
company meets one of the following criteria:
o the principal trading market for the company's securities is in a
country that is emerging;
o the company generates 50% or more of its annual revenue from operations
in emerging countries, even though the company's securities are traded
in an established market or in a combination of emerging and
established markets;
o the company is organized under the laws of an emerging market country
and has a principal office in an emerging country.
Currently, investing in many emerging countries is not feasible or may involve
significant political risks. We focus our investments in emerging countries
where we consider the economies to be developing strongly and where the markets
are becoming more sophisticated. In deciding where to invest we place particular
emphasis on factors such as economic conditions (including growth trends,
inflation rates and trade balances), regulatory and currency controls,
accounting standards and political and social conditions. We believe investment
opportunities may result from an evolving long-term trend favoring
market-oriented economies, a trend that may particularly benefit countries
having developing markets.
When we evaluate individual companies we strive to apply a value-oriented
selection process, similar to what we use for International Equity Series.
However, in emerging markets, more of the return is expected to come from
capital appreciation rather than income. Thus, there is greater emphasis on the
manager's assessment of the company's future growth potential.
The Series may invest up to 35% of its net assets in high yield, high risk
foreign fixed-income securities. This typically includes so-called Brady Bonds.
Emerging Markets Series uses the same investment strategy as Delaware Emerging
Markets Fund, a separate fund in the Delaware Investments Family of Funds,
although performance may differ depending on such factors as the size of the
funds and the timing of investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
70
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation. The
following chart provides a brief description of the securities that Emerging
Markets Series may invest in. Please see the Statement of Additional Information
for additional descriptions of these as well as other investments.
- --------------------------------------------------------------------------------
Securities How we use them
Emerging Markets Series
- --------------------------------------------------------------------------------
Common stocks of emerging The Series will invest its assets in
market companies: Securities common stocks, some of which will be
that represent shares of dividend-paying stocks.
ownership in a corporation.
Stockholders participate in
the corporation's profits and
losses, proportionate to the
number of shares they own.
- --------------------------------------------------------------------------------
Corporate bonds: Debt Emerging Markets Series may invest in
obligations issued by U.S. or corporate obligations issued by emerging
foreign corporations. country companies. These bonds may be
high risk, fixed-income securities.
Although not a principal strategy of the
Series, for temporary defensive
purposes, the Series may invest all or a
substantial portion of its assets in
corporate obligations rated AA or better
by S&P and Aa or better by Moody's, or
if unrated, determined to be of
comparable quality.
- --------------------------------------------------------------------------------
Foreign government securities: We may invest a portion of Emerging
Debt obligations issued by a Markets Series' assets in foreign
government other than the governmental securities issued by
United States or by an agency, emerging or developing countries, which
instrumentality or political may be lower rated, including securities
subdivision of such rated below investment grade.
governments.
Although not a principal strategy of the
Series, for temporary defensive
purposes, the Series may invest in high
quality debt obligations of foreign
governments, their agencies,
instrumentalities and political
sub-divisions.
- --------------------------------------------------------------------------------
Investment company securities: The Series may hold open-end and
In some countries, investments closed-end investment company securities
by U.S. mutual funds are if we believe the country offers good
generally made by purchasing investment opportunities. These
shares of investment companies investments involve an indirect payment
that in turn invest in the of a portion of the expenses of the
securities of such countries. other investment companies, including
their advisory fees.
- --------------------------------------------------------------------------------
71
<PAGE>
- --------------------------------------------------------------------------------
Securities How we use them
Emerging Markets Series
- --------------------------------------------------------------------------------
Foreign currency transactions: Although the Series value its assets
A forward foreign currency daily in U.S. dollars, it does not
exchange contract involves an intend to convert its holdings of
obligation to purchase or sell foreign currencies into U.S. dollars on
a specific currency on a fixed a daily basis. The Series will, however,
future date at a price that is from time to time, purchase or sell
set at the time of the foreign currencies and/or engage in
contract. The future date may forward foreign currency exchange
be any number of days from the transactions. The Series may conduct its
date of the contract as agreed foreign currency transactions on a cash
by the parties involved. basis at the rate prevailing in the
foreign currency exchange market or
through a forward foreign currency
exchange contract or forward contract.
The Series may use forward contracts for
defensive hedging purposes to attempt to
protect the value of the Series' current
security or currency holdings. It may
also use forward contracts if it has
agreed to sell a security and wants to
"lock-in" the price of that security, in
terms of U.S. dollars. Investors should
be aware of the costs of currency
conversion. The Series will not use
forward contracts for speculative
purposes.
- --------------------------------------------------------------------------------
American Depositary Receipts The Series may invest in sponsored and
(ADRs), European Depositary unsponsored ADRs, EDRs and GDRs,
Receipts (EDRs), and Global generally focusing on those whose
Depositary Receipts (GDRs): underlying securities are issued by
ADRs are receipts issued by a foreign entities.
U.S. depositary (usually a
U.S. bank) and EDRs and GDRs To determine whether to purchase a
are receipts issued by a security in a foreign market or through
depositary outside of the U.S. depositary receipts, we evaluate the
(usually a non-U.S. bank or price levels, the transaction costs,
trust company or a foreign taxes and administrative costs involved
branch of a U.S. bank). with each security to identify the most
Depositary receipts represent efficient choice.
an ownership interest in an
underlying security that is
held by the depositary.
Generally, the holder of the
depositary receipt is entitled
to all payments of interest,
dividends or capital gains
that are made on the
underlying security.
- --------------------------------------------------------------------------------
Zero coupon bonds: Zero coupon Emerging Markets Series may invest in
securities are debt zero coupon bonds. The market prices of
obligations which do not zero coupon bonds are generally more
entitle the holder to any volatile than the market prices of
periodic payments of interest securities that pay interest
prior to maturity or a periodically and are likely to respond
specified date when the to changes in interest rates to a
securities begin paying greater degree than do non-zero coupon
current interest, and securities having similar maturities and
therefore are issued and credit quality.
traded at a discount from
their face amounts or par
value.
<PAGE>
- --------------------------------------------------------------------------------
Brady Bonds: These are debt The Series may invest in Brady Bonds. We
securities issued under the believe that the economic reforms
framework of the Brady Plan, undertaken by countries in connection
an initiative for debtor with the issuance of Brady Bonds can
nations to restructure their make the debt of countries that have
outstanding external issued or have announced plans to issue
indebtedness (generally, these bonds a viable opportunity for
commercial bank debt). Brady investment.
Bonds tend to be of lower
quality and more speculative
than securities of developed
country issuers.
- --------------------------------------------------------------------------------
High-yield, high risk Emerging Markets Series may invest up to
fixed-income securities: 35% of its net assets, in high-yield,
Securities that are rated high risk foreign fixed-income
lower than BBB by S&P or Baa securities.
by Moody's, or if unrated, of
equal quality. These
securities may be issued by
companies or governments of
emerging or developing
countries, which may be less
creditworthy. The risk that
these companies or governments
may not be able to make
interest or principal payments
is substantial.
- --------------------------------------------------------------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
Securities How we use them
Emerging Markets Series
- --------------------------------------------------------------------------------
Repurchase Agreements: An Typically, we use repurchase agreements
agreement between a buyer, as a short-term investment for the
such as the Series, and a Series' cash position. In order to enter
seller of securities in which into these repurchase agreements, the
the seller agrees to buy the Series must have collateral of at least
securities back within a 102% of the repurchase price. The Series
specified time at the same will only enter into repurchase
price the buyer paid for them, agreements in which the collateral is
plus an amount equal to an composed of U.S. government securities.
agreed upon interest rate.
Repurchase agreements are
often viewed as equivalent to
cash.
- --------------------------------------------------------------------------------
Restricted securities: We may invest in privately placed
Privately placed securities securities that are eligible for resale
whose resale is restricted only among certain institutional buyers
under securities law. without registration. These are commonly
known as Rule 144A Securities.
Restricted securities that are
determined to be illiquid may not exceed
the Series' 10% limit on illiquid
securities, which is described below.
- --------------------------------------------------------------------------------
Illiquid securities: We may invest up to 10% of net assets in
Securities that do not have a illiquid securities, including
ready market, and cannot be repurchase agreements with maturities of
easily sold within seven days over seven days.
at approximately the price
that the Series has valued
them.
- --------------------------------------------------------------------------------
The Series may invest in preferred stocks, convertible securities, warrants,
futures and options. For temporary defensive purposes or for cash management
purposes, the Series may invest in high quality U.S. or foreign debt securities,
although to the extent it does so the Series may be unable to meet its
investment objective. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Portfolio turnover
The Series anticipates that its annual portfolio turnover will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
Borrowing from banks
Emerging Markets Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Securities lending
Emerging Market 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 securities transactions. These transactions will generate additional
income for the Series.
73
<PAGE>
The risks of investing in Emerging Markets Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Emerging Markets Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
- --------------------------------------------------------------------------------
Risks How we strive to manage them
Emerging Markets Series
- --------------------------------------------------------------------------------
Market risk is the risk that We maintain a long-term investment
all or a majority of the approach and focus on stocks we believe
securities in a certain can appreciate over an extended time
market--like the stock or bond frame regardless of interim market
market--will decline in value fluctuations. In deciding what portion
because of factors such as of the Series' portfolio should be
economic conditions, future invested in any individual country, we
expectations or investor evaluate a variety of factors, including
confidence. opportunities and risks relative to
other countries.
In addition, for temporary defensive
purposes, the Series may invest all or a
substantial portion of its assets in
high quality debt instruments of foreign
governments, the U.S. government,
(including their agencies and
instrumentalities) or foreign or U.S.
companies.
- --------------------------------------------------------------------------------
Industry and security risk is We typically hold a number of different
the risk that the value of securities in a variety of sectors in
securities in a particular order to minimize the impact that a
industry or the value of an poorly performing security would have on
individual stock or bond will the Series. This risk is more
decline because of changing significant for the Series, which is a
expectations for the non-diversified fund.
performance of that industry
or for the individual company
issuing the stock or bond.
- --------------------------------------------------------------------------------
Interest rate risk is the risk In an attempt to protect Emerging
that securities, particularly Markets Series' investments from
bonds with longer maturities, interest rate fluctuations, the Series
will decrease in value if may engage in interest rate swaps.
interest rates rise. Interest rate swaps involve the exchange
by the Series with another party of
their respective rights to receive
interest. The Series intends to use
interest rate swaps as a hedge and not
as a speculative investment. The use of
interest rate swaps involves investment
techniques and risks different from
those associated with ordinary portfolio
securities transactions. If the manager
is incorrect in its forecast of market
values, interest rates and other
applicable factors, the investment
performance of the Series will be less
favorable than it would have been if
this investment technique were never
used.
- --------------------------------------------------------------------------------
Foreign risk is the risk that We carefully evaluate the overall
foreign securities may be situations in the countries where we
adversely affected by invest in an attempt to reduce these
political instability, changes risks. We also tend to avoid markets
in currency exchange rates, where we believe accounting principles
foreign economic conditions or or the regulatory structure are too
inadequate regulatory and underdeveloped.
accounting standards.
- --------------------------------------------------------------------------------
74
<PAGE>
- --------------------------------------------------------------------------------
Risks How we strive to manage them
Emerging Markets Series
- --------------------------------------------------------------------------------
Currency risk is the risk that The Series may try to hedge its currency
the value of the Series' risk by purchasing foreign currency
investments may be negatively exchange contracts. If the Series agrees
affected by changes in foreign to purchase or sell foreign securities
currency exchange rates. at a pre-set price on a future date, the
Adverse changes in exchange Series attempts to protect the value of
rates may reduce or eliminate a security they own from future changes
any gains produced by in currency rates. If the Series has
investments that are agreed to purchase or sell a security,
denominated in foreign it may also use foreign currency
currencies and may increase exchange contracts to "lock-in" the
any losses. security's price in terms of U.S.
dollars or another applicable currency.
The Series may use forward currency
exchange contracts only for defensive or
protective measures, not to enhance
portfolio returns. However, there is no
assurance that such a strategy will be
successful.
- --------------------------------------------------------------------------------
Small company risk is the risk The Series may invest in small companies
that prices of smaller and would be subject to this risk. We
companies may be more volatile typically hold a number of different
than larger companies because stocks in order to reduce the impact
of limited financial resources that one small company stock would have
or dependence on narrow on the Funds. This risk is more
product lines. significant for the Series, which is a
non-diversified fund.
- --------------------------------------------------------------------------------
Political risk is the risk We carefully evaluate the political
that countries or the entire situations in the countries where we
region where we invest may invest and take into account any
experience political potential risks before we select
instability, which may cause securities for the portfolio. However,
greater fluctuation in the there is no way to eliminate political
value of our investments due risk when investing internationally.
to changes in currency
exchange rates, governmental
seizures or nationalization of
assets.
- --------------------------------------------------------------------------------
Emerging markets risk is the Striving to manage this risk, the
possibility that the risks portfolio managers carefully screen
associated with international securities within emerging markets and
investing will be greater in attempt to consider material risks
emerging markets than in more associated with an individual company or
developed foreign markets bond issuer. We cannot eliminate
because, among other things, emerging market risk and consequently
emerging markets may have less encourage shareholders to invest in this
stable political and economic Series only if they have a long-term
environments. time horizon, over which the potential
of individual securities is more likely
to be realized.
- --------------------------------------------------------------------------------
Inefficient market risk is the The Series will attempt to reduce these
risk that foreign markets may risks by investing in a number of
be less liquid, have greater different countries, and noting trends
price volatility, less in the economy, industries and financial
regulation and higher markets.
transaction costs than U.S.
markets.
- --------------------------------------------------------------------------------
Information risk is the The Series conducts a great deal of
possibility that foreign fundamental research on the companies
companies are subject to that it invests in rather than relying
different accounting, auditing solely on information available through
and financial reporting financial reporting. We believe this
standards than U.S. companies. will help us to better uncover any
There may be less information potential weaknesses in individual
available about foreign companies.
issuers than domestic issuers.
Furthermore, regulatory
oversight of foreign issuers
may be less stringent or less
consistently applied than in
the United States.
- --------------------------------------------------------------------------------
75
<PAGE>
- --------------------------------------------------------------------------------
Risks How we strive to manage them
Emerging Markets Series
- --------------------------------------------------------------------------------
Non-diversified funds are The Series is a non-diversified fund as
believed to be subject to defined by the Investment Company Act of
greater risks because adverse 1940 Act. That means the Series does not
effects on their security have to limit the percentage of assets
holdings may affect a larger invested in an individual security.
portion of their overall However, the Series does intend to
assets. satisfy the Internal Revenue Code's
diversification requirement, which says
that for 50% of the Series' assets, no
more than 5% of net assets can be
invested in any single security. This
means 50% of the Series' net assets must
be spread among various securities, with
no more than 5% of net assets invested
in any single security. The other 50%
can be more concentrated with up to 25%
invested in an individual security.
- --------------------------------------------------------------------------------
Foreign government and The Series attempts to limit this risk
supranational securities risks by performing credit analysis on the
relate to the ability of a issuer of each security purchased. In
foreign government or addition, the Series attempts to reduce
government related issuer to this risk by limiting the portion of net
make timely payments on its assets that may be invested in these
external debt obligations. securities.
The Series also compares the risk-reward
potential of foreign government
securities being considered to that
offered by equity securities to
determine whether to allocate assets to
equity or fixed-income investments.
- --------------------------------------------------------------------------------
Credit risk of high-yield, The Series may invest up to 35% of its
high risk fixed-income net assets in high-yield, high risk
securities: Securities rated foreign fixed-income securities.
lower than BBB by S&P and Baa
by Moody's are considered to We intend to limit our investment in any
be of poor standing and single lower rated bond, which can help
predominantly speculative as to reduce the effect of an individual
to the issuer's ability to default on the Series. We also intend to
repay interest and principal. limit our overall holdings of bonds in
this category. Such limitations may not
These bonds are often issued protect the Series from widespread bond
by less creditworthy companies defaults brought about by a sustained
or by highly leveraged economic downturn or from price declines
(indebted) firms, which are that might result from changes in the
generally less able than more quality ratings of individual bonds.
financially stable firms to
make scheduled payments of
interest and principal. The
risks posed by bonds issued
under such circumstances are
substantial.
- --------------------------------------------------------------------------------
Transaction costs risk: Costs We strive to monitor transaction costs
of buying, selling and holding and to choose an efficient trading
foreign securities, including strategy for the Series.
brokerage, tax and custody
costs, may be higher than
those involved in domestic
transactions
- --------------------------------------------------------------------------------
76
<PAGE>
Investment manger
The Series is managed by Delaware International Advisers Ltd. Delaware
International Advisers makes investment decisions for the Series, manages the
Series' business affairs and provides daily administrative services. For its
services to the Series, the manager was paid [1.00%] of average daily net assets
for the last fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Clive A. Gillmore has primary responsibility for making day-to-day investment
decisions for Emerging Markets Series. In making investment decisions for the
Series, Mr. Gillmore regularly consults with an international equity team of 14
members, including co-managers, Robert Akester and Joshua A. Brooks.
Clive A. Gillmore, Director, Deputy Managing Director, Senior Portfolio Manager
of Delaware International Advisers Ltd., is a graduate of the University of
Warwick. He began his career at Legal and General Investment Management, which
is the asset management division of Legal and General Assurance Society Ltd., a
large U.K. life and pension company. Mr. Gillmore joined Delaware International
Advisers in 1990 after eight years of investment experience. His most recent
position prior to joining Delaware International Advisers was as a Pacific Basin
equity analyst and senior portfolio manager for Hill Samuel Investment Advisers
Ltd. Mr. Gillmore completed the London Business School Investment program. He
has been managing Emerging Markets Series since its inception.
77
<PAGE>
Robert Akester, Senior Portfolio Manager of Delaware International Advisers
Ltd., joined Delaware International Advisers in 1996. Mr. Akester, who began his
investment career in 1969, was most recently a Director of Hill Samuel
Investment Management Ltd., which he joined in 1985. His prior experience
included working as a Senior Analyst and head of the South-East Asian Research
team at James Capel, and as a Fund Manager at Prudential Assurance Co., Ltd. Mr.
Akester holds a BS in Statistics and Economics from University College, London
and is an associate of the Institute of Actuaries, with a certificate in Finance
and Investment.
Joshua H. Brooks, Senior Portfolio Manager of Delaware International Advisers
Ltd., holds a bachelor's degree from Yale University and holds an MBA from The
London Business School. He began his investment career with Delaware Investments
in 1991. Prior to joining the investment team in London, he was based in
Philadelphia with responsibilities that included equity market analysis and
acting as liaison with Delaware International Advisers.
78
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Series
Year Ended 12/31
------------------------------ Period
5/1/97(1)
through
1999 1998 12/31/97
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.880 $10.000
Income (loss) from investment operations
Net investment income(2) 0.171 0.060
Net realized and unrealized loss on investments and foreign currencies (2.991) (1.180)
------- -------
Total from investment operations (2.820) (1.120)
------- -------
Less dividends and distributions
Dividends from net investment income (0.030) none
Distributions from net realized gain on investments (0.220) none
------- ----
Total dividends and distributions (0.250) none
------- ----
Net asset value, end of period $5.810 $8.880
====== ======
Total return(3) (32.48%) (11.20%)
Ratios and supplemental data
Net assets, end of period (000 omitted) $5,356 $5,776
Ratio of expenses to average net assets 1.50% 1.50%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.67% 2.45%
Ratio of net investment income to average net assets 2.34% 0.89%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly 2.17% (0.06%)
Portfolio turnover 38% 48%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Per share information was based on the average shares outstanding method.
(3) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown. Total return reflects expense
limitations in effect for the Series.
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<PAGE>
Global Bond Series
Our investment strategies
Global Bond Series seeks current income consistent with the preservation of
principal. We invest primarily in fixed-income securities that may also provide
the potential for capital appreciation.
We may invest in:
o foreign and U.S. government securities;
o debt obligations of foreign and U.S. companies;
o debt securities of supranational entities;
o securities of issuers in emerging markets countries, including Brady Bonds,
which tend to be of lower quality and more speculative than securities of
developed country issuers;
o zero-coupon bonds.
At the time this Prospectus was prepared we anticipated that for increased
safety, a large percentage of the Series' assets would be invested in securities
of supranational entities and in U.S. and foreign government securities.
While the Series may purchase securities of issuers in any foreign country,
developed or emerging, we currently anticipate investing in Australia, Belgium,
Canada, France, Germany, Hong Kong, Japan, Malaysia, the Netherlands, Singapore,
Spain, Switzerland and the United Kingdom, as well as Indonesia, Korea, New
Zealand, the Philippines, South Africa, Taiwan, and Thailand. This is a
representative list; we may also invest in other countries. More than 25% of the
Series' total assets may be invested in the securities of issuers located in the
same country.
Generally, the value of fixed-income securities rises when interest rates
decline and declines when interest rates rise. The value of your investment in
the Series will be affected by changes in interest rates. We generally keep the
average weighted maturity of the portfolio in the five-to-ten year range. If we
anticipate a declining interest rate environment; however, we may extend the
average weighted maturity past ten years or if we anticipate a rising rate
environment, we may shorten the average weighted maturity to less than five
years.
Global Bond Series uses the same investment strategy as Delaware Global Bond
Fund, a separate fund in the Delaware Investments Family of Funds, although
performance may differ depending on such factors as the size of the funds and
the timing of investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
80
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation. The following chart provides
a brief description of the securities that the Series may invest in. Please see
the Statement of Additional Information for additional descriptions of these as
well as other investments.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Global Bond Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by U.S. or foreign Global Bond Series may invest in corporate bonds, generally those
corporations. rated A or better by S&P or Moody's or if unrated, determined to
be of comparable quality. The Series may also invest in high
yield, high risk emerging markets corporate bonds.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign government securities: Debt obligations issued by a The Series will generally invest in securities issued by foreign
government other than the United States or by an agency, governments, their agencies, instrumentalities or political
instrumentality or political subdivision of such subdivisions that are rated AAA or AA by S&P or Aaa or Aa by
governments. Moody's or, if unrated, considered to be of comparable quality. We
may invest a portion of the Fund's assets in foreign governmental
securities issued by emerging countries, which may be lower rated,
including securities rated below investment grade.
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities: Securities issued or guaranteed The Series may invest a significant portion of its assets in U.S.
by the U.S. government or issued by an agency or government securities. It will invest only in U.S. government
instrumentality of the U.S. government. obligations, including bills, notes and bonds that are issued or
guaranteed as to the payment of principal and interest by the U.S.
government and securities of U.S. government agencies or
instrumentalities that are backed by the full faith and credit of
the United States.
- ------------------------------------------------------------------------------------------------------------------------------------
Investment company securities: In some countries, Global Bond Series may hold closed-end investment company
investments by U.S. mutual funds are generally made by securities. The Series may hold investment company securities if
purchasing shares of investment companies that in turn we believe the country offers good investment opportunities. These
invest in the securities of such countries. investments involve an indirect payment of a portion of the
expenses of the other investment companies, including their
advisory fees.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency transactions: A forward foreign currency Although the Series values its assets daily in U.S. dollars, it
exchange contract involves an obligation to purchase or sell does not intend to convert its holdings of foreign currencies into
a specific currency on a fixed future date at a price that U.S. dollars on a daily basis. The Series will, however, from time
is set at the time of the contract. The future date may be to time, purchase or sell foreign currencies and/or engage in
any number of days from the date of the contract as agreed forward foreign currency exchange transactions. The Series may
by the parties involved. conduct its foreign currency transactions on a cash basis at the
rate prevailing in the foreign currency exchange market or through
a forward foreign currency exchange contract or forward contract.
The Series may use forward contracts for defensive hedging
purposes to attempt to protect the value of the Series' current
security or currency holdings. It may also use forward contracts
if it has agreed to sell a security and wants to "lock-in" the
price of that security, in terms of U.S. dollars. Investors should
be aware of the costs of currency conversion. The Series will not
use forward contracts for speculative purposes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Global Bond Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Supranational entities: Debt securities of supranational We anticipate investing a large percentage of Global Bond Series'
entities may be denominated in any currency. These assets in debt securities of supranational entities.
securities are typically of high-grade quality. A
supranational entity is an entity established or financially
supported by the national governments of one or more
countries to promote reconstruction or development. The
International Bank for Reconstruction and Development (more
commonly known as the World Bank) would be one example of a
supranational entity.
- ------------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds: Zero coupon bonds are debt obligations The Series may invest in zero coupon bonds.
that do not entitle the holder to any periodic payments of
interest before maturity or a specified date when the
securities begin paying current interest. Therefore, they
are issued and traded at a discount from their face amounts
or par value. The market prices of zero coupon bonds 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Brady Bonds: These are debt securities issued under the Global Bond Series may invest in Brady Bonds. We believe that the
framework of the Brady Plan, an initiative for debtor economic reforms undertaken by countries in connection with the
nations to restructure their outstanding external issuance of Brady Bonds can make the debt of countries that have
indebtedness (generally, commercial bank debt). Brady Bonds issued or have announced plans to issue these bonds a viable
tend to be of lower quality and more speculative than opportunity for investment.
securities of developed country issuers.
- ------------------------------------------------------------------------------------------------------------------------------------
High-yield, high risk fixed-income securities: Securities Global Bond Series may invest a portion of its assets in these
that are rated lower than BBB by S&P or Baa by Moody's, or securities.
if unrated, of equal quality. These securities may be issued
by companies or governments of emerging or developing
countries, which may be less creditworthy. The risk that
these companies or governments may not be able to make
interest or principal payments is substantial.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible for
resale is restricted under securities law. resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold, if at all, at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in depositary receipts, futures contracts and options
and interest rate swaps. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Portfolio turnover
The Series anticipates that its annual portfolio turnover will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
82
<PAGE>
Borrowing from banks
Global Bond Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
Securities lending
Global Bond 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
securities transactions. These transactions will generate additional income for
the Series.
83
<PAGE>
The risks of investing in Global Bond Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Global Bond Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Global Bond Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market Risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market--like the stock or bond believe can appreciate over an extended time frame regardless of
market--will decline in value because of factors such as interim market fluctuations. In deciding what portion of the
economic conditions, future expectations or investor Series' portfolio should be invested in any individual country, we
confidence. evaluate a variety of factors, including opportunities and risks
relative to other countries. As part of the Series' principal
investment strategy, the Series may invest in securities that
generally have relatively less market risk.
We may hold a substantial part of the Series' assets in cash or
cash equivalents as a temporary defensive strategy. To the extent
it holds cash or cash equivalents, the Series may be unable to
achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We typically hold a number of different securities in a variety of
securities in a particular industry or the value of an sectors in order to minimize the impact that a poorly performing
individual stock or bond will decline because of changing security would have on a Fund. This risk is more significant for
expectations for the performance of that industry or for the the Series, which is a non-diversified fund.
individual company issuing the stock or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, particularly Interest rate risk is a significant risk for Global Bond Series.
bonds with longer maturities, will decrease in value if In an attempt to manage interest rate risk, we adjust the Series'
interest rates rise. average weighted maturity based on our view of interest rates. The
Series' average weighted maturity will generally be in the
five-to-ten year range. When we anticipate that interest rates
will decline, we may extend the average maturity beyond ten years
and when we anticipate that interest rates will rise, we may
shorten the average maturity to less than five years.
- ------------------------------------------------------------------------------------------------------------------------------------
Currency risk is the risk that the value of a series' The Series may try to hedge its currency risk by purchasing
investments may be negatively affected by changes in foreign foreign currency exchange contracts. If the Series agrees to
currency exchange rates. Adverse changes in exchange rates purchase or sell foreign securities at a pre-set price on a future
may reduce or eliminate any gains produced by investments date, the Series attempts to protect the value of a security they
that are denominated in foreign currencies and may increase own from future changes in currency rates. If the Series has
any losses. agreed to purchase or sell a security, it may also use foreign
currency exchange contracts to "lock-in" the security's price in
terms of U.S. dollars or another applicable currency. The Series
may use forward currency exchange contracts only for defensive or
protective measures, not to enhance portfolio returns. However,
there is no assurance that such a strategy will be successful.
- ------------------------------------------------------------------------------------------------------------------------------------
Political risk is the risk that countries or the entire We evaluate the political situations in the countries where we
region where we invest may experience political instability. invest and take into account any potential risks before we select
This may cause greater fluctuation in the value and securities for the portfolio. However, there is no way to
liquidity of our investments due to changes in currency eliminate political risk when investing internationally.
exchange rates, governmental seizures or nationalization of
assets.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Global Bond Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging market risk is the possibility that the risks Striving to manage this risk, the portfolio managers carefully
associated with international investing will be greater in screen securities within emerging markets and attempt to consider
emerging markets than in more developed foreign markets material risks associated with an individual company or bond
because, among other things, emerging markets may have less issuer. We cannot eliminate emerging market risk and consequently
stable political and economic environments. encourage shareholders to invest in these Funds only if they have
a long-term time horizon, over which the potential of individual
securities is more likely to be realized.
- ------------------------------------------------------------------------------------------------------------------------------------
Inefficient market risk is the risk that foreign markets may The Funds will attempt to reduce these risks by investing in a
be less liquid, have greater price volatility, less number of different countries, and noting trends in the economy,
regulation and higher transaction costs than U.S. markets. industries and financial markets.
Global Bond Series will also perform credit analysis in an attempt
to reduce these risks.
- ------------------------------------------------------------------------------------------------------------------------------------
Information risk is the risk that foreign companies may be We conduct fundamental research on the companies we invest in
subject to different accounting, auditing and financial rather than relying solely on information available through
reporting standards than U.S. companies. There may be less financial reporting. We believe this will help us to better
information available about foreign issuers than domestic uncover any potential weaknesses in individual companies.
issuers. Furthermore, regulatory oversight of foreign
issuers may be less stringent or less consistently applied
than in the United States.
- ------------------------------------------------------------------------------------------------------------------------------------
Non-diversified fund risk. Non-diversified funds are subject Global Bond Series is a non-diversified fund. The Series is a
to greater risks because adverse effects on their individual non-diversified fund as defined by the Investment Company Act of
investments may affect a larger portion of their overall 1940 Act. That means the Fund does not have to limit the
assets. percentage of assets invested in an individual security. However,
the Series does intend to satisfy the Internal Revenue Code's
diversification requirement, which says that for 50% of the
Series' assets, no more than 5% of net assets can be invested in
any single security. This means 50% of the Series' net assets must
be spread among various securities, with no more than 5% of net
assets invested in any single security. The other 50% can be more
concentrated with up to 25% invested in an individual security.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign government and supranational securities risks relate The Series is subject to this risk and will attempt to limit this
to the ability of a foreign government or government related risk by performing credit analysis on the issuer of each security
issuer to make timely payments on its external debt purchased.
obligations.
The Series attempts to reduce the risks associated with investing
in foreign governments by focusing on bonds rated within the two
highest rating categories.
- ------------------------------------------------------------------------------------------------------------------------------------
Credit risk of high-yield, high risk fixed-income Delaware Global Bond Fund may invest a portion of its assets in
securities: Securities rated lower than BBB by S&P and Baa these securities. We intend to limit our investment in any single
by Moody's are considered to be of poor standing and lower rated bond, which can help to reduce the effect of an
predominantly speculative as to the issuer's ability to individual default on the Series. We also intend to limit our
repay interest and principal. overall holdings of bonds in this category. Such limitations may
not protect the Series from widespread bond defaults brought about
These bonds are often issued by less creditworthy companies by a sustained economic downturn or from price declines that might
or by highly leveraged (indebted) firms, which are generally result from changes in the quality ratings of individual bonds.
less able than more financially stable firms to make
scheduled payments of interest and principal. The risks
posed by bonds issued under such circumstances are
substantial.
- ------------------------------------------------------------------------------------------------------------------------------------
Transaction costs risk: Costs of buying, selling and holding The Series is subject to this risk. We strive to monitor
foreign securities, including brokerage, tax and custody transaction costs and to choose an efficient trading strategy for
costs, may be higher than those involved in domestic the Series.
transactions
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
Investment manger
The Series is managed by Delaware International Advisers Ltd. Delaware
International Advisers makes investment decisions for the Series, manages the
Series' business affairs and provides daily administrative services. For its
services to the Series, the manager was paid [0.00%] of average daily net assets
for the last fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Christopher A. Moth and Joanna Bates have primary responsibility for making
day-to-day investment decisions for Global Bond Series. In making investment
decisions for the Series, Mr. Moth and Ms. Bates regularly consult with David G.
Tilles and four global fixed income team members.
Christopher A. Moth, Director, Senior Portfolio Manager, Head of Investment
Strategy of Delaware International Advisers Ltd., is a graduate of The City
University London. He joined Delaware International in 1992. He previously
worked at the Guardian Royal Exchange where he was responsible for technical
analysis, quantitative models and projections. Mr. Moth has been awarded the
certificate in Finance and Investment from the Institute of Actuaries in London.
Mr. Moth became Co-Manager of the Series in January 1997.
Joanna Bates, Senior Portfolio Manager, Credit and Emerging Markets of Delaware
International Advisers Ltd., is a graduate of London University. She joined the
Fixed Income team at Delaware International in June 1997. Prior to that she was
Associate Director, Fixed Interest at Hill Samuel Investment Management Ltd.
which she joined in 1990. She had previously worked at Fidelity International
and Save & Prosper as a fund manager and analyst for global bond markets. Ms.
Bates is an associate of the Institute of Investment Management and Research.
Ms. Bates became Co-Manager of the Series in July 1999.
David G. Tilles, Managing Director and Chief Investment Officer of Delaware
International Advisers Ltd., was educated at the Sorbonne, Warwick University
and Heidelberg University. Prior to joining Delaware International Advisers in
1990 as Managing Director and Chief Investment Officer, he spent 16 years with
Hill Samuel Investment Management Group in London, serving in a number of
investment capacities. His most recent position prior to joining Delaware
International Advisers was Chief Investment Officer of Hill Samuel Investment
Management Ltd.
86
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period
Global Bond Series 5/2/96(1)
Year Ended 12/31 through
----------------------------------------------------
1999 1998 1997 12/31/96
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.500 $10.960 $10.000
Income from investment operations
Net investment income(2) 0.608 0.636 0.339
Net realized and unrealized gain (loss) on investments and
foreign currencies 0.182 (0.551) 0.831
----- ------- -----
Total from investment operations 0.790 0.085 1.170
----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.600) (0.460) (0.210)
Distributions from net realized gain on investments (0.010) (0.085) none
------- ------- ----
Total dividends and distributions (0.610) (0.545) (0.210)
------- ------- -------
Net asset value, end of period $10.680 $10.500 $10.960
======= ======= =======
Total return(3) 7.82% 0.88% 11.79%
Ratios and supplemental data
Net assets, end of period (000 omitted) $21,711 $16,876 $9,471
Ratio of expenses to average net assets 0.83% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.92% 1.08% 1.19%
Ratio of net investment income to average net assets 5.83% 6.03% 6.51%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.74% 5.75% 6.12%
Portfolio turnover 79% 97% 56%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.
87
<PAGE>
(3) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
88
<PAGE>
Growth and Income Series
Our investment strategies
The Growth and Income Series seeks the highest possible total rate of return.
The Growth and Income Series invests primarily in the common stocks of
established companies that we believe have long-term total return potential.
These stocks offer both current income through dividends and capital growth
potential through possible increases in stock prices. A focus on stocks with
high dividend yields, such as the one we use, is generally considered to be a
value-oriented investment approach.
We first identify companies that have above-average dividend yields compared to
the unmanaged S&P 500 Index, a commonly used measure of U.S. stocks. We then
research individual companies and analyze economic and market conditions,
seeking to identify the securities that we think are the best investments for
the Series.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
89
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. High-yield bonds offer the potential for greater income
payments than stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Growth and Income Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest 90% to 100% of the Series' net assets in
in a corporation. Stockholders participate in the dividend-paying common stocks.
corporation's profits and losses, proportionate to the
number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts: Certificates issued by a U.S. We may invest without limitation in ADRs. We use them when we
bank which represent the bank's holdings of a stated number believe they offer better total return opportunities than U.S.
of shares of a foreign corporation. An ADR entitles the securities.
holder to all dividends and capital gains earned by the
underlying foreign shares, and an ADR is bought and sold the
same as U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series' must have collateral of at
the same price the buyer paid for them, plus an amount equal least 102% of the repurchase price. The Series will only enter
to an agreed upon interest rate. Repurchase agreements are into repurchase agreements in which the collateral is composed of
often viewed as equivalent to cash. U.S. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities. For
are privately placed securities whose resale is restricted this Series, the 10% limit includes restricted securities such as
under securities law. Illiquid securities are securities privately placed securities that are eligible for resale only
that do not have a ready market, and cannot be easily sold among certain institutional buyers without registration, which are
within seven days at approximately the price that the Series commonly known as "Rule 144A Securities" and repurchase agreements
has valued them. with maturities of over seven days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series is permitted to invest in all available types of equity securities
including preferred stock, rights and warrants and convertible securities. It
may also invest in fixed-income securities and enter into futures and options
transactions for defensive purposes. It may invest in global and European
depositary receipts and directly in foreign securities; however, the manager has
no present intention of doing so. Growth and Income Series reserves the right to
hold a substantial part of its assets in cash or cash equivalents as a
temporary, defensive strategy, although to the extent it does so it may be
unable to meet its investment objective. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities
The Series may lend up to 25% of its assets to qualified brokers, dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
The Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Portfolio turnover
We anticipate that annual portfolio turnover for the Series will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
90
<PAGE>
Borrowing from banks
Growth and Income Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
91
<PAGE>
The risks of investing in Growth and Income Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest, you should carefully
evaluate the risks. An investment in the Series typically provides the best
results when held for a number of years. The following are the chief risks you
assume when investing in Growth and Income Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Growth and Income Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority We maintain a long-term investment approach and focus on stocks we believe can
of the securities in a certain market -- like appreciate over an extended time frame regardless of interim market
the stock or bond market -- will decline in fluctuations. We do not try to predict overall stock market movements and
value because of factors such as economic generally do not trade for short-term purposes.
conditions, future expectations or investor
confidence. We may hold a substantial part of Growth and Income Series' assets in cash or
cash equivalents as a temporary defensive strategy. To the extent it holds cash
or cash equivalents, the Series may be unable to achieve its investment
objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the We limit the amount of the Series' assets invested in any one industry and in
value of securities in a particular industry or any individual security. We also follow a rigorous selection process designed to
the value of an individual stock or bond will identify undervalued securities before choosing securities for the portfolio.
decline because of changing expectations for
the performance of that industry or for the
individual company issuing the stock or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign We typically invest only a small portion of the Series' portfolio in foreign
securities may be adversely affected by corporations through American Depositary Receipts. We do not invest directly in
political instability, changes in currency foreign securities. When we do purchase ADRs, they are generally denominated in
exchange rates, foreign economic conditions or U.S. dollars and traded on a U.S. exchange.
inadequate regulatory and accounting standards.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that We limit exposure to illiquid securities.
securities cannot be readily sold within seven
days, at approximately the price that the
Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.60% of average daily net assets for the last
fiscal year.
Portfolio manager
John B. Fields has primary responsibility for making day-to-day investment
decisions for Growth and Income Series.
John B. Fields, Senior Vice President and Senior Portfolio Manager, joined
Delaware Investments in 1992 and has 29 years' experience in investment
management. He earned a bachelor's degree and an MBA from Ohio State University.
Before joining Delaware Investments, he was Director of Domestic Equity Risk
Management at DuPont. Prior to that time, he was Director of Equity Research at
Comerica Bank. Mr. Fields is a member of the Financial Analysts Society of
Wilmington, Delaware. In making investment decisions for Growth and Income
Series, Mr. Fields works with a team of Delaware portfolio managers utilizing
the same investment strategy. He has been managing Growth and Income Series
since 1992.
92
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Growth and Income Series
(formerly Decatur Total Return Series) Year Ended 12/31
------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 18.800 $ 15.980 $ 14.830 $ 11.480
Income (loss) from investment operations
Net investment income 0.361 0.324 0.377 0.416
Net realized and unrealized gain (loss) on investments 1.636 4.216 2.398 3.574
-------- -------- -------- --------
Total from investment operations 1.997 4.540 2.775 3.990
-------- -------- -------- --------
Less dividends and distributions
Dividends from net investment income (0.327) (0.370) (0.420) (0.430)
Distributions from net realized gain on investments (1.050) (1.350) (1.205) (0.210)
-------- -------- -------- --------
Total dividends and distributions (1.377) (1.720) (1.625) (0.640)
-------- -------- -------- --------
Net asset value, end of year $19.420 $ 18.800 $ 15.980 $14.830
======== ======== ======== ========
Total return(1) 11.35% 31.00% 20.72% 36.12%
Ratios and supplemental data
Net assets, end of period (000 omitted) $579,907 $401,402 $166,647 $109,003
Ratio of expenses to average net assets 0.71% 0.71% 0.67% 0.69%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.71% 0.71% 0.67% 0.69%
Ratio of net investment income to average net assets 2.00% 2.02% 2.66% 3.24%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 2.00% 2.02% 2.66% 3.24%
Portfolio turnover 81% 54% 81% 85%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
93
<PAGE>
Growth Opportunities Series
Our investment strategies
We strive to identify companies of medium market capitalization that offer
above-average opportunities for long-term capital growth because they are poised
to provide high and consistent earnings growth. Medium-size companies are
generally considered to be those with market capitalizations between $2 billion
and $10 billion.
Companies in the early stages of their development often offer the greatest
opportunities for rising share prices. However, the smallest companies generally
involve the most risk because they may have very limited resources, less
management experience and narrower product lines. We believe that medium-size
companies can provide many of the growth opportunities of small companies, but
with less risk. Medium-size companies may be more established in their industry
and have greater financial resources. Yet, they may still have the flexibility
and growth potential of a smaller company.
We use a bottom-up approach to stock selection, carefully evaluating the
characteristics of individual companies. We rely heavily on our own research in
selecting companies for the portfolio. That research might include one-on-one
meetings with executives, company competitors, industry experts and customers.
Our first step in identifying promising companies is to pinpoint stocks that
exhibit one or more of the following characteristics:
o A history of high earnings-per-share growth;
o Expectations for future earnings growth that are either high or accelerating;
o A price to earnings ratio that is low relative to other stocks - indicating
that the stock might be undervalued;
o A discounted cash flow that is high relative to other stocks; or
o A special situation that has caused the stock to fall out of favor, but which
we believe creates potential for even greater long-term price appreciation.
Once we have narrowed our search to companies with these characteristics, we
then conduct even more thorough hands-on research, evaluating a wide variety of
factors, including:
o The financial strength of the company;
o The expertise of its management;
o The growth potential of the company within its industry; and
o The growth potential of the industry.
Our goal is to select companies that are likely to perform well over an extended
time frame.
Growth Opportunities Series uses the same investment strategy as Growth
Opportunities Fund, a separate fund in the Delaware Investments Family of Funds,
although performance may differ depending on such factors as the size of the
funds and the timing of investments and redemptions.
In order to reduce the inherent risks of equity investing, we maintain a
diversified portfolio, typically holding a mix of different stocks, representing
a wide array of industries.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
94
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Growth Opportunities Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common stocks: Securities that represent shares of Generally, we invest 85% to 100% of net assets in common stock
ownership in a corporation. Stockholders participate in with an emphasis on medium-size companies.
the corporation's profits and losses, proportionate to the
number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts: ADRs are issued by a U.S. We may hold ADRs when we believe they offer greater
bank and represent the bank's holdings of a stated number appreciation potential than U.S. securities.
of shares of a foreign corporation. An ADR entitles the
holder to all dividends and capital gains earned by the
underlying foreign shares. ADRs are bought and sold the
same as U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such Typically, we use repurchase agreements as a short-term
as the Series, and a seller of securities in which the investment for the Series' cash position. In order to enter
seller agrees to buy the securities back within a into these repurchase agreements, the Series must have
specified time at the same price the buyer paid for them, collateral of at least 102% of the repurchase price. The
plus an amount equal to an agreed upon interest rate. Series will only enter into repurchase agreements in which the
Repurchase agreements are often viewed as equivalent to collateral is composed of U.S. government securities.
cash.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities.
are privately placed securities whose resale is restricted For this Series, the 10% limit includes restricted securities
under securities law. Illiquid securities are securities such as privately placed securities that are eligible for
that do not have a ready market, and cannot be easily sold resale only among certain institutional buyers without
within seven days at approximately the price that the registration, which are commonly known as "Rule 144A
Series has valued them. Securities" and repurchase agreements with maturities of over
seven days.
- ------------------------------------------------------------------------------------------------------------------------------------
Options and futures: Options represent a right to buy or If we have stocks that appreciated in price, we may want to
sell a security or group of securities at an agreed upon protect those gains when we anticipate adverse conditions. We
price at a future date. The purchaser of an option may or might use options or futures to neutralize the effect of any
may not choose to go through with the transaction. price declines, without selling the security. We might also
use options or futures to gain exposure to a particular market
Writing a covered call option on a security obligates the segment without purchasing individual securities in that
owner of the security to sell it at an agreed upon price segment. We might use this approach if we had excess cash that
on an agreed upon date (usually no more than nine months we wanted to invest quickly.
in the future.) The owner of the security receives a
premium payment from the purchaser of the call, but if the We might use covered call options if we believe that doing so
security appreciates to a price greater than the agreed would help the Series to meet its investment objective.
upon selling price, the fund would lose out on those
gains. Use of these strategies can increase the operating costs of
the Series and can lead to loss of principal.
Futures contracts are agreements for the purchase or sale
of securities at a specified price, on a specified date.
Unlike an option, a futures contract must be executed
unless it is sold before the settlement date.
Options and futures are generally considered to be
derivative securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE>
Growth Opportunities Series may also invest in other securities including
convertible securities, warrants, preferred stocks, and bonds. Please see the
Statement of Additional Information for additional descriptions and risk
information on these securities as well as those listed in the table above. You
can find additional information about the investments in the Series' portfolio
in the annual or semi-annual shareholder report.
Lending securities
Growth Opportunities Series may lend up to 25% of its assets to qualified
dealers and institutional investors for their use in security transactions.
Borrowing from banks
Growth Opportunities Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Purchasing securities on a when-issued or delayed delivery basis
Growth Opportunities Series may buy or sell securities on a when-issued or
delayed delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that Growth Opportunities Series' annual portfolio turnover may be
greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
96
<PAGE>
The risks of investing in Growth Opportunities Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Growth Opportunities Series. Please see the
Statement of Additional Information for further discussion of these risks and
the other risks not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Growth Opportunities Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks
securities in a certain market -- like the stock or bond we believe can appreciate over an extended time frame regardless
market -- will decline in value because of factors such of interim market fluctuations. We do not try to predict overall
as economic conditions, future expectations or investor stock market movements and though we may hold securities for any
confidence. amount of time, we typically do not trade for short-term
purposes.
We may hold a substantial part of Growth Opportunities Series'
assets in cash or cash equivalents as a temporary, defensive
strategy. To the extent it holds cash or cash equivalents, the
Series may be unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Growth Opportunities Series' assets
securities in a particular industry or the value of an invested in any one industry and in any individual security. We
individual stock or bond will decline because of also follow a rigorous selection process before choosing
changing expectations for the performance of that securities and continuously monitor them while they remain in
industry or for the individual company issuing the the portfolio.
stock.
- ------------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller Though the Series may invest in small companies, our focus is on
companies may be more volatile than larger companies medium-size companies. We believe medium-size companies, in
because of limited financial resources or dependence on general, are more stable than smaller companies and involve less
narrow product lines. risk due to their larger size, greater experience and more
extensive financial resources. In addition, the Series maintains
a well-diversified portfolio, selects stocks carefully and
monitors them continuously.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will We analyze each company's financial situation and its cash flow
decrease in value if interest rates rise. The risk is to determine the company's ability to finance future expansion
generally associated with bonds; however, because and operations. The potential affect that rising interest rates
smaller companies often borrow money to finance their might have on a stock is taken into consideration before the
operations, they may be adversely affected by rising stock is purchased.
interest rates.
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and options risk is the possibility that a We will not use futures and options for speculative reasons. We
series may experience a loss if it employs an options or may use options and futures to protect gains in the portfolio
futures strategy related to a security or a market index without actually selling a security. We may also use options and
and that security or index moves in the opposite futures to quickly invest excess cash so that the portfolio is
direction from what the manager anticipated. Futures and generally fully invested.
options also involve additional expenses, which could
reduce any benefit or increase any loss that a fund
gains from using the strategy.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of the Series'
adversely affected by political instability, changes in portfolio in foreign corporations indirectly through American
currency exchange rates, foreign economic conditions or Depositary Receipts. When we do purchase ADRs, they are
inadequate regulatory and accounting standards. generally denominated in U.S. dollars and traded on a U.S.
exchange.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot We limit exposure to illiquid securities.
be readily sold within seven days at approximately the
price that the Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
97
<PAGE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
Portfolio manager
Gerald S. Frey has primary responsibility for making day-to-day investment
decisions for Growth Opportunities Series. When making investment decisions for
the Series, Mr. Frey regularly consults with Marshall T. Bassett, John A.
Heffern, Jeffrey W. Hynoski, Steven T. Lampe and Lori P. Wachs.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has been senior portfolio
manager for the Series since its inception.
Marshall T. Bassett, Vice President/Portfolio Manager, joined Delaware
Investments in 1997. In his most recent position, he served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small
growth companies. Prior to that, he was a trust officer at Sovran Bank and Trust
Company. He received a bachelor's degree and an MBA from Duke University.
John A. Heffern, Vice President, Portfolio Manager, earned bachelors and MBA
degrees at the University of North Carolina at Chapel Hill. He joined Delaware
Investments in 1997. He previously was a Senior Vice President, Equity Research
at NatWest Securities Corporation's Specialty Financial Services unit. Before
that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he served as a Vice President at Bessemer Trust
Company in the mid and large capitalization growth group, where he specialized
in the areas of science, technology, and telecommunications. Prior to that, Mr.
Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University.
Steven T. Lampe, Vice President, Portfolio Manager, received a bachelor's degree
in Economics and an MBA degree with a concentration in Finance from the
University of Pennsylvania's Wharton School. He joined Delaware Investments in
1995 and covers the financial services and business services sectors for small
and mid-capitalization growth stocks. He previously served as a tax/audit
manager at Price Waterhouse, specializing in financial services firms. Mr. Lampe
is a Certified Public Accountant.
Lori P. Wachs, Vice President/Portfolio Manager, joined Delaware Investments in
1992 from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental Studies.
98
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Series
Year Ended 12/31
-----------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 17.270 $ 15.890 $15.130 $11.750
Income (loss) from investment operations
Net investment income (loss)(1) (0.026) (0.010) (0.015) 0.072
Net realized and unrealized gain (loss) on investments 2.901 2.260 2.030 3.378
-------- -------- ------- -------
Total from investment operations 2.875 2.250 2.015 3.450
-------- -------- ------- -------
Less dividends and distributions
Dividends from net investment income none none (0.070) (0.070)
Distributions from net realized gain on investments (1.595) (0.870) (1.185) none
-------- -------- ------- -------
Total dividends and distributions (1.595) (0.870) (1.255) (0.070)
-------- -------- ------- -------
Net asset value, end of year $ 18.550 $ 17.270 $15.890 $15.130
======== ======== ======= =======
Total return(2) 18.81% 14.90% 14.46% 29.53%
Ratios and supplemental data
Net assets, end of period (000 omitted) $130,548 $110,455 $79,900 $58,123
Ratio of expenses to average net assets 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.86% 0.87% 0.82% 0.85%
Ratio of net investment income (loss) to average net assets (0.16%) (0.06%) (0.11%) 0.61%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly (0.22%) (0.13%) (0.13%) 0.56%
Portfolio turnover 142% 134% 85% 73%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown. Total return reflects expense
limitations in effect for the Series.
99
<PAGE>
High Yield Series
Our investment strategies
High Yield Series
We invest primarily in fixed-income securities that we believe will have a
liberal and consistent yield and will tend to reduce the risk of market
fluctuations. We expect to invest the majority of the Series' assets primarily
in high-yield bonds or junk bonds, which involve greater risks than investment
grade bonds. The Series may also invest in unrated bonds that we consider to
have comparable credit characteristics. Unrated bonds may be more speculative in
nature than rated bonds.
Before selecting high-yield corporate bonds, we carefully evaluate each
individual bond including its income potential and the size of the bond
issuance. The size of the issuance helps us evaluate how easily we may be able
to buy and sell the bond.
We also do a thorough credit analysis of the issuer to determine whether that
company has the financial ability to meet the bond's payments.
We maintain a well-diversified portfolio of high-yield bonds that represents
many different sectors and industries. Through diversification we can help to
reduce the impact that any individual bond might have on the portfolio should
the issuer have difficulty making payments.
The Series strives to provide total return, with income as a secondary
objective. Before purchasing a bond, we evaluate both the income level and its
potential for price appreciation. At least 65% of the Series' assets will be
invested in corporate bonds rated at the time of purchase as BB or lower by S&P
or similarly rated by another NRSO or, if unrated, that we judge to be of
comparable quality. The Series also may invest in bonds of foreign issuers in
pursuit of its objective.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. The
Board changed the Series' investment objective effective May 1, 2000 from "high
current income" to the current investment objective of the Series "total return,
with high current income as a secondary objective." This change in investment
objective will be implemented over the course of the six months following May 1,
2000.
100
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
High-yield corporate bonds: Debt obligations issued by a The Series may invest without limit in high-yield corporate
corporation and rated lower than investment grade by an bonds. The Series generally will not purchase corporate bonds
NRSRO such as S&P or Moody's or, if unrated, that we which, at the time of purchase, are rated or lower than CCC by
believe are of comparable quality. These securities are S&P or Caa by Moody's.
considered to be of poor standing and predominately
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities: Direct U.S. obligations The Series may invest without limit in U.S. government
including bills, notes, bonds and other debt securities securities. However, they will typically be a small percentage
issued by the U.S. Treasury or securities of U.S. of the portfolio because they generally do not offer as high a
government agencies or instrumentalities which are level of current income as high-yield corporate bonds.
backed by the full faith and credit of the United
States.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign government or corporate securities: Securities The Series may invest up to 15% of its total assets in
issued by foreign governments or supranational entities securities of issuers domiciled in foreign countries including
or foreign corporations. both established countries and those with emerging markets.
A supranational entity is an entity established or
financially supported by the national governments of one
or more countries. The International Bank for
Reconstruction and Development (more commonly known as
the World Bank) is one example of a Supranational
entity.
- ------------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds and pay-in-kind bonds: Zero coupon We may invest in zero coupon bonds and payment-in-kind bonds,
securities are debt obligations which do not entitle the though we do not expect this to be a significant component of
holder to any periodic payments of interest prior to our strategy. The market prices of these bonds are generally
maturity or a specified date when the securities begin more volatile than the market prices of securities that pay
paying current interest. Therefore, they are issued and interest periodically and are likely to react to changes in
traded at a price lower than their face amounts or par interest rates to a greater degree than interest-paying bonds
value. Payment-in-kind bonds pay interest or dividends having similar maturities and credit quality. They may have
in the form of additional bonds or preferred stock. certain tax consequences which, under certain conditions, could
be adverse to the Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term
such as the Series, and seller of securities in which investment for the Series' cash position. In order to enter into
the seller agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid for at least 102% of the repurchase price. No more than 10% of the
them, plus an amount equal to an agreed upon interest Series' assets may be invested in repurchase agreement of over
rate. Repurchase agreements are often viewed as seven days' maturity. The Series will only enter into repurchase
equivalent to cash. agreements in which the collateral is composed of U.S.
government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities We may invest in privately placed securities that are eligible
whose resale is restricted under securities law. for resale only among certain institutional buyers without
registration, including Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 15% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Illiquid securities: Securities that do not have a ready We may invest up to 15% of net assets in illiquid securities.
market, and cannot be easily sold within seven days at
approximately the price that a series has valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in other income-producing securities including common
stocks and preferred stocks, some of which may have convertible features or
attached warrants. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Lending securities
The Series may lend up to 25% of its assets to qualified brokers, dealers and
institutional investors for their use in security transactions.
Borrowing from banks
The Series may borrow money as a temporary measure for extraordinary purposes or
to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Purchasing securities on a when-issued or delayed delivery basis
High Yield Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that the Series' annual portfolio turnover will exceed 100%. A
turnover rate of 100% would occur if the Series sold and replaced securities
valued at 100% of its net assets within one year. High turnover can result in
increased transaction costs and tax liability.
102
<PAGE>
The risks of investing in the High Yield Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in a Fund you should
carefully evaluate the risks. An investment in High Yield Series Fund typically
provides the best results when held for a number of years. The following are the
chief risks you assume when investing in the Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on bonds
securities in a certain market--like the stock or bond that we believe will continue to pay interest regardless of
market--will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor bond market or interest rate movements and generally do not
confidence. trade for short-term purposes.
We may hold a substantial part of the Series' assets in cash or
cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of the Series' assets invested in any one
securities in a particular industry or the value of an industry and in any individual security. We also follow a
individual stock or bond will decline because of rigorous selection process before choosing securities for the
changing expectations for the performance of that portfolio.
industry or for the individual company issuing the stock
or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will The Series is subject to interest rate risk. We cannot eliminate
decrease in value if interest rates rise. The risk is that risk, but we do strive to manage it by monitoring economic
greater for bonds with longer maturities than for those conditions.
with shorter maturities.
- ------------------------------------------------------------------------------------------------------------------------------------
Credit risk is the risk that there is the possibility Our careful, credit-oriented bond selection and our commitment
that a bond's issuer will be unable to make timely to hold a diversified selection of high-yield bonds are designed
payments of interest and principal. to manage this risk.
Investing in so-called "junk" or "high-yield" bonds We generally do not purchase corporate bonds which, at the time
entails the risk of principal loss, which may be greater of purchase, are rated lower than CCC by S&P or Caa by Moody's.
than the risk involved in investment grade bonds. If a corporate bond held by the Series drops below these levels
High-yield bonds are sometimes issued by companies whose or goes into default, the Series will begin to sell the security
earnings at the time of issuance are less than the in an orderly manner, striving to minimize any adverse affect on
projected debt service on the junk bonds. the Series.
- ------------------------------------------------------------------------------------------------------------------------------------
Recession risk: Although the market for high-yield bonds It is likely that protracted periods of economic uncertainty
existed through periods of economic downturns, the would cause increased volatility in the market prices of
high-yield market grew rapidly during the long economic high-yield bonds, an increase in the number of high-yield bond
expansion which took place in the United States during defaults and corresponding volatility in the Series' net asset
the 1980s. During that economic expansion, the use of value. In the past, uncertainty and volatility in the high-yield
high-yield debt securities to finance highly leveraged market have resulted in volatility in the Series' net asset
corporate acquisitions and restructurings increased value.
dramatically. As a result, the high-yield market grew
substantially. Some analysts believe a protracted In striving to manage this risk, we allocate assets across a
economic downturn would severely disrupt the market for wide range of industry sectors. We may emphasize industries that
high-yield bonds, adversely affect the value of have been less susceptible to economic cycles in the past,
outstanding bonds and adversely affect the ability of particularly if we believe that the economy may be entering into
high-yield issuers to repay principal and interest. a period of slower growth.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Foreign risk is the risk that foreign securities may be We carefully evaluate the reward and risk associated with each
adversely affected by political instability, changes in foreign security that we consider.
currency exchange rates, foreign economic conditions or
inadequate regulatory and accounting standards. We may
invest only 15% of the portfolio in securities of
foreign issuers.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot A less liquid secondary market may have an adverse effect on the
be readily sold within seven days at approximately the Series' ability to dispose of particular issues, when necessary,
price that a series values them. to meet the Series' liquidity needs or in response to a specific
economic event, such as the deterioration in the
There is generally no established retail secondary creditworthiness of the issuer. In striving to manage this risk,
market for high-yield securities. As a result, the we evaluate the size of a bond issuance as a way to anticipate
secondary market for high-yield securities is more its likely liquidity level.
limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly We may invest only 15% of net assets in illiquid securities.
susceptible to liquidity problems when the institutions,
such as mutual funds and certain financial institutions,
which dominate it temporarily stop buying bonds for
regulatory, financial or other reasons.
Adverse publicity and investor perceptions may also
disrupt the secondary market for high-yield securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Valuation risk: A less liquid secondary market as The Series' privately placed high-yield securities are
described above can make it more difficult for a series particularly susceptible to the liquidity and valuation risks.
to obtain precise valuations of the high-yield We will strive to manage this risk by carefully evaluating
securities in its portfolio. During periods of reduced individual bonds and by limiting the amount of the portfolio
liquidity, judgment plays a greater role in valuing that can be allocated to privately placed high-yield securities.
high-yield securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Redemption risk: If investors redeem more shares of a Volatility in the high-yield market could increase redemption
series than are purchased for an extended period of risk. We strive to maintain a cash balance sufficient to meet
time, a series may be required to sell securities any redemptions. We may also borrow money, if necessary, to meet
without regard to the investment merits of such actions. redemptions.
This could decrease a series' asset base, potentially
resulting in a higher expense ratio.
- ------------------------------------------------------------------------------------------------------------------------------------
Legislative and regulatory risk: The United States We monitor the status of regulatory and legislative proposals to
Congress has from time to time taken or considered evaluate any possible effects they might have on the Series'
legislative actions that could adversely affect the portfolios.
high-yield bond market. For example, Congressional
legislation has, with some exceptions, generally
prohibited federally insured savings and loan
institutions from investing in high-yield securities.
Regulatory actions have also affected the high-yield
market. Similar actions in the future could reduce
liquidity for high-yield issues, reduce the number of
new high-yield securities being issued and could make it
more difficult for a series to attain its investment
objective.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
104
<PAGE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
Portfolio managers
Paul A. Matlack and Gerald T. Nichols have primary responsibility for making
day-to-day investment decisions for High Yield Series.
Paul A. Matlack, Vice President/Senior Portfolio Manager, is a graduate of the
University of Pennsylvania with an MBA in Finance from George Washington
University. He began his career at Mellon Bank as a credit specialist, and later
served as a corporate loan officer for Mellon Bank and then Provident National
Bank. He is a CFA charterholder. Mr. Matlack has been a member of the High Yield
Series team since 1990 and has been co-managing the High Yield Series since
January 1993.
Gerald T. Nichols, Vice President/Senior Portfolio Manager, is a graduate of the
University of Kansas, where he received a BS in Business Administration and an
MS in Finance. Prior to joining Delaware Investments, he was a high-yield credit
analyst at Waddell & Reed, Inc. and subsequently the investment officer for a
private merchant banking firm. He is a CFA charterholder. Mr. Nichols has been a
member of the High Yield Series team since 1990 and has been co-managing the
High Yield Series since January 1993.
105
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
High Yield Series(1) Year Ended 12/31
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.510 $9.170 $ 8.940 $ 8.540
Income (loss) from investment operations
Net investment income 0.906 0.863 0.853 0.872
Net realized and unrealized gain (loss) on investments (1.048) 0.332 0.230 0.400
-------- ------- ------- -------
Total from investment operations (0.142) 1.195 1.083 1.272
-------- ------- ------- -------
Less dividends and distributions
Dividends from net investment income (0.905) (0.855) (0.853) (0.872)
Distributions from net realized gain on investments (0.003) none none none
-------- ------- ------- -------
Total dividends and distributions (0.908) (0.855) (0.853) (0.872)
-------- ------- ------- -------
Net asset value, end of year $ 8.460 $ 9.510 $ 9.170 $ 8.940
======== ======= ======= =======
Total return(2) (1.83%) 13.63% 12.79% 15.50%
Ratios and supplemental data
Net assets, end of period (000 omitted) $120,708 $98,875 $67,665 $56,605
Ratio of expenses to average net assets 0.70% 0.70% 0.70% 0.69%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid
indirectly 0.70% 0.70% 0.70% 0.69%
Ratio of net investment income to average net assets 9.85% 9.24% 9.54% 9.87%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly 9.85% 9.24% 9.54% 9.87%
Portfolio turnover 86% 121% 93% 74%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 1, 2000, the Series' investment objective changed from "high
current income" to "total return and, as a secondary objective, high current
income."
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
106
<PAGE>
International Equity Series
Our investment strategies
International Equity Series seeks long-term growth without undue risk to
principal. We invest primarily in equity securities, including common stocks,
which provide the potential for capital appreciation and income. Our strategy
would commonly be described as a value strategy. That is we strive to purchase
stocks that are selling for less than their true value. In order to estimate
what a security's true value is, we evaluate its future income potential, taking
into account the impact both currency fluctuations and inflation might have on
that income stream. We then determine what that income would be worth if paid
today. That helps us decide what we think the security is worth today. We then
compare our estimate of the security's value to its current price to determine
if it is a good value.
We use income as an indicator of value because we believe it allows us to
compare securities across different sectors and different countries--all using
one measurement standard. We can even use this analysis to compare stocks to
bonds.
We may purchase securities in any foreign country, developed or emerging;
however, we currently anticipate investing in Australia, Belgium, Canada,
Finland, France, Germany, Hong Kong, Italy, Japan, Malaysia, the Netherlands,
New Zealand, Singapore, Spain, Switzerland and the United Kingdom. This is a
representative list; the Series may also invest in countries not listed here.
More than 25% of the Series' total assets may be invested in the securities of
issuers located in the same country.
We generally maintain a long-term focus in the Series, seeking companies that we
believe will perform well over the next three to five years.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
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The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation. The
following chart provides a brief description of the securities that the Series
may invest in. Please see the Statement of Additional Information for additional
descriptions of these as well as other investments.
<TABLE>
<CAPTION>
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Securities How we use them
International Equity Series
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<S> <C>
Common Stocks: Securities that represent shares of The Series will invest its assets in common stocks, some of
ownership in a corporation. Stockholders participate in which will be dividend-paying stocks.
the corporation's profits and losses, proportionate to
the number of shares they own.
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Corporate bonds: Debt obligations issued by U.S. or Although not a principal strategy of the Series, for temporary
foreign corporations. defensive purposes, the Series may invest all or a substantial
portion of its assets in corporate obligations.
All corporate debt will be rated AA or better by S&P and Aa or
better by Moody's, or if unrated, determined to be of comparable
quality.
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Foreign government securities: Debt obligations issued Although not a principal strategy of the Series, for temporary
by a government other than the United States or by an defensive purposes, the Series may invest all or a substantial
agency, instrumentality or political subdivision of such portion of its assets in high quality debt obligations of
governments. foreign governments, their agencies, instrumentalities and
political sub-divisions.
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U.S. government securities: Securities issued or Although not a principal strategy of the Series, for temporary
guaranteed by the U.S. government or issued by an agency defensive purposes the Series may invest in U.S. government
or instrumentality of the U.S. government. securities.
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Investment company securities: In some countries, International Equity Series may hold closed-end investment
investments by U.S. mutual funds are generally made by company securities if we believe the country offers good
purchasing shares of investment companies that in turn investment opportunities. These investments involve an indirect
invest in the securities of such countries. payment of a portion of the expenses of the other investment
companies, including their advisory fees.
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Foreign currency transactions: A forward foreign Although the Series values its assets daily in U.S. dollars, its
currency exchange contract involves an obligation to does not intend to convert its holdings of foreign currencies
purchase or sell a specific currency on a fixed future into U.S. dollars on a daily basis. The Series will, however,
date at a price that is set at the time of the contract. from time to time, purchase or sell foreign currencies and/or
The future date may be any number of days from the date engage in forward foreign currency exchange transactions. The
of the contract as agreed by the parties involved. Series may conduct its foreign currency transactions on a cash
basis at the rate prevailing in the foreign currency exchange
market or through a forward foreign currency exchange contract
or forward contract.
The Series may use forward contracts for defensive hedging
purposes to attempt to protect the value of the Series' current
security or currency holdings. It may also use forward contracts
if it has agreed to sell a security and wants to "lock-in" the
price of that security, in terms of U.S. dollars. Investors
should be aware of the costs of currency conversion. The Series
will not use forward contracts for speculative purposes.
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</TABLE>
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<TABLE>
<CAPTION>
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Securities How we use them
International Equity Series
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<S> <C>
American Depositary Receipts (ADRs), European Depositary The Series may invest in sponsored and unsponsored ADRs, EDRs
Receipts (EDRs), and Global Depositary Receipts (GDRs): and GDRs, generally focusing on those whose underlying
ADRs are receipts issued by a U.S. depositary (usually a securities are issued by foreign entities.
U.S. bank) and EDRs and GDRs are receipts issued by a
depositary outside of the U.S. (usually a non-U.S. bank To determine whether to purchase a security in a foreign market
or trust company or a foreign branch of a U.S. bank). or through depositary receipts, we evaluate the price levels,
Depositary receipts represent an ownership interest in the transaction costs, taxes and administrative costs involved
an underlying security that is held by the depositary. with each security to identify the most efficient choice.
Generally, the holder of the depositary receipt is
entitled to all payments of interest, dividends or
capital gains that are made on the underlying security.
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Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
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Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold, if at all, at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
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Repurchase Agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term
such as the Series, and a seller of securities in which investment for the Series' cash position. In order to enter into
the seller agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid for at least 102% of the repurchase price. The Series will only
them, plus an amount equal to an agreed upon interest enter into repurchase agreements in which the collateral is
rate. Repurchase agreements are often viewed as composed of U.S. government securities.
equivalent to cash.
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</TABLE>
The Series may invest in preferred stocks, convertible securities, warrants,
futures and options. For temporary defensive purposes or for cash management
purposes, the Series may invest in high quality U.S. or foreign debt securities,
although to the extent it does so the Series may be unable to meet its
investment objective. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Portfolio turnover
We anticipate that International Equity Series' annual portfolio turnover will
be less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
Borrowing from banks
International Equity Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Securities lending
International Equity 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 securities transactions. These transactions will generate additional
income for the Series.
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The risks of investing in International Equity Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in International Equity Series. Please see the
Statement of Additional Information for further discussion of these risks and
the other risks not discussed here.
<TABLE>
<CAPTION>
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Securities How we use them
International Equity Series
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<S> <C>
Market Risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks
securities in a certain market--like the stock or bond we believe can appreciate over an extended time frame regardless
market--will decline in value because of factors such as of interim market fluctuations. In deciding what portion of a
economic conditions, future expectations or investor Fund's portfolio should be invested in any individual country,
confidence. we evaluate a variety of factors, including opportunities and
risks relative to other countries.
In addition, for temporary defensive purposes, the Funds may
invest all or a substantial portion of its assets in high
quality debt instruments of foreign governments, the U.S.
government, (including their agencies and instrumentalities) or
foreign or U.S. companies. To the extent it holds does so, the
Series may be unable to achieve its investment objective.
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Industry and security risk is the risk that the value of We typically hold a number of different securities in a variety
securities in a particular industry or the value of an of sectors in order to minimize the impact that a poorly
individual stock or bond will decline because of performing security would have on the Series.
changing expectations for the performance of that
industry or for the individual company issuing the stock
or bond.
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Currency Risk is the risk that the value of the Series' The Series may try to hedge its currency risk by purchasing
investments may be negatively affected by changes in foreign currency exchange contracts. If the Series agrees to
foreign currency exchange rates. Adverse changes in purchase or sell foreign securities at a pre-set price on a
exchange rates may reduce or eliminate any gains future date, the Series attempts to protect the value of a
produced by investments that are denominated in foreign security they own from future changes in currency rates. If the
currencies and may increase any losses. Series has agreed to purchase or sell a security, it may also
use foreign currency exchange contracts to "lock-in" the
security's price in terms of U.S. dollars or another applicable
currency. The Series may use forward currency exchange contracts
only for defensive or protective measures, not to enhance
portfolio returns. However, there is no assurance that such a
strategy will be successful.
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Political risk is the risk that countries or the entire We evaluate the political situations in the countries where we
region where we invest may experience political invest and take into account any potential risks before we
instability. This may cause greater fluctuation in the select securities for the portfolio. However, there is no way to
value and liquidity of our investments due to changes in eliminate political risk when investing internationally.
currency exchange rates, governmental seizures or
nationalization of assets.
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Emerging market risk is the possibility that the risks The Series, to the limited extent that it invests in emerging
associated with international investing will be greater markets, is subject to the risk.
in emerging markets than in more developed foreign
markets because, among other things, emerging markets
may have less stable political and economic
environments.
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Inefficient market risk is the risk that foreign markets The Series will attempt to reduce these risks by investing in a
may be less liquid, have greater price volatility, less number of different countries, and noting trends in the economy,
regulation and higher transaction costs than U.S. industries and financial markets.
markets.
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</TABLE>
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<TABLE>
<CAPTION>
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Securities How we use them
International Equity Series
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<S> <C>
Information risk is the risk that foreign companies may We conduct fundamental research on the companies we invest in
be subject to different accounting, auditing and rather than relying solely on information available through
financial reporting standards than U.S. companies. There financial reporting. We believe this will help us to better
may be less information available about foreign issuers uncover any potential weaknesses in individual companies.
than domestic issuers. Furthermore, regulatory oversight
of foreign issuers may be less stringent or less
consistently applied than in the United States.
- ------------------------------------------------------------------------------------------------------------------------------------
Transaction costs risk: Costs of buying, selling and We strive to monitor transaction costs and to choose an
holding foreign securities, including brokerage, tax and efficient trading strategy for the Series.
custody costs, may be higher than those involved in
domestic transactions
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</TABLE>
Investment manger
The Series is managed by Delaware International Advisers Ltd. Delaware
International Advisers makes investment decisions for the Series, manages the
Series' business affairs and provides daily administrative services. For its
services to the Series, the manager was paid [0.00%] of average daily net assets
for the last fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Clive A. Gillmore and Nigel G. May have primary responsibility for making
day-to-day investment decisions for the International Equity Series. In making
investment decisions for the Series, Mr. Gillmore and Mr. May regularly consult
with an international equity team of fourteen members.
Clive A. Gillmore, Director, Deputy Managing Director, Senior Portfolio Manager
of Delaware International Advisers Ltd., is a graduate of the University of
Warwick. He began his career at Legal and General Investment Management, which
is the asset management division of Legal and General Assurance Society Ltd., a
large U.K. life and pension company. Mr. Gillmore joined Delaware International
Advisers in 1990 after eight years of investment experience. His most recent
position prior to joining Delaware International Advisers was as a Pacific Basin
equity analyst and senior portfolio manager for Hill Samuel Investment
Management Ltd. Mr. Gillmore completed the London Business School Investment
program. He has been managing the Series since its inception.
Nigel G. May, Director, Senior Portfolio Manager, Delaware International Avisers
Ltd., joined Mr. Gillmore as Co-Manager of the Series on December 22, 1997. Mr.
May is a graduate of Sidney Sussex College, Cambridge. He joined Delaware
International Advisers in 1991, assuming portfolio management responsibilities
and sharing analytical responsibilities for continental Europe. He previously
had been with Hill Samuel Investment Management Ltd. for five years.
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<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
International Equity Series Year Ended 12/31
-------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.520 $ 15.110 $ 13.120 $11.840
Income from investment operations
Net investment income(1) 0.386 0.359 0.557 0.419
Net realized and unrealized gain on investments and foreign
currencies 1.169 0.596 1.966 1.191
-------- -------- -------- -----
Total from investment operations 1.555 0.955 2.523 1.610
-------- -------- -------- -----
Less dividends and distributions
Dividends from net investment income (0.595) (0.545) (0.420) (0.240)
Distributions from net realized gain on investments none none (0.113) (0.090)
-------- -------- -------- -------
Total dividends and distributions (0.595) (0.545) (0.533) (0.330)
-------- -------- -------- -------
Net asset value, end of year $ 16.480 $ 15.520 $ 15.110 $13.120
======== ======== ======== =======
Total return(2) 10.33% 6.60% 20.03% 13.98%
Ratios and supplemental data
Net assets, end of period (000 omitted) $243,536 $198,863 $131,428 $81,548
Ratio of expenses to average net assets 0.87% 0.85% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid
indirectly 0.88% 0.90% 0.91% 0.89%
Ratio of net investment income to average net assets 2.41% 2.28% 4.71% 3.69%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly 2.40% 2.23% 4.60% 3.60%
Portfolio turnover 5% 7% 8% 19%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
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<PAGE>
REIT Series
Our investment strategies
The REIT Series strives to achieve maximum long-term total return. Capital
appreciation is a secondary objective. The Series invests in securities of
companies principally engaged in the real estate industry. Under normal
circumstances, at least 65% of the Series' total assets will be invested in
equity securities of real estate investment trusts (REITs). The Series may also
invest in equity securities of real estate industry operating companies known as
REOCs.
The Series may also purchase preferred stock, convertible securities and
mortgage-backed securities.
While we do not intend to invest the Series' assets directly in real estate,
under certain circumstances it could own real estate directly as a result of a
default on securities in the portfolio. If the Series has rental income or
income from the direct disposition of real property, the receipt of such income
may adversely affect the Series' ability to retain its tax status as a regulated
investment company.
The Series may also, to a limited extent, enter into futures contracts on
stocks, purchase or sell options on such futures, engage in certain options
transactions on stocks and enter into closing transactions with respect to those
activities. However, futures, options and related activities will not be used
for speculative purposes but rather to quickly put money into the stock market
at times when the Series' assets are not fully invested in equity securities.
Positions in options or futures will generally be eliminated when the Series is
able to invest in appropriate securities.
We do not normally intend to acquire securities for the purpose of short-term
trading; however, we may take advantage of short-term opportunities that are
consistent with the Series' investment objectives.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
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<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
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Securities How we use them
REIT Series
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<S> <C>
Real Estate Investment Trusts: A company, usually The Series may invest without limitation in shares of REITs.
traded publicly, that manages a portfolio of real
estate to earn profits for shareholders.
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, derive income primarily from
the collection of rents and can 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. By investing in REITs
indirectly through the Series, a shareholder bears not
only a proportionate share of the expenses of the
Series, but also, indirectly, similar expenses of the
REITs.
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Industry Operating Companies: A We may invest without limit in REOCs.
company that derives at least 50% of its gross revenues
or net profits from:
(1) Ownership, development, construction, financing,
management or sale of commercial, industrial
or residential real estate, or
(2) products or services related to the real estate
industry, such as building supplies or mortgage
servicing.
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Foreign Securities and American Depositary Receipts: The Series' investments in equity securities of REITs and REOCs may
Securities of foreign entities issued directly or, in include, from time to time, sponsored or unsponsored American
the case of American Depositary Receipts, through a Depositary Receipts actively traded in the United States. Equity
U.S. bank. ADRs are issued by a U.S. bank and represent securities for this purpose include common stocks, securities
the bank's holding of a stated number of shares of a convertible into common stocks and securities having common stock
foreign corporation. An ADR entitles the holder to all characteristics, such as rights and warrants to purchase common
dividends and capital gains earned by the underlying stocks.
foreign shares. ADRs are bought and sold the same as
U.S. securities. We may invest up to 10% of the Series' assets in foreign securities.
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</TABLE>
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<TABLE>
<CAPTION>
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Securities How we use them
REIT Series
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<S> <C>
Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term investment
such as the Series, and a seller of securities in which for the Series' cash position. In order to enter into these
the seller agrees to buy the securities back within a repurchase agreements, the Series must have collateral of at least
specified time at the same price the buyer paid for 102% of the repurchase price. The Series will only enter into
them, plus an amount equal to an agreed upon interest repurchase agreements in which the collateral is composed of U.S.
rate. Repurchase agreements are often viewed as government securities.. Except when the manager believes a temporary
equivalent to cash. defensive approach is appropriate, the Series will not hold more than
5% of its total assets in cash or such short-term investments. All
short-term investments will be of the highest quality as determined
by a nationally-recognized statistical rating organization (e.g. AAA
by S&P or Aaa by Moody's) or be of comparable quality as determined
by the manager.
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Restricted securities: Privately placed securities We may invest in privately placed securities that are eligible for
whose resale is restricted under securities law. resale only among certain institutional buyers without registration.
These are commonly known as Rule 144A Securities. Restricted
securities that are determined to be illiquid may not exceed the
Series' 15% limit on illiquid securities, which is described below.
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Illiquid securities: Securities that do not have a We may invest up to 15% of net assets in illiquid securities,
ready market, and cannot be easily sold, if at all, at including repurchase agreements with maturities of over seven days.
approximately the price that the Series has valued
them.
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</TABLE>
Lending securities
REIT Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
REIT Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
REIT Series may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that annual portfolio turnover for the Series will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
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The risks of investing in REIT Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in REIT Series. Please see the Statement of Additional
Information for further discussion of these risks and other risks not discussed
here.
<TABLE>
<CAPTION>
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Risks How we strive to manage them
REIT Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or believe can appreciate over an extended time frame regardless of
bond market -- will decline in value because of factors interim market fluctuations. We do not try to predict overall stock
such as economic conditions, future expectations or market movements and do not trade for short-term purposes.
investor confidence.
We may hold a substantial part of the Series' assets in cash or cash
equivalents as a temporary, defensive strategy. To the extent it
holds cash or cash equivalents, the Series may be unable to achieve
its investment objective.
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Industry and security risk is the risk that the value In the REIT Series we concentrate on the real estate industry. As a
of securities in a particular industry or the value of consequence, the share price of the Series may fluctuate in response
an individual stock or bond will decline because of to factors affecting that industry, and may fluctuate more widely
changing expectations for the performance of that than a Portfolio that invests in a broader range of industries. The
industry or for the individual company issuing the Series may be more susceptible to any single economic, political or
stock or bond. regulatory occurrence affecting the real estate industry.
In addition, because the Series is non-diversified, it may invest a
greater proportion of its assets in the securities of a single issuer
than diversified Series. See "Non-diversified risk" below.
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will The REIT Series is subject to interest rate risk. As interest rates
decrease in value if interest rates rise. decline, the value of the Series' investments in real estate
investment trusts that hold fixed rate obligations can be expected to
rise. Conversely, when interest rates rise, the value of the Series'
investments in real estate investment trusts holding fixed rate
obligations can be expected to decline. However, lower interest rates
tend to increase the level of refinancing, which can hurt the returns
of REITs that hold fixed rate obligations.
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Industry Risk includes among others: Since the Series invests principally in REITs it is subject to risks
possible declines in the value of real estate; risks associated with the real estate industry. Investors should carefully
related to general and local economic conditions; consider these risks before investing in the Series.
possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties;
increases in competition; and changes in interest
rates. 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
or to maintain exemptions from the Investment Company
Act of 1940.
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</TABLE>
116
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<TABLE>
<CAPTION>
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Risks How we strive to manage them
REIT Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Non-Diversified Risk affects portfolios with a greater Though the REIT Series will hold a number of different securities,
percentage of assets invested in fewer securities. technically, it is considered a non-diversified fund according to the
Adverse effects on individual holdings may have a definition in the 1940 Act. In a diversified fund, 75% of the
greater impact on performance. portfolio must be diversified, meaning the fund or series cannot
invest more than 5% of total assets in an individual security. When a
fund is non-diversified, it does not have to limit the percentage of
assets invested in individual securities. However, the REIT Series
does intent to satisfy the Internal Revenue Code's diversification
requirement, which says that for 50% of the Series' assets, no more
than 5% of total assets can be invested in any one individual
security. The bottom line for shareholders is that 50% of the REIT
Series must be spread among various securities, with no more than 5%
of total assets invested in any single security. The other 50% can be
more concentrated with greater than 5% invested in individual
securities.
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Foreign risk is the risk that foreign securities may be We may invest up to 10% of the REIT Series' total assets in foreign
adversely affected by political instability, changes in securities; however we typically invest only a small portion of
currency exchange rates, foreign economic conditions or assets in foreign securities.
inadequate regulatory and accounting standards.
If the Series holds international securities, currency considerations
may present risks. The Series may try to reduce this risk by
investing in forward foreign currency exchange contracts to
neutralize currency risks associated with the purchase of individual
securities denominated in a particular currency. See "Futures and
options" risks below.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold, if at all, at approximately the
price that the Series values them.
- ----------------------------------------------------------------------------------------------------------------------------------
Futures and Options Risk: Futures contracts, options on The REIT Series may use futures contracts and options on futures
futures contracts, forward contracts, and certain other contracts, as well as options on securities for defensive purposes
options involve risks. For example, there may be no and not for speculation. The Series will enter into futures contracts
correlation between price changes of an option or and options only as long as no more than 5% of the Series' assets are
futures contract and the assets being hedged. This required as futures contract margin deposits and premiums on options.
could render the hedging strategy unsuccessful and Obligations under such futures contracts and options on those futures
could result in losses. contracts may not exceed 20% of the Series' total assets.
Options and futures contracts on foreign currencies,
and forward contracts, entail particular risks related
to conditions affecting the underlying currency.
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</TABLE>
Investment manger and sub-adviser
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. Lincoln Investment
Management, Inc. (Lincoln) is the Series' sub-adviser. As sub-adviser, Lincoln
provides Delaware with investment recommendations, asset allocation advice,
research, economic analysis and other investment services regarding the types of
securities in which we invest. For its services to the Series, the Series will
pay the manager a fee of 0.75% on the first $500 million of average daily net
assets; 0.70% on the next $500 million; 0.65% on the next $1.5 billion and 0.60%
on assets in excess of $2.5 billion on an annual basis.
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Lincoln is a wholly owned subsidiary of Lincoln National Corporation and was
incorporated in 1930. Lincoln's primary activity is institutional fixed-income
investment management and consulting. These activities include fixed-income
portfolios, private placements, real estate debt and equity, and asset/liability
management. As of November 30, 1998, Lincoln had approximately $41 billion in
assets under management. Lincoln provides investment management services to
Lincoln National Corporation, its principal subsidiaries and affiliated
registered investment companies, and acts as investment adviser to other
unaffiliated clients.
Portfolio manager
Christopher S. Beck, Vice President/Senior Portfolio Manager, together with
Thomas J. Trotman and Damon J. Andres, both Vice Presidents, have primary
responsibility for making day-to-day investment decisions for the REIT Series.
Mr. Beck was named to the REIT management team on May 6, 1999, joining Mr.
Trotman who has been on the team since 1998 and Mr. Andres who has been on the
team since 1997.
Christopher S. Beck, Vice President/Senior Portfolio Manager, has 19 years of
investment management experience, starting with Wilmington Trust in 1981. Later,
he became Director of Research at Cypress Capital Management in Wilmington and
Chief Investment Officer of the University of Delaware Endowment Fund. Prior to
joining Delaware Investments in May 1997, he managed the Small Cap Fund at
Pitcairn Trust Company for two years. Mr. Beck holds a BS from the University of
Delaware, an MBA from Lehigh University and is a CFA charterholder.
Thomas J. Trotman, Vice President/Portfolio Manager, earned a bachelor's degree
in Accounting from Muhlenberg College and an MBA from Widener University. Prior
to joining Delaware Investments in 1995, he was Vice President and Director of
Investment Research at Independence Capital Management. Before that, he held
credit-related positions at Marine Midland Bank, U.S. Steel Corporation, and
Amerada Hess. Mr. Trotman is a CFA charterholder.
Damon J. Andres, Vice President/Portfolio Manager, earned a BS in Business
Administration with an emphasis in Finance and Accounting from the University of
Richmond. Prior to joining Delaware Investments in 1994, he provided investment
consulting services as a Consulting Associate with Cambridge Associates, Inc. in
Arlington, Virginia.
118
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
---------------- -------------
Period
Year 5/4/98(1)
Ended through
REIT Series 12/31/99 12/31/98
- ------------------------------------------------------------------ ---------------- -------------
<S> <C> <C>
Net asset value, beginning of period $10.000
Income (loss) from investment operations
Net investment income 0.217
Net realized and unrealized loss on investments (1.117)
-------
Total from investment operations (0.900)
-------
Net asset value, end of period $9.100
======
Total return(2) (9.00%)
Ratios and supplemental data
Net assets, end of period (000 omitted) $5,562
Ratio of expenses to average net assets 0.85%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.02%
Ratio of net investment income to average net assets 6.42%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.25%
Portfolio turnover 39%
- ------------------------------------------------------------------ ---------------- -------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
119
<PAGE>
Select Growth Series
Our investment strategies
We strive to identify companies that offer the potential for long-term price
appreciation because they are likely to experience high earnings growth. The
companies we choose for the portfolio will typically exhibit one or more of the
following characteristics:
o a history of high growth in earnings-per-share;
o projections for high future growth or acceleration in earnings-per-share;
o a price-to-earnings ratio that is low relative to other stocks; and
o discounted cash flows that are high relative to other stocks.
Once we identify stocks that have these characteristics, we further evaluate the
company. We look at the capability of the management team, the strength of the
company's position within its industry, whether its internal structure can
support continued growth, how high is the company's return on equity, how much
of the company's profits are reinvested into the company to fuel additional
growth, and how stringent are the company's financial and accounting policies.
All of these give us insight into the outlook for the company, helping us to
identify companies poised for high earnings growth. We believe that this high
earnings growth, if it occurs, would result in price appreciation for the
company's stock.
We maintain a well-diversified portfolio, typically holding a mix of different
stocks, representing a wide array of industries and a mix of small companies,
medium-size companies and large companies.
Select Growth Series uses the same investment strategy as Select Growth Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
120
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Select Growth Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common stocks: Securities that represent shares of We invest at least 65% of the Series' total assets in equity
ownership in a corporation. Stockholders participate in securities (including common stocks and convertible securities.
the corporation's profits and losses, proportionate to Generally, however, we invest 90% to 100% of net assets in common
the number of shares they own. stock. We may invest in companies of any size greater than $300
million in market capitalization.
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer and Typically, we use repurchase agreements as a short-term investment
seller of securities in which the seller agrees to buy for the Series' cash position. In order to enter into these
the securities back within a specified time at the same repurchase agreements, the Series must have collateral of at least
price the buyer paid for them, plus an amount equal to 102% of the repurchase price. The Series will only enter into
an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities We may invest in privately placed securities that are eligible for
whose resale is restricted under securities law. resale only among certain institutional buyers without registration.
These are commonly known as Rule 144A Securities. Restricted
securities that are determined to be illiquid may not exceed the
Series' 15% limit on illiquid securities, which is described below.
- ----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a We may invest up to 15% of net assets in illiquid securities,
ready market, and cannot be easily sold within seven including repurchase agreements with maturities of over seven days.
days at approximately the price that the Series has
valued them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Select Growth Series may also invest in other securities including preferred
stocks, convertible securities, warrants, rights, futures, options, debt
securities of government or corporate issuers or investment company securities.
Select Growth Series may invest a portion of its net assets in foreign
securities; however, the manager has no present intention of doing so. Please
see the Statement of Additional Information for additional descriptions and risk
information on these securities as well as those listed in the table above. You
will be able to find additional information about the investments in the Series'
portfolio in the annual or semi-annual shareholder report.
Lending securities
Select Growth Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Select Growth Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Borrowing from banks
Select Growth Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. It will not purchase new
securities if borrowing exceeds 5% of net assets.
121
<PAGE>
Portfolio turnover
We anticipate that Select Growth Series' annual portfolio turnover may be
greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
122
<PAGE>
The risks of investing in Select Growth Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Select Growth Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Select Growth Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or believe can appreciate over an extended time frame regardless of
bond market -- will decline in value because of factors interim market fluctuations. We do not try to predict overall stock
such as economic conditions, future expectations or market movements and though we may hold securities for any amount of
investor confidence. time, we typically do not trade for short-term purposes.
We may hold up to 100% of Select Growth Series' assets in cash or
cash equivalents as a temporary, defensive strategy. To the extent it
holds cash or cash equivalents, the Series may be unable to achieve
its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value We limit the amount of Select Growth Series' assets invested in any
of securities in a particular industry or the value of one industry and in any individual security. We also follow a
an individual stock or bond will decline because of rigorous selection process before choosing securities and
changing expectations for the performance of that continuously monitor them while they remain in the portfolio.
industry or for the individual company issuing the
stock.
- ----------------------------------------------------------------------------------------------------------------------------------
Company size risk is the risk that prices of small and Select Growth Series seeks opportunities among companies of all
medium-size companies may be more volatile than larger sizes. Because its portfolio does not concentrate specifically on
companies because of limited financial resources or small or medium-size companies, this risk may be balanced by our
dependence on narrow product lines. holdings of large companies.
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will We analyze each company's financial situation and its cash flow to
decrease in value if interest rates rise. The risk is determine the company's ability to finance future expansion and
generally associated with bonds; however, because small operations. The potential affect that rising interest rates might
and medium-size companies often borrow money to finance have on a stock is taken into consideration before the stock is
their operations, they may be adversely affected by purchased.
rising interest rates.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold within seven days at
approximately the price that the Series values them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. The Series will pay the
manager the following fee on an annual basis: 0.75% on the first $500 million of
average daily net assets; 0.70% on the next $500 million; 0.65% on the next $1.5
billion and 0.60% on assets in excess of $2.5 billion.
123
<PAGE>
Portfolio managers
Gerald S. Frey has primary responsibility for making day-to-day investment
decisions for the Select Growth Series. When making investment decisions for the
Series, Mr. Frey regularly consults with Marshall T. Bassett, John A. Heffern,
Jeffrey W. Hynoski, Steven T. Lampe and Lori P. Wachs.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has been senior portfolio
manager for the Series since its inception.
Marshall T. Bassett, Vice President/Portfolio Manager, joined Delaware
Investments in 1997. In his most recent position, he served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small
growth companies. Prior to that, he was a trust officer at Sovran Bank and Trust
Company. He received a bachelor's degree and an MBA from Duke University.
John A. Heffern, Vice President, Portfolio Manager, earned bachelors and MBA
degrees at the University of North Carolina at Chapel Hill. He joined Delaware
Investments in 1997. He previously was a Senior Vice President, Equity Research
at NatWest Securities Corporation's Specialty Financial Services unit. Before
that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he served as a Vice President at Bessemer Trust
Company in the mid and large capitalization growth group, where he specialized
in the areas of science, technology, and telecommunications. Prior to that, Mr.
Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University.
Steven T. Lampe, Vice President, Portfolio Manager, received a bachelor's degree
in Economics and an MBA degree with a concentration in Finance from the
University of Pennsylvania's Wharton School. He joined Delaware Investments in
1995 and covers the financial services and business services sectors for small
and mid-capitalization growth stocks. He previously served as a tax/audit
manager at Price Waterhouse, specializing in financial services firms. Mr. Lampe
is a Certified Public Accountant.
Lori P. Wachs, Vice President/Portfolio Manager, joined Delaware Investments in
1992 from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental Studies.
124
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
- --------------------------------------------------------------------------------
Period
Select Growth Series 5/1/99(1)
through
12/31/99
- --------------------------------------------------------------------------------
Net asset value, beginning of period $10.000
Income (loss) from investment operations
Net investment income
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less dividends and distributions
Dividends from net investment income
Distributions from net realized gain on investments
Total dividends and distributions
Net asset value, end of period
Total return(2)
Ratios and supplemental data
Net assets, end of period (000 omitted)
Ratio of expenses to average net assets
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly
Ratio of net investment income to average net assets
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly
Portfolio turnover
- --------------------------------------------------------------------------------
(3) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(4) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown.
(3) Total return reflects expense limitations in effect for the Series.
125
<PAGE>
Small Cap Value Series
Our investment strategies
We strive to identify small companies that we believe offer above-average
opportunities for long-term price appreciation because their current stock price
does not accurately reflect the companies' underlying value or future earning
potential.
Under normal conditions, at least 65% of the Series' net assets will be invested
in the common stock of small cap companies, those having a market capitalization
generally less than $1.5 billion. Our focus will be on value stocks, defined as
stocks whose price is historically low based on a given financial measure such
as profits, book value or cashflow.
Companies may be undervalued for many reasons. They may be unknown to stock
analysts, they may have experienced poor earnings or their industry may be in
the midst of a period of weak growth.
We will carefully evaluate the financial strength of the company, the nature of
its management, any developments affecting the company or its industry,
anticipated new products or services, possible management changes, projected
takeovers or technological breakthroughs. Using this extensive analysis, our
goal is to pinpoint the companies within the universe of undervalued stocks,
whose true value is likely to be recognized and rewarded with a rising stock
price in the future.
Because there is added risk when investing in smaller companies, which may still
be in their early developmental stages, we maintain a well-diversified
portfolio, typically holding a mix of different stocks, representing a wide
array of industries.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
126
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Small Cap Value Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Under normal market conditions, we will hold at least 65% of the
in a corporation. Stockholders participate in the Series' net assets in common stock of small companies that we
corporation's profits and losses, proportionate to the believe are selling for less than their true value. Generally, we
number of shares they own. invest 90% to 100% of net assets in these stocks.
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts: A company, usually traded The Series is permitted to invest in REITs and would typically do
publicly, manages a portfolio of real estate to earn profits so when this sector or companies within the sector appeared to
for shareholders. offer opportunities for price appreciation.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Securities and American Depositary Receipts: Although Small Cap Value Series may invest up to 25% of its net
Securities of foreign entities issued directly or, in the assets in foreign securities or depository receipts, the manager
case of American Depositary Receipts, through a U.S. bank. has no present intention of doing so. We may hold ADRs when we
ADRs are issued by a U.S. bank and represent a stated number believe they offer greater value and greater appreciation
of shares of a foreign corporation that the bank holds in potential than U.S. securities.
its vault. An ADR entitles the holder to all dividends and
capital gains earned by the underlying foreign shares. ADRs
are bought and sold the same as U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible for
resale is restricted under securities law. resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities.
market, and cannot be easily sold within seven days at
approximately the price that the Series has valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Small Cap Value Series may also invest in other securities including convertible
securities, warrants, preferred stocks, and bonds. Please see the Statement of
Additional Information for additional descriptions and risk information on these
securities as well as those listed in the table above. You can find additional
information about the investments in the Series' portfolio in the annual or
semi-annual shareholder report.
127
<PAGE>
Lending securities
Small Cap Value Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Small Cap Value Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Borrowing from banks
Small Cap Value Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Small Cap Value Series' annual portfolio turnover will be
less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
128
<PAGE>
The risks of investing in Small Cap Value Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Small Cap Value Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Small Cap Value Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or bond believe can appreciate over an extended time frame regardless of
market -- will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor stock market movements and generally do not trade for short-term
confidence. purposes.
We may hold a substantial part of Small Cap Value Series' assets
in cash or cash equivalents as a temporary, defensive strategy. To
the extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Small Cap Value Series' assets invested in
securities in a particular industry or the value of an any one industry and in any individual security. We also follow a
individual stock or bond will decline because of changing rigorous selection process before choosing securities and
expectations for the performance of that industry or for the continuously monitor them while they remain in the portfolio.
individual company issuing the stock.
- ------------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller Small Cap Value Series maintains a well-diversified portfolio,
companies may be more volatile than larger companies because selects stocks carefully and monitors them continuously. And,
of limited financial resources or dependence on narrow because we focus on stocks that are already selling at relatively
product lines. low prices, we believe we may experience less price volatility
than small cap funds that do not use a value-oriented strategy.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will decrease We analyze each company's financial situation and its cashflow to
in value if interest rates rise. The risk is generally determine the company's ability to finance future expansion and
associated with bonds; however, because smaller companies operations. The potential affect that rising interest rates might
often borrow money to finance their operations, they may be have on a stock is taken into consideration before the stock is
adversely affected by rising interest rates. purchased.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold, if at all, at approximately the price that the
Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.00% of average daily net assets for the last
fiscal year, reflecting the waiver of fees by the manger.
Portfolio managers
Christopher S. Beck has primary responsibility for making day-to-day investment
decisions for the Small Cap Value Series. In making investment decisions for the
Series, Mr. Beck consults with Andrea Giles.
129
<PAGE>
Christopher S. Beck, Vice President/Senior Portfolio Manager, has been in the
investment business for 19 years, starting with Wilmington Trust in 1981. Later,
he became Director of Research at Cypress Capital Management in Wilmington and
Chief Investment Officer of the University of Delaware Endowment Fund. Prior to
joining Delaware Investments in May 1997, he managed the Small Cap Fund for two
years at Pitcairn Trust Company. He holds a BS from the University of Delaware,
an MBA from Lehigh University and is a CFA charterholder. Mr. Beck has been
managing the Small Cap Value Series since May 1997.
Andrea Giles, Vice President/Portfolio Manager, holds a BSAD from the
Massachusetts Institute of Technology and an MBA in Finance from Columbia
University. Prior to joining Delaware Investments in 1996, she was an account
officer in the Leveraged Capital Group with Citibank.
130
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Series
Year Ended 12/31
-------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $17.920 $14.500 $12.470 $10.290
Income (loss) from investment operations
Net investment income 0.196 0.122 0.112 0.192
Net realized and unrealized gain (loss) on investments (1.036) 4.338 2.548 2.208
------- ----- ----- -----
Total from investment operations (0.840) 4.460 2.660 2.400
------- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.135) (0.110) (0.180) (0.150)
Distributions from net realized gain on investments (0.495) (0.930) (0.450) (0.070)
------- ------- ------- -------
Total dividends and distributions (0.630) (1.040) (0.630) (0.220)
------- ------- ------- -------
Net asset value, end of year $16.450 $17.920 $14.500 $12.470
======= ======= ======= =======
Total return(1) (4.79%) 32.91% 22.55% 23.85%
Ratios and supplemental data
Net assets, end of period (000 omitted) $103,989 $84,071 $23,683 $11,929
Ratio of expenses to average net assets 0.83% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.85% 0.90% 0.99% 0.96%
Ratio of net investment income to average net assets 1.32% 1.24% 1.28% 2.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.30% 1.14% 1.09% 1.97%
Portfolio turnover 45% 41% 84% 71%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
131
<PAGE>
Social Awareness Series
Our investment strategies
Social Awareness Series is a socially responsible fund that invests primarily in
stocks that meet certain socially responsible criteria. It strives to provide
long-term capital appreciation to its shareholders.
We use a computer-driven selection process designed to identify stocks of
companies that are likely to grow significantly faster than the average of the
companies in the S&P 500. Aided by this technology, we evaluate and rank
hundreds of stocks daily, using a variety of factors such as dividend yield,
earnings growth and price to earnings ratios. Decisions to buy and sell stocks
are determined by this objective evaluation process.
We invest primarily in the common stocks of medium and large-sized companies
(generally $1.0 billion or more in market capitalization at the time of
purchase) that have met the established socially responsible criteria. We use
the Social Investment Database published by Kinder, Lyndberg, Domini & Company,
Inc. to determine which companies to exclude from our selection process. The
approved stocks are then evaluated using the computer selection process
described above.
Our goal is to seek stocks of companies that have the potential to grow
significantly faster than the average of the companies in the S&P 500. We
believe this growth, if achieved, will result in a rising share price that will
provide long-term appreciation to investors.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
132
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation and may pay
dividends as well.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Social Awareness Series
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Common stocks: Securities that represent shares of ownership Generally, we invest 90% to 100% of net assets in common stock of
in a corporation. Stockholders participate in the medium-to large-size companies.
corporation's profits and losses, proportionate to the
number of shares they own.
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Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
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Restricted and Illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities. For
are privately placed securities whose resale is restricted this Series, the 10% limit includes restricted securities such as
under securities law. Illiquid securities are securities privately placed securities that are eligible for resale only
that do not have a ready market, and cannot be easily sold, among certain institutional buyers without registration, which are
if at all, at approximately the price that the Series has commonly known as "Rule 144A Securities" and repurchase agreements
valued them. with maturities of over seven days.
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Social Awareness Series is permitted to invest in all available types of equity
securities, including preferred stock, warrants and convertible securities. It
may hold cash, short-term debt securities and money market instruments and
engage in futures and options transactions for defensive purposes, although to
the extent it does so it may be unable to meet its investment objective. Please
see the Statement of Additional Information for additional descriptions on these
securities as well as those listed in the table above. You can find additional
information about the investments in the Series' portfolio in the annual or
semi-annual shareholder report.
Lending securities
Social Awareness Series may lend up to 25% of its assets to qualified brokers,
dealers and institutional investors for their use in security transactions.
Portfolio turnover
We anticipate that Social Awareness Series' annual portfolio turnover will be
less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
Borrowing from banks
Social Awareness Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
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The risks of investing in Social Awareness Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Social Awareness Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
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Risks How we strive to manage them
Social Awareness Series
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Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or bond believe can appreciate over an extended time frame regardless of
market -- will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor stock market movements and generally do not trade for short-term
confidence. purposes.
We may hold a substantial part of the Series' assets in cash or
cash equivalents as a temporary, defensive strategy. To the extent
it holds cash or cash equivalents, the Series may be unable to
achieve its investment objective.
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Industry and security risk is the risk that the value of We limit the amount of Social Awareness Series' assets invested in
securities in a particular industry or the value of an any one industry and in any individual security.
individual stock or bond will decline because of changing
expectations for the performance of that industry or for the Because Social Awareness Series avoids investing in companies that
individual company issuing the stock or bond. don't meet socially responsible criteria, its exposure to certain
industry sectors may be greater or less than similar funds or
market indexes. This could affect its performance positively or
negatively, depending on the performance of those sectors.
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Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold within seven days at approximately the price
that the Series has valued them.
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Limited market risk is the risk that because the Series Because the Series only invests in companies that meet its
avoids certain companies not considered socially definition of "socially responsible," this risk is unavoidable.
responsible, it could miss out on strong performance from
those companies.
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Investment manger and sub-adviser
The Series is managed by Delaware Management Company. Vantage Investment
Advisors is the Series' sub-adviser. As sub-adviser, Vantage is responsible for
day-to-day management of the Series' assets. Delaware Management Company
administers the Series' affairs and has ultimate responsibility for all
investment advisory services for the Series. Delaware Management Company also
supervises the sub-adviser's performance. For their services to the Series, the
manager and sub-adviser were paid an aggregate fee of 0.00% of average daily net
assets for the last fiscal year, reflecting the waiver of fees by the manager.
Vantage Investment Advisors was founded in 1979. It provides investment advice
to pension plans, endowments, insurance and commingled products and had assets
under management in excess of $9.34 billion as of December 31, 1999.
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Portfolio managers
Enrique Chang and Christopher P. Harvey have primary responsibility for making
day-to-day investment decisions for Social Awareness Series.
Enrique Chang, Senior Vice President and Chief Investment Officer of Vantage
Investment Advisors, became co-manager of the Series in January 1999. Mr. Chang
oversees the management of all equity portfolios and directs Vantage's
quantitative research efforts. He received a BA in mathematics from Fairleigh
Dickinson University in May of 1985, an MBA in finance and quantitative analysis
from New York University in May of 1988, and an MS in statistics and operations
research from New York University in May of 1996. He was previously an actuary
with Prudential, Director of Quantitative Analysis and Strategy with General
Reinsurance Corporation, and Senior Vice President and Director of Quantitative
Analysis with J&W Seligman.
Christopher P. Harvey, Vice President, Vantage Investment Advisors, became
co-manager of the Series in January 1999. Mr. Harvey manages portfolios,
conducts investment research and assists in equity trading. He graduated from
Bucknell University with a BS degree in accounting. He received an MBA from the
Stern School of Business at New York University. Prior to joining Vantage
Investment Advisors, Mr. Harvey was a financial analyst with Merrill Lynch.
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Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
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Period
5/1/97(1)
Social Awareness Series Year Ended 12/31 through
12/31/97
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1999 1998
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Net asset value, beginning of period $12.840 $10.000
Income from investment operations
Net investment income 0.065 0.051
Net realized and net unrealized gain on investments 1.880 2.789
----- -----
Total from investment operations 1.945 2.840
----- -----
Less dividends and distributions
Dividends from net investment income (0.050) none
Distributions from net realized gain on investments (0.185) none
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Total dividends and distributions (0.235) none
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Net asset value, end of period $14.550 $12.840
======= =======
Total return(2) 15.45% 28.40%
Ratios and supplemental data
Net assets, end of period (000 omitted) $26,962 $7,800
Ratio of expenses to average net assets 0.83% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.89% 1.40%
Ratio of net investment income to average net assets 0.80% 1.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 0.74% 0.53%
Portfolio turnover 30% 52%
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</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
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Strategic Income Series
Our investment strategies
Strategic Income Series is a type of fixed income fund that invests in three
distinct sectors of the fixed income market as it pursues its investment
objective of providing high current income and total return. Certain economic
and market events generally may have a greater impact on certain types of bonds.
By spreading the portfolio assets among three key types of bonds, we strive to
reduce the affect that such events might have on the portfolio. The foundation
of our strategy is the belief that when one or more bond sectors are not
performing well, the others may continue to provide high income and appreciation
potential, helping to support the Series' performance.
Following are the three key sectors we focus on as well as our general
investment approach in each sector:
o U.S. government and high-quality corporate bonds are selected primarily on
the basis of their income potential. In periods of slower U.S. economic
growth, these bonds might also provide a stabilizing influence on the
portfolio which could enhance total return.
o U.S. high-yield corporate bonds are primarily used to increase the
portfolio's income potential. These bonds are of lower quality and involve
the risk that the companies issuing them may not be able to pay interest or
repay principal. However, we carefully select the high-yield bonds for the
portfolio after evaluating both the company's fundamental strength and the
bond's liquidity.
o Foreign bonds are used to add diversification to the portfolio. Because
foreign markets are often affected by different economic cycles than the
U.S., foreign bonds may experience performance cycles that are different as
well. In selecting foreign bonds for the portfolio, we strive to manage the
risk associated with foreign investing through a thorough analysis of the
bond's issuer and the inflation trends in the country where the bond is
issued.
In determining how much of the portfolio to allocate to each sector, we review
economic and market conditions and interest rate trends as well as the potential
risks and rewards associated with each sector. As little as 20% or as much as
60% of the Series' assets may be invested in each fixed-income sector. In
addition, the Series may invest up to 10% of its assets in U.S. equity
securities.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
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The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation.
Securities we typically invest in
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Securities How we use them
Strategic Income Series
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High-yield corporate bonds: Debt obligations issued by a The Series may invest up to 60% of net assets in high-yield
corporation and rated lower than investment grade by a corporate bonds. Emphasis is typically on those rated BB or Ba by
nationally recognized statistical ratings organization an NRSRO.
(NRSRO) such as S&P or Moody's. High-yield bonds are issued
by corporations that have poor credit quality and may have We carefully evaluate an individual company's financial situation,
difficulty repaying principal and interest. its management, the prospects for its industry and the technical
factors related to its bond offering. Our goal is to identify
those companies that we believe will be able to repay their debt
obligations in spite of poor ratings. The Series may invest in
unrated bonds if we believe their credit quality is comparable to
the rated bonds we are permitted to invest in. Unrated bonds may
be more speculative in nature than rated bonds.
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U.S. government securities: Direct U.S. obligations The Series may invest up to 60% of net assets in direct U.S.
including bills, notes, bonds as well as other debt government obligations; however, these securities will typically
securities issued by the U.S. Treasury and securities of be a smaller percentage of the portfolio because they generally do
U.S. government agencies or instrumentalities. not offer as high a level of current income as other fixed-income
securities the Series may invest in.
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Mortgage-backed securities: Fixed-income securities that We may invest up to 60% of net assets in government-related
represent pools of mortgages, with investors receiving mortgage-backed securities or fully collateralized privately
principal and interest payments as the underlying mortgage issued mortgage-backed securities.
loans are paid back. Many are issued and guaranteed against
default by the U.S. government or its agencies or We may invest in mortgage-backed securities issued by private
instrumentalities, such as the Federal Home Loan Mortgage companies whether or not the securities are 100% collateralized.
Corporation, Fannie Mae and the Government National Mortgage However, these securities must be rated in one of the four highest
Association. Others are issued by private financial categories by an NRSRO at the time of purchase. The privately
institutions, with some fully collateralized by certificates issued securities we invest in are either CMOs or REMICs (see
issued or guaranteed by the government or its agencies or below).
instrumentalities.
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Collateralized mortgage obligations (CMOs): Privately issued See mortgage-backed securities above.
mortgage-backed bonds whose underlying value is the
mortgages that are grouped into different pools according to
their maturity.
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Real estate mortgage investment conduits (REMICs): Privately See mortgage-backed securities above.
issued mortgage-backed bonds whose underlying value is a
fixed pool of mortgages secured by an interest in real
property. Like CMOs, REMICs offer different pools.
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Asset-backed securities: Bonds or notes backed by accounts We invest only in asset-backed securities rated in one of the four
receivables including home equity, automobile or credit highest categories by an NRSRO.
loans.
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Securities How we use them
Strategic Income Series
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Investment grade corporate bonds: Debt obligations issued by Debt securities within the top three categories comprise what are
a corporation, rated in one of the four highest categories known as high-grade bonds and are regarded as having a strong
by an NRSRO (or, if unrated, that we believe are of equal ability to pay principal and interest. Securities in the fourth
quality). category are known as medium-grade bonds and are regarded as
having an adequate capacity to pay principal and interest but with
greater vulnerability to adverse economic conditions and
speculative characteristics.
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Foreign government securities: Securities issued by foreign We may invest in foreign government securities and primarily focus
governments or supranational entities. A supranational on better quality bonds with investment-grade credit ratings.
entity is an entity established or financially supported by
the national governments of one or more countries. The However, up to 15% of the Series' assets may also be invested in
International Bank for Reconstruction and Development (more foreign government securities issued by emerging or developing
commonly known as the World Bank) is one example of a countries, which may be lower rated, including securities rated
supranational entity. below investment grade.
We may also invest in securities issued by supranational entities,
which are typically of higher quality.
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Foreign corporate bonds: Debt obligations issued by a We may invest in both rated and unrated securities of foreign
foreign corporation. corporations. We may invest both in investment grade securities
and non-investment grade (i.e., those rated BB or lower by S&P or
Fitch, Ba or lower by Moody's, or similarly rated by another
NRSRO.)
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Zero coupon bonds and pay-in-kind bonds: Zero coupon We may invest in zero coupon bonds and payment in kind bonds,
securities are debt obligations which do not entitle the though we do not expect this to be a significant component of our
holder to any periodic payments of interest prior to strategy. The market prices of these bonds are generally more
maturity or a specified date when the securities begin volatile than the market prices of securities that pay interest
paying current interest. Therefore, they are issued and periodically and are likely to react to changes in interest rates
traded at a price lower than their face amounts or par to a greater degree than interest-paying bonds having similar
value. Payment-in-kind bonds pay interest or dividends in maturities and credit quality. They may have certain tax
the form of additional bonds or preferred stock. consequences which, under certain conditions, could be adverse to
the Fund.
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Equity securities: Common stocks, preferred stocks Up to 10% of the Series' assets may be invested in U.S. equity
(including adjustable rate preferred stocks) and other securities.
equity securities, such as convertible securities and
warrants. We would select only equity securities that were consistent with
the Series' objective of high current income and total return.
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Options and futures: Options represent a right to buy or At times when we anticipate adverse conditions, we may want to
sell a security or group of securities at an agreed upon protect gains on securities without actually selling them. We
price at a future date. The purchaser of an option may or might use options or futures to neutralize the effect of any price
may not choose to go through with the transaction. declines, without selling the bond or bonds, or as a hedge against
changes in interest rates.
Futures contracts are agreements for the purchase or sale of
securities at a specified price, on a specified date. Unlike Use of these strategies can increase the operating costs of the
an option, a futures contract must be executed unless it is Series and can lead to loss of principal.
sold before the settlement date.
Options and futures are generally considered to be
derivative securities.
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Securities How we use them
Strategic Income Series
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Investment company securities: In some foreign countries, We may invest in either closed-end or open-end investment
investments by a mutual fund may only be made through companies consistent with the 1940 Act requirements. These
investments in closed-end investment companies that in turn investments involve an indirect payment of a portion of the other
invest in the securities of such countries. investment companies' expenses, including advisory fees.
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Brady bonds: These are debt securities issued under the We may invest in Brady Bonds. We believe that the economic reforms
framework of the Brady Plan, an initiative announced by the undertaken by countries in connection with the issuance of Brady
U.S. Treasury Secretary, Nicholas F. Brady in 1989, as a Bonds makes the debt of countries that have issued Brady Bonds or
mechanism for debtor nations to restructure their those that have announced plans to issue them a viable opportunity
outstanding external indebtedness (generally, commercial for investment.
bank debt).
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Foreign currency, foreign currency contracts or forward We may invest in securities issued in any currency and may hold
contracts: A forward contract involves an obligation to foreign currency.
purchase or sell a specific currency at a future date at a
price set at the time of the contract. Forward contracts are Although the Series values its assets daily in terms of U.S.
used to "lock-in" the price of a security that will be dollars, we do not convert our holdings of foreign currencies into
purchased or sold, in terms of U.S. dollars or other U.S. dollars on a daily basis. We may, however, from time to time,
currencies. purchase or sell foreign currencies and/or engage in forward
foreign currency transactions in order to expedite settlement of
portfolio transactions and to minimize currency value
fluctuations. We may conduct foreign currency transactions on a
cash basis at the spot rate prevailing in the foreign currency
exchange market or through a forward foreign currency contract or
forward contract. By entering into these transactions, the Series
attempts to protect against a possible loss resulting from an
adverse change in currency exchange rates during the period
between when a security is purchased or sold and the date on which
payment is made or received.
These transactions may increase the Series' expenses.
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Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
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Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible for
resale is restricted under securities law. resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
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Securities How we use them
Strategic Income Series
<S> <C>
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Interest rate swap and index swap agreements: In an interest Interest rate swaps may be used to adjust the Fund's sensitivity
rate swap, a series receives payments from another party to interest rates by changing its duration. We may also use
based on a floating interest rate in return for making interest rate swaps to hedge against changes in interest rates. We
payments based on a fixed interest rate. An interest rate use index swaps to gain exposure to markets that the Fund invests
swap can also work in reverse, with a series receiving in, such as the corporate bond market. We may also use index swaps
payments based on a fixed interest rate and making payments as a substitute for futures, options or forward contracts if such
based on a floating interest rate. In an index swap, a contracts are not directly available to the Fund on favorable
series receives gains or incurs losses based on the total terms.
return of an index, in exchange for making fixed or floating
interest rate payments to another party. Interest rate swaps and index swaps will be considered illiquid
securities (see below).
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Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold within seven days at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
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Please see the Statement of Additional Information for additional descriptions
on these securities.
Lending securities
Strategic Income Series may lend up to 25% of its assets to qualified brokers,
dealers and institutional investors for their use in security transactions.
Borrowing from banks
Strategic Income Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Purchasing securities on a when-issued or delayed delivery basis
Strategic Income Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that Strategic Income Series' annual portfolio turnover will
exceed 100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year. High turnover can
result in increased transaction costs and tax liability.
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The risks of investing in Strategic Income Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Strategic Income Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
<TABLE>
<CAPTION>
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Risks How we strive to manage them
Strategic Income Series
<S> <C>
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Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on bonds
securities in a certain market--like the stock or bond that we believe will continue to pay interest regardless of
market--will decline in value because of factors such as interim market fluctuations. We do not try to predict overall bond
economic conditions, future expectations or investor market or interest rate movements and generally do not trade for
confidence short-term purposes.
Index swaps are subject to the same market risks as the We may hold a substantial part of the Series' assets in cash or
investment market or sector that the index represents. cash equivalents as a temporary defensive strategy. To the extent
Depending on the actual movements of the index and how well it holds cash or cash equivalents, the Series may be unable to
the portfolio managers forecast those movements, a series achieve its investment objective.
could experience a higher or lower return than anticipated.
In evaluating the use of an index swap, we carefully consider how
market changes could affect the swap and how that compares to us
investing directly in the market the swap is intended to
represent.
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Industry and security risk is the risk that the value of We diversify the Series assets across three distinct sectors of
securities in a particular industry or the value of an the bond market and among a wide variety of individual issuers.
individual stock or bond will decline because of changing
expectations for the performance of that industry or for the
individual company issuing the stock or bond.
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Interest rate risk is the risk that securities will decrease The Series is subject to interest rate risk. We cannot eliminate
in value if interest rates rise. The risk is greater for that risk, but we do strive to manage it by monitoring economic
bonds with longer maturities than for those with shorter conditions.
maturities.
Swaps may be particularly sensitive to interest rate The Series will not invest in interest rate or index swaps with
changes. Depending on the actual movements of interest rates maturities of more than two years. Each business day we will
and how well the portfolio managers anticipate them, a calculate the amount the Series must pay for any swaps it holds
series could experience a higher or lower return than and will segregate enough cash or other liquid securities to cover
anticipated. For example, if a series holds interest rate that amount.
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 necessarily be offset by
the fixed-rate payments it is entitled to receive under the
swap agreement.
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Risks How we strive to manage them
Strategic Income Series
<S> <C>
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Credit risk The possibility that a bond's issuer (or an Our careful, credit-oriented bond selection and our commitment to
entity that insures the bond) will not be able to make hold a diversified selection of high-yield bonds are designed to
timely payments of interest and principal. manage this risk.
Investing in so-called "junk" or "high-yield" bonds entails It is likely that protracted periods of economic uncertainty would
the risk of principal loss, which may be greater than the cause increased volatility in the market prices of high-yield
risk involved in investment grade bonds. High-yield bonds bonds, an increase in the number of high-yield bond defaults and
are sometimes issued by companies whose earnings at the time corresponding volatility in the Series' net asset value.
the bond is issued are less than the projected debt payments
on the bonds. Our holdings of high quality investment grade bonds are less
subject to credit risk and may help to balance any credit problems
Some analysts believe a protracted economic downturn would experienced by individual high-yield bond issuers or foreign
severely disrupt the market for high-yield bonds, adversely issuers.
affect the value of outstanding bonds and adversely affect
the ability of high-yield issuers to repay principal and When selecting dealers with whom we would make interest rate or
interest. index swap agreements, we focus on those with high quality ratings
and do careful credit analysis before investing.
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Futures and options risk is the possibility that a series We will use options and futures for defensive purposes, such as to
may experience a significant loss if it employs an option or protect gains in the portfolio without actually selling the
futures strategy related to a security or a market index and security or to neutralize the impact of interest rate changes. We
that security or index moves in the opposite direction from will not use futures and options for speculative reasons or in an
what the portfolio managers anticipated. Futures and options effort to enhance return.
also involve additional expenses, which could reduce any
benefit or increase any loss to a fund from using the
strategy.
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Foreign risk is the risk that foreign securities may be The Series will attempt to reduce foreign investing risks through
adversely affected by political instability (including portfolio diversification, credit analysis and attention to trends
governmental seizures or nationalization of assets), changes in the world economies, industries and financial markets.
in currency exchange rates, foreign economic conditions or
inadequate regulatory and accounting standards. Foreign We carefully evaluate the political and economic situations in the
markets may also be less efficient, less liquid, have countries where we invest and take these risks into account before
greater price volatility, less regulation and higher we select securities for the portfolio. However, there is no way
transaction costs than U.S. markets. to eliminate foreign risks when investing internationally.
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Foreign government securities risks involve the ability of a Strategic Income Series attempts to reduce the risks associated
foreign government or government related issuer to make with investing in foreign governments by limiting the portion of
timely and ultimate payments on its external debt portfolio assets that may be invested in such securities.
obligations. This ability to make payments will 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.
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Risks How we strive to manage them
Strategic Income Series
<S> <C>
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Currency risk is the risk that the value of an investment We may try to hedge currency risk by purchasing foreign currency
may be negatively affected by changes in foreign currency exchange contracts. By agreeing to purchase or sell foreign
exchange rates. Adverse changes in exchange rates may reduce securities at a pre-set price on a future date, the Series strive
or eliminate any gains produced by investments that are to protect the value of the stock it owns from future changes in
denominated in foreign currencies and may increase any currency rates. We will use forward currency exchange contracts
losses. only for defensive measures, not to enhance portfolio returns.
However, there is no assurance that a strategy such as this will
be successful.
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Emerging markets risk is the possibility that the risks While the Strategic Income Series may purchase securities of
associated with international investing will be greater in issuers in any foreign country, developed and emerging, no more
emerging markets than in more developed foreign markets than 15% of the Series' assets may be invested in direct
because, among other things, emerging markets may have less obligations of issuers located in emerging market countries.
stable political and economic environments.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be A less liquid secondary market may have an adverse effect on our
readily sold within seven days at approximately the price ability to dispose of particular issues, when necessary, to meet
that a series values them. the Series' liquidity needs or in response to a specific event,
such as the declining creditworthiness of the issuer. In striving
The high-yield secondary market is particularly susceptible to manage this risk, we evaluate the size of a bond issuance as a
to liquidity problems when the institutions, such as mutual way to anticipate its likely liquidity level.
funds and certain financial institutions that dominate it
temporarily stop buying bonds for regulatory, financial or We may invest only 10% of net assets in illiquid securities,
other reasons. excluding Rule 144A securities described above.
- ------------------------------------------------------------------------------------------------------------------------------------
Valuation risk A less liquid secondary market as described We will strive to manage this risk by carefully evaluating
above makes it more difficult to obtain precise valuations individual bonds and by limiting the amount of the portfolio that
of the high-yield securities in its portfolio. During can be allocated to privately placed high-yield securities.
periods of reduced liquidity, judgment plays a greater role
in valuing high-yield securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Legislative and regulatory risk: The United States Congress We monitor the status of regulatory and legislative proposals to
has from time to time taken or considered legislative valuate any possible effects they might have on the Series'
actions that could adversely affect the high-yield bond portfolio.
market. For example, Congressional legislation, has, with
some exceptions, generally prohibited federally insured
savings and loan institutions from investing in high-yield
securities. Regulatory actions have also affected the
high-yield market. Similar actions in the future could
reduce liquidity for high-yield issues, reduce the number of
new high-yield securities being issued and could make it
more difficult for a fund to attain its investment
objective.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger and sub-adviser
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. Delaware International
Advisers is the Series' sub-adviser. Subject to the overall supervision of
manager, the sub-adviser manages the international sector of the Series'
portfolio and furnishes the manager with investment recommendations, asset
allocation advice, research and other investment services regarding foreign
144
<PAGE>
securities. For its services to the Series, the Series paid the manager and
sub-adviser an aggregate fee of [0.00%] of average daily net assets for the last
fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Paul A. Matlack and Paul Grillo have primary responsibility for making
day-to-day investment decisions for Strategic Income Series. Christopher A. Moth
and Joanna Bates have primary responsibility for making day-to-day investment
decisions for Strategic Income Series regarding its investments in foreign
securities. In making investment decisions for the Series, Mr. Moth and Ms.
Bates regularly consult with David G. Tilles and four global fixed-income team
members.
Paul A. Matlack, Vice President/Senior Portfolio Manager, is a graduate of the
University of Pennsylvania with an MBA in Finance from George Washington
University. He began his career at Mellon Bank as a credit specialist, and later
served as a corporate loan officer for Mellon Bank and then Provident National
Bank. He has primary responsibility for allocating Strategic Income Series'
assets among the fixed-income and equity sectors and for making day-to-day
investment decisions for the Series regarding its investments in the high-yield
sector. He is a CFA charterholder. Mr. Matlack has been a member of Strategic
Income Series' management team since its inception.
Paul Grillo, Vice President/Portfolio Manager, holds a BA in Business Management
from North Carolina State University and an MBA in Finance from Pace University.
Prior to joining Delaware Investments in 1993, he served as mortgage strategist
and trader at the Dreyfus Corporation. He also served as a mortgage strategist
and portfolio manager for the Chemical Investment Group and as financial analyst
at the Chemical Bank. Mr. Grillo is a CFA charterholder. He has primary
responsibility for making day-to-day investment decisions for the Series
regarding its investments in investment grade securities. Mr. Grillo has been a
member of Strategic Income Series' management team since its inception.
Christopher A. Moth, Director, Senior Portfolio Manager, Head of Investment
Strategy of Delaware International Advisers Ltd., is a graduate of The City
University London. He joined Delaware International in 1992. He previously
worked at the Guardian Royal Exchange where he was responsible for technical
analysis, quantitative models and projections. Mr. Moth has been awarded the
certificate in Finance and Investment from the Institute of Actuaries in London.
Mr. Moth became Co-Manager of the Series in July 1999.
Joanna Bates, Senior Portfolio Manager, Credit and Emerging Markets of Delaware
International Advisers Ltd., is a graduate of London University. She joined the
Fixed Income team at Delaware International in June 1997. Prior to that she was
Associate Director, Fixed Interest at Hill Samuel Investment Management Ltd.
which she joined in 1990. She had previously worked at Fidelity International
and Save & Prosper as a fund manager and analyst for global bond markets. Ms.
Bates is an associate of the Institute of Investment Management and Research.
Ms. Bates became Co-Manager of the Series in July 1999.
David G. Tilles, Managing Director and Chief Investment Officer of Delaware
International Advisers Ltd., was educated at the Sorbonne, Warwick University
and Heidelberg University. Prior to joining Delaware International Advisers in
1990 as Managing Director and Chief Investment Officer, he spent 16 years with
Hill Samuel Investment Management Group in London, serving in a number of
investment capacities. His most recent position prior to joining Delaware
International Advisers was Chief Investment Officer of Hill Samuel Investment
Management Ltd.
145
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. All "per share" information reflects financial results
for a single Series share. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). This information has been audited by Ernst & Young
LLP, whose report, along with the Series' financial statements, is included in
the Series' annual report, which is available upon request by calling
800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Strategic Income Series
Year Ended
12/31 Period
----------------------------------------- 5/1/97(1)
through
1999 1998 12/31/97
- ------------------------------------------------------------------ -------------------- -------------------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period $10.620 $10.000
Income from investment operations
Net investment income(2) 0.832 0.523
Net realized and unrealized gain (loss) on investments, foreign
currencies and future contracts (0.557) 0.097
------- -----
Total from investment operations 0.275 0.620
----- -----
Less dividends and distributions
Dividends from net investment income (0.270) none
Distributions from net realized gain on investments (0.025) none
------- ----
Total dividends and distributions (0.295) none
------- ----
Net asset value, end of period $10.600 $10.620
======= =======
Total return(3) 2.63% 6.20%
Ratios and supplemental data
Net assets, end of period (000 omitted) $20,571 $8,606
Ratio of expenses to average net assets 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.81% 1.23%
Ratio of net investment income to average net assets 7.90% 7.44%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.89% 7.01%
Portfolio turnover 143% 70%
- ------------------------------------------------------------------ -------------------- -------------------- -----------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Per share information was based on the average shares outstanding method.
(3) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
146
<PAGE>
Trend Series
Our investment strategies
We strive to identify small companies that offer above-average opportunities for
long-term price appreciation because they are poised to benefit from changing
and dominant trends within society or the political arena. In striving to
identify such companies, we will evaluate a company's managerial skills, product
development and sales and earnings.
Companies in the early stages of their development often offer the greatest
opportunities for rising share prices. The key to investing successfully in
small companies is to invest in them before their stock price matches their
growth potential. In striving to do this, Trend Series studies:
o the operational history of the company;
o its strategic focus; and
o its competitive environment.
The Series uses a bottom-up approach to stock selection that seeks market
leaders, strong product cycles, innovative concepts and industry trends. We look
at price-to-earnings ratios, estimated growth rates, market capitalization and
cashflow as we strive to determine how attractive a company is relative to other
companies.
We also rely on our own research in selecting companies for the portfolio. That
research might include one-on-one meetings with executives, company competitors,
industry experts and customers. Our goal is to select companies that are likely
to perform well over an extended time frame.
Because there is added risk when investing in small companies, which may still
be in their early developmental stages, we maintain a well-diversified
portfolio, typically holding a mix of different stocks, representing a wide
array of industries.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
147
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Trend Series
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest 85% to 100% of net assets in common stock
in a corporation. Stockholders participate in the with at least 65% in small, growth-oriented companies.
corporation's profits and losses, proportionate to the number
of shares they own.
- -----------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts: ADRs are issued by a U.S. bank We may hold ADRs when we believe they offer greater
and represent the bank's holdings of a stated number of shares appreciation potential than U.S. securities.
of a foreign corporation. An ADR entitles the holder to all
dividends and capital gains earned by the underlying foreign
shares. ADRs are bought and sold the same as U.S. securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term
the Series, and a seller of securities in which the seller investment for the Series' cash position. In order to enter
agrees to buy the securities back within a specified time at into these repurchase agreements, the Series must have
the same price the buyer paid for them, plus an amount equal collateral of at least 102% of the repurchase price. The
to an agreed upon interest rate. Repurchase agreements are Series will only enter into repurchase agreements in which the
often viewed as equivalent to cash. collateral is composed of U.S. government securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A
Securities. Restricted securities that are determined to be
illiquid may not exceed the Series' 10% limit on illiquid
securities, which is described below.
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold, if at all, at approximately including repurchase agreements with maturities of over seven
the price that the Series has valued them. days.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Trend Series may also invest in other securities including convertible
securities, warrants, preferred stocks, and bonds. Trend Series may invest a
portion of its net assets in foreign securities; however, the manager has no
present intention of doing so. Please see the Statement of Additional
Information for additional descriptions and risk information on these securities
as well as those listed in the table above. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities
Trend Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Trend Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
Trend Series may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Trend Series' annual portfolio turnover may be greater than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year. High turnover can
result in increased transaction costs and tax liability.
148
<PAGE>
The risks of investing in Trend Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Trend Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Trend Series
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market -- like the stock or bond stocks we believe can appreciate over an extended time frame
market -- will decline in value because of factors such as regardless of interim market fluctuations. We do not try to
economic conditions, future expectations or investor predict overall stock market movements and though we may hold
confidence. securities for any amount of time, we typically do not trade
for short-term purposes.
We may hold a substantial part of Trend Series' assets in cash
or cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- -----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Trend Series' assets invested in any
securities in a particular industry or the value of an one industry and in any individual security. We also follow a
individual stock or bond will decline because of changing rigorous selection process before choosing securities and
expectations for the performance of that industry or for the continuously monitor them while they remain in the portfolio.
individual company issuing the stock.
- -----------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller Trend Series maintains a well-diversified portfolio, selects
companies may be more volatile than larger companies because stocks carefully and monitors them continuously.
of limited financial resources or dependence on narrow product
lines.
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will decrease We analyze each company's financial situation and its cash
in value if interest rates rise. The risk is generally flow to determine the company's ability to finance future
associated with bonds; however, because smaller companies expansion and operations. The potential effect that rising
often borrow money to finance their operations, they may be interest rates might have on a stock is taken into
adversely affected by rising interest rates. consideration before the stock is purchased.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of the Series'
adversely affected by political instability, changes in portfolio in foreign corporations through American Depositary
currency exchange rates, foreign economic conditions or Receipts. We do not invest directly in foreign securities.
inadequate regulatory and accounting standards. When we do purchase ADRs, they are generally denominated in
U.S. dollars and traded on a U.S. exchange.
- -----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold, or can only be sold within seven days at
approximately the price that the Series has valued them.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
149
<PAGE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year, reflecting the waiver of fees by the manager.
Portfolio manager
Gerald S. Frey has primary responsibility for making day-to-day investment
decisions for the Trend Series. When making investment decisions for the Series,
Mr. Frey regularly consults with Marshall T. Bassett, John A. Heffern, Jeffrey
W. Hynoski, Steven T. Lampe and Lori P. Wachs.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has been senior portfolio
manager for the Series since its inception.
Marshall T. Bassett, Vice President/Portfolio Manager, joined Delaware
Investments in 1997. In his most recent position, he served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small
growth companies. Prior to that, he was a trust officer at Sovran Bank and Trust
Company. He received a bachelor's degree and an MBA from Duke University.
John A. Heffern, Vice President, Portfolio Manager, earned bachelors and MBA
degrees at the University of North Carolina at Chapel Hill. He joined Delaware
Investments in 1997. He previously was a Senior Vice President, Equity Research
at NatWest Securities Corporation's Specialty Financial Services unit. Before
that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he served as a Vice President at Bessemer Trust
Company in the mid and large capitalization growth group, where he specialized
in the areas of science, technology, and telecommunications. Prior to that, Mr.
Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University.
Steven T. Lampe, Vice President, Portfolio Manager, received a bachelor's degree
in Economics and an MBA degree with a concentration in Finance from the
University of Pennsylvania's Wharton School. He joined Delaware Investments in
1995 and covers the financial services and business services sectors for small
and mid-capitalization growth stocks. He previously served as a tax/audit
manager at Price Waterhouse, specializing in financial services firms. Mr. Lampe
is a Certified Public Accountant.
Lori P. Wachs, Vice President/Portfolio Manager, joined Delaware Investments in
1992 from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental Studies.
150
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Trend Series
Year Ended 12/31
---------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $17.380 $14.560 $14.020 $10.160
Income (loss) from investment operations
Net investment income 0.006 0.019 0.050 0.098
Net realized and unrealized gain (loss) on investments 2.736 3.031 1.380 3.852
----- ----- ----- -----
Total from investment operations 2.742 3.050 1.430 3.950
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.020) (0.050) (0.090) (0.090)
Distributions from net realized gain on investments (0.342) (0.180) (0.800) none
------- ------- ------- ----
Total dividends and distributions (0.362) (0.230) (0.890) (0.090)
------- ------- ------- -------
Net asset value, end of year $19.760 $17.380 $14.560 $14.020
======= ======= ======= =======
Total return(1) 16.04% 21.37% 11.00% 39.21%
Ratios and supplemental data
Net assets, end of period (000 omitted) $168,251 $118,276 $56,423 $20,510
Ratio of expenses to average net assets 0.81% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.85% 0.88% 0.92% 0.96%
Ratio of net investment income to average net assets 0.03% 0.16% 0.56% 1.03%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly (0.01%) 0.08% 0.44% 0.87%
Portfolio turnover 121% 125% 112% 76%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
151
<PAGE>
U.S. Growth Series
Our investment strategies
U.S. Growth Series seeks to maximize capital appreciation. We invest primarily
in common stocks and though we have the flexibility to invest in companies of
all sizes, we generally focus on medium-sized and large and companies. Our goal
is to own companies with the potential to grow earnings faster than the U.S.
economy in general. We look for companies that have:
o low dividend yields;
o strong balance sheets; and
o high expected earnings growth rates relative to their industry.
There are a number of catalysts that might increase a company's potential for
accelerated earnings growth. Our disciplined, research-intensive selection
process is designed to identify earnings catalysts such as:
o management changes;
o new products;
o structural changes in the economy; or
o corporate restructurings and turnaround situations.
We maintain a diversified portfolio representing a number of different
industries. Such an approach helps to minimize the impact that any one security
or industry could have on the portfolio if it were to experience a period of
slow or declining earnings growth.
Because our objective is capital appreciation, the amount of dividend income
that a stock provides is only an incidental consideration for us.
U.S Growth Series uses the same investment strategy as U.S. Growth Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
152
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
U.S. Growth Series
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest 85% to 100% of the Series' net assets in
in a corporation. Stockholders participate in the common stock of companies that we think have appreciation
corporation's profits and losses, proportionate to the number potential. We may invest in companies of all sizes, but
of shares they own. typically focus on medium and large-size companies.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign securities and American Depositary Receipts: The Series may invest up to 20% of its assets in securities of
Securities of foreign entities issued directly or, in the case foreign issuers. Such foreign securities may be traded on a
of American Depositary Receipts (ADRs), through a U.S. bank. foreign exchange, or they may be in the form of American
ADRs represent a bank's holding of a stated number of shares Depositary Receipts (ADRs). Direct ownership of foreign
of a foreign corporation. An ADR entitles the holder to all securities will typically not be a significant part of our
dividends and capital gains earned by the underlying foreign strategy. We may, however own ADRs when we think they offer
shares. ADRs are bought and sold in the same way as U.S. greater appreciation potential than domestic stocks.
securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term
the Series, and a seller of securities in which the seller investment for the Series' cash position. In order to enter
agrees to buy the securities back within a specified time at into these repurchase agreements, the Series must have
the same price the buyer paid for them, plus an amount equal collateral of at least 102% of the repurchase price. The
to an agreed upon interest rate. Repurchase agreements are Series would only enter into repurchase agreements in which
often viewed as equivalent to cash. the collateral is composed of U.S. government securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration, including Rule 144A Securities. Restricted
securities that are determined to be illiquid may not exceed
the Series' 10% limit on illiquid securities, which is
described below.
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities.
market, and cannot be easily sold within seven days at
approximately the price that a fund has valued them.
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed-income securities: Securities that may include debt We may invest up to 35% of the Series' assets in debt
securities, bonds, convertible bonds, as well as, securities, bonds, convertible bonds, preferred stocks and
non-investment grade fixed-income securities. convertible preferred stock. We may also invest up to 10% of
this portion in non-investment grade bonds if we believe that
doing so would help us to meet the Series' objective.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
153
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
U.S. Growth Series
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Options and Futures: Options represent a right to buy or sell We might use options or futures to neutralize the effect of
a security or group of securities at an agreed upon price at a any anticipated price declines, without selling the security.
future date. The purchaser of an option may or may not choose We might also use options or futures to gain exposure to a
to go through with the transaction. particular market segment without purchasing individual
securities in that segment particularly if we had excess cash
Writing a covered call option on a security obligates the that we wanted to invest quickly.
owner of the security to sell it at an agreed upon price on an
agreed upon date (usually no more than nine months in the When writing call options we will only write covered call
future.) The owner of the security receives a premium payment options - call options on securities we actually own.
from the purchaser of the call, but if the security
appreciates to a price greater than the agreed upon selling Use of these strategies can increase the operating costs of
price, a series would lose out on those gains. the Series and can lead to loss of principal.
Futures contracts are agreements for the purchase or sale of
securities at a specified price, on a specified date. Unlike
an option, a futures contract must be executed unless it is
sold before the settlement date.
Options and futures are generally considered to be derivative
securities.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in other securities including U.S. government
securities, futures and options. Please see the Statement of Additional
Information for additional descriptions and risk information on these securities
as well as those listed in the table above. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities
The Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Borrowing from banks
The Series may borrow money as a temporary measure for extraordinary purposes or
to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets. Whenever these borrowings,
including reverse repurchase agreements, exceed 5% of the value of the Series'
total assets, the Series will not purchase any securities.
Purchasing securities on a when-issued or delayed delivery basis
The Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Portfolio turnover
We anticipate that the Series' annual portfolio turnover may be greater than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year. High turnover can
result in increased transaction costs and tax liability.
154
<PAGE>
Temporary defensive positions
For temporary defensive purposes, the Series may invest up to 100% of its assets
in money market instruments when the manager or sub-adviser determines that
market conditions warrant. The Series may also hold a portion of its assets in
cash for liquidity purposes. To the extent that it does so, the Series may be
unable to meet its investment objective.
155
<PAGE>
The risks of investing in the Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in U.S. Growth Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
U.S. Growth Series
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market -- like the stock or bond stocks we believe can appreciate over an extended time frame
market -- will decline in value because of factors such as regardless of interim market fluctuations. We do not try to
economic conditions, future expectations or investor predict overall stock market movements and generally do not
confidence. trade for short-term purposes.
We may hold a substantial part of the Series' assets in cash
or cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
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Industry and security risk is the risk that the value of We limit the amount of U.S. Growth Series' assets invested in
securities in a particular industry or the value of an any one industry and in any individual security.
individual stock or bond will decline because of changing
expectations for the performance of that industry or for the
individual company issuing the stock or bond.
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Foreign risk is the risk that foreign securities may be We are permitted to invest up to 20% of the Series' portfolio
adversely affected by political instability, changes in in foreign securities. When we do purchase foreign securities,
currency exchange rates, foreign economic conditions or they are generally American Depositary Receipts which are
inadequate regulatory and accounting standards. denominated in U.S. dollars and traded on U.S. stock
exchanges.
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Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities to 15% of net assets.
readily sold within seven days at approximately the price that
the Series values them.
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Credit risk is the possibility that a bond' issuer (or an Fixed-income securities are not typically a significant
entity that insures the bond) will be unable to make timely component of our strategy. However, when we do invest in
payments of interest and principle. fixed-income securities, we will not hold more than 10% of net
assets in high-yield, non-investment grade bonds. This
limitation, combined with our careful, credit-oriented bond
selection and our commitment to hold a diversified selection
of high-yield bonds are designed to manage this risk.
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</TABLE>
156
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<TABLE>
<CAPTION>
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Risks How we strive to manage them
U.S. Growth Series
<S> <C>
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Futures and options risk is the possibility that a fund may We will not use futures and options for speculative reasons.
experience a loss if it employs an options or futures strategy We may use options and futures to protect gains in the
related to a security or a market index and that security or portfolio without actually selling a security. We may also use
index moves in the opposite direction from what the manager options and futures to quickly invest excess cash so that the
anticipated. Futures and options also involve additional portfolio is generally fully invested.
expenses, which could reduce any benefit or increase any loss
that a fund gains from using the strategy.
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</TABLE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. The Series will pay Delaware
Management Company the following fee on an annual basis: 0.65% on the first $500
million of average daily net assets; 0.60% on the next $500 million; 0.55% on
the next $1.5 billion and 0.50% on assets in excess of $2.5 billion.
Portfolio managers
Frank Houghton and Rufus Winton have primary responsibility for making
investment decisions for U.S. Growth Series.
Frank Houghton, [ ] of Delaware,
joined Delaware in March 2000. Prior to joining Delaware, Mr. Houghton was
President and Portfolio Manager of Lynch & Mayer, Inc., which he joined in 1990
and became President in 1999. Prior to joining Lynch & Mayer, Inc., Mr. Houghton
was Chairman of BMI Capital from 1984 to1990, a Portfolio Manager at Neuberger &
Berman from 1977 to 1984 and a Partner at Oppenheimer & Co., Inc. from
1969-1977. Mr. Houghton received a BBA from Manhattan College and attended New
York University Graduate School of Business Administration.
Rufus Winton, [ ] of Delaware,
joined Delaware in March 2000. Prior to joining Delaware, Mr. Winton was Senior
Vice President and Portfolio Manager of Lynch & Mayer, Inc., which he joined in
1993. Prior to joining Lynch & Mayer, Inc., Mr. Winton was a Planning Analyst at
Northwest Airlines, Inc., Director of Business development at Postal Automation
Inc. and a Manager in Mortgage-Backed Securities Sales at Citicorp Investment
Bank. He received a BA in Economics from Connecticut College in 1982 and an MBA
from Kellogg Graduate School of Management in 1991, where he was an Amoco
Scholar.
157
<PAGE>
Who's who?
The following describes the various organizations involved with managing,
administering, and servicing the Series.
Board of trustees A mutual fund is governed by a board of trustees which has
oversight responsibility for the management of the fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor and others that perform services for the
fund. At least 40% of the board of trustees must be independent of the fund's
investment manager and distributor. These independent fund trustees, in
particular, are advocates for shareholder interests.
Investment managers
Delaware Management Company, One Commerce Square, Philadelphia, PA 19103
Delaware International Advisers Ltd., Third Floor, 80 Cheapside, London, England
EC2V 6EE
An investment manager is a company responsible for selecting portfolio
investments consistent with objectives and policies stated in the mutual fund's
prospectus. The investment manager places portfolio orders with broker/dealers
and is responsible for obtaining the best overall execution of those orders. A
written contract between a mutual fund and its investment manager specifies the
services the manager performs. Most management contracts provide for the manager
to receive an annual fee based on a percentage of the fund's average net assets.
The manager is subject to numerous legal restrictions, especially regarding
transactions between itself and the funds it advises.
Delaware Management Company and its predecessors have been managing the funds in
Delaware Investments since 1938. On December 31, 1999, Delaware Management
Company and its affiliates within Delaware Investments, including Delaware
International Advisers Ltd., were managing in the aggregate more than $00
billion in assets in the various institutional or separately managed
(approximately $00,000,000,000) and investment company (approximately
$00,000,00,000) accounts. Delaware International Advisers began operating in
1990 and manages global and international institutional and mutual fund
accounts. Delaware Management Company is a series of Delaware Management
Business Trust, which is an indirect, wholly owned subsidiary of Delaware
Management Holdings, Inc.
Sub-advisers
Lincoln Investment Management, Inc., 200 E. Berry Street, Fort Wayne, Indiana
46802 Vantage Investment Advisors, 630 Fifth Avenue, New York, NY 10111 Delaware
International Advisers Ltd., Third Floor, 80 Cheapside, London, England EC2V 6EE
A sub-adviser is a company generally responsible for the management of the
fund's assets. They are selected and supervised by the investment manager.
Portfolio managers Portfolio managers are employed by the investment managers or
sub-advisers to make investment decisions for individual portfolios on a
day-to-day basis. See "Information about individual Series" for information
about the portfolio managers of the various series.
Distributor
Delaware Distributors, L.P., 1818 Market Street, Philadelphia, PA 19103
Shares of the Series are only sold to separate accounts of insurance companies
used in connection with variable annuity or variable life products.
Custodian
The Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn, NY 11245
Mutual funds are legally required to protect their portfolio securities and most
funds place them with a custodian, typically a qualified bank custodian who
segregates fund securities from other bank assets.
158
<PAGE>
Important Information about all Series
Share classes
Each Series has two classes of shares, class 1 and class 2. Each class is
identical except that class 2 has a distribution or "rule 12b-1" plan which is
described in the prospectuses offering class 2 shares.
Purchase and redemption of shares
Shares are sold only to separate accounts of life companies at net asset value.
(See Valuation of shares.) Redemptions will be effected by the separate accounts
at the net asset value next determined after receipt of the order to meet
obligations under the variable contracts. Cash Reserve Series is managed to
maintain a constant $10 per share net asset value although there is no assurance
that this objective can be achieved. Contract owners do not deal directly with
the Fund with respect to the acquisition or redemption of Series shares.
Valuation of shares
The price you pay for shares will depend on when we receive your purchase order.
If we or an authorized agent receive your order before the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time) on a
business day, you will pay that day's closing share price which is based on the
Series' net asset value. If we receive your order after the close of regular
trading, you will pay the next business day's price. A business day is any day
that the New York Stock Exchange is open for business. We reserve the right to
reject any purchase order.
We determine a Series' net asset value (NAV) per share at the close of regular
trading of the New York Stock Exchange each business day that the Exchange is
open. We calculate this value by adding the market value of all the securities
and assets a Series' portfolio, deducting all liabilities, and dividing the
resulting number by the number of shares outstanding. The result is the net
asset value per share. We price securities and other assets for which market
quotations are available at their market value. We price debt securities on the
basis of valuations provided to us by an independent pricing service that uses
methods approved by the board of trustees. Any investments that have a maturity
of less than 60 days we price at amortized cost. For all other securities, we
use methods approved by the board of trustees that are designed to price
securities at their fair market value.
A significant portion of the portfolio securities of the Emerging Markets,
Global Bond, International Equity and Strategic Income Series are listed on
foreign exchanges. From time to time, other Series may also hold securities that
are listed on foreign exchanges. These foreign exchanges may trade on weekends
or days when the Series do not price their shares. As a result, the NAV of these
Series may change on days when you will not be able to purchase or redeem shares
of the Series.
Dividends, distributions and taxes
For the Capital Reserves and Cash Reserve Series, dividends, if any, 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.
For the Balanced and Growth and Income Series, dividends, if any, are paid
quarterly. Capital gain distributions, if any, normally will be made following
the close of the fiscal year.
For the Convertible Securities, Devon, Emerging Markets, Global Bond, Growth
Opportunities, High Yield, International Equity, REIT, Select Growth Small Cap
Value, Social Awareness, Strategic Income, Trend and U.S. Growth Series,
dividends and capital gain distributions, if any, are distributed annually.
We automatically reinvest all dividends and any capital gains.
A Series will not be subject to federal income tax to the extent its earnings
are distributed. The Fund intends to distribute substantially all of the
respective Series' net investment income and net capital gains. Shareholders may
be proportionately liable for taxes on income and gains of the Series but
shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them, and the Fund will inform shareholders of the
amount and nature of such income or gains.
159
<PAGE>
Please refer to the prospectus for the variable insurance contract for
additional tax information relevant to such contracts.
Additional information about the Series' investments is available in the Series'
Annual and Semi-Annual Reports to shareholders. In the Series annual reports you
will find a discussion of the market conditions and investment strategies that
significantly affected the Series' performance during its last fiscal period.
You can find more detailed information about the Series in the current Statement
of Additional Information (SAI), which we have filed electronically with the
Securities and Exchange Commission (SEC) and which is legally a part of this
prospectus. You may obtain a free copy of the Statement of Additional
Information by writing to us at 1818 Market Street, Philadelphia, PA 19103, or
call toll-free 800.523.1918.
You can find reports and other information about the Series on the EDGAR
Database on the SEC web site (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by e-mailing the SEC at
[email protected] or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. Information about the Series, including their
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. You can get information on the public
reference room by calling the SEC at 1.202.942.8090.
Investment Company Act File No. 811-5162
160
<PAGE>
DELAWARE GROUP PREMIUM FUND
Class 2
1818 Market Street, Philadelphia, PA 19103
Prospectus
May 1, 2000
This Prospectus offers 18 Portfolios. Each Portfolio (Series) is in effect a
separate fund issuing its own shares. The shares of the Series are sold only to
separate accounts of life insurance companies (life companies). The separate
accounts are used in conjunction with variable annuity contracts and variable
life insurance policies (variable contracts). The separate accounts invest in
shares of the various Series in accordance with allocation instructions received
from contract owners. The investment objectives and principal policies of the
Series are described below.
As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal offense.
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
remainder primarily in equity securities. This Series has the same objective and
investment disciplines as Delaware Balanced Fund of Delaware Group Equity Funds
I, 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--a money market fund which seeks the highest level of income
consistent with preservation of capital and liquidity through investments in
short-term money market instruments. This Series has the same objective and
investment disciplines as Delaware Cash Reserve Fund of Delaware Group Cash
Reserve, a separate fund in the Delaware Investments family. The shares of Cash
Reserve Series are neither insured nor guaranteed by the U.S. government and
there is no assurance that the Series will be able to maintain a stable net
asset value of $10.00 per share.
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.
Devon Series--seeks current income and capital appreciation. The Series will
seek to achieve its objective by investing primarily in income-producing common
stocks, with a focus on common stocks that the investment manager believes have
the potential for above-average dividend increases over time. This Series has
the same objective and investment disciplines as Delaware Devon Fund of Delaware
Group Equity Funds I, 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
securities of issuers located or operating in emerging countries. This Series
has the same objective and investment disciplines as Delaware Emerging Markets
Fund of Delaware Group Global & International Funds, 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. The Series will invest in
fixed-income securities of issuers from at least three different countries, one
of which may be the United States. This Series has the same objective and
investment disciplines as Delaware Global Bond Fund of Delaware Group Global &
International Funds, a separate fund in the Delaware Investments family.
1
<PAGE>
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 of
Delaware Group Equity Funds II, a separate fund in the Delaware Investments
family.
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 of
Delaware Group Equity Funds IV, a separate fund in the Delaware Investments
family.
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. This Series has the same objective and investment disciplines as
Delaware High Yield Opportunities Fund of Delaware Group Income Funds, a
separate fund in the Delaware Investments family. An investment in this 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
of Delaware Group Global & International Funds, a separate fund in the Delaware
Investments family.
REIT Series -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in the real estate
industry. This Series has the same objective and investment discipline as The
Real Estate Investment Trust Portfolio and The Real Estate Investment Trust
Portfolio II of Delaware Pooled Trust, separate funds in the Delaware
Investments family.
Select Growth Series (formerly Aggressive Growth Series) -- seeks long-term
capital appreciation. The Series attempts to achieve its investment objective 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 of Voyageur Mutual
Funds III, 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. This Series has the
same objective and investment disciplines as Delaware Small Cap Value Fund of
Delaware Group Equity Funds V, a separate fund in the Delaware Investments
family.
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 of Delaware Group
Equity Funds II, 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. This Series
has the same objective and investment disciplines as Delaware Strategic Income
Fund of Delaware Group Income Funds, a separate fund in the Delaware Investments
family.
Trend Series--seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. This Series has the same objective and investment
disciplines as Delaware Trend Fund of Delaware Group Equity Funds III, a
separate fund in the Delaware Investments family.
2
<PAGE>
U.S. Growth Series - seeks to maximize capital appreciation. The Series seeks to
achieve its objective by investing primarily in stocks of companies of all
sizes. We look for stocks with low dividend yields, strong balance sheets and
high expected earnings growth rates as compared to other companies in the same
industry. This Series has the same objective and investment disciplines as
Delaware U.S. Growth Fund of Delaware Group Adviser Funds, a separate fund in
the Delaware Investments family.
The Global Bond Series and the Convertible Securities Series are not
available in the Group Flexible Premium Variable Life Insurance
product.
3
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Profiles How we manage the Series
(Strategies, Risks, Portfolio managers, Financial
highlights)
Balanced Series Page Page
Capital Reserves Series
Cash Reserve Series
Convertible Securities Series
Devon Series
Emerging Markets Series
Global Bond Series
Growth and Income Series
Growth Opportunities Series
High Yield Series
International Equity Series
REIT Series
Select Growth Series
Small Cap Value Series
Social Awareness Series
Strategic Income Series
Trend Series
U.S. Growth Series
Important Information about all Series
Fund administration (Who's who) Page
Share classes
Purchase and redemption of shares
Valuation of shares
Dividends, distributions and taxes
</TABLE>
4
<PAGE>
Profile: Balanced Series (formerly Delaware Balanced Series)
What are the Series' goals?
Balanced Series seeks a balance of capital appreciation, income and preservation
of capital. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
We invest primarily in common stocks of established companies we believe have
the potential for long-term capital appreciation. In addition, we invest at
least 25% of the Series' assets in various types of fixed-income securities,
including U.S. government securities and corporate bonds. Funds with this mix of
stocks and bonds are commonly known as balanced funds.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines in
stock and bond prices, which can be caused by a drop in the stock or bond
market, an adverse change in interest rates or poor performance in specific
industries or companies. For a more complete discussion of risk, please turn to
"The risks of investing in Balanced Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for stocks and bonds combined in a single investment.
o Investors seeking a measure of capital preservation.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
5
<PAGE>
How has Balanced Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Balanced Series. We show how returns for Balanced Series have varied over the
past ten calendar years, as well as average annual returns for one, five and ten
years. The Series' past performance does not necessarily indicate how it will
perform in the future. The returns reflect applicable voluntary expense caps.
The returns would be lower without the voluntary caps. Moreover, the performance
presented does not reflect any separate account fees, which would reduce the
returns. Performance shown is based on the Class 1 shares of the Series, which
are offered through a separate prospectus and do not carry a 12b-1 fee.
Performance of Class 2 shares will be substantially similar to Class 1 shares
because the shares will be invested in the same portfolio of securities and will
differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Balanced Series)
Year-by-year total return
Balanced Series
1990 -0.18%
1991 26.59%
1992 13.85%
1993 8.18%
1994 -0.15%
1995 26.58%
1996 15.91%
1997 26.40%
1998 18.62%
1999 -7.85%
As of March 31, 2000, Balanced Series had a year-to-date return of [0.00%].
During the periods illustrated in this bar chart, Balanced Series' highest
quarterly return was [15.89%] for the quarter ended [December 31, 1998] and its
lowest quarterly return was [-12.93%] for the quarter ended [September 30,
1990.]
Average annual returns for periods ending 12/31/99
Balanced Series S&P 500 Lehman Brothers
Composite Stock Aggregate Bond Index
Price Index
1 year -7.85% [00.00%] [0.00%]
5 years 15.18% [00.00%] [0.00%]
10 years 12.16% [00.00%] [0.00%]
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index and the Lehman Brothers Aggregate Bond Index. The Standard &
Poor's 500 Composite Stock Price Index is an unmanaged index of 500 widely held
common stocks that is often used to represent performance of the U.S. stock
market. The Lehman Brothers Aggregate Bond Index is an index that measures the
performance of about 6,500 U.S. corporate and government bonds. Neither index is
a perfect comparison to Balanced Series since the S&P 500 Composite Stock Price
Index does not include fixed-income securities and the Lehman Brothers Aggregate
Bond Index does not include stocks. You should remember that unlike the Series,
the indexes are unmanaged and don't reflect the actual costs of operating a
mutual fund, such as the costs of buying, selling and holding securities.
6
<PAGE>
Profile: Capital Reserves Series
What are the Series' goals?
Capital Reserves Series seeks a high stable level of current income while
attempting to minimize fluctuations in principal and provide maximum liquidity.
Although the Series will strive to achieve its goal, there is no assurance that
it will.
What are the Series' main investment strategies?
Capital Reserves Series invests primarily in short- and intermediate-term
securities, including securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, instruments secured by U.S. government
securities and debt securities issued by U.S. corporations.
Capital Reserves Series is not a money market fund. A money market fund is
designed for stability of principal; consequently, the level of income
fluctuates. The Series is designed for greater stability of income at a
relatively higher level; consequently, the principal value will fluctuate over
time. The Series will attempt to provide investors with yields higher than those
available in money market vehicles by extending the average maturity of the
bonds in its portfolio beyond what is typically associated with money market
funds.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by adverse
changes in interest rates or, in the case of corporate bonds, by poor
performance in specific industries or companies. For a more complete discussion
of risk, please turn to "The risks of investing in Capital Reserves Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for relatively stable and high income flow.
o Investors looking for the security associated with a portfolio of high quality
fixed-income securities.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
7
<PAGE>
How has Capital Reserves Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Capital Reserves Series. We show how returns for Capital Reserves Series have
varied over the past ten calendar years, as well as average annual returns for
one, five and ten years. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns. Performance shown is based on the Class 1 shares
of the Series, which are offered through a separate prospectus and do not carry
a 12b-1 fee. Performance of Class 2 shares will be substantially similar to
Class 1 shares because the shares will be invested in the same portfolio of
securities and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Capital Reserves
Series)]
Year-by-year total return
Capital Reserves Series
1990 8.23%
1991 8.84%
1992 7.20%
1993 7.85%
1994 -2.68%
1995 14.08%
1996 4.05%
1997 7.60%
1998 6.78%
1999 [0.00%]
As of March 31, 2000, Capital Reserves Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Capital Reserves
Series' highest quarterly return was [4.35%] for the quarter ended [June 30,
1995] and its lowest quarterly return was [-2.21%] for the quarter ended [March
31, 1994].
Average annual returns for periods ending 12/31/99
Capital Reserves Lehman Brothers
Series Intermediate
Government Corporate
Index
1 year 0.28% [0.00%]
5 years 6.46% [0.00%]
10 years 6.13% [0.00%]
The Series returns are compared to the performance of the Lehman Brothers
Intermediate Government Corporate Index. Lehman Brothers Intermediate Government
Corporate Index is based on all publicly issued intermediate government and
corporate debt securities with an average maturity of 4 to 5 years. You should
remember that unlike the Series, the index is unmanaged and doesn't reflect the
actual costs of operating a mutual fund, such as the costs of buying, selling
and holding securities.
8
<PAGE>
Profile: Cash Reserve Series
What are the Series' goals?
Cash Reserve Series seeks to provide maximum current income, while preserving
principal and maintaining liquidity, by investing its assets in a diversified
portfolio of money market securities and managing the portfolio to maintain a
constant net asset value of $10 per share. Although the Series will strive to
achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
Cash Reserve Series invests primarily in short- term money market securities,
including securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities and short-term debt instruments of banks and corporations.
Cash Reserve Series is a money market fund. A money market fund is designed for
stability of principal; consequently, the level of income fluctuates.
We typically maintain an average maturity of 90 days or less. Also, we do not
purchase any instruments with an effective remaining maturity of more than 13
months. We intend to hold our investments until maturity, but we may sell them
prior to maturity in order to shorten or lengthen the average maturity of the
bonds in the portfolio, increase the yield, maintain the quality of the
portfolio or maintain a stable share value.
Cash Reserve Series uses the same investment strategy as Delaware Group Cash
Reserve, a separate fund in the Delaware Investments Family of Funds.
What are the main risks of investing in the Series?
Cash Reserve Series will be affected primarily by declines in interest rates
that would reduce the income provided by the Series. For a more complete
discussion of risk, please turn to "The risks of investing in Cash Reserve
Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the Series seeks to preserve the value of your
investment at $10 per share, it is possible to lose money by investing in the
Series.
Who should invest in the Series
o Investors with short-term financial goals.
o Investors who want to own an investment whose value may fluctuate over the
short term.
o Investors who are looking for a short-term, relatively safe investment to
complement more long-term investments in their portfolio.
Who should not invest in the Series
o Investors with long-term financial goals.
o Investors looking for relatively high income flow.
9
<PAGE>
How has Cash Reserve Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Cash Reserve Series. We show how returns for Cash Reserve Series have varied
over the past ten calendar years, as well as average annual returns for one,
five and ten years. The Series' past performance does not necessarily indicate
how it will perform in the future. The returns reflect applicable voluntary
expense caps. The returns would be lower without the voluntary caps. Moreover,
the performance presented does not reflect any separate account fees, which
would reduce the returns. Performance shown is based on the Class 1 shares of
the Series, which are offered through a separate prospectus and do not carry a
12b-1 fee. Performance of Class 2 shares will be substantially similar to Class
1 shares because the shares will be invested in the same portfolio of securities
and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Cash Reserve
Series)]
Year-by-year total return
Cash Reserve Series
1990 7.56%
1991 5.58%
1992 3.25%
1993 2.48%
1994 3.68%
1995 5.48%
1996 4.93%
1997 5.10%
1998 5.08%
1999 [0.00%]
As of March 31, 2000, Cash Reserve Series had a year-to-date return of [0.00%].
During the periods illustrated in this bar chart, Cash Reserve Series' highest
quarterly return was [2.22%] for the quarter ended [June 30, 1989] and its
lowest quarterly return was [0.58%] for the quarter ended [June 30, 1993.]
Average annual returns for periods ending 12/31/99
Cash Reserve Series
1 year 4.81%
5 years 5.08%
10 years 4.79%
10
<PAGE>
Profile: Convertible Securities Series
What are the Series' goals?
Convertible Securities Series seeks a high level of total return on its assets
through a combination of current income and capital appreciation. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security which may be converted into a
prescribed amount of common stock of the same or a different issuer at a
specified price or using a specified pricing formula. A convertible security
entitles the holder to receive interest paid on convertible debt or the dividend
paid on a preferred stock until the convertible security matures, is redeemed or
is converted.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines in
convertible securities prices, which can be caused by a drop in the stock or
bond market, an adverse change in interest rates or poor performance in specific
industries or companies. Convertible securities are often rated below investment
grade and, as a result, are subject to a higher credit risk that the issuer will
be unable to meet payments of interest and principal, particularly under adverse
economic conditions. For a more complete discussion of risk, please turn to "The
risks of investing in Convertible Securities Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for appreciation potential combined with the potential for
current income which could act as a cushion for the portfolio's performance.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
11
<PAGE>
How has Convertible Securities Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Convertible Securities Series. We show how returns for Convertible Securities
Series have varied over the past two calendar years, as well as average annual
returns for one year and since inception. The Series' past performance does not
necessarily indicate how it will perform in the future. The returns reflect
applicable voluntary expense caps. The returns would be lower without the
voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns. Performance shown is
based on the Class 1 shares of the Series, which are offered through a separate
prospectus and do not carry a 12b-1 fee. Performance of Class 2 shares will be
substantially similar to Class 1 shares because the shares will be invested in
the same portfolio of securities and will differ only to the extent of the Class
2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR-BY-YEAR TOTAL RETURN (Convertible
Securities Series)]
Year-by-year total return
Convertible Securities Series
1998 -1.17%
1999 [0.00%]
As of March 31, 2000, Convertible Securities Series had a year-to-date return of
[-0.00%]. During the periods illustrated in this bar chart, Convertible
Securities Series' highest quarterly return was [8.14%] for the quarter ended
[December 31, 1998] and its lowest quarterly return was [-10.65%] for the
quarter ended [September 30, 1998.]
Average annual returns for periods ending 12/31/99
Merrill Lynch
Convertible Convertible Securities
Securities Series Index
1 year [0.00%] [0.00%]
Since Inception [0.00%] [0.00%]
(5/1/97)
The Series returns are compared to the performance of the Merrill Lynch
Convertible Securities Index. The Merrill Lynch Convertible Securities Index is
an unmanaged index representative of the convertible securities market. You
should remember that unlike the Series, the index is unmanaged and doesn't
reflect the actual costs of operating a mutual fund, such as the costs of
buying, selling and holding securities.
12
<PAGE>
Profile: Devon Series
What are the Series' goals?
Devon Series seeks current income and capital appreciation. Although the Series
will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in income-producing common stocks. We focus on common stocks
that we believe have the potential for above-average dividend increases over
time.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be particularly affected by changes
in stock prices. Stock prices may be negatively affected by declines in the
stock market or poor performance in specific industries or companies. For a more
complete discussion of risk, please turn to "The risks of investing in Devon
Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking long-term capital appreciation.
o Investors seeking an investment primarily in common stocks.
Who should not invest in the Series
o Investors seeking an investment primarily in fixed-income securities.
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
13
<PAGE>
How has Devon Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Devon Series. We show how returns for Devon Series have varied over the past
two calendar years as well as average annual returns for one year and since
inception. The Series' past performance does not necessarily indicate how it
will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns. Performance shown is based on the Class 1 shares of
the Series, which are offered through a separate prospectus and do not carry a
12b-1 fee. Performance of Class 2 shares will be substantially similar to Class
1 shares because the shares will be invested in the same portfolio of securities
and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Devon Series)]
Year-by-year Total return
Devon Series
1998 24.05%
1999 [0.00%]
As of March 31, 2000, Devon Series had a year-to-date return of [-0.00%.] During
the periods illustrated in this bar chart, Devon Series' highest quarterly
return was [20.81%] for the quarter ended [December 31, 1998] and its lowest
quarterly return was [-8.19%] for the quarter ended [September 30, 1998.]
Average annual returns for periods ending 12/31/99
Devon Series S&P 500
Composite Stock
Price Index
1 year [0.00%] [00.00%]
Since Inception [0.00%] [00.00%]
(5/1/97)
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index. The S&P 500 Composite Stock Price Index is an unmanaged index
of 500 widely held common stocks that is often used to represent performance of
the U.S. stock market. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
14
<PAGE>
Profile: Emerging Markets Series
What are the Series' goals?
The Emerging Markets Series seeks long-term capital appreciation. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
The Series invests primarily in equity securities of issuers from emerging
foreign countries. Under normal market conditions, at least 65% of the Series'
total assets will be invested in equity securities of issuers from at least
three different countries whose economies are considered to be emerging or
developing.
We may invest up to 35% of the Series' net assets in fixed-income securities
issued by companies in emerging countries or by foreign governments, their
agents, instrumentalities or political sub-divisions. We may invest in
fixed-income securities that are denominated in the currencies of emerging
market countries. All of these may be high-yield, high risk fixed-income
securities.
In selecting investments for the Series,
o We strive to identify well managed companies that are undervalued based on
such factors as assets, earnings, dividends or growth potential.
o In order to compare the value of different stocks, we consider whether the
future dividends on a stock are expected to increase faster than, slower than,
or in line with the level of inflation. We then estimate what we think the
value of those anticipated future dividends would be worth if they were being
paid today. We believe this gives us an estimate of the stock's true value.
Because many of the countries in which the Series invests are emerging
countries, there may be less information available for us to use in making
this analysis than is available for more developed countries.
o We generally prefer to purchase securities in countries where the currency is
undervalued or fair-valued compared to other countries because these
securities may offer greater return potential. We attempt to determine whether
a particular currency is overvalued or undervalued by comparing the amount of
goods and services that a dollar will buy in the United States to the amount
of foreign currency required to buy the same amount of goods and services in
another country. When the dollar buys less, the foreign currency may be
overvalued, and when the dollar buys more, the foreign currency may be
undervalued.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
held in the Series' portfolio. These fluctuations can be even more pronounced
for funds like Emerging Markets Series, which invests in emerging countries.
This Series will be affected primarily by declines in stock prices, which can be
caused by a drop in foreign stock markets or poor performance in specific
industries or companies. The value of the Series' investments and, therefore,
the price of the Series' shares may be more volatile than investments in more
developed markets. Because the Series invests in international securities in
developing countries as well as established countries, it will be affected by
international investment risks related to currency valuations, political
instability, economic instability, or lax accounting and regulatory standards.
The Series may invest up to 35% of its net assets in high-yield, high risk
foreign fixed-income securities, which are subject to substantial risks,
particularly during periods of economic downturns or rising interest rates.
The Series is considered "non-diversified" under federal laws that regulate
mutual funds. Thus, adverse effects on the Fund's investments may affect a
larger portion of its overall assets and subject the Fund to greater risks. For
a more complete discussion of risk, please turn to "The risks of investing in
Emerging Markets Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
15
<PAGE>
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for a portfolio of securities of emerging markets which may
offer high return potential but can be substantially more risky than
investments in either the U.S. or established foreign countries.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly, over the short term.
o Investors who do not understand or are unwilling to accept the significant
risks associated with investing in emerging markets.
16
<PAGE>
How has Emerging Markets Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Emerging Markets Series. We show how returns for Emerging Markets Series have
varied over the past two calendar years, as well as average annual returns for
one year and since inception. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns. Performance shown is based on the Class 1 shares
of the Series, which are offered through a separate prospectus and do not carry
a 12b-1 fee. Performance of Class 2 shares will be substantially similar to
Class 1 shares because the shares will be invested in the same portfolio of
securities and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Emerging Markets
Series)]
Year-by-Year total return (Emerging Markets Series)
Emerging Markets Series
1998 -32.48%
1999 48.28%
As of March 31, 2000, Emerging Markets Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Emerging Markets
Series highest quarterly return was [7.61%] for the quarter ended [March 31,
1998] and its lowest quarterly return was [-22.25%] for the quarter ended [June
30, 1998.]
Average annual returns for periods ending 12/31/99
Emerging Markets Morgan Stanley
Series International
Emerging Markets
Free Index
1 year 48.28% [00.00%]
Since inception -4.31% [00.00%]
(5/1/97)
The Series returns are compared to the performance of the Morgan Stanley
International Emerging Markets Free Index. The Morgan Stanley International
Emerging Markets Free Index is a U.S. dollar dominated index comprised of stocks
of countries with below average per capita GDP as defined by the World Bank,
foreign ownership restrictions, a tax regulatory environment, and greater
perceived market risk than in the developed countries. Within this index, MSCI
aims to capture an aggregate of 60% of local market capitalization. You should
remember that unlike the Series, the index is unmanaged and doesn't reflect the
actual costs of operating a mutual fund, such as the costs of buying, selling
and holding securities.
17
<PAGE>
Profile: Global Bond Series
What are the Series' goals?
Global Bond Series seeks current income consistent with preservation of
principal. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
The Series invests primarily in fixed-income securities that may also provide
the potential for capital appreciation. The Series is a global fund. Therefore,
at least 65% of the Series' total assets will be invested in fixed-income
securities of issuers from at least three different countries, one of which may
be the United States. An issuer is considered to be from the country where it is
located, where the majority of its assets are or where it generates the majority
of its operating income.
In selecting investments for the Series,
o We strive to identify fixed-income securities that provide high income
potential.
o In order to compare the value of different fixed-income securities, even those
issued in different countries, we look at the value of anticipated future
interest and principal payments, taking into consideration what we think the
inflation rate in that country will be. We then estimate what we think the
value of those anticipated future payments would be worth if they were being
paid today. We believe this gives us an estimate of a bond's true value.
o We generally prefer to purchase securities in countries where the currency is
undervalued or fair-valued compared to other countries because these
securities may offer greater return potential. We attempt to determine whether
a particular currency is overvalued or undervalued by comparing the amount of
goods and services that a dollar will buy in the United States to the amount
of foreign currency required to buy the same amount of goods and services in
another country. When the dollar buys less, the foreign currency may be
overvalued, and when the dollar buys more, the foreign currency may be
undervalued.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
held in the Series' portfolio. These fluctuations can be even more pronounced
for funds like Global Bond Series, which invests in developing countries. The
Series' investments normally decrease when there are declines in bond prices,
which can be caused by a drop in the bond market, an adverse change in interest
rates or an adverse situation affecting the issuer of the bond. Because the
Series invests in international securities in both established and developing
countries, it will be affected by international investment risks related to
currency valuations, political instability, economic instability, or lax
accounting and regulatory standards. The Series may invest in high-yield, high
risk foreign fixed-income securities, which are subject to substantial risks,
particularly during periods of economic downturns or rising interest rates.
The Series is considered "non-diversified" under federal laws that regulate
mutual funds. Thus, adverse effects on the Series' investments may affect a
larger portion of its overall assets and subject the Series to greater risks.
For a more complete discussion of risk, please turn to "The risks of investing
in Global Bond Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for a portfolio that includes both U.S. and foreign
fixed-income securities.
o Investors seeking a measure of capital appreciation.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept risks of investing in foreign
fixed-income securities.
18
<PAGE>
How has Global Bond Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Global Bond Series. We show how returns varied for Global Bond Series for the
past three calendar years, as well as average annual returns for one year and
since inception. The Series' past performance does not necessarily indicate how
it will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns. Performance shown is based on the Class 1 shares of the
Series, which are offered through a separate prospectus and do not carry a 12b-1
fee. Performance of Class 2 shares will be substantially similar to Class 1
shares because the shares will be invested in the same portfolio of securities
and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Global Bond
Series)]
Year-by-year total return (Global Bond Series)
Global Bond Series
1997 0.88%
1998 7.82%
1999 -3.60%
As of March 31, 2000, Global Bond Series had a year-to-date return of [0.00%].
During the periods illustrated in this bar chart, Global Bond Series' highest
quarterly return was [4.25%] for the quarter ended [September 30, 1998] and its
lowest quarterly return was [-3.07%] for the quarter ended [March 31, 1997.]
Average annual returns for periods ending 12/31/99
Salomon Smith
Barney World
Global Bond Series Government Bond
Index
1 year -3.60% [00.00%]
Since inception
(5/2/96) 4.43% [0.00%]
The Series returns are compared to the performance of the Salomon Smith Barney
World Government Bond Index. Salomon Smith Barney World Government Bond Index is
a market-capitalization weighted benchmark that tracks the performance of the 18
Government bond markets of Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal,
Spain, Sweden, Switzerland, the United Kingdom, and the United States. You
should remember that unlike the Series, the index is unmanaged and doesn't
reflect the actual costs of operating a mutual fund, such as the costs of
buying, selling and holding securities.
19
<PAGE>
Profile: Growth and Income Series
What are the Series' goals?
The 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. Although the Series will strive
to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in dividend-paying stocks of large, well-established
companies. Typically, we consider buying a stock when its dividend yield is
higher than the average of the unmanaged S&P 500 Composite Stock Price Index.
The manager then considers the financial strength of the company, the nature of
its management and any developments affecting the security, the company or its
industry. If the yield on a stock already in the portfolio falls below the
average of the S&P 500 Index, we generally sell that stock.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices, which could be caused by a drop in the stock market or poor performance
from particular companies or industries. For a more complete discussion of risk,
please turn to "The risks of investing in Growth and Income Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking long-term capital appreciation.
o Investors seeking an investment primarily in common stocks.
o Investors seeking moderate quarterly income with the opportunity for inflation
protection.
Who should not invest in the Series
o Investors seeking an investment primarily in fixed-income securities.
o Investors with short-term financial goals.
o Investors who are unwilling to accept that the value of their investment may
fluctuate, sometimes significantly over the short term.
20
<PAGE>
How has Growth and Income Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Growth and Income Series. We show how returns for Growth and Income Series
have varied over the past ten calendar years, as well as average annual returns
for one, five and ten years. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns. Performance shown is based on the Class 1 shares
of the Series, which are offered through a separate prospectus and do not carry
a 12b-1 fee. Performance of Class 2 shares will be substantially similar to
Class 1 shares because the shares will be invested in the same portfolio of
securities and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Growth and Income
Series)]
Year-by-year total return
Growth and Income Series
1990 -13.31%
1991 22.32%
1992 8.83%
1993 15.45%
1994 -0.20%
1995 36.12%
1996 20.72%
1997 31.00%
1998 11.35%
1999 -2.98%
As of March 31, 2000, Growth and Income Series had a year-to-date return of
[-0.00%.] During the periods illustrated in this bar chart, Growth and Income
Series' highest quarterly return was [13.46%] for the quarter ended [December
31, 1998] and its lowest quarterly return was [-15.79%] for the quarter ended
[September 30, 1990.]
Average annual return for periods ending 12/31/99
Growth and Income S&P 500 Composite
Series Stock Price Index
1 year -2.98% [00.00%]
5 years 18.39% [00.00%]
10 years 11.95% [00.00%]
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index. The S&P 500 Composite Stock Price Index is an unmanaged index
of 500 widely held common stocks that is often used to represent performance of
the U.S. stock market. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
21
<PAGE>
Profile: Growth Opportunities Series (formerly DelCap Series)
What are the Series' goals?
Growth Opportunities Series seeks long-term capital appreciation. Although the
Series will strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in common stocks of medium-size companies. These are
generally considered to be stocks with market capitalizations between $2 billion
and $10 billion. We may also invest in securities that are convertible into
common stock. In selecting stocks for the portfolio, we typically look for
companies that have established themselves within their industry, but still have
growth potential.
We use a bottom-up approach to select stocks, evaluating individual companies
rather than trends in the economy or the investment markets. Researching each
company, its products, services, competitors and management team helps us to
select stocks of companies that we think will provide high and consistent
earnings growth with a reasonable level of risk.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Growth Opportunities Series' portfolio. This Series will be affected by
declines in stock prices, which could be caused by a drop in the stock market or
poor performance from particular companies or industries. In addition, Growth
Opportunities Series invests in medium-size or small companies. These companies
may involve greater risk due to their size, narrow product lines and limited
financial resources. For a more complete discussion of risk, please turn to "The
risks of investing in Growth Opportunities Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
medium-sized, growth oriented companies.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
22
<PAGE>
How has Growth Opportunities Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Growth Opportunities Series. We show how returns for Growth Opportunities
Series have varied over the past eight calendar years, as well as average annual
returns for one and five years and since inception. The Series' past performance
does not necessarily indicate how it will perform in the future. The returns
reflect applicable voluntary expense caps. The returns would be lower without
the voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns. Performance shown is
based on the Class 1 shares of the Series, which are offered through a separate
prospectus and do not carry a 12b-1 fee. Performance of Class 2 shares will be
substantially similar to Class 1 shares because the shares will be invested in
the same portfolio of securities and will differ only to the extent of the Class
2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Growth
Opportunities Series)]
Year-by-year total return
Growth Opportunities
Series
1992 1.99%
1993 11.56%
1994 -3.54%
1995 29.53%
1996 14.46%
1997 14.90%
1998 18.81%
1999 [0.00%]
As of March 31, 2000, Growth Opportunities Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Growth Opportunities
Series' highest quarterly return was [24.58%] for the quarter ended December 31,
1998 and its lowest quarterly return was [-16.07%] for the quarter ended
[September 30, 1998.]
Average annual returns for periods ending 12/31/99
Growth Opportunities Russell 2000 Index Russell Midcap
Series Growth Index
1 year [0.00%] [0.00%] [0.00%]
5 years [0.00%] [0.00%] [0.00%]
Since Inception [0.00%] [0.00%] [0.00%]
(7/12/91)
The Series returns are compared to the performance of the Russell 2000 Index and
the Russell Midcap Growth Index. The Russell 2000 Index measures the performance
of the 2000 smallest companies in the Russell 3000 Index. Russell Midcap Growth
Index contains Russell Midcap (800) securities with a greater-than-average
growth orientation. Companies in this index tend to exhibit higher price-to-book
and price-earnings ratios, lower dividend yields and higher forecasted growth
values than the value universe. You should remember that unlike the Series, the
index is unmanaged and doesn't reflect the actual costs of operating a mutual
fund, such as the costs of buying, selling and holding securities.
23
<PAGE>
Profile: High Yield Series (formerly Delchester Series)
What are the Series' goals?
High Yield seeks total return and, as a secondary objective, high current
income. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
We invest primarily in corporate bonds rated BB or lower by S&P or similarly
rated by another NRSO. These are commonly known as high-yield bonds or junk
bonds and involve greater risks than investment grade bonds. The Series will
also invest in unrated bonds we judge to be of comparable quality. Unrated bonds
may be more speculative in nature than rated bonds. The Series may also invest
in U.S. and foreign government securities and corporate bonds of foreign
issuers. In selecting bonds for the portfolio, we evaluate the income provided
by the bond and the bond's appreciation potential as well as the issuer's
ability to make income and principal payments.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Fund will be affected primarily by declines in
bond prices, which can be caused by adverse changes in interest rates, adverse
economic conditions or poor performance from specific industries or bond
issuers. High-yield bonds are rated below investment grade and are subject to
greater risk that the issuer will be unable to make payments on interest and
principal. Bonds of foreign issuers are also subject to certain risks such as
political and economic instability, currency fluctuations and less stringent
regulatory standards. For a more complete discussion of risk, please turn to
"The risks of investing in High Yield Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking a fixed-income investment that offers a combination
of total return with high current income.
o Investors who want a total return-oriented income investment as a
diversification tool for long-term, equity-oriented portfolios.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may
fluctuate, sometimes significantly, over the short term.
24
<PAGE>
How has High Yield Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in High Yield Series. We show how returns for High Yield Series have varied over
the past ten calendar years, as well as average annual returns for one, five and
ten years. The Series' past performance does not necessarily indicate how it
will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns. On ________, 2000, the Series' name was changed from
Delchester Series 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. Performance shown is based on the Class 1 shares of the
Series, which are offered through a separate prospectus and do not carry a 12b-1
fee. Performance of Class 2 shares will be substantially similar to Class 1
shares because the shares will be invested in the same portfolio of securities
and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (High Yield
Series)]
Year-by-year total return
High Yield Series
1990 -7.13%
1991 37.54%
1992 13.44%
1993 16.36%
1994 -2.87%
1995 15.50%
1996 12.79%
1997 13.63%
1998 -1.83%
1999 -2.64%
As of March 31, 2000, High Yield Series had a year-to-date return of [0.00%.]
During the periods illustrated in this bar chart, High Yield Series' highest
quarterly return was [15.95%] for the quarter ended [March 31, 1991] and its
lowest quarterly return was [-7.20%] for the quarter ended [September 30, 1998.]
Average annual returns for periods ending 12/31/99
Salomon Smith
Barney Cash Pay
High Yield Series High-Yield Index
1 year -2.64% [0.00%]
5 years 7.19% [0.00%]
10 years 8.37% [00.00%]
The Series returns are compared to the performance of the Salomon Smith Barney
Cash Pay High-Yield Index. The Salomon Smith Barney Cash Pay High-Yield Index
includes a mix of non-investment grade corporate bonds that pay cash interest,
it excludes both corporate bonds that pay deferred-interest and bankrupt bonds.
You should remember that unlike the Series, the index is unmanaged and doesn't
reflect the actual costs of operating a mutual fund, such as the costs of
buying, selling and holding securities.
25
<PAGE>
Profile: International Equity Series
What are the Series' goals?
The International Equity Series seeks long-term growth without undue risk to
principal. Although the Series will strive to achieve its goal, there is no
assurance that it will.
What are the Series' main investment strategies?
The Series invests primarily in foreign equity securities that provide the
potential for capital appreciation and income. At least 65% of the Series' total
assets will be invested in equity securities of issuers from at least three
foreign countries. An issuer is considered to be from the country where it is
located, where the majority of its assets are located or where it generates the
majority of its operating income.
In selecting investments for the Series,
o We strive to identify well managed companies that are undervalued based on
such factors as assets, earnings, dividends or growth potential.
o In order to compare the value of different stocks, we consider whether the
future dividends on a stock are expected to increase faster than, slower
than, or in line with the level of inflation. We then estimate what we
think the value of those anticipated future dividends would be worth if
they were being paid today. We believe this gives us an estimate of the
stock's true value.
o We generally prefer to purchase securities in countries where the currency
is undervalued or fair-valued compared to other countries because these
securities may offer greater return potential. We attempt to determine
whether a particular currency is overvalued or undervalued by comparing the
amount of goods and services that a dollar will buy in the United States to
the amount of foreign currency required to buy the same amount of goods and
services in another country. When the dollar buys less, the foreign
currency may be overvalued, and when the dollar buys more, the foreign
currency may be undervalued.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines in
stock prices, which can be caused by a drop in foreign stock markets or poor
performance in specific industries or companies. Because the Series invests in
international securities in both established and developing countries, it will
be affected by international investment risks related to currency valuations,
political instability, economic instability, and lax accounting and regulatory
standards. For a more complete discussion of risk, please turn to "The risks of
investing in International Equity Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals
o Investors looking for a portfolio of equity securities from foreign
countries.
o Investors seeking a measure of capital appreciation and income.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept the risks of investing in foreign
securities.
o Investors looking for an investment that provides a high level of
income.
26
<PAGE>
How has International Equity Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in International Equity Series. We show how returns for International Equity
Series have varied over the past seven calendar years, as well as average annual
returns for one and five years and since inception. The Series' past performance
does not necessarily indicate how it will perform in the future. The returns
reflect applicable voluntary expense caps. The returns would be lower without
the voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns. Performance shown is
based on the Class 1 shares of the Series, which are offered through a separate
prospectus and do not carry a 12b-1 fee. Performance of Class 2 shares will be
substantially similar to Class 1 shares because the shares will be invested in
the same portfolio of securities and will differ only to the extent of the Class
2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (International
Equity Series)]
Year-by-year total return
International Equity Series
1993 15.97%
1994 2.57%
1995 13.98%
1996 20.03%
1997 6.60%
1998 10.33%
1999 15.76%
As of March 31, 2000, International Equity Series had a year-to-date return of
[0.00%.] During the periods illustrated in this bar chart, International Equity
Series' highest quarterly return was [14.44%] for the quarter ended [December
31, 1998] and its lowest quarterly return was [-14.24%] for the quarter ended
[September 30, 1998.]
Average annual returns for period ending 12/31/99
International Equity Morgan Stanley Capital
Series International EAFE (Europe,
Australia, Far East) Index
1 year 15.76% [00.00%]
5 years 13.24% [0.00%]
Since inception
(10/29/92) 11.77% [00.00%]
The Series returns are compared to the performance of the Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) Index. Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) Index is an international index
including stocks traded on 16 exchanges in Europe, Australia and the Far East,
weighted by capitalization. You should remember that unlike the Series, the
index is unmanaged and doesn't reflect the actual costs of operating a mutual
fund, such as the costs of buying, selling and holding securities.
27
<PAGE>
Profile: REIT Series
What are the Series' Goals?
The REIT Series seeks maximum long-term total return, with capital appreciation
as a secondary objective. Although the Series will strive to achieve its goal,
there is no assurance that it will.
What are the Series' main investment strategies?
The REIT Series invests in securities of companies principally engaged in the
real estate industry. Under normal circumstances, we will invest at least 65% of
the Series' total assets in equity securities of real estate investment trusts,
commonly known as REITs. The REIT Series is considered "non-diversified" under
the federal laws and regulations that regulate mutual funds. That means that
with respect to 50% of its assets, the Series may invest more than 5% of net
assets in a single security. Thus, adverse effects on an investment held by the
Series may affect a larger portion of overall assets and subject the Series to
greater risks.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the REIT
Series will increase and decrease according to changes in the value of the
securities held in the portfolio. The Series' value and yields will fluctuate in
response to movements in stock prices.
Because we concentrate our investments in the real estate industry, the Series
may be subject to certain risks associated with direct ownership of real estate
and with the real estate industry in general. See "The risks of investing in
REIT Series" for further information about these and other risks.
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Series is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Series with your financial adviser to
determine whether it is an appropriate investment for you.
Who should invest in the Series
o Investors seeking a high level of total return.
o Investors willing to invest in equity securities of companies
principally engaged in the real estate industry.
o Investors looking to diversify their equity holdings by adding exposure
to the real estate markets.
Who should not invest in the Series
o Investors seeking current income.
o Investors unwilling to accept the risks of investing in the real estate
industry as well as in a non-diversified fund.
o Investors who are unwilling to accept that the value of their
investment may fluctuate, sometimes significantly, over the short term.
28
<PAGE>
How has REIT Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in REIT Series. We show returns for REIT Series for the past calendar year, as
well as average annual returns for one year and since inception. The Series'
past performance does not necessarily indicate how it will perform in the
future. The returns reflect applicable voluntary expense caps. The returns would
be lower without the voluntary caps. Moreover, the performance presented does
not reflect any separate account fees, which would reduce the returns.
Performance shown is based on the Class 1 shares of the Series, which are
offered through a separate prospectus and do not carry a 12b-1 fee. Performance
of Class 2 shares will be substantially similar to Class 1 shares because the
shares will be invested in the same portfolio of securities and will differ only
to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (REIT Series)]
Total return
REIT Series
1999
As of March 31, 2000, REIT Series had a year-to-date return of [-0.00%.] During
the periods illustrated in this bar chart, REIT Series' highest quarterly return
was [00.00%] for the quarter ended [___________, 1999] and its lowest quarterly
return was [0.00%] for the quarter ended [____________, 1999.]
Average annual return for period ending 12/31/99
REIT NAREIT Equity REIT
Index
1 year [0.00%] [0.00%]
Since inception [0.00%] [0.00%]
(5/4/98)
The Series returns are compared to the performance of the NAREIT Equity REIT
Index. The NAREIT Equity REIT Index is a benchmark of real estate investment
trusts that invest in many types of U.S. property. You should remember that
unlike the Series, the index is unmanaged and doesn't reflect the actual costs
of operating a mutual fund, such as the costs of buying, selling and holding
securities.
29
<PAGE>
Profile: Select Growth Series (formerly Aggressive Growth Series)
What are the Series' goals?
Select Growth Series seeks long-term capital appreciation. Although the Series
will strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in common stocks of companies that we believe have the
potential for high earnings growth based on our analysis of their historic or
projected earnings growth rate, price to earnings ratio and cash flows. We
consider companies of any size, as long as they are larger than $300 million in
market capitalization. We look for companies that are undervalued, but still
have the potential for high earnings growth.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices. The Series may be subject to greater investment risk than assumed by
other funds because the companies the Series invests in are subject to greater
changes in earnings and business prospects than companies with more earnings
patterns. For a more complete discussion of risk, please turn to "The risks of
investing in Select Growth Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities across
a broad range of industry sectors and company sizes.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
30
<PAGE>
Profile: Small Cap Value Series
What are the Series' goals?
Small Cap Value Series seeks capital appreciation. Although the Series will
strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of small companies whose stock prices appear low
relative to their underlying value or future potential. Among other factors, we
consider the financial strength of a company, its management, the prospects for
its industry and any anticipated changes within the company, which might suggest
a more favorable outlook going forward.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices. In addition, the companies that Small Cap Value Series invests in may
involve greater risk due to their size, narrow product lines and limited
financial resources. For a more complete discussion of risk, please turn to "The
risks of investing in Small Cap Value Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
small companies.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
31
<PAGE>
How has Small Cap Value Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Small Cap Value Series. We show how returns for Small Cap Value Series have
varied over the past six calendar years, as well as average annual returns for
one and five years and since inception. The Series' past performance does not
necessarily indicate how it will perform in the future. The returns reflect
applicable voluntary expense caps. The returns would be lower without the
voluntary caps. Moreover, the performance presented does not reflect any
separate account fees, which would reduce the returns. Performance shown is
based on the Class 1 shares of the Series, which are offered through a separate
prospectus and do not carry a 12b-1 fee. Performance of Class 2 shares will be
substantially similar to Class 1 shares because the shares will be invested in
the same portfolio of securities and will differ only to the extent of the Class
2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Small Cap Value
Series)]
Year-by-year total return
Small Cap Value Series
1994 0.78%
1995 23.85%
1996 22.55%
1997 32.91%
1998 -4.79%
1999 -4.86%
As of March 31, 2000, Small Cap Value Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Small Cap Value
Series' highest quarterly return was [12.59%] for the quarter ended [December
31, 1998] and its lowest quarterly return was [-16.13%] for the quarter ended
[September 30, 1998.]
Average annual returns for period ending 12/31/99
Small Cap Value Series Russell 2000 Index
1 year -4.86% [0.00%]
5 years 12.81% [0.00%]
Since inception
(12/27/93) 11.07% [0.00%]
The Series returns are compared to the performance of the Russell 2000 Index.
The Russell 2000 Index measures the performance of the 2000 smallest companies
in the Russell 3000 Index. You should remember that unlike the Series, the index
is unmanaged and doesn't reflect the actual costs of operating a mutual fund,
such as the costs of buying, selling and holding securities.
32
<PAGE>
Profile: Social Awareness Series
What is the Series' goal?
Social Awareness Series seeks long-term capital appreciation. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of medium to large-sized companies that meet
certain socially responsible criteria and which we expect to grow over time. Our
socially responsible criteria exclude companies that:
o engage in activities likely to result in damage to the natural
environment
o produce nuclear power, design or construct nuclear power plants or
manufacture equipment for the production of nuclear power
o manufacture or contract for military weapons
o are in the liquor, tobacco or gambling industries
o conduct animal testing for cosmetic or personal care products.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of an investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices, which can be caused by a drop in the stock market or poor performance in
specific industries or companies. Because the Series avoids certain companies
not considered socially responsible, it could miss out on strong performance
from those companies. For a more complete discussion of risk, please turn to
"The risks of investing in Social Awareness Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for capital growth potential.
o Investors who would like an investment that incorporates social
responsibility into its security selection process.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly, over the short term.
o Investors whose primary goal is to receive current income.
33
<PAGE>
How has Social Awareness Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Social Awareness Series. We show how returns for Social Awareness Series have
varied over the past two calendar years, as well as average annual returns for
one year and since inception. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns. Performance shown is based on the Class 1 shares
of the Series, which are offered through a separate prospectus and do not carry
a 12b-1 fee. Performance of Class 2 shares will be substantially similar to
Class 1 shares because the shares will be invested in the same portfolio of
securities and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Social Awareness
Series)]
Year-by-year total return
Social Awareness Series
1998 15.45%
1999 [0.00%]
As of March 31, 2000, Social Awareness Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Social Awareness
Series' highest return was [21.45%] for the quarter ended [December 31, 1998]
and its lowest quarterly return was [-17.21%] for the quarter ended [September
30, 1998.]
Average annual returns for periods ending 12/31/99
Social Awareness S&P 500 Composite
Series Stock Price Index
1 year [0.00%] [00.00%]
Since Inception [0.00%] [00.00%]
(5/1/97)
The Series returns are compared to the performance of the S&P 500 Composite
Stock Price Index. The S&P 500 Composite Stock Price Index is an unmanaged index
of 500 widely held common stocks that is often used to represent performance of
the U.S. stock market. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
34
<PAGE>
Profile: Strategic Income Series
What are the Series' goals?
Strategic Income Series seeks high current income and total return. Although the
Series will strive to achieve its goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in bonds allocated among three sectors of the fixed-income
market. These include:
o the High-Yield Sector, consisting of high-yielding, higher risk,
lower-rated or unrated fixed-income securities that we believe to be
similarly rated issued by U.S. companies. (These involve higher risks and
are commonly known as junk bonds).
o the Investment Grade Sector, consisting of investment grade debt
obligations of U.S. companies and those issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or by U.S. companies.
o the International Sector, consisting of obligations of foreign governments,
their agencies and instrumentalities, and other fixed-income securities of
issuers in foreign countries and denominated in foreign currencies. (An
issuer is considered to be from the country where it is located, where the
majority of its assets are or where it generates the majority of its
operating income.)
We determine the amount of the Series' assets that will be allocated to each of
the three sectors based on our analysis of economic and market conditions and
our assessment of the returns and potential for appreciation from each sector.
We will periodically reallocate the Series' assets.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected primarily by declines
bond prices, which can be caused by an adverse change in interest rates, adverse
economic conditions or poor performance from specific industries or bond
issuers. The Series is also subject to the special risks associated with
high-yield bond investing and with foreign investing. In particular, high-yield
bonds are rated below investment grade and are subject to a higher risk that
issuers will be unable to make interest or principal payments, particularly
under adverse economic conditions. For a more complete discussion of risk,
please turn to "The risks of investing in Strategic Income Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for an investment that offers professional allocation
among key types of fixed-income securities.
o Investors looking for a fixed-income investment that offers potential for
high current income and total return.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to own an investment whose value may fluctuate,
sometimes significantly, over the short term.
35
<PAGE>
How has Strategic Income Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Strategic Income Series. We show how returns for Strategic Income Series have
varied over the past two calendar years, as well as average annual returns for
one year and since inception. The Series' past performance does not necessarily
indicate how it will perform in the future. The returns reflect applicable
voluntary expense caps. The returns would be lower without the voluntary caps.
Moreover, the performance presented does not reflect any separate account fees,
which would reduce the returns. Performance shown is based on the Class 1 shares
of the Series, which are offered through a separate prospectus and do not carry
a 12b-1 fee. Performance of Class 2 shares will be substantially similar to
Class 1 shares because the shares will be invested in the same portfolio of
securities and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Strategic Income
Series)]
Year-by-year total return
Strategic Income Series
1998 2.63%
1999 [0.00%]
As of March 31, 2000, Strategic Income Series had a year-to-date return of
[0.00%]. During the periods illustrated in this bar chart, Strategic Income
Series' highest quarterly return was [2.05%] for the quarter ended [March 31,
1998] and its lowest quarterly return was [-0.95%] for the quarter ended
September 30, 1998.
Average annual returns for periods ending 12/31/99
Strategic Income Lehman Brothers
Series Aggregate Bond Index
1 year [0.00%] [0.00%]
Since Inception [0.00%] [0.00%]
(5/1/97)
The Series returns are compared to the performance of the Lehman Brothers
Aggregate Bond Index. Lehman Brothers Aggregate Bond Index is comprised of
approximately 6000 publicly traded bonds including U.S. government,
mortgage-backed, corporate and Yankee bonds with an average maturity of
approximately 10 years. The index is weighted by the market value of the bonds
weighted in the index. You should remember that unlike the Series, the index is
unmanaged and doesn't reflect the actual costs of operating a mutual fund, such
as the costs of buying, selling and holding securities.
36
<PAGE>
Profile: Trend Series
What are the Series' goals?
Trend Series seeks long-term capital appreciation. Although the Series will
strive to meet its goals, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of small, growth-oriented or emerging companies
that we believe are responsive to changes within the marketplace and which we
believe have the fundamental characteristics to support continued growth.
The Fund uses a bottom-up approach to stock selection that seeks market leaders,
strong product cycles, innovative concepts and industry trends. We look at
price-to-earnings ratios, estimated growth rates, market capitalization and
cashflow as we strive to determine how attractive a company is relative to other
companies.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The value of your investment in the Series
will increase and decrease according to changes in the value of the securities
in the Series' portfolio. This Series will be affected by declines in stock
prices. In addition, the companies that Trend Series invests in may involve
greater risk due to their size, narrow product lines and limited financial
resources. For a more complete discussion of risk, please turn to "The risks of
investing in Trend Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors seeking an investment primarily in common stocks.
o Investors seeking exposure to the capital appreciation opportunities of
small, growth-oriented companies.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors whose primary goal is current income.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly over the short term.
37
<PAGE>
How has Trend Series performed?
This bar chart and table can help you evaluate the potential risks of investing
in Trend Series. We show how returns for Trend Series have varied over the past
six calendar years, as well as average annual returns for one and five years and
since inception. The Series' past performance does not necessarily indicate how
it will perform in the future. The returns reflect applicable voluntary expense
caps. The returns would be lower without the voluntary caps. Moreover, the
performance presented does not reflect any separate account fees, which would
reduce the returns. Performance shown is based on the Class 1 shares of the
Series, which are offered through a separate prospectus and do not carry a 12b-1
fee. Performance of Class 2 shares will be substantially similar to Class 1
shares because the shares will be invested in the same portfolio of securities
and will differ only to the extent of the Class 2 12b-1 fee.
[GRAPHIC OMITTED: BAR CHART SHOWING YEAR BY YEAR TOTAL RETURN (Trend Series)]
Year-by-year total return
Trend Series
1994 -0.39%
1995 39.21%
1996 11.00%
1997 21.37%
1998 16.04%
1999 70.45%
As of March 31, 2000, Trend Series had a year-to-date return of [0.00%]. During
the periods illustrated in this bar chart, Trend Series' highest quarterly
return was [23.75%] for the quarter ended [December 31, 1998] and its lowest
quarterly return was [-15.51%] for the quarter ended [September 30, 1998.]
Average annual returns for period ending 12/31/99
Trend Series Russell 2000 Growth Index
1 year 70.45% 0.00%
5 years 29.97% 00.00%
Since inception
(12/27/93) 24.68% 00.00%
The Series returns are compared to the performance of the Russell 2000 Growth
Index. The Russell 2000 Growth Index measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth
values. You should remember that unlike the Series, the index is unmanaged and
doesn't reflect the actual costs of operating a mutual fund, such as the costs
of buying, selling and holding securities.
38
<PAGE>
Profile: U.S. Growth Series
What is the Series' goal?
U.S. Growth Series seeks to maximize capital appreciation. Although the Series
will strive to achieve its investment goal, there is no assurance that it will.
What are the Series' main investment strategies?
We invest primarily in stocks of companies of all sizes. We look for stocks with
low dividend yields, strong balance sheets and high expected earnings growth
rates as compared to other companies in the same industry. Our strategy is to
identify companies whose earnings are expected to grow faster than the U.S.
economy in general. Whether companies provide dividend income and how much
income they provide will not be a primary factor in the Series' selection
decisions.
What are the main risks of investing in the Series?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The price of Series shares will increase
and decrease according to changes in the value of the Series' investments. This
Series will be particularly affected by changes in stock prices, which tend to
fluctuate more than bond prices. Stock prices may be negatively affected by
declines in the stock market or poor performance in specific industries or
companies. Stocks of companies with high growth expectations may be more
susceptible to price declines if they do not meet those high expectations. For a
more complete discussion of risk, please turn to "The risks of investing in the
Series."
An investment in the Series is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Series is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Series with your financial adviser to
determine whether it is an appropriate choice for you.
Who should invest in the Series
o Investors with long-term financial goals.
o Investors looking for capital growth potential.
o Investors looking for a fund that can be a complement to income-producing
or value-oriented investments.
Who should not invest in the Series
o Investors with short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
sometimes significantly, over the short term.
o Investors whose primary goal is to receive current income.
39
<PAGE>
Information about individual Series
Balanced Series
Our investment strategies
Balanced Series is a type of total return fund that invests in both stocks and
bonds to pursue a three-pronged investment objective: capital appreciation,
current income and preservation of principal. We blend several investment
strategies to manage this Series.
Balanced Series uses the same investment strategy as Delaware Balanced Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
We seek capital appreciation by investing primarily in common stocks of
companies we believe have:
o Reasonably priced equity securities with strong, consistent and predictable
earnings growth rates.
o Strong, capable management teams and competitive products or services.
o An attractive debt to capitalization ratio or strong cash flow.
To seek current income and help preserve capital, we generally invest at least
25% of the Series' net assets in various types of fixed-income securities,
including U.S. government and government agency securities and corporate bonds.
Each bond in the portfolio will have a maturity between five and 30 years, and
the average maturity of the portfolio will typically be between five and ten
years.
We conduct ongoing analysis of the different markets to determine the
appropriate mix of stocks and bonds for the current economic and investment
environment.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
40
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Balanced Series
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common stocks: Securities that represent shares of Generally, we invest up to 75% of net assets in common stocks.
ownership in a corporation. Stockholders
participate in the corporation's profits and
losses, proportionate to the number of shares they
own.
- -------------------------------------------------------------------------------------------------------------------------------
Convertible securities: Usually preferred stocks The Series may invest in convertible securities; however, we will
or corporate bonds that can be exchanged for a set not invest more than 10% of the net assets of the Series in
number of shares of common stock at a convertible securities that are rated below investment grade by
predetermined price. These securities offer higher an NRSRO or in securities that are unrated but deemed equivalent
appreciation potential than nonconvertible bonds to non-investment grade.
and greater income potential than nonconvertible
preferred stocks.
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities: Fixed-income There is no limit on government-related mortgage-backed
securities that represent pools of mortgages, with securities or on fully collateralized privately issued
investors receiving principal and interest mortgage-backed securities.
payments as the underlying mortgage loans are paid
back. Many are issued and guaranteed against We may invest up to 20% of net assets in mortgage-backed
default by the U.S. government or its agencies or securities issued by private companies whether or not the
instrumentalities, such as the Federal Home Loan securities are 100% collateralized. However, these securities
Mortgage Corporation, Fannie Mae and the must be rated at the time of purchase in one of the four highest
Government National Mortgage Association. Others categories by an NRSRO. The privately issued securities we invest
are issued by private financial institutions, with in are either CMOs or REMICs (see below).
some fully collateralized by certificates issued
or guaranteed by the government or its agencies or
instrumentalities.
- -------------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations (CMOs): See mortgage-backed securities above.
Privately issued mortgage-backed bonds whose
underlying value is the mortgages that are grouped
into different pools according to their maturity.
- -------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage investment conduits (REMICs): See mortgage-backed securities above.
Privately issued mortgage-backed bonds whose
underlying value is a fixed pool of mortgages
secured by an interest in real property. Like
CMOs, REMICs offer different pools.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
Securities we typically invest in (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Balanced Series
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Asset-backed securities: Bonds or notes backed by We invest only in asset-backed securities rated in one of the
accounts receivables including home equity, four highest categories by an NRSRO.
automobile or credit loans.
- -------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by a We focus on bonds rated in one of the four highest categories by
corporation. an NRSRO (or, if unrated, deemed equivalent), with maturities
between five and 30 years.
- -------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a Typically, we use repurchase agreements as a short-term
buyer, such as the Series, and a seller of investment for the Series' cash position. In order to enter into
securities in which the seller agrees to buy the these repurchase agreements, the Series must have collateral of
securities back within a specified time at the at least 102% of the repurchase price. The Series will only enter
same price the buyer paid for them, plus an amount into repurchase agreements in which the collateral is composed of
equal to an agreed upon interest rate. Repurchase U.S. government securities. (The Series may not have more than
agreements are often viewed as equivalent to cash. 10% of its total assets in repurchase agreements with maturities
of over seven days.)
- -------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts (ADRs): Certificates We may invest without limitation in ADRs.
issued by a U.S. bank that represent the bank's
holding of a stated number of shares of a foreign
corporation. An ADR entitles the holder to all
dividends and capital gains earned by the
underlying foreign shares. An ADR is bought and
sold the same as U.S. securities.
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate swap and index swap agreements: In We may use interest rate swaps to adjust the Series' sensitivity
an interest rate swap, a series receives payments to interest rates, or to hedge against changes in interest rates.
from another party based on a floating interest
rate in return for making payments based on a Index swaps may be used to gain exposure to markets that the Fund
fixed interest rate. An interest rate swap can invests in or as a substitute for futures options or forward
also work in reverse, with a series receiving contracts if such contracts are not directly available to the
payments based on a fixed interest rate and making Series on favorable terms.
payments based on a floating interest rate. In an
index swap, a fund receives gains or incurs losses Interest rate swaps and index swaps will be considered illiquid
based on the total return of an index, in exchange securities (see below).
for making fixed or floating interest rate
payments to another party.
- -------------------------------------------------------------------------------------------------------------------------------
Restricted and illiquid securities: Restricted We may invest up to 10% of net assets in illiquid securities. For
securities are privately placed securities whose this Series, the 10% limit includes restricted securities such as
resale is restricted under securities law. privately placed securities that are eligible for resale only
Illiquid securities are securities that do not among certain institutional buyers without registration, which
have a ready market, and cannot be easily sold are commonly known as "Rule 144A Securities" and repurchase
within seven days at approximately the price that agreements with maturities of over seven days.
the Series has valued them.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in other securities including real estate investment
trusts, rights and warrants to purchase common stock, futures contracts,
options, U.S. Treasury securities, Yankee and Euro bonds. Please see the
Statement of Additional Information for additional descriptions on these
securities as well as those listed in the table above.
42
<PAGE>
Lending securities
Balanced Series may lend up to 25% of its assets to qualified brokers, dealers
and institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Balanced Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
Balanced Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
Portfolio turnover
The Series modified its investment strategy in April, 2000 to become more
growth-oriented. As a result, portfolio turnover may be relatively higher than
in past years, and may exceed 100%. A turnover rate of 100% would occur if the
Series sold and replaced securities valued at 100% of its net assets within one
year. High turnover can result in increased transaction costs and tax liability.
43
<PAGE>
The risks of investing in Balanced Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Balanced Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
How we strive to manage them
Risks Balanced Series
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of We maintain a long-term investment approach and focus on stocks
the securities in a certain market--like the stock we believe can appreciate over an extended time frame regardless
or bond market--will decline in value because of of interim market fluctuations. We do not try to predict overall
factors such as economic conditions, future stock market movements and generally do not trade for short-term
expectations or investor confidence. purposes.
We may hold a substantial part of Balanced Series' assets in cash
or cash equivalents as a temporary defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
We diversify the Series' assets among two major categories of
investments--stocks and bonds--which tend to increase and decline
in value in different economic or investment conditions.
In evaluating the use of an index swap, we carefully consider how
market changes could affect the swap and how that compares to us
investing directly in the market the swap is intended to
represent.
- -------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the We limit the amount of Balanced Series' assets invested in any
value of securities in a particular industry or one industry and in any individual security. We also follow a
the value of an individual stock or bond will rigorous selection process before choosing securities for the
decline because of changing expectations for the portfolio.
performance of that industry or for the individual
company issuing the stock or bond.
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, We do not try to increase return by predicting and aggressively
particularly bonds with longer maturities, will capitalizing on interest rate moves. Instead, we aim to keep the
decrease in value if interest rates rise. interest rate risk similar to the Lehman Brothers Aggregate Bond
Index.
Swaps may be particularly sensitive to interest
rates. Depending on the actual movements of We will not invest in swaps with maturities of more than two
interest rates and how well the portfolio manager years. Each business day we calculate the amount the Fund must
anticipates them, a fund could experience a higher pay for swaps it holds and will segregate cash or other liquid
or lower return that anticipated. securities to cover that amount.
- -------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities We typically invest only a small portion of the Series' portfolio
may be adversely affected by political in foreign securities. When we do purchase foreign securities,
instability, changes in currency exchange rates, they are often denominated in U.S. dollars. We also tend to avoid
foreign economic conditions or inadequate markets where we believe accounting principles or the regulatory
regulatory and accounting standards. structure are underdeveloped.
- -------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold within seven days at
approximately the price that the Series values Swap agreements will be treated as illiquid securities, but most
them. swap dealers will be willing to repurchase interest rate swaps.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
44
<PAGE>
Portfolio managers
John Jares and Gary A. Reed have primary responsibility for making day-to-day
investment decisions for the Balanced Series.
John Jares, Vice President/Senior Portfolio Manager, holds a BS degree in
finance and an MBA from the University of Colorado. He joined Delaware
Investments in March, 2000. Mr. Jares came to Delaware from Berger Funds, where
he served as a portfolio manager and securities analyst specializing in the
consumer and technology sectors. Prior to joining Berger, Mr. Jares was a senior
equity analyst at Founders Asset Management, with responsibility for large
capitalization companies. He began his career at Lipper Analytical Services,
Inc. in 1992. Mr. Jares is a CFA charterholder.
Gary A. Reed, Vice President/Senior Portfolio Manager, holds an AB in Economics
from the University of Chicago and an MA in Economics from Columbia University.
He began his career in 1978 with the Equitable Life Assurance Company in New
York City, where he specialized in credit analysis. Prior to joining Delaware
Investments in 1989, Mr. Reed was Vice President and Manager of the fixed-income
department at Irving Trust Company in New York. Mr. Reed has been Balanced
Series' senior portfolio manager for fixed-income since 1989.
45
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Balanced Series Year Ended 12/31
(formerly Delaware Series)
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 19.050 $ 16.640 $15.500 $12.680
Income (loss) from investment operations
Net investment income 0.349 0.435 0.530 0.509
Net realized and unrealized gain (loss) on investments 2.831 3.575 1.765 2.761
-------- -------- ------- -------
Total from investment operations 3.180 4.010 2.295 3.270
-------- -------- ------- -------
Less dividends and distributions
Dividends from net investment income (0.420) (0.530) (0.500) (0.450)
Distributions from net realized gain on investments (1.770) (1.070) (0.655) none
-------- -------- ------- -------
Total dividends and distributions (2.190) (1.600) (1.155) (0.450)
-------- -------- ------- -------
Net asset value, end of year $ 20.040 $ 19.050 $16.640 $15.500
======== ======== ======= =======
Total return(1) 18.62% 26.40% 15.91% 26.58%
Ratios and supplemental data
Net assets, end of period (000 omitted) $201,856 $127,675 $75,402 $63,215
Ratio of expenses to average net assets 0.70% 0.67% 0.68% 0.69%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid 0.70% 0.67% 0.68% 0.69%
indirectly
Ratio of net investment income to average net assets 2.20% 2.85% 3.56% 3.75%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid 2.20% 2.85% 3.56% 3.75%
indirectly
Portfolio turnover 94% 67% 92% 106%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
46
<PAGE>
Capital Reserves Series
Our investment strategies
Capital Reserves Series is a type of current income fund that invests in high
quality fixed-income securities. The Series will invest in a variety of high
quality fixed-income securities which provide high income potential.
We will strive to reduce the effects of interest rate volatility on principal by
maintaining an intermediate average maturity for the Series. The average
weighted maturity of the Series' portfolio will normally range from five to
seven years. It will not exceed ten years. We will decide where to position the
portfolio within this permissible maturity range based on our perception of the
direction of interest rates and the risks in the fixed-income markets. If, in
our judgment, interest rates are relatively high and borrowing requirements in
the economy are weakening, we will generally extend the average weighted
maturity of the Series. Conversely, if we believe interest rates are relatively
low and borrowing requirements appear to be strengthening, we may shorten the
average weighted maturity. We have the ability to purchase individual securities
with a remaining maturity of up to 15 years.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
47
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
---------------------------------------------------------------------
Capital Reserves Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Direct U.S. Treasury obligations include Treasury bills, We may invest without limit in U.S. Treasury securities, though
notes and bonds of varying maturities. U.S. Treasury they are typically not our largest holding because they
securities are backed by the "full faith and credit" of generally do not offer as high a level of current income as
the United States. other fixed-income securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities: Fixed-income securities that There is no limit on government-related mortgage-backed
represent pools of mortgages, with investors receiving securities or on fully collateralized privately issued
principal and interest payments as the underlying mortgage-backed securities.
mortgage loans are paid back. Many are issued and
guaranteed against default by the U.S. government or its We may invest up to 20% of net assets in mortgage-backed
agencies or instrumentalities, such as the Federal Home securities issued by private companies whether or not the
Loan Mortgage Corporation, Fannie Mae and the Government securities are 100% collateralized. However, these securities
National Mortgage Association. Others are issued by must be rated at the time of purchase in one of the four highest
private financial institutions, with some fully categories by a nationally recognized statistical rating
collateralized by certificates issued or guaranteed by organization such as S&P or Moody's. They must also represent
the U.S. government or its agencies or interests in whole-loan mortgages, multi-family mortgages,
instrumentalities. commercial mortgages and other mortgage collateral supported by
a first mortgage lien on real estate. The privately issued
securities we invest in are either CMOs or REMICs (see below).
- ------------------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations (CMOs): Privately See mortgage-backed securities above.
issued mortgage-backed bonds whose underlying value is
the mortgages that are grouped into different pools
according to their maturity.
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage investment conduits (REMICs): See mortgage-backed securities above.
Privately issued mortgage-backed bonds whose underlying
value is a fixed pool of mortgages secured by an
interest in real property. Like CMOs, REMICs offer
different pools.
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities: Bonds or notes backed by We invest only in asset-backed securities rated in one of the
accounts receivables including home equity, automobile four highest categories by a nationally recognized statistical
or credit loans. ratings organization (NRSRO).
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by a We focus on bonds with investment grade ratings, that is bonds
corporation. rated BBB or better by S&P or Baa or better by Moody's. We may
invest in bonds that are unrated, if we believe the quality of
the securities is comparable to the ratings above.
- ------------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit and obligations of both U.S. and We may invest in certificates of deposit from banks that have
foreign banks: Debt instruments issued by a bank, that assets of at least one billion dollars.
pay interest.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate commercial paper: Short-term debt obligations We may invest in commercial paper that is rated P-1 or P-2 by
with maturities ranging from 2 to 270 days, issued by Moody's and/or A-1 or A-2 by S&P.
companies.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term
such as the Series, and seller of securities in which investment for the Series' cash position. In order to enter into
the seller agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid for at least 102% of the repurchase price. The Series will only
them, plus an amount equal to an agreed upon interest enter into repurchase agreements in which the collateral is
rate. Repurchase agreements are often viewed as composed of U.S. government securities.
equivalent to cash.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate swap agreements: In an interest rate swap, Interest rate swaps may be used to adjust the Series'
a series receives payments from another party based on a sensitivity to interest rates by changing its duration. We may
floating interest rate in return for making payments also use interest rate swaps to hedge against changes in
based on a fixed interest rate. An interest rate swap interest rates.
can also work in reverse, with a series receiving
payments based on a fixed interest rate and making Interest rate swaps will be considered illiquid securities.
payments based on a floating interest rate.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and illiquid securities: Restricted We may invest up to 10% of net assets in illiquid securities.
securities are privately placed securities whose resale For this Series, the 10% limit includes restricted securities
is restricted under securities law. such as privately placed securities that are eligible for resale
only among certain institutional buyers without registration,
Illiquid securities are securities that do not have a which are commonly known as "Rule 144A Securities" and
ready market, and cannot be easily sold within seven repurchase agreements with maturities of over seven days.
days at approximately the price that the Series has
valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities as well as those listed in the table above.
Lending securities
Capital Reserves Series may lend up to 25% of its assets to qualified brokers,
dealers and institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Capital Reserves Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Borrowing from banks
Capital Reserves Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. It will not
borrow money in excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Capital Reserves Series' annual portfolio turnover will be
greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
49
<PAGE>
The risks of investing in Capital Reserves Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Capital Reserves Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Capital Reserves Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market--like the stock or bond fixed-income securities that we believe can continue to make
market--will decline in value because of factors such as interest and principal payments over an extended time frame
economic conditions, future expectations or investor regardless of interim market fluctuations. We do not try to
confidence. predict overall bond market movements and do not trade for
short-term purposes.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We diversify the Series' portfolio. We also follow a rigorous
securities in a particular industry or the value of an selection process before choosing securities for the portfolio.
individual stock or bond will decline because of
changing expectations for the performance of that
industry or for the individual company issuing the stock
or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, We do not try to increase return by predicting and aggressively
particularly bonds with longer maturities, will decrease capitalizing on interest rate moves.
in value if interest rates rise. Swaps may be
particularly sensitive to interest rate changes. The Series will not invest in interest rate swaps with
Depending on the actual movements of interest rates and maturities of more than two years. Each business day we will
how well the portfolio manager anticipates them, a calculate the amount the Series must pay for any swaps it holds
series could experience a higher or lower return than and will segregate enough cash or other liquid securities to
anticipated. For example, if a series holds interest cover that amount.
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
necessarily be offset by the fixed-rate payments it is
entitled to receive under the swap agreement.
- ------------------------------------------------------------------------------------------------------------------------------------
Credit risk is the risk that there is the possibility We may hold securities rated in the fourth category of
that a bond's issuer (or an entity that insures the investment grade; however, we carefully evaluate their
bond) will be unable to make timely payments of interest creditworthiness before purchasing the security. When selecting
and principal. dealers with whom we would make interest rate or index swap
agreements, we focus on those with high quality ratings and do
careful credit analysis before investing.
- ------------------------------------------------------------------------------------------------------------------------------------
Debt securities rated in the fourth category of If the rating of a corporate debt security held by the Series
investment grade (e.g., BBB by S&P or Baa by Moody's) falls below the fourth rating grade or if we determine that an
may have speculative characteristics. Changes in unrated security is no longer of comparable quality, we will
economic conditions or other circumstances are more dispose of the security as soon as practical, unless we think
likely to affect issuers ability to make principal and that would be detrimental in light of market conditions.
interest payments.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Capital Reserves Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prepayment risk is the risk that homeowners will prepay We take into consideration the likelihood of prepayment when we
mortgages during periods of low interest rates, forcing select mortgages. We may look for mortgage securities that have
an investor to reinvest their money at interest rates characteristics that make them less likely to be prepaid, such
that might be lower than those on the prepaid mortgage. as low outstanding loan balance or below-market interest rates.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot We limit exposure to illiquid securities.
be readily sold, within seven days at approximately the
price that the Series values them. Swap agreements will be treated as illiquid securities, but most
swap dealers will be willing to repurchase interest rate swaps.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
Portfolio manager
Gary A. Reed has primary responsibility for making day-to-day investment
decisions for the Capital Reserves Series.
Gary A. Reed, Vice President/Senior Portfolio Manager, holds an AB in Economics
from the University of Chicago and an MA in Economics from Columbia University.
He began his career in 1978 with the Equitable Life Assurance Company in New
York City, where he specialized in credit analysis. Prior to joining Delaware
Investments in 1989, Mr. Reed was Vice President and Manager of the fixed-income
department at Irving Trust Company in New York. Mr. Reed has been Capital
Reserves Series' senior portfolio manager since 1989.
51
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Capital Reserves Series Year Ended 12/31
-------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.790 $ 9.690 $ 9.930 $ 9.300
Income (loss) from investment operations
Net investment income 0.556 0.613 0.623 0.643
Net realized and unrealized gain (loss) on investments 0.090 0.100 (0.240) 0.630
------- ------- ------- -------
Total from investment operations 0.646 0.713 0.383 1.273
------- ------- ------- -------
Less dividends and distributions
Dividends from net investment income (0.556) (0.613) (0.623) (0.643)
Distributions from net realized gain on investments none none none none
------- ------- ------- -------
Total dividends and distributions (0.556) (0.613) (0.623) (0.643)
------- ------- ------- -------
Net asset value, end of year $ 9.880 $ 9.790 $ 9.690 $ 9.930
======= ======= ======= =======
Total return(1) 6.78% 7.60% 4.05% 14.08%
Ratios and supplemental data
Net assets, end of period (000 omitted) $41,711 $29,177 $27,768 $27,935
Ratio of expenses to average net assets 0.79% 0.75% 0.72% 0.71%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.79% 0.75% 0.72% 0.71%
Ratio of net investment income to average net assets 5.62% 6.31% 6.43% 6.64%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.62% 6.31% 6.43% 6.64%
Portfolio turnover 166% 120% 122% 145%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
52
<PAGE>
Cash Reserve Series
The securities we typically invest in
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Cash Reserve Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Direct U.S. Treasury obligations include Treasury bills, We may invest without limit in U.S. Treasury securities. We
notes and bonds of varying maturities. U.S. Treasury would typically invest in Treasury bills or longer term Treasury
securities are backed by the "full faith and credit" of securities whose remaining effective maturity is less than 13
the United States. months.
- ------------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit and obligations of both U.S. and We may invest in certificates of deposit from banks that have
foreign banks: Debt instruments issued by a bank that assets of at least one billion dollars.
pay interest.
Investments in foreign banks and overseas branches of U.S. banks
may be subject to less stringent regulations and different risks
than U.S. domestic banks.
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate commercial paper: Short-term debt obligations We may invest in commercial paper that is rated P-1 or P-2 by
with maturities ranging from 2 to 270 days, issued by Moody's and/or A-1 or A-2 by S&P. The Series will not invest
companies. more than 5% of its total assets in securities rated in the
second highest category by a ratings organization.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities as well as those listed in the table above.
Cash Reserve Series uses the same investment strategy as Delaware Cash Reserve
Fund, a separate fund in the Delaware Investments Family of Funds, although
performance may differ depending on such factors as the size of the funds and
the timing of investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
Borrowing from banks
Cash Reserve Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
53
<PAGE>
The risks of investing in Cash Reserve Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. The following are the chief risks you assume when
investing in the Cash Reserve Series. Please see the Statement of Additional
Information for further discussion of these risks and the other risks not
discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Cash Reserve Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest rate risk is the risk that securities, Because Cash Reserve Series invests in short-term securities,
particularly bonds with longer maturities, will decrease the value of its investments is generally not affected by
in value if interest rates rise. interest rate risk. However, a decline in interest rates would
adversely affect the level of income provided by the Series.
- ------------------------------------------------------------------------------------------------------------------------------------
Credit risk is the risk that there is the possibility Cash Reserve Series holds only high quality short-term
that a bond's issuer (or an entity that insures the securities. Therefore it is generally not subject to significant
bond) will be unable to make timely payments of interest credit risk.
and principal.
We limit our investments to those which the Board of Trustees
has determined to involve minimal credit risks and to be of high
quality and which will otherwise meet the maturity, quality and
diversification conditions with which taxable money market funds
must comply.
If there were a national credit crisis or an issuer were to
become insolvent, principal values could be adversely affected.
- ------------------------------------------------------------------------------------------------------------------------------------
Inflation risk is the risk that the return from your Cash Reserve Series is designed for short-term investment goals
investments will be less than the increase in the cost and therefore may not outpace inflation over longer time
of living due to inflation, thus preventing you from periods. For this reason, Cash Reserve Series is not recommended
reaching your financial goals. as a primary investment for people with long-term goals.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
54
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Cash Reserve Series Year Ended 12/31
-----------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------ ---------- ---------- ---------- ---------- ---------
Net asset value, beginning of year $10.000 $10.000 $10.000 $10.000
Income from investment operations
Net investment income 0.497 0.497 0.482 0.535
----- ----- ----- -----
Total from investment operations 0.497 0.497 0.482 0.535
----- ----- ----- -----
Less dividends
Dividends from net investment income (0.497) (0.497) (0.482) (0.535)
------- ------- ------- -------
Total dividends (0.497) (0.497) (0.482) (0.535)
------- ------- ------- -------
Net asset value, end of year $10.000 $10.000 $10.000 $10.000
======= ======= ======= ======
Total return(1) 5.08% 5.10% 4.93% 5.48%
Ratios and supplemental data
Net assets, end of period (000 omitted) $42,893 $30,711 $26,479 $16,338
Ratio of expenses to average net assets 0.59% 0.64% 0.61% 0.62%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.59% 0.64% 0.61% 0.62%
Ratio of net investment income to average net assets 4.96% 4.98% 4.82% 5.35%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.96% 4.98% 4.82% 5.35%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
55
<PAGE>
Convertible Securities Series
Our investment strategies
Convertible Securities Series is a type of total return fund that invests in
convertible securities to pursue a two-pronged investment objective: capital
appreciation and current income.
We invest primarily in convertible securities. Our strategy is based on the
belief that characteristics of these securities make them particularly
appropriate investments in seeking both capital appreciation and current income.
These characteristics include:
o the potential for capital appreciation as the value of the underlying common
stock increases,
o the relatively high yield received from interest or dividend payments on
convertible securities as compared to common stock dividends; and,
o reduced price decline risk relative to the underlying common stock due to the
income features of a convertible security.
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.
We may also invest in preferred and common stock, warrants, U.S. government
securities, non-convertible fixed-income securities and money market securities.
Securities or assets obtained upon the conversion of convertible securities may
be retained, subject to the Series' investment objective. There are no size
limits on corporations in whose securities the Series may invest.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
56
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation.
Convertible securities often blend the potential benefits of stocks and
fixed-income securities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Convertible Securities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible securities: Usually preferred stocks or Under normal conditions, the Series intends to invest at least 65%
corporate bonds that can be exchanged for a set number of of its total assets in convertible securities, which may include
shares of common stock at a predetermined price. These privately placed convertible securities.
securities offer higher appreciation potential than
nonconvertible bonds and greater income potential than We will invest in convertible securities without regard to rating
nonconvertible preferred stocks. categories. To the extent that securities we hold are not
investment grade or are not rated, there may be a greater risk as
Convertible securities rank ahead of common stock in a to the timely payment of interest and principal.
corporation's capital structure and therefore entail less
risk than the corporation's common stock. However, If a convertible security held by the Series is called for
convertible securities typically rank behind non-convertible redemption, the Series will be required to redeem the security,
securities of the same issuer. convert it into the underlying common stock or sell it to a third
party.
Convertible securities may be rated below investment grade,
that is, not rated within the four highest categories by S&P
and Moody's. Debt securities rated below investment grade
are often referred to as "high-yield bonds" or "junk bonds,"
although these terms are not generally used in reference to
convertible debt securities.
A convertible security may be subject to redemption at the
option of the issuer at a price established in the
instrument under which the convertible security was issued.
- ------------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds and pay-in-kind bonds: Zero coupon The Series may invest in zero coupon bonds and payment in kind
securities are debt obligations which do not entitle the bonds, though this is not expected to be a significant component
holder to any periodic payments of interest prior to of its strategy. The market prices of these bonds are generally
maturity or a specified date when the securities begin more volatile than the market prices of securities that pay
paying current interest. Therefore, they are issued and interest periodically and are likely to react changes in interest
traded at a discount from their face amounts or par value. rates to a greater degree than interest-paying bonds having
Payment-in-kind bonds pay interest or dividends in the form similar maturities and credit quality. They may have certain tax
of additional bonds or preferred stock. consequences which, under certain conditions, could be adverse to
the Series.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Convertible Securities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Private placements: For various reasons, an issuer may What portion of the Series' portfolio is invested in convertible
prefer or be required as a practical matter to obtain securities purchased in private placements depends upon the
private financing. Adverse conditions in the public relative attractiveness of those securities compared to
securities markets may preclude a public offering of an convertible securities, which are publicly offered. Ordinarily,
issuer's securities. An issuer is often willing to provide the Series expects that 50% of its portfolio may be invested in
more attractive features in securities issued privately, convertible securities purchased in private placements, but the
because it has avoided the expense and delay involved in a percentage may be substantially greater or less than 50%,
public offering. Private placements of debt securities have depending upon prevailing market conditions.
frequently resulted in higher yields and restrictive
covenants that provide greater protection for the purchaser, We anticipate that substantially all of the private placements we
such as longer call or refunding protection than would purchase will be subject to Rule 144A under the 1933 Act and
typically be available with publicly offered securities of therefore, may be traded freely among qualified institutional
the same type. Securities acquired through private buyers. Subject to procedures approved by the Series' Board of
placements may also have special features not usually Trustees, we may treat Rule 144A securities as liquid and
characteristic of similar securities offered to the public, therefore not subject to the 15% limitation on illiquid securities
such as contingent interest or warrants for the purchase of described below. The private placements we purchase will typically
the issuer's stock. 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.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Convertible Securities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Equity linked securities: Convertible securities that offer We may invest in equity linked securities when we believe they
enhanced yield features, such as PRIDES (Preferred offer suitable income and capital appreciation potential in
Redeemable Increased Dividend Equity Securities) and DECS keeping with the Series' investment objective.
(Dividend Enhanced Convertible Securities). These securities
typically have the following features: (a) the issuer's We may also invest in other types of convertible securities
common stock will be received in the event the convertible similar to those described here.
preferred stock is converted; (b) they do not have a capital
appreciation limit; (c) they seek to provide the investor An investment in an equity-linked security may involve additional
with high current income with some prospect of future risks. Unlike conventional convertible securities, equity-linked
capital appreciation; (d) they are typically issued with securities do not usually have a fixed maturity (par) value.
three to four year maturities; (e) they typically have some Rather, equity-linked securities generally provide only for a
built-in call protection for the first two to three years; mandatory conversion into cash or common stock. As a result, the
(f) investors have the right to convert them into shares of Series risks loss of principal if the cash received or the price
common stock at a preset conversion formula or hold them of the underlying common stock at the time of conversion is less
until maturity; and (g) upon maturity they will than the price paid for the equity-linked security. Equity-linked
automatically convert into either cash or a specified number securities may be more or less liquid than conventional
of shares of common stock. convertible securities or non-convertible debt securities. We
primarily intend to acquire liquid equity-linked securities since
Preferred Equity Redemption Cumulative Stock ("PERCS") is a any purchases of illiquid equity-linked securities would be
preferred stock convertible into common stock of the issuer subject to the Series' 15% limit on illiquid securities described
which generally features a mandatory conversion date below.
(typically three years) as well as a capital appreciation
limit usually expressed in terms of a stated price.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign securities, Eurodollar convertible securities and The Series may invest in securities of foreign issuers, including
American Depositary Receipts: Securities of foreign entities issuers located in emerging markets. Such foreign securities may
issued directly or, in the case of American Depositary be traded on a foreign exchange, or they may be in the form of
Receipts, through a U.S. bank. ADRs represent the bank's depositary receipts or notes, such as American Depositary Receipts
holding of a stated number of shares of a foreign (ADRs), American Depositary Notes (ADNs), European Depositary
corporation. An ADR entitles the holder to all dividends and Receipts (EDRs), European Depositary Notes (EDNs), Global
capital gains earned by the underlying foreign shares. ADRs Depositary Receipts (GDRs) or Global Depositary Notes (GDNs). The
are bought and sold the same as U.S. securities. Eurodollar Series may also invest in Eurodollar securities.
convertible securities are fixed-income securities of a U.S.
issuer which are convertible into equity securities of that
issuer. These Eurodollar securities are payable in U.S.
dollars outside of the United States.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Convertible Securities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible for
resale is restricted under securities law. resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 15% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 15% of net assets in illiquid securities,
market, and cannot be easily sold within seven days at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities as well as those listed in the table above.
Lending securities
Convertible Securities Series may lend up to 25% of its assets to qualified
brokers, dealers and institutional investors for their use in security
transactions.
Purchasing securities on a when-issued or delayed delivery basis
Convertible Securities Series may buy or sell securities on a when-issued or
delayed delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that Convertible Securities Series' annual portfolio turnover will
be less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
Borrowing from banks
Convertible Securities Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Short sales against the box The Series may engage in short sales "against the
box." While a short sale is made by selling a security the Series does not own,
a short sale is "against the box" if the Series contemporaneously owns or has
the right to obtain securities identical to those sold short, at no added cost.
60
<PAGE>
The risks of investing in Convertible Securities Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Convertible Securities Series. Please see the
Statement of Additional Information for further discussion of these risks and
the other risks not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Convertible Securities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market--like the stock or bond securities we believe can continue to pay income and appreciate
market--will decline in value because of factors such as over an extended time frame regardless of interim market
economic conditions, future expectations or investor fluctuations. We do not try to predict overall stock market
confidence. movements and though we may hold securities for any period of
time, we do not typically trade for short-term purposes.
We may hold a substantial part of Convertible Securities Series'
assets in cash or cash equivalents as a temporary defensive
strategy. To the extent it holds Cash or Cash equivalents, the
Series may be unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Convertible Securities Series' assets
securities in a particular industry or the value of an invested in any one industry and in any individual security. We
individual stock or bond will decline because of changing also follow a rigorous selection process before choosing
expectations for the performance of that industry or for the securities for the portfolio.
individual company issuing the security.
- ------------------------------------------------------------------------------------------------------------------------------------
Credit risk The possibility that a security's issuer (or an This risk may be reduced because of the ability to convert these
entity that insures the security) will be unable to make securities into common stock.
timely payments of interest, dividends and principal.
Investing in securities rated below investment grade entails
greater risk of principal loss than associated with
investment grade bonds. It is likely that protracted periods
of economic uncertainty would cause increased volatility in
the market prices of non-investment grade securities and
corresponding volatility in the Series' net asset value.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, particularly We will monitor interest rate trends and their potential impact on
bonds with longer maturities, will decrease in value if the Series. Though convertible securities may be sensitive to
interest rates rise. interest rate movements, an individual security's link to the
underlying common stock may reduce that sensitivity.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be Most of the foreign securities that we invest in are denominated
adversely affected by political instability, changes in in U.S. dollars.
currency exchange rates, foreign economic conditions or
inadequate regulatory and accounting standards.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold within seven days at approximately the price
that the Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.00% of average daily net assets for the last
fiscal year.
Portfolio manager
Damon Andres has primary responsibility for making day-to-day investment
decisions for the Convertible Securities Series.
Damon Andres, Vice President/Portfolio Manager, earned a BS in Business
Administration with an emphasis in Finance and Accounting from the University of
Richmond. Prior to joining Delaware Investments in 1994, Mr. Andres performed
investment consulting services as a Consulting Associate with Cambridge
Associates, Inc. in Arlington, Virginia. Mr. Andres has been managing the
Convertible Securities Series since February 1999.
62
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Convertible Securities Series
Period
Year Ended 12/31 5/1/97(1)
----------------------------------------- through
1999 1998 12/31/97
<S> <C> <C> <C>
- ------------------------------------------------------------------ -------------------- -------------------- -----------
Net asset value, beginning of period $11.660 $10.000
Income (loss) from investment operations
Net investment income 0.386 0.318
Net realized and unrealized gain (loss) on investments (0.511) 1.342
------- -----
Total from investment operations (0.125) 1.660
------- -----
Less dividends and distributions
Dividends from net investment income (0.305) none
Distributions from net realized gain on investments (0.070) none
------- ----
Total dividends and distributions (0.375) none
------- ----
Net asset value, end of period $11.160 $11.660
======= =======
Total return(2) (1.17%) 16.60%(3)
Ratios and supplemental data
Net assets, end of period (000 omitted) $8,133 $3,921
Ratio of expenses to average net assets 0.82% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.82% 2.30%
Ratio of net investment income to average net assets 4.78% 5.68%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.78% 4.18%
Portfolio turnover 77% 209%
- ------------------------------------------------------------------ -------------------- -------------------- -----------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown.
(3) Total return reflects expense limitations in effect for the Series.
63
<PAGE>
Devon Series
Our investment strategies
Devon Series is a total return fund but it invests the majority of its assets in
stocks. This Series has a dual objective of capital appreciation and current
income, but since it invests primarily in stocks, its shareholders should be
comfortable accepting fluctuations of principal.
We invest primarily in common stocks that we believe have the potential for
above-average dividend increases over time. Generally, at least 65% of the
Series' assets will be invested in dividend-paying stocks.
In selecting stocks for Devon Series, we consider factors such as how much the
stock's dividend has grown in the past, the frequency of the stock's prior
dividend increases, the company's potential for strong positive cash flow, and
the price/earnings ratio of the stock compared to other stocks in the market. We
avoid stocks that we think are overvalued. We seek stocks that we believe have
the potential for above-average dividend growth.
Devon Series uses the same investment strategy as Delaware Devon Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
64
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Devon Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, 90% to 100% of the Series' assets will be invested in
in a corporation. Stockholders participate in the common stocks. Under normal market conditions we will invest at
corporation's profits and losses, proportionate to the least 65% of total assets in dividend-paying stocks.
number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible securities: Usually preferred stocks or Devon Series may invest in convertible securities; however, we
corporate bonds that can be exchanged for a set number of will not invest more than 5% of net assets in convertible
shares of common stock at a predetermined price. These securities that are rated below investment grade by an NRSRO or in
securities offer higher appreciation potential than securities that are unrated but deemed equivalent to
nonconvertible bonds and greater income potential than non-investment grade.
nonconvertible preferred stocks.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts (ADRs): Certificates issued by We may invest without limitation in ADRs.
a U.S. bank that represent the bank's holdings of a stated
number of shares of a foreign corporation. An ADR entitles
the holder to all dividends and capital gains earned by the
underlying foreign shares. An ADR is bought and sold the
same as U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities. For
are privately placed securities whose resale is restricted this Series, the 10% limit includes restricted securities such as
under securities law. Illiquid securities are securities privately placed securities that are eligible for resale only
that do not have a ready market, and cannot be easily sold among certain institutional buyers without registration, which are
within seven days at approximately the price that the Series commonly known as "Rule 144A Securities" and repurchase agreements
has valued them. with maturities of over seven days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Devon Series may also invest in other securities including real estate
investment trusts, rights and warrants to purchase common stock, fixed-income
securities [or mention the list] futures contracts and options. Please see the
Statement of Additional Information for additional descriptions on these
securities as well as those listed in the table above.
65
<PAGE>
Lending securities
Devon Series may lend up to 25% of its assets to qualified brokers, dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Devon Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
Devon Series may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Devon Series' annual portfolio turnover will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
66
<PAGE>
The risks of investing in Devon Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Devon Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Devon Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market--like the stock or bond stocks we believe can appreciate over an extended time frame
market--will decline in value because of factors such as regardless of interim market fluctuations. We do not try to
economic conditions, future expectations or investor predict overall stock market movements and do not trade for
confidence. short-term purposes.
We may hold a substantial part of Devon Series' assets in cash
or cash equivalents as a temporary defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Devon Series' assets invested in any
securities in a particular industry or the value of an one industry and in any individual security. We also follow a
individual stock or bond will decline because of changing rigorous selection process before choosing securities for the
expectations for the performance of that industry or for the portfolio.
individual company issuing the stock or bond.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of Devon Series'
adversely affected by political instability, changes in portfolio in foreign securities. When we do purchase foreign
currency exchange rates, foreign economic conditions or securities, they are often denominated in U.S. dollars. We
inadequate regulatory and accounting standards. also tend to avoid markets where we believe accounting
principles or the regulatory structure are underdeveloped.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold within seven days at approximately the price that
the Series values them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.00% of average daily net assets for the last
fiscal year.
Portfolio manager
Frank X. Morris has primary responsibility for making day-to-day investment
decisions for the Devon Series. In making investment decisions for the Series,
Mr. Morris regularly consults with Christopher Driver and Michael S. Morris.
Frank X. Morris, Vice President/Senior Portfolio Manager, holds a bachelor's
degree in finance from Providence College in Rhode Island and an MBA from
Widener University in Pennsylvania. Mr. Morris has been managing institutional
equity portfolios at Delaware Investments since 1997. He has 16 years of
investment management experience. He came to Delaware Investments from PNC Asset
Management where he served as a securities analyst from 1983 to 1991 and
portfolio manager from 1991 to 1994. He was subsequently named Director of
Equity Research at PNC. He is a past president of the Philadelphia Society of
Financial Analysts. Mr. Morris has been a member of Devon Series' management
team since March 1999.
67
<PAGE>
Christopher Driver, Assistant Vice President/Equity Analyst, holds a BS in
Finance from the University of Delaware. Prior to joining Delaware Investments
in 1998, he was a Research Analyst in the Equity Value group at Blackrock, Inc.
Prior to Blackrock, he was a partner at Cashman Farrell & Associates. Mr. Driver
is a CFA charterholder.
Michael S. Morris, Assistant Vice President/Equity Analyst, holds a BS from
Indiana University with a major in finance. Previously he served as equity
analyst at Walnut Asset Management where he covered a variety of industries. He
has also worked at Pilgrim Baxter as a Senior Research Analyst covering
financials and began his career at The State Teachers Retirement System of Ohio.
Mr. Morris is a CFA charterholder.
68
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Devon Series
Year Ended
12/31 Period
----------------------------------------- 5/1/97(1)
through
1999 1998 12/31/97
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $12.730 $10.000
Income from investment operations
Net investment income 0.106 0.080
Net realized and unrealized gain on investments 2.889 2.650
----- -----
Total from investment operations 2.995 2.730
----- -----
Less dividends and distributions
Dividends from net investment income (0.080) none
Distributions from net realized gain on investments (0.205) none
------- ----
Total dividends and distributions (0.285) none
------- ----
Net asset value, end of period $15.440 $12.730
======= =======
Total return(2) 24.05% 27.30%(3)
Ratios and supplemental data
Net assets, end of period (000 omitted) $68,714 $16,653
Ratio of expenses to average net assets 0.66% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.66% 0.91%
Ratio of net investment income to average net assets 1.30% 2.01%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.30% 1.90%
Portfolio turnover 34% 80%
- ------------------------------------------------------------------ --------------------- --------------------- ----------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
(3) Total return reflects expense limitations in effect for the Series.
69
<PAGE>
Emerging Markets Series
Our investment strategies
Emerging Markets Series seeks long-term capital appreciation. The Series may
invest in a broad range of equity securities, including common stocks. Our
primary emphasis will be on the stocks of companies located in or having their
principal business in an emerging country.
We consider an "emerging country" to be any country that is
o generally recognized to be an emerging or developing country by the
international financial community, including the World Bank and the
International Finance Corporation,
o any country that is classified by the United Nations as developing, or
o any country that is included in the International Finance Corporation
Free Index or the Morgan Stanley Capital International Emerging
Markets Free Index.
Developing or emerging countries include almost every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western and Northern Europe. A representative list of the countries
where we may invest includes: Argentina, Botswana, Brazil, Chile, China,
Colombia, Czech Republic, Estonia, Ghana, Greece, Hong Kong, Hungary, India,
Indonesia, Ivory Coast, Jamaica, Jordan, Kenya, Korea, Latvia, Lithuania,
Malaysia, Mauritius, Mexico, Morocco, Nigeria, Pakistan, Peru, the Philippines,
Poland, Portugal, Russia, Slovenia, South Africa, Sri Lanka, Taiwan, Thailand,
Turkey, Venezuela and Zimbabwe. We may invest in other countries, particularly
as markets in other emerging countries develop. More than 25% of the Series'
total assets may be invested in the securities of issuers located in the same
country.
In deciding whether a company is from an emerging country, we evaluate publicly
available information and question individual companies to determine if the
company meets one of the following criteria:
o the principal trading market for the company's securities is in a
country that is emerging;
o the company generates 50% or more of its annual revenue from
operations in emerging countries, even though the company's securities
are traded in an established market or in a combination of emerging
and established markets;
o the company is organized under the laws of an emerging market country
and has a principal office in an emerging country.
Currently, investing in many emerging countries is not feasible or may involve
significant political risks. We focus our investments in emerging countries
where we consider the economies to be developing strongly and where the markets
are becoming more sophisticated. In deciding where to invest we place particular
emphasis on factors such as economic conditions (including growth trends,
inflation rates and trade balances), regulatory and currency controls,
accounting standards and political and social conditions. We believe investment
opportunities may result from an evolving long-term trend favoring
market-oriented economies, a trend that may particularly benefit countries
having developing markets.
When we evaluate individual companies we strive to apply a value-oriented
selection process, similar to what we use for International Equity Series.
However, in emerging markets, more of the return is expected to come from
capital appreciation rather than income. Thus, there is greater emphasis on the
manager's assessment of the company's future growth potential.
The Series may invest up to 35% of its net assets in high yield, high risk
foreign fixed-income securities. This typically includes so-called Brady Bonds.
Emerging Markets Series uses the same investment strategy as Delaware Emerging
Markets Fund, a separate fund in the Delaware Investments Family of Funds,
although performance may differ depending on such factors as the size of the
funds and the timing of investments and redemptions.
70
<PAGE>
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
71
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation. The
following chart provides a brief description of the securities that Emerging
Markets Series may invest in. Please see the Statement of Additional Information
for additional descriptions of these as well as other investments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Emerging Markets Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Common stocks of emerging market companies: Securities that The Series will invest its assets in common stocks, some of
represent shares of ownership in a corporation. Stockholders which will be dividend-paying stocks.
participate in the corporation's profits and losses,
proportionate to the number of shares they own.
- ----------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by U.S. or foreign Emerging Markets Series may invest in corporate obligations
corporations. issued by emerging country companies. These bonds may be high
risk, fixed-income securities.
Although not a principal strategy of the Series, for temporary
defensive purposes, the Series may invest all or a substantial
portion of its assets in corporate obligations rated AA or
better by S&P and Aa or better by Moody's, or if unrated,
determined to be of comparable quality.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign government securities: Debt obligations issued by a We may invest a portion of Emerging Markets Series' assets in
government other than the United States or by an agency, foreign governmental securities issued by emerging or
instrumentality or political subdivision of such governments. developing countries, which may be lower rated, including
securities rated below investment grade.
Although not a principal strategy of the Series, for temporary
defensive purposes, the Series may invest in high quality debt
obligations of foreign governments, their agencies,
instrumentalities and political sub-divisions.
- ----------------------------------------------------------------------------------------------------------------------------------
Investment company securities: In some countries, investments The Series may hold open-end and closed-end investment company
by U.S. mutual funds are generally made by purchasing shares securities if we believe the country offers good investment
of investment companies that in turn invest in the securities opportunities. These investments involve an indirect payment
of such countries. of a portion of the expenses of the other investment
companies, including their advisory fees.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Emerging Markets Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign currency transactions: A forward foreign currency Although the Series value its assets daily in U.S. dollars, it
exchange contract involves an obligation to purchase or sell a does not intend to convert its holdings of foreign currencies
specific currency on a fixed future date at a price that is into U.S. dollars on a daily basis. The Series will, however,
set at the time of the contract. The future date may be any from time to time, purchase or sell foreign currencies and/or
number of days from the date of the contract as agreed by the engage in forward foreign currency exchange transactions. The
parties involved. Series may conduct its foreign currency transactions on a cash
basis at the rate prevailing in the foreign currency exchange
market or through a forward foreign currency exchange contract
or forward contract.
The Series may use forward contracts for defensive hedging
purposes to attempt to protect the value of the Series'
current security or currency holdings. It may also use forward
contracts if it has agreed to sell a security and wants to
"lock-in" the price of that security, in terms of U.S.
dollars. Investors should be aware of the costs of currency
conversion. The Series will not use forward contracts for
speculative purposes.
- ----------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts (ADRs), European Depositary The Series may invest in sponsored and unsponsored ADRs, EDRs
Receipts (EDRs), and Global Depositary Receipts (GDRs): ADRs and GDRs, generally focusing on those whose underlying
are receipts issued by a U.S. depositary (usually a U.S. bank) securities are issued by foreign entities.
and EDRs and GDRs are receipts issued by a depositary outside
of the U.S. (usually a non-U.S. bank or trust company or a To determine whether to purchase a security in a foreign
foreign branch of a U.S. bank). Depositary receipts represent market or through depositary receipts, we evaluate the price
an ownership interest in an underlying security that is held levels, the transaction costs, taxes and administrative costs
by the depositary. Generally, the holder of the depositary involved with each security to identify the most efficient
receipt is entitled to all payments of interest, dividends or choice.
capital gains that are made on the underlying security.
- ----------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds: Zero coupon securities are debt obligations Emerging Markets Series may invest in zero coupon bonds. The
which do not entitle the holder to any periodic payments of market prices of zero coupon bonds are generally more volatile
interest prior to maturity or a specified date when the than the market prices of securities that pay interest
securities begin paying current interest, and therefore are periodically and are likely to respond to changes in interest
issued and traded at a discount from their face amounts or par rates to a greater degree than do non-zero coupon securities
value. having similar maturities and credit quality.
- ----------------------------------------------------------------------------------------------------------------------------------
Brady Bonds: These are debt securities issued under the The Series may invest in Brady Bonds. We believe that the
framework of the Brady Plan, an initiative for debtor nations economic reforms undertaken by countries in connection with
to restructure their outstanding external indebtedness the issuance of Brady Bonds can make the debt of countries
(generally, commercial bank debt). Brady Bonds tend to be of that have issued or have announced plans to issue these bonds
lower quality and more speculative than securities of a viable opportunity for investment.
developed country issuers.
- ----------------------------------------------------------------------------------------------------------------------------------
High-yield, high risk fixed-income securities: Securities that Emerging Markets Series may invest up to 35% of its net
are rated lower than BBB by S&P or Baa by Moody's, or if assets, in high-yield, high risk foreign fixed-income
unrated, of equal quality. These securities may be issued by securities.
companies or governments of emerging or developing countries,
which may be less creditworthy. The risk that these companies
or governments may not be able to make interest or principal
payments is substantial.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Emerging Markets Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term
the Series, and a seller of securities in which the seller investment for the Series' cash position. In order to enter
agrees to buy the securities back within a specified time at into these repurchase agreements, the Series must have
the same price the buyer paid for them, plus an amount equal collateral of at least 102% of the repurchase price. The
to an agreed upon interest rate. Repurchase agreements are Series will only enter into repurchase agreements in which the
often viewed as equivalent to cash. collateral is composed of U.S. government securities.
- ----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A
Securities. Restricted securities that are determined to be
illiquid may not exceed the Series' 10% limit on illiquid
securities, which is described below.
- ----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold within seven days at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may invest in preferred stocks, convertible securities, warrants,
futures and options. For temporary defensive purposes or for cash management
purposes, the Series may invest in high quality U.S. or foreign debt securities,
although to the extent it does so the Series may be unable to meet its
investment objective. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Portfolio turnover
The Series anticipates that its annual portfolio turnover will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
Borrowing from banks
Emerging Markets Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Securities lending
Emerging Market 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 securities transactions. These transactions will generate additional
income for the Series.
74
<PAGE>
The risks of investing in Emerging Markets Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Emerging Markets Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Emerging Markets Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market--like the stock or bond stocks we believe can appreciate over an extended time frame
market--will decline in value because of factors such as regardless of interim market fluctuations. In deciding what
economic conditions, future expectations or investor portion of the Series' portfolio should be invested in any
confidence. individual country, we evaluate a variety of factors,
including opportunities and risks relative to other countries.
In addition, for temporary defensive purposes, the Series may
invest all or a substantial portion of its assets in high
quality debt instruments of foreign governments, the U.S.
government, (including their agencies and instrumentalities)
or foreign or U.S. companies.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We typically hold a number of different securities in a
securities in a particular industry or the value of an variety of sectors in order to minimize the impact that a
individual stock or bond will decline because of changing poorly performing security would have on the Series. This risk
expectations for the performance of that industry or for the is more significant for the Series, which is a non-diversified
individual company issuing the stock or bond. fund.
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, particularly In an attempt to protect Emerging Markets Series' investments
bonds with longer maturities, will decrease in value if from interest rate fluctuations, the Series may engage in
interest rates rise. interest rate swaps. Interest rate swaps involve the exchange
by the Series with another party of their respective rights to
receive interest. The Series intends to use interest rate
swaps as a hedge and not as a speculative investment. The use
of interest rate swaps involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. If the manager is incorrect in its
forecast of market values, interest rates and other applicable
factors, the investment performance of the Series will be less
favorable than it would have been if this investment technique
were never used.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We carefully evaluate the overall situations in the countries
adversely affected by political instability, changes in where we invest in an attempt to reduce these risks. We also
currency exchange rates, foreign economic conditions or tend to avoid markets where we believe accounting principles
inadequate regulatory and accounting standards. or the regulatory structure are too underdeveloped.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Emerging Markets Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Currency risk is the risk that the value of the Series' The Series may try to hedge its currency risk by purchasing
investments may be negatively affected by changes in foreign foreign currency exchange contracts. If the Series agrees to
currency exchange rates. Adverse changes in exchange rates may purchase or sell foreign securities at a pre-set price on a
reduce or eliminate any gains produced by investments that are future date, the Series attempts to protect the value of a
denominated in foreign currencies and may increase any losses. security they own from future changes in currency rates. If
the Series has agreed to purchase or sell a security, it may
also use foreign currency exchange contracts to "lock-in" the
security's price in terms of U.S. dollars or another
applicable currency. The Series may use forward currency
exchange contracts only for defensive or protective measures,
not to enhance portfolio returns. However, there is no
assurance that such a strategy will be successful.
- ----------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller The Series may invest in small companies and would be subject
companies may be more volatile than larger companies because to this risk. We typically hold a number of different stocks
of limited financial resources or dependence on narrow product in order to reduce the impact that one small company stock
lines. would have on the Funds. This risk is more significant for the
Series, which is a non-diversified fund.
- ----------------------------------------------------------------------------------------------------------------------------------
Political risk is the risk that countries or the entire region We carefully evaluate the political situations in the
where we invest may experience political instability, which countries where we invest and take into account any potential
may cause greater fluctuation in the value of our investments risks before we select securities for the portfolio. However,
due to changes in currency exchange rates, governmental there is no way to eliminate political risk when investing
seizures or nationalization of assets. internationally.
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging markets risk is the possibility that the risks Striving to manage this risk, the portfolio managers carefully
associated with international investing will be greater in screen securities within emerging markets and attempt to
emerging markets than in more developed foreign markets consider material risks associated with an individual company
because, among other things, emerging markets may have less or bond issuer. We cannot eliminate emerging market risk and
stable political and economic environments. consequently encourage shareholders to invest in this Series
only if they have a long-term time horizon, over which the
potential of individual securities is more likely to be
realized.
- ----------------------------------------------------------------------------------------------------------------------------------
Inefficient market risk is the risk that foreign markets may The Series will attempt to reduce these risks by investing in
be less liquid, have greater price volatility, less regulation a number of different countries, and noting trends in the
and higher transaction costs than U.S. markets. economy, industries and financial markets.
- ----------------------------------------------------------------------------------------------------------------------------------
Information risk is the possibility that foreign companies are The Series conducts a great deal of fundamental research on
subject to different accounting, auditing and financial the companies that it invests in rather than relying solely on
reporting standards than U.S. companies. There may be less information available through financial reporting. We believe
information available about foreign issuers than domestic this will help us to better uncover any potential weaknesses
issuers. Furthermore, regulatory oversight of foreign issuers in individual companies.
may be less stringent or less consistently applied than in the
United States.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Emerging Markets Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Non-diversified funds are believed to be subject to greater The Series is a non-diversified fund as defined by the
risks because adverse effects on their security holdings may Investment Company Act of 1940 Act. That means the Series does
affect a larger portion of their overall assets. not have to limit the percentage of assets invested in an
individual security. However, the Series does intend to
satisfy the Internal Revenue Code's diversification
requirement, which says that for 50% of the Series' assets, no
more than 5% of net assets can be invested in any single
security. This means 50% of the Series' net assets must be
spread among various securities, with no more than 5% of net
assets invested in any single security. The other 50% can be
more concentrated with up to 25% invested in an individual
security.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign government and supranational securities risks relate The Series attempts to limit this risk by performing credit
to the ability of a foreign government or government related analysis on the issuer of each security purchased. In
issuer to make timely payments on its external debt addition, the Series attempts to reduce this risk by limiting
obligations. the portion of net assets that may be invested in these
securities.
The Series also compares the risk-reward potential of foreign
government securities being considered to that offered by
equity securities to determine whether to allocate assets to
equity or fixed-income investments.
- ----------------------------------------------------------------------------------------------------------------------------------
Credit risk of high-yield, high risk fixed-income securities: The Series may invest up to 35% of its net assets in
Securities rated lower than BBB by S&P and Baa by Moody's are high-yield, high risk foreign fixed-income securities.
considered to be of poor standing and predominantly
speculative as to the issuer's ability to repay interest and We intend to limit our investment in any single lower rated
principal. bond, which can help to reduce the effect of an individual
default on the Series. We also intend to limit our overall
These bonds are often issued by less creditworthy companies or holdings of bonds in this category. Such limitations may not
by highly leveraged (indebted) firms, which are generally less protect the Series from widespread bond defaults brought about
able than more financially stable firms to make scheduled by a sustained economic downturn or from price declines that
payments of interest and principal. The risks posed by bonds might result from changes in the quality ratings of individual
issued under such circumstances are substantial. bonds.
- ----------------------------------------------------------------------------------------------------------------------------------
Transaction costs risk: Costs of buying, selling and holding We strive to monitor transaction costs and to choose an
foreign securities, including brokerage, tax and custody efficient trading strategy for the Series.
costs, may be higher than those involved in domestic
transactions
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger
The Series is managed by Delaware International Advisers Ltd. Delaware
International Advisers makes investment decisions for the Series, manages the
Series' business affairs and provides daily administrative services. For its
services to the Series, the manager was paid [1.00%] of average daily net assets
for the last fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Clive A. Gillmore has primary responsibility for making day-to-day investment
decisions for Emerging Markets Series. In making investment decisions for the
Series, Mr. Gillmore regularly consults with an international equity team of 14
members, including co-managers, Robert Akester and Joshua A. Brooks.
Clive A. Gillmore, Director, Deputy Managing Director, Senior Portfolio Manager
of Delaware International Advisers Ltd., is a graduate of the University of
Warwick. He began his career at Legal and General Investment Management, which
is the asset management division of Legal and General Assurance Society Ltd., a
large U.K. life and pension company. Mr. Gillmore joined Delaware International
Advisers in 1990 after eight years of investment experience. His most recent
position prior to joining Delaware International Advisers was as a Pacific Basin
equity analyst and senior portfolio manager for Hill Samuel Investment Advisers
Ltd. Mr. Gillmore completed the London Business School Investment program. He
has been managing Emerging Markets Series since its inception.
77
<PAGE>
Robert Akester, Senior Portfolio Manager of Delaware International Advisers
Ltd., joined Delaware International Advisers in 1996. Mr. Akester, who began his
investment career in 1969, was most recently a Director of Hill Samuel
Investment Management Ltd., which he joined in 1985. His prior experience
included working as a Senior Analyst and head of the South-East Asian Research
team at James Capel, and as a Fund Manager at Prudential Assurance Co., Ltd. Mr.
Akester holds a BS in Statistics and Economics from University College, London
and is an associate of the Institute of Actuaries, with a certificate in Finance
and Investment.
Joshua H. Brooks, Senior Portfolio Manager of Delaware International Advisers
Ltd., holds a bachelor's degree from Yale University and holds an MBA from The
London Business School. He began his investment career with Delaware Investments
in 1991. Prior to joining the investment team in London, he was based in
Philadelphia with responsibilities that included equity market analysis and
acting as liaison with Delaware International Advisers.
78
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ --------------- -------------------- -----------
Emerging Markets Series Period
Year Ended 12/31 5/1/97(1)
------------------------------------ through
1999 1998 12/31/97
- ------------------------------------------------------------------ --------------- -------------------- -----------
<S> <C> <C>
Net asset value, beginning of period $8.880 $10.000
Income (loss) from investment operations
Net investment income(2) 0.171 0.060
Net realized and unrealized loss on investments and foreign
currencies (2.991) (1.180)
------- -------
Total from investment operations (2.820) (1.120)
------- -------
Less dividends and distributions
Dividends from net investment income (0.030) none
Distributions from net realized gain on investments (0.220) none
------- ----
Total dividends and distributions (0.250) none
------- ----
Net asset value, end of period $5.810 $8.880
====== ======
Total return(3) (32.48%) (11.20%)
Ratios and supplemental data
Net assets, end of period (000 omitted) $5,356 $5,776
Ratio of expenses to average net assets 1.50% 1.50%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.67% 2.45%
Ratio of net investment income to average net assets 2.34% 0.89%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly 2.17% (0.06%)
Portfolio turnover 38% 48%
- ------------------------------------------------------------------ --------------- -------------------- -----------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Per share information was based on the average shares outstanding method.
(3) Total return does not reflect expenses that apply to Separate Accounts or
to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown. Total return reflects
expense limitations in effect for the Series.
79
<PAGE>
Global Bond Series
Our investment strategies
Global Bond Series seeks current income consistent with the preservation of
principal. We invest primarily in fixed-income securities that may also provide
the potential for capital appreciation.
We may invest in:
o foreign and U.S. government securities;
o debt obligations of foreign and U.S. companies;
o debt securities of supranational entities;
o securities of issuers in emerging markets countries, including Brady Bonds,
which tend to be of lower quality and more speculative than securities of
developed country issuers;
o zero-coupon bonds.
At the time this Prospectus was prepared we anticipated that for increased
safety, a large percentage of the Series' assets would be invested in securities
of supranational entities and in U.S. and foreign government securities.
While the Series may purchase securities of issuers in any foreign country,
developed or emerging, we currently anticipate investing in Australia, Belgium,
Canada, France, Germany, Hong Kong, Japan, Malaysia, the Netherlands, Singapore,
Spain, Switzerland and the United Kingdom, as well as Indonesia, Korea, New
Zealand, the Philippines, South Africa, Taiwan, and Thailand. This is a
representative list; we may also invest in other countries. More than 25% of the
Series' total assets may be invested in the securities of issuers located in the
same country.
Generally, the value of fixed-income securities rises when interest rates
decline and declines when interest rates rise. The value of your investment in
the Series will be affected by changes in interest rates. We generally keep the
average weighted maturity of the portfolio in the five-to-ten year range. If we
anticipate a declining interest rate environment; however, we may extend the
average weighted maturity past ten years or if we anticipate a rising rate
environment, we may shorten the average weighted maturity to less than five
years.
Global Bond Series uses the same investment strategy as Delaware Global Bond
Fund, a separate fund in the Delaware Investments Family of Funds, although
performance may differ depending on such factors as the size of the funds and
the timing of investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
80
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation. The following chart provides
a brief description of the securities that the Series may invest in. Please see
the Statement of Additional Information for additional descriptions of these as
well as other investments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Global Bond Series
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Corporate bonds: Debt obligations issued by U.S. Global Bond Series may invest in corporate bonds, generally those
or foreign corporations. rated A or better by S&P or Moody's or if unrated, determined to
be of comparable quality. The Series may also invest in high
yield, high risk emerging markets corporate bonds.
- --------------------------------------------------------------------------------------------------------------------------------
Foreign government securities: Debt obligations The Series will generally invest in securities issued by foreign
issued by a government other than the United governments, their agencies, instrumentalities or political
States or by an agency, instrumentality or subdivisions that are rated AAA or AA by S&P or Aaa or Aa by
political subdivision of such governments. Moody's or, if unrated, considered to be of comparable quality.
We may invest a portion of the Fund's assets in foreign
governmental securities issued by emerging countries, which may
be lower rated, including securities rated below investment
grade.
- --------------------------------------------------------------------------------------------------------------------------------
U.S. government securities: Securities issued or The Series may invest a significant portion of its assets in U.S.
guaranteed by the U.S. government or issued by an government securities. It will invest only in U.S. government
agency or instrumentality of the U.S. government. obligations, including bills, notes and bonds that are issued or
guaranteed as to the payment of principal and interest by the
U.S. government and securities of U.S. government agencies or
instrumentalities that are backed by the full faith and credit of
the United States.
- --------------------------------------------------------------------------------------------------------------------------------
Investment company securities: In some countries, Global Bond Series may hold closed-end investment company
investments by U.S. mutual funds are generally securities. The Series may hold investment company securities if
made by purchasing shares of investment companies we believe the country offers good investment opportunities.
that in turn invest in the securities of such These investments involve an indirect payment of a portion of the
countries. expenses of the other investment companies, including their
advisory fees.
- --------------------------------------------------------------------------------------------------------------------------------
Foreign currency transactions: A forward foreign Although the Series values its assets daily in U.S. dollars, it
currency exchange contract involves an obligation does not intend to convert its holdings of foreign currencies
to purchase or sell a specific currency on a fixed into U.S. dollars on a daily basis. The Series will, however,
future date at a price that is set at the time of from time to time, purchase or sell foreign currencies and/or
the contract. The future date may be any number of engage in forward foreign currency exchange transactions. The
days from the date of the contract as agreed by Series may conduct its foreign currency transactions on a cash
the parties involved. basis at the rate prevailing in the foreign currency exchange
market or through a forward foreign currency exchange contract or
forward contract.
The Series may use forward contracts for defensive hedging
purposes to attempt to protect the value of the Series' current
security or currency holdings. It may also use forward contracts
if it has agreed to sell a security and wants to "lock-in" the
price of that security, in terms of U.S. dollars. Investors
should be aware of the costs of currency conversion. The Series
will not use forward contracts for speculative purposes.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Global Bond Series
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Supranational entities: Debt securities of We anticipate investing a large percentage of Global Bond Series'
supranational entities may be denominated in any assets in debt securities of supranational entities.
currency. These securities are typically of
high-grade quality. A supranational entity is an
entity established or financially supported by the
national governments of one or more countries to
promote reconstruction or development. The
International Bank for Reconstruction and
Development (more commonly known as the World
Bank) would be one example of a supranational
entity.
- --------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds: Zero coupon bonds are debt The Series may invest in zero coupon bonds.
obligations that do not entitle the holder to any
periodic payments of interest before maturity or a
specified date when the securities begin paying
current interest. Therefore, they are issued and
traded at a discount from their face amounts or
par value. The market prices of zero coupon bonds
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.
- --------------------------------------------------------------------------------------------------------------------------------
Brady Bonds: These are debt securities issued Global Bond Series may invest in Brady Bonds. We believe that the
under the framework of the Brady Plan, an economic reforms undertaken by countries in connection with the
initiative for debtor nations to restructure their issuance of Brady Bonds can make the debt of countries that have
outstanding external indebtedness (generally, issued or have announced plans to issue these bonds a viable
commercial bank debt). Brady Bonds tend to be of opportunity for investment.
lower quality and more speculative than securities
of developed country issuers.
- --------------------------------------------------------------------------------------------------------------------------------
High-yield, high risk fixed-income securities: Global Bond Series may invest a portion of its assets in these
Securities that are rated lower than BBB by S&P or securities.
Baa by Moody's, or if unrated, of equal quality.
These securities may be issued by companies or
governments of emerging or developing countries,
which may be less creditworthy. The risk that
these companies or governments may not be able to
make interest or principal payments is
substantial.
- --------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements: An agreement between a Typically, we use repurchase agreements as a short-term
buyer, such as the Series, and a seller of investment for the Series' cash position. In order to enter into
securities in which the seller agrees to buy the these repurchase agreements, the Series must have collateral of
securities back within a specified time at the at least 102% of the repurchase price. The Series will only enter
same price the buyer paid for them, plus an amount into repurchase agreements in which the collateral is composed of
equal to an agreed upon interest rate. Repurchase U.S. government securities..
agreements are often viewed as equivalent to cash.
- --------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities We may invest in privately placed securities that are eligible
whose resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
- --------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a We may invest up to 10% of net assets in illiquid securities, including
ready market, and cannot be easily sold, if at repurchase agreements with maturities of over seven days.
all, at approximately the price that the Series
has valued them.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in depositary receipts, futures contracts and options
and interest rate swaps. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Portfolio turnover
The Series anticipates that its annual portfolio turnover will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
82
<PAGE>
Borrowing from banks
Global Bond Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
Securities lending
Global Bond 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
securities transactions. These transactions will generate additional income for
the Series.
83
<PAGE>
The risks of investing in Global Bond Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Global Bond Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
How we strive to manage them
Risks Global Bond Series
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market Risk is the risk that all or a majority of We maintain a long-term investment approach and focus on stocks
the securities in a certain market--like the stock we believe can appreciate over an extended time frame regardless
or bond market--will decline in value because of of interim market fluctuations. In deciding what portion of the
factors such as economic conditions, future Series' portfolio should be invested in any individual country,
expectations or investor confidence. we evaluate a variety of factors, including opportunities and
risks relative to other countries. As part of the Series'
principal investment strategy, the Series may invest in
securities that generally have relatively less market risk.
We may hold a substantial part of the Series' assets in cash or
cash equivalents as a temporary defensive strategy. To the extent
it holds cash or cash equivalents, the Series may be unable to
achieve its investment objective.
- --------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the We typically hold a number of different securities in a variety
value of securities in a particular industry or of sectors in order to minimize the impact that a poorly
the value of an individual stock or bond will performing security would have on a Fund. This risk is more
decline because of changing expectations for the significant for the Series, which is a non-diversified fund.
performance of that industry or for the individual
company issuing the stock or bond.
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities, Interest rate risk is a significant risk for Global Bond Series.
particularly bonds with longer maturities, will In an attempt to manage interest rate risk, we adjust the Series'
decrease in value if interest rates rise. average weighted maturity based on our view of interest rates.
The Series' average weighted maturity will generally be in the
five-to-ten year range. When we anticipate that interest rates
will decline, we may extend the average maturity beyond ten years
and when we anticipate that interest rates will rise, we may
shorten the average maturity to less than five years.
- --------------------------------------------------------------------------------------------------------------------------------
Currency risk is the risk that the value of a The Series may try to hedge its currency risk by purchasing
series' investments may be negatively affected by foreign currency exchange contracts. If the Series agrees to
changes in foreign currency exchange rates. purchase or sell foreign securities at a pre-set price on a
Adverse changes in exchange rates may reduce or future date, the Series attempts to protect the value of a
eliminate any gains produced by investments that security they own from future changes in currency rates. If the
are denominated in foreign currencies and may Series has agreed to purchase or sell a security, it may also use
increase any losses. foreign currency exchange contracts to "lock-in" the security's
price in terms of U.S. dollars or another applicable currency.
The Series may use forward currency exchange contracts only for
defensive or protective measures, not to enhance portfolio
returns. However, there is no assurance that such a strategy will
be successful.
- --------------------------------------------------------------------------------------------------------------------------------
Political risk is the risk that countries or the We evaluate the political situations in the countries where we
entire region where we invest may experience invest and take into account any potential risks before we select
political instability. This may cause greater securities for the portfolio. However, there is no way to
fluctuation in the value and liquidity of our eliminate political risk when investing internationally.
investments due to changes in currency exchange
rates, governmental seizures or nationalization of
assets.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
How we strive to manage them
Risks Global Bond Series
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Emerging market risk is the possibility that the Striving to manage this risk, the portfolio managers carefully
risks associated with international investing will screen securities within emerging markets and attempt to consider
be greater in emerging markets than in more material risks associated with an individual company or bond
developed foreign markets because, among other issuer. We cannot eliminate emerging market risk and consequently
things, emerging markets may have less stable encourage shareholders to invest in these Funds only if they have
political and economic environments. a long-term time horizon, over which the potential of individual
securities is more likely to be realized.
- --------------------------------------------------------------------------------------------------------------------------------
Inefficient market risk is the risk that foreign The Funds will attempt to reduce these risks by investing in a
markets may be less liquid, have greater price number of different countries, and noting trends in the economy,
volatility, less regulation and higher transaction industries and financial markets.
costs than U.S. markets.
Global Bond Series will also perform credit analysis in an
attempt to reduce these risks.
- --------------------------------------------------------------------------------------------------------------------------------
Information risk is the risk that foreign We conduct fundamental research on the companies we invest in
companies may be subject to different accounting, rather than relying solely on information available through
auditing and financial reporting standards than financial reporting. We believe this will help us to better
U.S. companies. There may be less information uncover any potential weaknesses in individual companies.
available about foreign issuers than domestic
issuers. Furthermore, regulatory oversight of
foreign issuers may be less stringent or less
consistently applied than in the United States.
- --------------------------------------------------------------------------------------------------------------------------------
Non-diversified fund risk. Non-diversified funds Global Bond Series is a non-diversified fund. The Series is a
are subject to greater risks because adverse non-diversified fund as defined by the Investment Company Act of
effects on their individual investments may affect 1940 Act. That means the Fund does not have to limit the
a larger portion of their overall assets. percentage of assets invested in an individual security. However,
the Series does intend to satisfy the Internal Revenue Code's
diversification requirement, which says that for 50% of the
Series' assets, no more than 5% of net assets can be invested in
any single security. This means 50% of the Series' net assets
must be spread among various securities, with no more than 5% of
net assets invested in any single security. The other 50% can be
more concentrated with up to 25% invested in an individual
security.
- --------------------------------------------------------------------------------------------------------------------------------
Foreign government and supranational securities The Series is subject to this risk and will attempt to limit this
risks relate to the ability of a foreign risk by performing credit analysis on the issuer of each security
government or government related issuer to make purchased.
timely payments on its external debt obligations.
The Series attempts to reduce the risks associated with investing
in foreign governments by focusing on bonds rated within the two
highest rating categories.
- --------------------------------------------------------------------------------------------------------------------------------
Credit risk of high-yield, high risk fixed-income Delaware Global Bond Fund may invest a portion of its assets in
securities: Securities rated lower than BBB by S&P these securities. We intend to limit our investment in any single
and Baa by Moody's are considered to be of poor lower rated bond, which can help to reduce the effect of an
standing and predominantly speculative as to the individual default on the Series. We also intend to limit our
issuer's ability to repay interest and principal. overall holdings of bonds in this category. Such limitations may
not protect the Series from widespread bond defaults brought
These bonds are often issued by less creditworthy about by a sustained economic downturn or from price declines
companies or by highly leveraged (indebted) firms, that might result from changes in the quality ratings of
which are generally less able than more individual bonds.
financially stable firms to make scheduled
payments of interest and principal. The risks
posed by bonds issued under such circumstances are
substantial.
- --------------------------------------------------------------------------------------------------------------------------------
Transaction costs risk: Costs of buying, selling The Series is subject to this risk. We strive to monitor
and holding foreign securities, including transaction costs and to choose an efficient trading strategy for
brokerage, tax and custody costs, may be higher the Series.
than those involved in domestic transactions
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
Investment manger
The Series is managed by Delaware International Advisers Ltd. Delaware
International Advisers makes investment decisions for the Series, manages the
Series' business affairs and provides daily administrative services. For its
services to the Series, the manager was paid [0.00%] of average daily net assets
for the last fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Christopher A. Moth and Joanna Bates have primary responsibility for making
day-to-day investment decisions for Global Bond Series. In making investment
decisions for the Series, Mr. Moth and Ms. Bates regularly consult with David G.
Tilles and four global fixed income team members.
Christopher A. Moth, Director, Senior Portfolio Manager, Head of Investment
Strategy of Delaware International Advisers Ltd., is a graduate of The City
University London. He joined Delaware International in 1992. He previously
worked at the Guardian Royal Exchange where he was responsible for technical
analysis, quantitative models and projections. Mr. Moth has been awarded the
certificate in Finance and Investment from the Institute of Actuaries in London.
Mr. Moth became Co-Manager of the Series in January 1997.
Joanna Bates, Senior Portfolio Manager, Credit and Emerging Markets of Delaware
International Advisers Ltd., is a graduate of London University. She joined the
Fixed Income team at Delaware International in June 1997. Prior to that she was
Associate Director, Fixed Interest at Hill Samuel Investment Management Ltd.
which she joined in 1990. She had previously worked at Fidelity International
and Save & Prosper as a fund manager and analyst for global bond markets. Ms.
Bates is an associate of the Institute of Investment Management and Research.
Ms. Bates became Co-Manager of the Series in July 1999.
David G. Tilles, Managing Director and Chief Investment Officer of Delaware
International Advisers Ltd., was educated at the Sorbonne, Warwick University
and Heidelberg University. Prior to joining Delaware International Advisers in
1990 as Managing Director and Chief Investment Officer, he spent 16 years with
Hill Samuel Investment Management Group in London, serving in a number of
investment capacities. His most recent position prior to joining Delaware
International Advisers was Chief Investment Officer of Hill Samuel Investment
Management Ltd.
86
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Period
Global Bond Series 5/2/96(1)
Year Ended 12/31 through
---------------------------------------------------
1999 1998 1997 12/31/96
- ---------------------------------------------------------------- ------------ ------------ ---------- --------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.500 $10.960 $10.000
Income from investment operations
Net investment income(2) 0.608 0.636 0.339
Net realized and unrealized gain (loss) on investments and
foreign currencies 0.182 (0.551) 0.831
----- ------- -----
Total from investment operations 0.790 0.085 1.170
----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.600) (0.460) (0.210)
Distributions from net realized gain on investments (0.010) (0.085) none
------- ------- ----
Total dividends and distributions (0.610) (0.545) (0.210)
------- ------- -------
Net asset value, end of period $10.680 $10.500 $10.960
======= ======= =======
Total return(3) 7.82% 0.88% 11.79%
Ratios and supplemental data
Net assets, end of period (000 omitted) $21,711 $16,876 $9,471
Ratio of expenses to average net assets 0.83% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid
indirectly 0.92% 1.08% 1.19%
Ratio of net investment income to average net assets 5.83% 6.03% 6.51%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly 5.74% 5.75% 6.12%
Portfolio turnover 79% 97% 56%
- ---------------------------------------------------------------- ------------ ------------ ---------- --------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Per share information for the years ended
December 31, 1997 and 1998 was based on the average shares outstanding
method.
(3) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown. Total return reflects expense
limitations in effect for the Series.
87
<PAGE>
Growth and Income Series
Our investment strategies
The Growth and Income Series seeks the highest possible total rate of return.
The Growth and Income Series invests primarily in the common stocks of
established companies that we believe have long-term total return potential.
These stocks offer both current income through dividends and capital growth
potential through possible increases in stock prices. A focus on stocks with
high dividend yields, such as the one we use, is generally considered to be a
value-oriented investment approach.
We first identify companies that have above-average dividend yields compared to
the unmanaged S&P 500 Index, a commonly used measure of U.S. stocks. We then
research individual companies and analyze economic and market conditions,
seeking to identify the securities that we think are the best investments for
the Series.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
88
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. High-yield bonds offer the potential for greater income
payments than stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Growth and Income Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest 90% to 100% of the Series' net assets in
in a corporation. Stockholders participate in the dividend-paying common stocks.
corporation's profits and losses, proportionate to the
number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts: Certificates issued by a U.S. We may invest without limitation in ADRs. We use them when we
bank which represent the bank's holdings of a stated number believe they offer better total return opportunities than U.S.
of shares of a foreign corporation. An ADR entitles the securities.
holder to all dividends and capital gains earned by the
underlying foreign shares, and an ADR is bought and sold the
same as U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series' must have collateral of at
the same price the buyer paid for them, plus an amount equal least 102% of the repurchase price. The Series will only enter
to an agreed upon interest rate. Repurchase agreements are into repurchase agreements in which the collateral is composed of
often viewed as equivalent to cash. U.S. government securities..
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities. For
are privately placed securities whose resale is restricted this Series, the 10% limit includes restricted securities such as
under securities law. Illiquid securities are securities privately placed securities that are eligible for resale only
that do not have a ready market, and cannot be easily sold among certain institutional buyers without registration, which are
within seven days at approximately the price that the Series commonly known as "Rule 144A Securities" and repurchase agreements
has valued them. with maturities of over seven days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series is permitted to invest in all available types of equity securities
including preferred stock, rights and warrants and convertible securities. It
may also invest in fixed-income securities and enter into futures and options
transactions for defensive purposes. It may invest in global and European
depositary receipts and directly in foreign securities; however, the manager has
no present intention of doing so. Growth and Income Series reserves the right to
hold a substantial part of its assets in cash or cash equivalents as a
temporary, defensive strategy, although to the extent it does so it may be
unable to meet its investment objective. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities
The Series may lend up to 25% of its assets to qualified brokers, dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
The Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Portfolio turnover
We anticipate that annual portfolio turnover for the Series will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
89
<PAGE>
Borrowing from banks
Growth and Income Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
90
<PAGE>
The risks of investing in Growth and Income Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest, you should carefully
evaluate the risks. An investment in the Series typically provides the best
results when held for a number of years. The following are the chief risks you
assume when investing in Growth and Income Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Growth and Income Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or bond believe can appreciate over an extended time frame regardless of
market -- will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor stock market movements and generally do not trade for short-term
confidence. purposes.
We may hold a substantial part of Growth and Income Series' assets
in cash or cash equivalents as a temporary defensive strategy. To
the extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of the Series' assets invested in any one
securities in a particular industry or the value of an industry and in any individual security. We also follow a rigorous
individual stock or bond will decline because of changing selection process designed to identify undervalued securities
expectations for the performance of that industry or for the before choosing securities for the portfolio.
individual company issuing the stock or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of the Series' portfolio
adversely affected by political instability, changes in in foreign corporations through American Depositary Receipts. We
currency exchange rates, foreign economic conditions or do not invest directly in foreign securities. When we do purchase
inadequate regulatory and accounting standards. ADRs, they are generally denominated in U.S. dollars and traded on
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold within seven days, at approximately the price
that the Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.60% of average daily net assets for the last
fiscal year.
Portfolio manager
John B. Fields has primary responsibility for making day-to-day investment
decisions for Growth and Income Series.
John B. Fields, Senior Vice President and Senior Portfolio Manager, joined
Delaware Investments in 1992 and has 29 years' experience in investment
management. He earned a bachelor's degree and an MBA from Ohio State University.
Before joining Delaware Investments, he was Director of Domestic Equity Risk
Management at DuPont. Prior to that time, he was Director of Equity Research at
Comerica Bank. Mr. Fields is a member of the Financial Analysts Society of
Wilmington, Delaware. In making investment decisions for Growth and Income
Series, Mr. Fields works with a team of Delaware portfolio managers utilizing
the same investment strategy. He has been managing Growth and Income Series
since 1992.
92
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------- ----------------------------------------------------------
Growth and Income Series
(formerly Decatur Total Return Series) Year Ended 12/31
----------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------- ----------- ----------- ----------- ----------- ----------
Net asset value, beginning of year $18.800 $15.980 $14.830 $11.480
Income (loss) from investment operations
Net investment income 0.361 0.324 0.377 0.416
Net realized and unrealized gain (loss) on investments 1.636 4.216 2.398 3.574
----- ----- ----- -----
Total from investment operations 1.997 4.540 2.775 3.990
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.327) (0.370) (0.420) (0.430)
Distributions from net realized gain on investments (1.050) (1.350) (1.205) (0.210)
------- ------- ------- -------
Total dividends and distributions (1.377) (1.720) (1.625) (0.640)
------- ------- ------- -------
Net asset value, end of year $19.420 $18.800 $15.980 $14.830
======= ======= ======= =======
Total return(1) 11.35% 31.00% 20.72% 36.12%
Ratios and supplemental data
Net assets, end of period (000 omitted) $579,907 $401,402 $166,647 $109,003
Ratio of expenses to average net assets 0.71% 0.71% 0.67% 0.69%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.71% 0.71% 0.67% 0.69%
Ratio of net investment income to average net assets 2.00% 2.02% 2.66% 3.24%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid 2.00% 2.02% 2.66% 3.24%
Portfolio turnover 81% 54% 81% 85%
- --------------------------------------------------------------- ----------- ----------- ----------- ----------- ----------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
93
<PAGE>
Growth Opportunities Series
Our investment strategies
We strive to identify companies of medium market capitalization that offer
above-average opportunities for long-term capital growth because they are poised
to provide high and consistent earnings growth. Medium-size companies are
generally considered to be those with market capitalizations between $2 billion
and $10 billion.
Companies in the early stages of their development often offer the greatest
opportunities for rising share prices. However, the smallest companies generally
involve the most risk because they may have very limited resources, less
management experience and narrower product lines. We believe that medium-size
companies can provide many of the growth opportunities of small companies, but
with less risk. Medium-size companies may be more established in their industry
and have greater financial resources. Yet, they may still have the flexibility
and growth potential of a smaller company.
We use a bottom-up approach to stock selection, carefully evaluating the
characteristics of individual companies. We rely heavily on our own research in
selecting companies for the portfolio. That research might include one-on-one
meetings with executives, company competitors, industry experts and customers.
Our first step in identifying promising companies is to pinpoint stocks that
exhibit one or more of the following characteristics:
o A history of high earnings-per-share growth;
o Expectations for future earnings growth that are either high or accelerating;
o A price to earnings ratio that is low relative to other stocks - indicating
that the stock might be undervalued;
o A discounted cash flow that is high relative to other stocks; or
o A special situation that has caused the stock to fall out of favor, but which
we believe creates potential for even greater long-term price appreciation.
Once we have narrowed our search to companies with these characteristics, we
then conduct even more thorough hands-on research, evaluating a wide variety of
factors, including:
o The financial strength of the company;
o The expertise of its management;
o The growth potential of the company within its industry; and
o The growth potential of the industry.
Our goal is to select companies that are likely to perform well over an extended
time frame.
Growth Opportunities Series uses the same investment strategy as Growth
Opportunities Fund, a separate fund in the Delaware Investments Family of Funds,
although performance may differ depending on such factors as the size of the
funds and the timing of investments and redemptions.
In order to reduce the inherent risks of equity investing, we maintain a
diversified portfolio, typically holding a mix of different stocks, representing
a wide array of industries.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
94
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Growth Opportunities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest 85% to 100% of net assets in common stock
in a corporation. Stockholders participate in the with an emphasis on medium-size companies.
corporation's profits and losses, proportionate to the
number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
American Depositary Receipts: ADRs are issued by a U.S. bank We may hold ADRs when we believe they offer greater appreciation
and represent the bank's holdings of a stated number of potential than U.S. securities.
shares of a foreign corporation. An ADR entitles the holder
to all dividends and capital gains earned by the underlying
foreign shares. ADRs are bought and sold the same as U.S.
securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted and illiquid securities: Restricted securities We may invest up to 10% of net assets in illiquid securities. For
are privately placed securities whose resale is restricted this Series, the 10% limit includes restricted securities such as
under securities law. Illiquid securities are securities privately placed securities that are eligible for resale only
that do not have a ready market, and cannot be easily sold among certain institutional buyers without registration, which are
within seven days at approximately the price that the Series commonly known as "Rule 144A Securities" and repurchase agreements
has valued them. with maturities of over seven days.
- ------------------------------------------------------------------------------------------------------------------------------------
Options and futures: Options represent a right to buy or If we have stocks that appreciated in price, we may want to
sell a security or group of securities at an agreed upon protect those gains when we anticipate adverse conditions. We
price at a future date. The purchaser of an option may or might use options or futures to neutralize the effect of any price
may not choose to go through with the transaction. declines, without selling the security. We might also use options
or futures to gain exposure to a particular market segment without
Writing a covered call option on a security obligates the purchasing individual securities in that segment. We might use
owner of the security to sell it at an agreed upon price on this approach if we had excess cash that we wanted to invest
an agreed upon date (usually no more than nine months in the quickly.
future.) The owner of the security receives a premium
payment from the purchaser of the call, but if the security We might use covered call options if we believe that doing so
appreciates to a price greater than the agreed upon selling would help the Series to meet its investment objective.
price, the fund would lose out on those gains.
Use of these strategies can increase the operating costs of the
Futures contracts are agreements for the purchase or sale of Series and can lead to loss of principal.
securities at a specified price, on a specified date. Unlike
an option, a futures contract must be executed unless it is
sold before the settlement date.
Options and futures are generally considered to be
derivative securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE>
Growth Opportunities Series may also invest in other securities including
convertible securities, warrants, preferred stocks, and bonds. Please see the
Statement of Additional Information for additional descriptions and risk
information on these securities as well as those listed in the table above. You
can find additional information about the investments in the Series' portfolio
in the annual or semi-annual shareholder report.
Lending securities
Growth Opportunities Series may lend up to 25% of its assets to qualified
dealers and institutional investors for their use in security transactions.
Borrowing from banks
Growth Opportunities Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Purchasing securities on a when-issued or delayed delivery basis
Growth Opportunities Series may buy or sell securities on a when-issued or
delayed delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that Growth Opportunities Series' annual portfolio turnover may be
greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
96
<PAGE>
The risks of investing in Growth Opportunities Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Growth Opportunities Series. Please see the
Statement of Additional Information for further discussion of these risks and
the other risks not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Growth Opportunities Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or bond believe can appreciate over an extended time frame regardless of
market -- will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor stock market movements and though we may hold securities for any
confidence. amount of time, we typically do not trade for short-term purposes.
We may hold a substantial part of Growth Opportunities Series'
assets in cash or cash equivalents as a temporary, defensive
strategy. To the extent it holds cash or cash equivalents, the
Series may be unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Growth Opportunities Series' assets
securities in a particular industry or the value of an invested in any one industry and in any individual security. We
individual stock or bond will decline because of changing also follow a rigorous selection process before choosing
expectations for the performance of that industry or for the securities and continuously monitor them while they remain in the
individual company issuing the stock. portfolio.
- ------------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller Though the Series may invest in small companies, our focus is on
companies may be more volatile than larger companies because medium-size companies. We believe medium-size companies, in
of limited financial resources or dependence on narrow general, are more stable than smaller companies and involve less
product lines. risk due to their larger size, greater experience and more
extensive financial resources. In addition, the Series maintains a
well-diversified portfolio, selects stocks carefully and monitors
them continuously.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will decrease We analyze each company's financial situation and its cash flow to
in value if interest rates rise. The risk is generally determine the company's ability to finance future expansion and
associated with bonds; however, because smaller companies operations. The potential affect that rising interest rates might
often borrow money to finance their operations, they may be have on a stock is taken into consideration before the stock is
adversely affected by rising interest rates. purchased.
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and options risk is the possibility that a series We will not use futures and options for speculative reasons. We
may experience a loss if it employs an options or futures may use options and futures to protect gains in the portfolio
strategy related to a security or a market index and that without actually selling a security. We may also use options and
security or index moves in the opposite direction from what futures to quickly invest excess cash so that the portfolio is
the manager anticipated. Futures and options also involve generally fully invested.
additional expenses, which could reduce any benefit or
increase any loss that a fund gains from using the strategy.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of the Series' portfolio
adversely affected by political instability, changes in in foreign corporations indirectly through American Depositary
currency exchange rates, foreign economic conditions or Receipts. When we do purchase ADRs, they are generally denominated
inadequate regulatory and accounting standards. in U.S. dollars and traded on a U.S. exchange.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold within seven days at approximately the price
that the Series values them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
97
<PAGE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
Portfolio manager
Gerald S. Frey has primary responsibility for making day-to-day investment
decisions for Growth Opportunities Series. When making investment decisions for
the Series, Mr. Frey regularly consults with Marshall T. Bassett, John A.
Heffern, Jeffrey W. Hynoski, Steven T. Lampe and Lori P. Wachs.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has been senior portfolio
manager for the Series since its inception.
Marshall T. Bassett, Vice President/Portfolio Manager, joined Delaware
Investments in 1997. In his most recent position, he served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small
growth companies. Prior to that, he was a trust officer at Sovran Bank and Trust
Company. He received a bachelor's degree and an MBA from Duke University.
John A. Heffern, Vice President, Portfolio Manager, earned bachelors and MBA
degrees at the University of North Carolina at Chapel Hill. He joined Delaware
Investments in 1997. He previously was a Senior Vice President, Equity Research
at NatWest Securities Corporation's Specialty Financial Services unit. Before
that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he served as a Vice President at Bessemer Trust
Company in the mid and large capitalization growth group, where he specialized
in the areas of science, technology, and telecommunications. Prior to that, Mr.
Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University.
Steven T. Lampe, Vice President, Portfolio Manager, received a bachelor's degree
in Economics and an MBA degree with a concentration in Finance from the
University of Pennsylvania's Wharton School. He joined Delaware Investments in
1995 and covers the financial services and business services sectors for small
and mid-capitalization growth stocks. He previously served as a tax/audit
manager at Price Waterhouse, specializing in financial services firms. Mr. Lampe
is a Certified Public Accountant.
Lori P. Wachs, Vice President/Portfolio Manager, joined Delaware Investments in
1992 from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental Studies.
98
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- --------------------------------------------------------
Growth Opportunities Series
Year Ended 12/31
--------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------- ----------- ---------- ---------- ----------- ----------
Net asset value, beginning of year $17.270 $15.890 $15.130 $11.750
Income (loss) from investment operations
Net investment income (loss) (1) (0.026) (0.010) (0.015) 0.072
Net realized and unrealized gain (loss) on investments 2.901 2.260 2.030 3.378
----- ----- ----- -----
Total from investment operations 2.875 2.250 2.015 3.450
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income none none (0.070) (0.070)
Distributions from net realized gain on investments (1.595) (0.870) (1.185) none
------- ------- ------- -------
Total dividends and distributions (1.595) (0.870) (1.255) (0.070)
------- ------- ------- -------
Net asset value, end of year $18.550 $17.270 $15.890 $15.130
======= ======= ======= =======
Total return(2) 18.81% 14.90% 14.46% 29.53%
Ratios and supplemental data
Net assets, end of period (000 omitted) $130,548 $110,455 $79,900 $58,123
Ratio of expenses to average net assets 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.86% 0.87% 0.82% 0.85%
Ratio of net investment income (loss) to average net assets (0.16%) (0.06%) (0.11%) 0.61%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly (0.22% (0.13% (0.13%) 0.56%
Portfolio turnover 142% 134% 85% 73%
- ----------------------------------------------------------------- ----------- ---------- ---------- ----------- ----------
</TABLE>
(1) Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.
(2) Total return does not reflect expenses that apply to Separate Accounts or
to the related insurance policies and inclusion of these charges would
reduce total return figures for all periods shown. Total return reflects
expense limitations in effect for the Series.
99
<PAGE>
High Yield Series
Our investment strategies
High Yield Series
We invest primarily in fixed-income securities that we believe will have a
liberal and consistent yield and will tend to reduce the risk of market
fluctuations. We expect to invest the majority of the Series' assets primarily
in high-yield bonds or junk bonds, which involve greater risks than investment
grade bonds. The Series may also invest in unrated bonds that we consider to
have comparable credit characteristics. Unrated bonds may be more speculative in
nature than rated bonds.
Before selecting high-yield corporate bonds, we carefully evaluate each
individual bond including its income potential and the size of the bond
issuance. The size of the issuance helps us evaluate how easily we may be able
to buy and sell the bond.
We also do a thorough credit analysis of the issuer to determine whether that
company has the financial ability to meet the bond's payments.
We maintain a well-diversified portfolio of high-yield bonds that represents
many different sectors and industries. Through diversification we can help to
reduce the impact that any individual bond might have on the portfolio should
the issuer have difficulty making payments.
The Series strives to provide total return, with income as a secondary
objective. Before purchasing a bond, we evaluate both the income level and its
potential for price appreciation. At least 65% of the Series' assets will be
invested in corporate bonds rated at the time of purchase as BB or lower by S&P
or similarly rated by another NRSO or, if unrated, that we judge to be of
comparable quality. The Series also may invest in bonds of foreign issuers in
pursuit of its objective.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. The
Board changed the Series' investment objective effective May 1, 2000 from "high
current income" to the current investment objective of the Series "total return,
with high current income as a secondary objective." This change in investment
objective will be implemented over the course of the six months following May 1,
2000.
100
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
High-yield corporate bonds: Debt obligations issued by a The Series may invest without limit in high-yield corporate
corporation and rated lower than investment grade by an bonds. The Series generally will not purchase corporate bonds
NRSRO such as S&P or Moody's or, if unrated, that we which, at the time of purchase, are rated or lower than CCC by
believe are of comparable quality. These securities are S&P or Caa by Moody's.
considered to be of poor standing and predominately
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities: Direct U.S. obligations The Series may invest without limit in U.S. government
including bills, notes, bonds and other debt securities securities. However, they will typically be a small percentage
issued by the U.S. Treasury or securities of U.S. of the portfolio because they generally do not offer as high a
government agencies or instrumentalities which are level of current income as high-yield corporate bonds.
backed by the full faith and credit of the United
States.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign government or corporate securities: Securities The Series may invest up to 15% of its total assets in
issued by foreign governments or supranational entities securities of issuers domiciled in foreign countries including
or foreign corporations. both established countries and those with emerging markets.
A supranational entity is an entity established or
financially supported by the national governments of one
or more countries. The International Bank for
Reconstruction and Development (more commonly known as
the World Bank) is one example of a Supranational
entity.
- ------------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds and pay-in-kind bonds: Zero coupon We may invest in zero coupon bonds and payment-in-kind bonds,
securities are debt obligations which do not entitle the though we do not expect this to be a significant component of
holder to any periodic payments of interest prior to our strategy. The market prices of these bonds are generally
maturity or a specified date when the securities begin more volatile than the market prices of securities that pay
paying current interest. Therefore, they are issued and interest periodically and are likely to react to changes in
traded at a price lower than their face amounts or par interest rates to a greater degree than interest-paying bonds
value. Payment-in-kind bonds pay interest or dividends having similar maturities and credit quality. They may have
in the form of additional bonds or preferred stock. certain tax consequences which, under certain conditions, could
be adverse to the Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term
such as the Series, and seller of securities in which investment for the Series' cash position. In order to enter into
the seller agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid for at least 102% of the repurchase price. No more than 10% of the
them, plus an amount equal to an agreed upon interest Series' assets may be invested in repurchase agreement of over
rate. Repurchase agreements are often viewed as seven days' maturity. The Series will only enter into repurchase
equivalent to cash. agreements in which the collateral is composed of U.S.
government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration, including Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 15% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Illiquid securities: Securities that do not have a ready We may invest up to 15% of net assets in illiquid securities.
market, and cannot be easily sold within seven days at
approximately the price that a series has valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in other income-producing securities including common
stocks and preferred stocks, some of which may have convertible features or
attached warrants. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Lending securities
The Series may lend up to 25% of its assets to qualified brokers, dealers and
institutional investors for their use in security transactions.
Borrowing from banks
The Series may borrow money as a temporary measure for extraordinary purposes or
to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Purchasing securities on a when-issued or delayed delivery basis
High Yield Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that the Series' annual portfolio turnover will exceed 100%. A
turnover rate of 100% would occur if the Series sold and replaced securities
valued at 100% of its net assets within one year. High turnover can result in
increased transaction costs and tax liability.
102
<PAGE>
The risks of investing in the High Yield Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in a Fund you should
carefully evaluate the risks. An investment in High Yield Series Fund typically
provides the best results when held for a number of years. The following are the
chief risks you assume when investing in the Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on bonds
securities in a certain market--like the stock or bond that we believe will continue to pay interest regardless of
market--will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor bond market or interest rate movements and generally do not
confidence. trade for short-term purposes.
We may hold a substantial part of the Series' assets in cash or
cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of the Series' assets invested in any one
securities in a particular industry or the value of an industry and in any individual security. We also follow a
individual stock or bond will decline because of rigorous selection process before choosing securities for the
changing expectations for the performance of that portfolio.
industry or for the individual company issuing the stock
or bond.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will The Series is subject to interest rate risk. We cannot eliminate
decrease in value if interest rates rise. The risk is that risk, but we do strive to manage it by monitoring economic
greater for bonds with longer maturities than for those conditions.
with shorter maturities.
- ------------------------------------------------------------------------------------------------------------------------------------
Credit risk is the risk that there is the possibility Our careful, credit-oriented bond selection and our commitment
that a bond's issuer will be unable to make timely to hold a diversified selection of high-yield bonds are designed
payments of interest and principal. to manage this risk.
Investing in so-called "junk" or "high-yield" bonds We generally do not purchase corporate bonds which, at the time
entails the risk of principal loss, which may be greater of purchase, are rated lower than CCC by S&P or Caa by Moody's.
than the risk involved in investment grade bonds. If a corporate bond held by the Series drops below these levels
High-yield bonds are sometimes issued by companies whose or goes into default, the Series will begin to sell the security
earnings at the time of issuance are less than the in an orderly manner, striving to minimize any adverse affect on
projected debt service on the junk bonds. the Series.
- ------------------------------------------------------------------------------------------------------------------------------------
Recession risk: Although the market for high-yield bonds It is likely that protracted periods of economic uncertainty
existed through periods of economic downturns, the would cause increased volatility in the market prices of
high-yield market grew rapidly during the long economic high-yield bonds, an increase in the number of high-yield bond
expansion which took place in the United States during defaults and corresponding volatility in the Series' net asset
the 1980s. During that economic expansion, the use of value. In the past, uncertainty and volatility in the high-yield
high-yield debt securities to finance highly leveraged market have resulted in volatility in the Series' net asset
corporate acquisitions and restructurings increased value.
dramatically. As a result, the high-yield market grew
substantially. Some analysts believe a protracted In striving to manage this risk, we allocate assets across a
economic downturn would severely disrupt the market for wide range of industry sectors. We may emphasize industries that
high-yield bonds, adversely affect the value of have been less susceptible to economic cycles in the past,
outstanding bonds and adversely affect the ability of particularly if we believe that the economy may be entering into
high-yield issuers to repay principal and interest. a period of slower growth.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
High Yield Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Foreign risk is the risk that foreign securities may be We may invest only 15% of the portfolio in securities of foreign
adversely affected by political instability, changes in issuers. We carefully evaluate the reward and risk associated
currency exchange rates, foreign economic conditions or with each foreign security that we consider.
inadequate regulatory and accounting standards.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot A less liquid secondary market may have an adverse effect on the
be readily sold within seven days at approximately the Series' ability to dispose of particular issues, when necessary,
price that a series values them. to meet the Series' liquidity needs or in response to a specific
economic event, such as the deterioration in the
There is generally no established retail secondary creditworthiness of the issuer. In striving to manage this risk,
market for high-yield securities. As a result, the we evaluate the size of a bond issuance as a way to anticipate
secondary market for high-yield securities is more its likely liquidity level.
limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly We may invest only 15% of net assets in illiquid securities.
susceptible to liquidity problems when the institutions,
such as mutual funds and certain financial institutions,
which dominate it temporarily stop buying bonds for
regulatory, financial or other reasons.
Adverse publicity and investor perceptions may also
disrupt the secondary market for high-yield securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Valuation risk: A less liquid secondary market as The Series' privately placed high-yield securities are
described above can make it more difficult for a series particularly susceptible to the liquidity and valuation risks.
to obtain precise valuations of the high-yield We will strive to manage this risk by carefully evaluating
securities in its portfolio. During periods of reduced individual bonds and by limiting the amount of the portfolio
liquidity, judgment plays a greater role in valuing that can be allocated to privately placed high-yield securities.
high-yield securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Redemption risk: If investors redeem more shares of a Volatility in the high-yield market could increase redemption
series than are purchased for an extended period of risk. We strive to maintain a cash balance sufficient to meet
time, a series may be required to sell securities any redemptions. We may also borrow money, if necessary, to meet
without regard to the investment merits of such actions. redemptions.
This could decrease a series' asset base, potentially
resulting in a higher expense ratio.
- ------------------------------------------------------------------------------------------------------------------------------------
Legislative and regulatory risk: The United States We monitor the status of regulatory and legislative proposals to
Congress has from time to time taken or considered evaluate any possible effects they might have on the Series'
legislative actions that could adversely affect the portfolios.
high-yield bond market. For example, Congressional
legislation has, with some exceptions, generally
prohibited federally insured savings and loan
institutions from investing in high-yield securities.
Regulatory actions have also affected the high-yield
market. Similar actions in the future could reduce
liquidity for high-yield issues, reduce the number of
new high-yield securities being issued and could make it
more difficult for a series to attain its investment
objective.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
104
<PAGE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year.
Portfolio managers
Paul A. Matlack and Gerald T. Nichols have primary responsibility for making
day-to-day investment decisions for High Yield Series.
Paul A. Matlack, Vice President/Senior Portfolio Manager, is a graduate of the
University of Pennsylvania with an MBA in Finance from George Washington
University. He began his career at Mellon Bank as a credit specialist, and later
served as a corporate loan officer for Mellon Bank and then Provident National
Bank. He is a CFA charterholder. Mr. Matlack has been a member of the High Yield
Series team since 1990 and has been co-managing the High Yield Series since
January 1993.
Gerald T. Nichols, Vice President/Senior Portfolio Manager, is a graduate of the
University of Kansas, where he received a BS in Business Administration and an
MS in Finance. Prior to joining Delaware Investments, he was a high-yield credit
analyst at Waddell & Reed, Inc. and subsequently the investment officer for a
private merchant banking firm. He is a CFA charterholder. Mr. Nichols has been a
member of the High Yield Series team since 1990 and has been co-managing the
High Yield Series since January 1993.
105
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
High Yield Series(1) Year Ended 12/31
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.510 $ 9.170 $ 8.940 $ 8.540
Income (loss) from investment operations
Net investment income 0.906 0.863 0.853 0.872
Net realized and unrealized gain (loss) on investments (1.048) 0.332 0.230 0.400
-------- ------- ------- -------
Total from investment operations (0.142) 1.195 1.083 1.272
-------- ------- ------- -------
Less dividends and distributions
Dividends from net investment income (0.905) (0.855) (0.853) (0.872)
Distributions from net realized gain on investments (0.003) none none none
-------- ------- ------- -------
Total dividends and distributions (0.908) (0.855) (0.853) (0.872)
-------- ------- ------- -------
Net asset value, end of year $ 8.460 $ 9.510 $ 9.170 $ 8.940
======== ======= ======= =======
Total return(2) (1.83%) 13.63% 12.79% 15.50%
Ratios and supplemental data
Net assets, end of period (000 omitted) $120,708 $98,875 $67,665 $56,605
Ratio of expenses to average net assets 0.70% 0.70% 0.70% 0.69%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.70% 0.70% 0.70% 0.69%
Ratio of net investment income to average net assets 9.85% 9.24% 9.54% 9.87%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 9.85% 9.24% 9.54% 9.87%
Portfolio turnover 86% 121% 93% 74%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 1, 2000, the Series' investment objective changed from "high
current income" to "total return and, as a secondary objective, high current
income."
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown.
106
<PAGE>
International Equity Series
Our investment strategies
International Equity Series seeks long-term growth without undue risk to
principal. We invest primarily in equity securities, including common stocks,
which provide the potential for capital appreciation and income. Our strategy
would commonly be described as a value strategy. That is we strive to purchase
stocks that are selling for less than their true value. In order to estimate
what a security's true value is, we evaluate its future income potential, taking
into account the impact both currency fluctuations and inflation might have on
that income stream. We then determine what that income would be worth if paid
today. That helps us decide what we think the security is worth today. We then
compare our estimate of the security's value to its current price to determine
if it is a good value.
We use income as an indicator of value because we believe it allows us to
compare securities across different sectors and different countries--all using
one measurement standard. We can even use this analysis to compare stocks to
bonds.
We may purchase securities in any foreign country, developed or emerging;
however, we currently anticipate investing in Australia, Belgium, Canada,
Finland, France, Germany, Hong Kong, Italy, Japan, Malaysia, the Netherlands,
New Zealand, Singapore, Spain, Switzerland and the United Kingdom. This is a
representative list; the Series may also invest in countries not listed here.
More than 25% of the Series' total assets may be invested in the securities of
issuers located in the same country.
We generally maintain a long-term focus in the Series, seeking companies that we
believe will perform well over the next three to five years.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
107
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well. Fixed-income securities offer the potential for greater
income payments than stocks, and also may provide capital appreciation. The
following chart provides a brief description of the securities that the Series
may invest in. Please see the Statement of Additional Information for additional
descriptions of these as well as other investments.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
International Equity Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks: Securities that represent shares of The Series will invest its assets in common stocks, some of
ownership in a corporation. Stockholders participate in which will be dividend-paying stocks.
the corporation's profits and losses, proportionate to
the number of shares they own.
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate bonds: Debt obligations issued by U.S. or Although not a principal strategy of the Series, for temporary
foreign corporations. defensive purposes, the Series may invest all or a substantial
portion of its assets in corporate obligations.
All corporate debt will be rated AA or better by S&P and Aa or
better by Moody's, or if unrated, determined to be of comparable
quality.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign government securities: Debt obligations issued Although not a principal strategy of the Series, for temporary
by a government other than the United States or by an defensive purposes, the Series may invest all or a substantial
agency, instrumentality or political subdivision of such portion of its assets in high quality debt obligations of
governments. foreign governments, their agencies, instrumentalities and
political sub-divisions.
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities: Securities issued or Although not a principal strategy of the Series, for temporary
guaranteed by the U.S. government or issued by an agency defensive purposes the Series may invest in U.S. government
or instrumentality of the U.S. government. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Investment company securities: In some countries, International Equity Series may hold closed-end investment
investments by U.S. mutual funds are generally made by company securities if we believe the country offers good
purchasing shares of investment companies that in turn investment opportunities. These investments involve an indirect
invest in the securities of such countries. payment of a portion of the expenses of the other investment
companies, including their advisory fees.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency transactions: A forward foreign Although the Series values its assets daily in U.S. dollars, its
currency exchange contract involves an obligation to does not intend to convert its holdings of foreign currencies
purchase or sell a specific currency on a fixed future into U.S. dollars on a daily basis. The Series will, however,
date at a price that is set at the time of the contract. from time to time, purchase or sell foreign currencies and/or
The future date may be any number of days from the date engage in forward foreign currency exchange transactions. The
of the contract as agreed by the parties involved. Series may conduct its foreign currency transactions on a cash
basis at the rate prevailing in the foreign currency exchange
market or through a forward foreign currency exchange contract
or forward contract.
The Series may use forward contracts for defensive hedging
purposes to attempt to protect the value of the Series' current
security or currency holdings. It may also use forward contracts
if it has agreed to sell a security and wants to "lock-in" the
price of that security, in terms of U.S. dollars. Investors
should be aware of the costs of currency conversion. The Series
will not use forward contracts for speculative purposes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
International Equity Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
American Depositary Receipts (ADRs), European Depositary The Series may invest in sponsored and unsponsored ADRs, EDRs
Receipts (EDRs), and Global Depositary Receipts (GDRs): and GDRs, generally focusing on those whose underlying
ADRs are receipts issued by a U.S. depositary (usually a securities are issued by foreign entities.
U.S. bank) and EDRs and GDRs are receipts issued by a
depositary outside of the U.S. (usually a non-U.S. bank To determine whether to purchase a security in a foreign market
or trust company or a foreign branch of a U.S. bank). or through depositary receipts, we evaluate the price levels,
Depositary receipts represent an ownership interest in the transaction costs, taxes and administrative costs involved
an underlying security that is held by the depositary. with each security to identify the most efficient choice.
Generally, the holder of the depositary receipt is
entitled to all payments of interest, dividends or
capital gains that are made on the underlying security.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold, if at all, at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term
such as the Series, and a seller of securities in which investment for the Series' cash position. In order to enter into
the seller agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid for at least 102% of the repurchase price. The Series will only
them, plus an amount equal to an agreed upon interest enter into repurchase agreements in which the collateral is
rate. Repurchase agreements are often viewed as composed of U.S. government securities.
equivalent to cash.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may invest in preferred stocks, convertible securities, warrants,
futures and options. For temporary defensive purposes or for cash management
purposes, the Series may invest in high quality U.S. or foreign debt securities,
although to the extent it does so the Series may be unable to meet its
investment objective. Please see the Statement of Additional Information for
additional descriptions on these securities as well as those listed in the table
above.
Portfolio turnover
We anticipate that International Equity Series' annual portfolio turnover will
be less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
Borrowing from banks
International Equity Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Securities lending
International Equity 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 securities transactions. These transactions will generate additional
income for the Series.
109
<PAGE>
The risks of investing in International Equity Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in International Equity Series. Please see the
Statement of Additional Information for further discussion of these risks and
the other risks not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
International Equity Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Market Risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market--like the stock or bond stocks we believe can appreciate over an extended time frame
market--will decline in value because of factors such as regardless of interim market fluctuations. In deciding what
economic conditions, future expectations or investor portion of a Fund's portfolio should be invested in any
confidence. individual country, we evaluate a variety of factors,
including opportunities and risks relative to other countries.
In addition, for temporary defensive purposes, the Funds may
invest all or a substantial portion of its assets in high
quality debt instruments of foreign governments, the U.S.
government, (including their agencies and instrumentalities)
or foreign or U.S. companies. To the extent it holds does so,
the Series may be unable to achieve its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We typically hold a number of different securities in a
securities in a particular industry or the value of an variety of sectors in order to minimize the impact that a
individual stock or bond will decline because of changing poorly performing security would have on the Series.
expectations for the performance of that industry or for the
individual company issuing the stock or bond.
- ----------------------------------------------------------------------------------------------------------------------------------
Currency Risk is the risk that the value of the Series' The Series may try to hedge its currency risk by purchasing
investments may be negatively affected by changes in foreign foreign currency exchange contracts. If the Series agrees to
currency exchange rates. Adverse changes in exchange rates may purchase or sell foreign securities at a pre-set price on a
reduce or eliminate any gains produced by investments that are future date, the Series attempts to protect the value of a
denominated in foreign currencies and may increase any losses. security they own from future changes in currency rates. If
the Series has agreed to purchase or sell a security, it may
also use foreign currency exchange contracts to "lock-in" the
security's price in terms of U.S. dollars or another
applicable currency. The Series may use forward currency
exchange contracts only for defensive or protective measures,
not to enhance portfolio returns. However, there is no
assurance that such a strategy will be successful.
- ----------------------------------------------------------------------------------------------------------------------------------
Political risk is the risk that countries or the entire region We evaluate the political situations in the countries where we
where we invest may experience political instability. This may invest and take into account any potential risks before we
cause greater fluctuation in the value and liquidity of our select securities for the portfolio. However, there is no way
investments due to changes in currency exchange rates, to eliminate political risk when investing internationally.
governmental seizures or nationalization of assets.
- ----------------------------------------------------------------------------------------------------------------------------------
Emerging market risk is the possibility that the risks The Series, to the limited extent that it invests in emerging
associated with international investing will be greater in markets, is subject to the risk.
emerging markets than in more developed foreign markets
because, among other things, emerging markets may have less
stable political and economic environments.
- ----------------------------------------------------------------------------------------------------------------------------------
Inefficient market risk is the risk that foreign markets may The Series will attempt to reduce these risks by investing in
be less liquid, have greater price volatility, less regulation a number of different countries, and noting trends in the
and higher transaction costs than U.S. markets. economy, industries and financial markets.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
International Equity Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Information risk is the risk that foreign companies may be We conduct fundamental research on the companies we invest in
subject to different accounting, auditing and financial rather than relying solely on information available through
reporting standards than U.S. companies. There may be less financial reporting. We believe this will help us to better
information available about foreign issuers than domestic uncover any potential weaknesses in individual companies.
issuers. Furthermore, regulatory oversight of foreign issuers
may be less stringent or less consistently applied than in the
United States.
- ----------------------------------------------------------------------------------------------------------------------------------
Transaction costs risk: Costs of buying, selling and holding We strive to monitor transaction costs and to choose an
foreign securities, including brokerage, tax and custody efficient trading strategy for the Series.
costs, may be higher than those involved in domestic
transactions
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger
The Series is managed by Delaware International Advisers Ltd. Delaware
International Advisers makes investment decisions for the Series, manages the
Series' business affairs and provides daily administrative services. For its
services to the Series, the manager was paid [0.00%] of average daily net assets
for the last fiscal year, reflecting the waiver of fees by the manager.
Portfolio managers
Clive A. Gillmore and Nigel G. May have primary responsibility for making
day-to-day investment decisions for the International Equity Series. In making
investment decisions for the Series, Mr. Gillmore and Mr. May regularly consult
with an international equity team of fourteen members.
Clive A. Gillmore, Director, Deputy Managing Director, Senior Portfolio Manager
of Delaware International Advisers Ltd., is a graduate of the University of
Warwick. He began his career at Legal and General Investment Management, which
is the asset management division of Legal and General Assurance Society Ltd., a
large U.K. life and pension company. Mr. Gillmore joined Delaware International
Advisers in 1990 after eight years of investment experience. His most recent
position prior to joining Delaware International Advisers was as a Pacific Basin
equity analyst and senior portfolio manager for Hill Samuel Investment
Management Ltd. Mr. Gillmore completed the London Business School Investment
program. He has been managing the Series since its inception.
Nigel G. May, Director, Senior Portfolio Manager, Delaware International Avisers
Ltd., joined Mr. Gillmore as Co-Manager of the Series on December 22, 1997. Mr.
May is a graduate of Sidney Sussex College, Cambridge. He joined Delaware
International Advisers in 1991, assuming portfolio management responsibilities
and sharing analytical responsibilities for continental Europe. He previously
had been with Hill Samuel Investment Management Ltd. for five years.
111
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
International Equity Series Year Ended 12/31
-------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $15.520 $15.110 $13.120 $11.840
Income from investment operations
Net investment income(1) 0.386 0.359 0.557 0.419
Net realized and unrealized gain on investments and foreign
currencies 1.169 0.596 1.966 1.191
----- ----- ----- -----
Total from investment operations 1.555 0.955 2.523 1.610
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.595) (0.545) (0.420) (0.240)
Distributions from net realized gain on investments none none (0.113) (0.090)
------- ------- ------- -------
Total dividends and distributions (0.595) (0.545) (0.533) (0.330)
------- ------- ------- -------
Net asset value, end of year $16.480 $15.520 $15.110 $13.120
======= ======= ======= =======
Total return(2) 10.33% 6.60% 20.03% 13.98%
Ratios and supplemental data
Net assets, end of period (000 omitted) $243,536 $198,863 $131,428 $81,548
Ratio of expenses to average net assets 0.87% 0.85% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.88% 0.90% 0.91% 0.89%
Ratio of net investment income to average net assets 2.41% 2.28% 4.71% 3.69%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 2.40% 2.23% 4.60% 3.60%
Portfolio turnover 5% 7% 8% 19%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
112
<PAGE>
REIT Series
Our investment strategies
The REIT Series strives to achieve maximum long-term total return. Capital
appreciation is a secondary objective. The Series invests in securities of
companies principally engaged in the real estate industry. Under normal
circumstances, at least 65% of the Series' total assets will be invested in
equity securities of real estate investment trusts (REITs). The Series may also
invest in equity securities of real estate industry operating companies known as
REOCs.
The Series may also purchase preferred stock, convertible securities and
mortgage-backed securities.
While we do not intend to invest the Series' assets directly in real estate,
under certain circumstances it could own real estate directly as a result of a
default on securities in the portfolio. If the Series has rental income or
income from the direct disposition of real property, the receipt of such income
may adversely affect the Series' ability to retain its tax status as a regulated
investment company.
The Series may also, to a limited extent, enter into futures contracts on
stocks, purchase or sell options on such futures, engage in certain options
transactions on stocks and enter into closing transactions with respect to those
activities. However, futures, options and related activities will not be used
for speculative purposes but rather to quickly put money into the stock market
at times when the Series' assets are not fully invested in equity securities.
Positions in options or futures will generally be eliminated when the Series is
able to invest in appropriate securities.
We do not normally intend to acquire securities for the purpose of short-term
trading; however, we may take advantage of short-term opportunities that are
consistent with the Series' investment objectives.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
113
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
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Securities How we use them
REIT Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts: A company, usually traded The Series may invest without limitation in shares of REITs.
publicly, that manages a portfolio of real estate to earn
profits for shareholders.
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,
derive income primarily from the collection of rents and can
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. By investing in REITs
indirectly through the Series, a shareholder bears not only a
proportionate share of the expenses of the Series, but also,
indirectly, similar expenses of the REITs.
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Industry Operating Companies: A company that We may invest without limit in REOCs.
derives at least 50% of its gross revenues or net profits
from:
(1) Ownership, development, construction, financing,
management or sale of commercial, industrial or
residential real estate, or (2)
(2) products or services related to the real estate industry,
such as building supplies or mortgage servicing.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities and American Depositary Receipts: The Series' investments in equity securities of REITs and
Securities of foreign entities issued directly or, in the case REOCs may include, from time to time, sponsored or unsponsored
of American Depositary Receipts, through a U.S. bank. ADRs are American Depositary Receipts actively traded in the United
issued by a U.S. bank and represent the bank's holding of a States. Equity securities for this purpose include common
stated number of shares of a foreign corporation. An ADR stocks, securities convertible into common stocks and
entitles the holder to all dividends and capital gains earned securities having common stock characteristics, such as rights
by the underlying foreign shares. ADRs are bought and sold the and warrants to purchase common stocks.
same as U.S. securities.
We may invest up to 10% of the Series' assets in foreign
securities.
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</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
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Securities How we use them
REIT Series
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term
the Series, and a seller of securities in which the seller investment for the Series' cash position. In order to enter
agrees to buy the securities back within a specified time at into these repurchase agreements, the Series must have
the same price the buyer paid for them, plus an amount equal collateral of at least 102% of the repurchase price. The
to an agreed upon interest rate. Repurchase agreements are Series will only enter into repurchase agreements in which the
often viewed as equivalent to cash. collateral is composed of U.S. government securities.. Except
when the manager believes a temporary defensive approach is
appropriate, the Series will not hold more than 5% of its
total assets in cash or such short-term investments. All
short-term investments will be of the highest quality as
determined by a nationally-recognized statistical rating
organization (e.g. AAA by S&P or Aaa by Moody's) or be of
comparable quality as determined by the manager.
- ----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A
Securities. Restricted securities that are determined to be
illiquid may not exceed the Series' 15% limit on illiquid
securities, which is described below.
- ----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 15% of net assets in illiquid securities,
market, and cannot be easily sold, if at all, at approximately including repurchase agreements with maturities of over seven
the price that the Series has valued them. days.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Lending securities
REIT Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
REIT Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
REIT Series may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that annual portfolio turnover for the Series will be less than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year.
115
<PAGE>
The risks of investing in REIT Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in REIT Series. Please see the Statement of Additional
Information for further discussion of these risks and other risks not discussed
here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
REIT Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on
securities in a certain market -- like the stock or bond stocks we believe can appreciate over an extended time frame
market -- will decline in value because of factors such as regardless of interim market fluctuations. We do not try to
economic conditions, future expectations or investor predict overall stock market movements and do not trade for
confidence. short-term purposes.
We may hold a substantial part of the Series' assets in cash
or cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of In the REIT Series we concentrate on the real estate industry.
securities in a particular industry or the value of an As a consequence, the share price of the Series may fluctuate
individual stock or bond will decline because of changing in response to factors affecting that industry, and may
expectations for the performance of that industry or for the fluctuate more widely than a Portfolio that invests in a
individual company issuing the stock or bond. broader range of industries. The Series may be more
susceptible to any single economic, political or regulatory
occurrence affecting the real estate industry.
In addition, because the Series is non-diversified, it may
invest a greater proportion of its assets in the securities of
a single issuer than diversified Series. See "Non-diversified
risk" below.
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will decrease The REIT Series is subject to interest rate risk. As interest
in value if interest rates rise. rates decline, the value of the Series' investments in real
estate investment trusts that hold fixed rate obligations can
be expected to rise. Conversely, when interest rates rise, the
value of the Series' investments in real estate investment
trusts holding fixed rate obligations can be expected to
decline. However, lower interest rates tend to increase the
level of refinancing, which can hurt the returns of REITs that
hold fixed rate obligations.
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Industry Risk includes among others: possible Since the Series invests principally in REITs it is subject to
declines in the value of real estate; risks related to general risks associated with the real estate industry. Investors
and local economic conditions; possible lack of availability should carefully consider these risks before investing in the
of mortgage funds; overbuilding; extended vacancies of Series.
properties; increases in competition; and changes in interest
rates. 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 or to maintain exemptions from the
Investment Company Act of 1940.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
REIT Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Non-Diversified Risk affects portfolios with a greater Though the REIT Series will hold a number of different
percentage of assets invested in fewer securities. Adverse securities, technically, it is considered a non-diversified
effects on individual holdings may have a greater impact on fund according to the definition in the 1940 Act. In a
performance. diversified fund, 75% of the portfolio must be diversified,
meaning the fund or series cannot invest more than 5% of total
assets in an individual security. When a fund is
non-diversified, it does not have to limit the percentage of
assets invested in individual securities.
However, the REIT Series does intent to satisfy the Internal
Revenue Code's diversification requirement, which says that
for 50% of the Series' assets, no more than 5% of total assets
can be invested in any one individual security. The bottom
line for shareholders is that 50% of the REIT Series must be
spread among various securities, with no more than 5% of total
assets invested in any single security. The other 50% can be
more concentrated with greater than 5% invested in individual
securities.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We may invest up to 10% of the REIT Series' total assets in
adversely affected by political instability, changes in foreign securities; however we typically invest only a small
currency exchange rates, foreign economic conditions or portion of assets in foreign securities.
inadequate regulatory and accounting standards.
If the Series holds international securities, currency
considerations may present risks. The Series may try to reduce
this risk by investing in forward foreign currency exchange
contracts to neutralize currency risks associated with the
purchase of individual securities denominated in a particular
currency. See "Futures and options" risks below.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold, if at all, at approximately the price that the
Series values them.
- ----------------------------------------------------------------------------------------------------------------------------------
Futures and Options Risk: Futures contracts, options on The REIT Series may use futures contracts and options on
futures contracts, forward contracts, and certain other futures contracts, as well as options on securities for
options involve risks. For example, there may be no defensive purposes and not for speculation. The Series will
correlation between price changes of an option or futures enter into futures contracts and options only as long as no
contract and the assets being hedged. This could render the more than 5% of the Series' assets are required as futures
hedging strategy unsuccessful and could result in losses. contract margin deposits and premiums on options. Obligations
Options and futures contracts on foreign currencies, and under such futures contracts and options on those futures
forward contracts, entail particular risks related to contracts may not exceed 20% of the Series' total assets.
conditions affecting the underlying currency.
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</TABLE>
Investment manger and sub-adviser
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. Lincoln Investment
Management, Inc. (Lincoln) is the Series' sub-adviser. As sub-adviser, Lincoln
provides Delaware with investment recommendations, asset allocation advice,
research, economic analysis and other investment services regarding the types of
securities in which we invest. For its services to the Series, the Series will
pay the manager a fee of 0.75% on the first $500 million of average daily net
assets; 0.70% on the next $500 million; 0.65% on the next $1.5 billion and 0.60%
on assets in excess of $2.5 billion on an annual basis.
117
<PAGE>
Lincoln is a wholly owned subsidiary of Lincoln National Corporation and was
incorporated in 1930. Lincoln's primary activity is institutional fixed-income
investment management and consulting. These activities include fixed-income
portfolios, private placements, real estate debt and equity, and asset/liability
management. As of November 30, 1998, Lincoln had approximately $41 billion in
assets under management. Lincoln provides investment management services to
Lincoln National Corporation, its principal subsidiaries and affiliated
registered investment companies, and acts as investment adviser to other
unaffiliated clients.
Portfolio manager
Christopher S. Beck, Vice President/Senior Portfolio Manager, together with
Thomas J. Trotman and Damon J. Andres, both Vice Presidents, have primary
responsibility for making day-to-day investment decisions for the REIT Series.
Mr. Beck was named to the REIT management team on May 6, 1999, joining Mr.
Trotman who has been on the team since 1998 and Mr. Andres who has been on the
team since 1997.
Christopher S. Beck, Vice President/Senior Portfolio Manager, has 19 years of
investment management experience, starting with Wilmington Trust in 1981. Later,
he became Director of Research at Cypress Capital Management in Wilmington and
Chief Investment Officer of the University of Delaware Endowment Fund. Prior to
joining Delaware Investments in May 1997, he managed the Small Cap Fund at
Pitcairn Trust Company for two years. Mr. Beck holds a BS from the University of
Delaware, an MBA from Lehigh University and is a CFA charterholder.
Thomas J. Trotman, Vice President/Portfolio Manager, earned a bachelor's degree
in Accounting from Muhlenberg College and an MBA from Widener University. Prior
to joining Delaware Investments in 1995, he was Vice President and Director of
Investment Research at Independence Capital Management. Before that, he held
credit-related positions at Marine Midland Bank, U.S. Steel Corporation, and
Amerada Hess. Mr. Trotman is a CFA charterholder.
Damon J. Andres, Vice President/Portfolio Manager, earned a BS in Business
Administration with an emphasis in Finance and Accounting from the University of
Richmond. Prior to joining Delaware Investments in 1994, he provided investment
consulting services as a Consulting Associate with Cambridge Associates, Inc. in
Arlington, Virginia.
118
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
------------------------------
Period
Year 5/4/98(1)
Ended through
REIT Series 12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $10.000
Income (loss) from investment operations
Net investment income 0.217
Net realized and unrealized loss on investments (1.117)
-------
Total from investment operations (0.900)
-------
Net asset value, end of period $9.100
======
Total return(2) (9.00%)
Ratios and supplemental data
Net assets, end of period (000 omitted) $5,562
Ratio of expenses to average net assets 0.85%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.02%
Ratio of net investment income to average net assets 6.42%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.25%
Portfolio turnover 39%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
119
<PAGE>
Select Growth Series
Our investment strategies
We strive to identify companies that offer the potential for long-term price
appreciation because they are likely to experience high earnings growth. The
companies we choose for the portfolio will typically exhibit one or more of the
following characteristics:
o a history of high growth in earnings-per-share;
o projections for high future growth or acceleration in earnings-per-share;
o a price-to-earnings ratio that is low relative to other stocks; and
o discounted cash flows that are high relative to other stocks.
Once we identify stocks that have these characteristics, we further evaluate the
company. We look at the capability of the management team, the strength of the
company's position within its industry, whether its internal structure can
support continued growth, how high is the company's return on equity, how much
of the company's profits are reinvested into the company to fuel additional
growth, and how stringent are the company's financial and accounting policies.
All of these give us insight into the outlook for the company, helping us to
identify companies poised for high earnings growth. We believe that this high
earnings growth, if it occurs, would result in price appreciation for the
company's stock.
We maintain a well-diversified portfolio, typically holding a mix of different
stocks, representing a wide array of industries and a mix of small companies,
medium-size companies and large companies.
Select Growth Series uses the same investment strategy as Select Growth Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
120
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Select Growth Series
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common stocks: Securities that represent shares of We invest at least 65% of the Series' total assets in equity
ownership in a corporation. Stockholders securities (including common stocks and convertible securities.
participate in the corporation's profits and Generally, however, we invest 90% to 100% of net assets in common
losses, proportionate to the number of shares they stock. We may invest in companies of any size greater than $300
own. million in market capitalization.
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a Typically, we use repurchase agreements as a short-term
buyer and seller of securities in which the seller investment for the Series' cash position. In order to enter into
agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid at least 102% of the repurchase price. The Series will only enter
for them, plus an amount equal to an agreed upon into repurchase agreements in which the collateral is composed of
interest rate. Repurchase agreements are often U.S. government securities.
viewed as equivalent to cash.
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities We may invest in privately placed securities that are eligible
whose resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 15% limit on illiquid securities, which is
described below.
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a We may invest up to 15% of net assets in illiquid securities,
ready market, and cannot be easily sold within including repurchase agreements with maturities of over seven
seven days at approximately the price that the days.
Series has valued them.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Select Growth Series may also invest in other securities including preferred
stocks, convertible securities, warrants, rights, futures, options, debt
securities of government or corporate issuers or investment company securities.
Select Growth Series may invest a portion of its net assets in foreign
securities; however, the manager has no present intention of doing so. Please
see the Statement of Additional Information for additional descriptions and risk
information on these securities as well as those listed in the table above. You
will be able to find additional information about the investments in the Series'
portfolio in the annual or semi-annual shareholder report.
Lending securities
Select Growth Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Select Growth Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Borrowing from banks
Select Growth Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. It will not purchase new
securities if borrowing exceeds 5% of net assets.
121
<PAGE>
Portfolio turnover
We anticipate that Select Growth Series' annual portfolio turnover may be
greater than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year. High
turnover can result in increased transaction costs and tax liability.
122
<PAGE>
The risks of investing in Select Growth Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Select Growth Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
How we strive to manage them
Risks Select Growth Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of We maintain a long-term investment approach and focus on stocks
the securities in a certain market -- like the we believe can appreciate over an extended time frame regardless
stock or bond market -- will decline in value of interim market fluctuations. We do not try to predict overall
because of factors such as economic conditions, stock market movements and though we may hold securities for any
future expectations or investor confidence. amount of time, we typically do not trade for short-term
purposes.
We may hold up to 100% of Select Growth Series' assets in cash or
cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be
unable to achieve its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the We limit the amount of Select Growth Series' assets invested in
value of securities in a particular industry or any one industry and in any individual security. We also follow a
the value of an individual stock or bond will rigorous selection process before choosing securities and
decline because of changing expectations for the continuously monitor them while they remain in the portfolio.
performance of that industry or for the individual
company issuing the stock.
- ----------------------------------------------------------------------------------------------------------------------------------
Company size risk is the risk that prices of small Select Growth Series seeks opportunities among companies of all
and medium-size companies may be more volatile sizes. Because its portfolio does not concentrate specifically on
than larger companies because of limited financial small or medium-size companies, this risk may be balanced by our
resources or dependence on narrow product lines. holdings of large companies.
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities We analyze each company's financial situation and its cash flow
will decrease in value if interest rates rise. The to determine the company's ability to finance future expansion
risk is generally associated with bonds; however, and operations. The potential affect that rising interest rates
because small and medium-size companies often might have on a stock is taken into consideration before the
borrow money to finance their operations, they may stock is purchased.
be adversely affected by rising interest rates.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold within seven days at
approximately the price that the Series values
them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manager
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. The Series will pay the
manager the following fee on an annual basis: 0.75% on the first $500 million of
average daily net assets; 0.70% on the next $500 million; 0.65% on the next $1.5
billion and 0.60% on assets in excess of $2.5 billion.
123
<PAGE>
Portfolio managers
Gerald S. Frey has primary responsibility for making day-to-day investment
decisions for the Select Growth Series. When making investment decisions for the
Series, Mr. Frey regularly consults with Marshall T. Bassett, John A. Heffern,
Jeffrey W. Hynoski, Steven T. Lampe and Lori P. Wachs.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has been senior portfolio
manager for the Series since its inception.
Marshall T. Bassett, Vice President/Portfolio Manager, joined Delaware
Investments in 1997. In his most recent position, he served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small
growth companies. Prior to that, he was a trust officer at Sovran Bank and Trust
Company. He received a bachelor's degree and an MBA from Duke University.
John A. Heffern, Vice President, Portfolio Manager, earned bachelors and MBA
degrees at the University of North Carolina at Chapel Hill. He joined Delaware
Investments in 1997. He previously was a Senior Vice President, Equity Research
at NatWest Securities Corporation's Specialty Financial Services unit. Before
that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he served as a Vice President at Bessemer Trust
Company in the mid and large capitalization growth group, where he specialized
in the areas of science, technology, and telecommunications. Prior to that, Mr.
Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University.
Steven T. Lampe, Vice President, Portfolio Manager, received a bachelor's degree
in Economics and an MBA degree with a concentration in Finance from the
University of Pennsylvania's Wharton School. He joined Delaware Investments in
1995 and covers the financial services and business services sectors for small
and mid-capitalization growth stocks. He previously served as a tax/audit
manager at Price Waterhouse, specializing in financial services firms. Mr. Lampe
is a Certified Public Accountant.
Lori P. Wachs, Vice President/Portfolio Manager, joined Delaware Investments in
1992 from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental Studies.
124
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
- ------------------------------------------------------------------ -----------
Period
Select Growth Series 5/1/99(1)
through
12/31/99
- ------------------------------------------------------------------ -----------
Net asset value, beginning of period $10.000
Income (loss) from investment operations
Net investment income
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less dividends and distributions
Dividends from net investment income
Distributions from net realized gain on investments
Total dividends and distributions
Net asset value, end of period
Total return(2)
Ratios and supplemental data
Net assets, end of period (000 omitted)
Ratio of expenses to average net assets
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly
Ratio of net investment income to average net assets
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly
Portfolio turnover
- ------------------------------------------------------------------ -----------
(3) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(4) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce
total return figures for all periods shown.
(3) Total return reflects expense limitations in effect for the Series.
125
<PAGE>
Small Cap Value Series
Our investment strategies
We strive to identify small companies that we believe offer above-average
opportunities for long-term price appreciation because their current stock price
does not accurately reflect the companies' underlying value or future earning
potential.
Under normal conditions, at least 65% of the Series' net assets will be invested
in the common stock of small cap companies, those having a market capitalization
generally less than $1.5 billion. Our focus will be on value stocks, defined as
stocks whose price is historically low based on a given financial measure such
as profits, book value or cashflow.
Companies may be undervalued for many reasons. They may be unknown to stock
analysts, they may have experienced poor earnings or their industry may be in
the midst of a period of weak growth.
We will carefully evaluate the financial strength of the company, the nature of
its management, any developments affecting the company or its industry,
anticipated new products or services, possible management changes, projected
takeovers or technological breakthroughs. Using this extensive analysis, our
goal is to pinpoint the companies within the universe of undervalued stocks,
whose true value is likely to be recognized and rewarded with a rising stock
price in the future.
Because there is added risk when investing in smaller companies, which may still
be in their early developmental stages, we maintain a well-diversified
portfolio, typically holding a mix of different stocks, representing a wide
array of industries.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
126
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
How we use them
Securities Small Cap Value Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common stocks: Securities that represent shares of Under normal market conditions, we will hold at least 65% of the
ownership in a corporation. Stockholders Series' net assets in common stock of small companies that we
participate in the corporation's profits and believe are selling for less than their true value. Generally, we
losses, proportionate to the number of shares they invest 90% to 100% of net assets in these stocks.
own.
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts: A company, usually The Series is permitted to invest in REITs and would typically do
traded publicly, manages a portfolio of real so when this sector or companies within the sector appeared to
estate to earn profits for shareholders. offer opportunities for price appreciation.
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities and American Depositary Although Small Cap Value Series may invest up to 25% of its net
Receipts: Securities of foreign entities issued assets in foreign securities or depository receipts, the manager
directly or, in the case of American Depositary has no present intention of doing so. We may hold ADRs when we
Receipts, through a U.S. bank. ADRs are issued by believe they offer greater value and greater appreciation
a U.S. bank and represent a stated number of potential than U.S. securities.
shares of a foreign corporation that the bank
holds in its vault. An ADR entitles the holder to
all dividends and capital gains earned by the
underlying foreign shares. ADRs are bought and
sold the same as U.S. securities.
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a Typically, we use repurchase agreements as a short-term
buyer, such as the Series, and a seller of investment for the Series' cash position. In order to enter into
securities in which the seller agrees to buy the these repurchase agreements, the Series must have collateral of
securities back within a specified time at the at least 102% of the repurchase price. The Series will only enter
same price the buyer paid for them, plus an amount into repurchase agreements in which the collateral is composed of
equal to an agreed upon interest rate. Repurchase U.S. government securities.
agreements are often viewed as equivalent to cash.
- ----------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities We may invest in privately placed securities that are eligible
whose resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
- ----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a We may invest up to 10% of net assets in illiquid securities.
ready market, and cannot be easily sold within
seven days at approximately the price that the
Series has valued them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Small Cap Value Series may also invest in other securities including convertible
securities, warrants, preferred stocks, and bonds. Please see the Statement of
Additional Information for additional descriptions and risk information on these
securities as well as those listed in the table above. You can find additional
information about the investments in the Series' portfolio in the annual or
semi-annual shareholder report.
127
<PAGE>
Lending securities
Small Cap Value Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Small Cap Value Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Borrowing from banks
Small Cap Value Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. To the extent that it does so, the Series
may be unable to meet its investment objective. The Series will not borrow money
in excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Small Cap Value Series' annual portfolio turnover will be
less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
128
<PAGE>
The risks of investing in Small Cap Value Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Small Cap Value Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Small Cap Value Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or believe can appreciate over an extended time frame regardless of
bond market -- will decline in value because of factors interim market fluctuations. We do not try to predict overall stock
such as economic conditions, future expectations or market movements and generally do not trade for short-term purposes.
investor confidence.
We may hold a substantial part of Small Cap Value Series' assets in
cash or cash equivalents as a temporary, defensive strategy. To the
extent it holds cash or cash equivalents, the Series may be unable to
achieve its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value We limit the amount of Small Cap Value Series' assets invested in any
of securities in a particular industry or the value of one industry and in any individual security. We also follow a
an individual stock or bond will decline because of rigorous selection process before choosing securities and
changing expectations for the performance of that continuously monitor them while they remain in the portfolio.
industry or for the individual company issuing the
stock.
- ----------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller Small Cap Value Series maintains a well-diversified portfolio,
companies may be more volatile than larger companies selects stocks carefully and monitors them continuously. And, because
because of limited financial resources or dependence on we focus on stocks that are already selling at relatively low prices,
narrow product lines. we believe we may experience less price volatility than small cap
funds that do not use a value-oriented strategy.
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will We analyze each company's financial situation and its cashflow to
decrease in value if interest rates rise. The risk is determine the company's ability to finance future expansion and
generally associated with bonds; however, because operations. The potential affect that rising interest rates might
smaller companies often borrow money to finance their have on a stock is taken into consideration before the stock is
operations, they may be adversely affected by rising purchased.
interest rates.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold, if at all, at approximately the
price that the Series values them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid 0.00% of average daily net assets for the last
fiscal year, reflecting the waiver of fees by the manger.
Portfolio managers
Christopher S. Beck has primary responsibility for making day-to-day investment
decisions for the Small Cap Value Series. In making investment decisions for the
Series, Mr. Beck consults with Andrea Giles.
129
<PAGE>
Christopher S. Beck, Vice President/Senior Portfolio Manager, has been in the
investment business for 19 years, starting with Wilmington Trust in 1981. Later,
he became Director of Research at Cypress Capital Management in Wilmington and
Chief Investment Officer of the University of Delaware Endowment Fund. Prior to
joining Delaware Investments in May 1997, he managed the Small Cap Fund for two
years at Pitcairn Trust Company. He holds a BS from the University of Delaware,
an MBA from Lehigh University and is a CFA charterholder. Mr. Beck has been
managing the Small Cap Value Series since May 1997.
Andrea Giles, Vice President/Portfolio Manager, holds a BSAD from the
Massachusetts Institute of Technology and an MBA in Finance from Columbia
University. Prior to joining Delaware Investments in 1996, she was an account
officer in the Leveraged Capital Group with Citibank.
130
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Small Cap Value Series
Year Ended 12/31
--------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $17.920 $14.500 $12.470 $10.290
Income (loss) from investment operations
Net investment income 0.196 0.122 0.112 0.192
Net realized and unrealized gain (loss) on investments (1.036) 4.338 2.548 2.208
------- ----- ----- -----
Total from investment operations (0.840) 4.460 2.660 2.400
------- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.135) (0.110) (0.180) (0.150)
Distributions from net realized gain on investments (0.495) (0.930) (0.450) (0.070)
------- ------- ------- -------
Total dividends and distributions (0.630) (1.040) (0.630) (0.220)
------- ------- ------- -------
Net asset value, end of year $16.450 $17.920 $14.500 $12.470
======= ======= ======= =======
Total return(1) (4.79%) 32.91% 22.55% 23.85%
Ratios and supplemental data
Net assets, end of period (000 omitted) $103,989 $84,071 $23,683 $11,929
Ratio of expenses to average net assets 0.83% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.85% 0.90% 0.99% 0.96%
Ratio of net investment income to average net assets 1.32% 1.24% 1.28% 2.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.30% 1.14% 1.09% 1.97%
Portfolio turnover 45% 41% 84% 71%
- ----------------------------------------------------------------- ----------- ---------- ---------- ----------- ----------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
131
<PAGE>
Social Awareness Series
Our investment strategies
Social Awareness Series is a socially responsible fund that invests primarily in
stocks that meet certain socially responsible criteria. It strives to provide
long-term capital appreciation to its shareholders.
We use a computer-driven selection process designed to identify stocks of
companies that are likely to grow significantly faster than the average of the
companies in the S&P 500. Aided by this technology, we evaluate and rank
hundreds of stocks daily, using a variety of factors such as dividend yield,
earnings growth and price to earnings ratios. Decisions to buy and sell stocks
are determined by this objective evaluation process.
We invest primarily in the common stocks of medium and large-sized companies
(generally $1.0 billion or more in market capitalization at the time of
purchase) that have met the established socially responsible criteria. We use
the Social Investment Database published by Kinder, Lyndberg, Domini & Company,
Inc. to determine which companies to exclude from our selection process. The
approved stocks are then evaluated using the computer selection process
described above.
Our goal is to seek stocks of companies that have the potential to grow
significantly faster than the average of the companies in the S&P 500. We
believe this growth, if achieved, will result in a rising share price that will
provide long-term appreciation to investors.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
132
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation and may pay
dividends as well.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Social Awareness Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Common stocks: Securities that represent shares of Generally, we invest 90% to 100% of net assets in common stock of
ownership in a corporation. Stockholders participate in medium-to large-size companies.
the corporation's profits and losses, proportionate to
the number of shares they own.
- ----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term investment
such as the Series, and a seller of securities in which for the Series' cash position. In order to enter into these
the seller agrees to buy the securities back within a repurchase agreements, the Series must have collateral of at least
specified time at the same price the buyer paid for 102% of the repurchase price. The Series will only enter into
them, plus an amount equal to an agreed upon interest repurchase agreements in which the collateral is composed of U.S.
rate. Repurchase agreements are often viewed as government securities.
equivalent to cash.
- ----------------------------------------------------------------------------------------------------------------------------------
Restricted and Illiquid securities: Restricted We may invest up to 10% of net assets in illiquid securities. For
securities are privately placed securities whose resale this Series, the 10% limit includes restricted securities such as
is restricted under securities law. privately placed securities that are eligible for resale only among
Illiquid securities are securities that do not have a certain institutional buyers without registration, which are commonly
ready market, and cannot be easily sold, if at all, at known as "Rule 144A Securities" and repurchase agreements with
approximately the price that the Series has valued maturities of over seven days.
them.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Social Awareness Series is permitted to invest in all available types of equity
securities, including preferred stock, warrants and convertible securities. It
may hold cash, short-term debt securities and money market instruments and
engage in futures and options transactions for defensive purposes, although to
the extent it does so it may be unable to meet its investment objective. Please
see the Statement of Additional Information for additional descriptions on these
securities as well as those listed in the table above. You can find additional
information about the investments in the Series' portfolio in the annual or
semi-annual shareholder report.
Lending securities
Social Awareness Series may lend up to 25% of its assets to qualified brokers,
dealers and institutional investors for their use in security transactions.
Portfolio turnover
We anticipate that Social Awareness Series' annual portfolio turnover will be
less than 100%. A turnover rate of 100% would occur if the Series sold and
replaced securities valued at 100% of its net assets within one year.
Borrowing from banks
Social Awareness Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
133
<PAGE>
The risks of investing in Social Awareness Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Social Awareness Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Social Awareness Series
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or believe can appreciate over an extended time frame regardless of
bond market -- will decline in value because of factors interim market fluctuations. We do not try to predict overall stock
such as economic conditions, future expectations or market movements and generally do not trade for short-term purposes.
investor confidence.
We may hold a substantial part of the Series' assets in cash or cash
equivalents as a temporary, defensive strategy. To the extent it
holds cash or cash equivalents, the Series may be unable to achieve
its investment objective.
- ----------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value We limit the amount of Social Awareness Series' assets invested in
of securities in a particular industry or the value of any one industry and in any individual security.
an individual stock or bond will decline because of
changing expectations for the performance of that Because Social Awareness Series avoids investing in companies that
industry or for the individual company issuing the don't meet socially responsible criteria, its exposure to certain
stock or bond. industry sectors may be greater or less than similar funds or market
indexes. This could affect its performance positively or negatively,
depending on the performance of those sectors.
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold within seven days at
approximately the price that the Series has valued
them.
- ----------------------------------------------------------------------------------------------------------------------------------
Limited market risk is the risk that because the Series Because the Series only invests in companies that meet its definition
avoids certain companies not considered socially of "socially responsible," this risk is unavoidable.
responsible, it could miss out on strong performance
from those companies.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment manger and sub-adviser
The Series is managed by Delaware Management Company. Vantage Investment
Advisors is the Series' sub-adviser. As sub-adviser, Vantage is responsible for
day-to-day management of the Series' assets. Delaware Management Company
administers the Series' affairs and has ultimate responsibility for all
investment advisory services for the Series. Delaware Management Company also
supervises the sub-adviser's performance. For their services to the Series, the
manager and sub-adviser were paid an aggregate fee of 0.00% of average daily net
assets for the last fiscal year, reflecting the waiver of fees by the manager.
Vantage Investment Advisors was founded in 1979. It provides investment advice
to pension plans, endowments, insurance and commingled products and had assets
under management in excess of $9.34 billion as of December 31, 1999.
134
<PAGE>
Portfolio managers
Enrique Chang and Christopher P. Harvey have primary responsibility for making
day-to-day investment decisions for Social Awareness Series.
Enrique Chang, Senior Vice President and Chief Investment Officer of Vantage
Investment Advisors, became co-manager of the Series in January 1999. Mr. Chang
oversees the management of all equity portfolios and directs Vantage's
quantitative research efforts. He received a BA in mathematics from Fairleigh
Dickinson University in May of 1985, an MBA in finance and quantitative analysis
from New York University in May of 1988, and an MS in statistics and operations
research from New York University in May of 1996. He was previously an actuary
with Prudential, Director of Quantitative Analysis and Strategy with General
Reinsurance Corporation, and Senior Vice President and Director of Quantitative
Analysis with J&W Seligman.
Christopher P. Harvey, Vice President, Vantage Investment Advisors, became
co-manager of the Series in January 1999. Mr. Harvey manages portfolios,
conducts investment research and assists in equity trading. He graduated from
Bucknell University with a BS degree in accounting. He received an MBA from the
Stern School of Business at New York University. Prior to joining Vantage
Investment Advisors, Mr. Harvey was a financial analyst with Merrill Lynch.
135
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Social Awareness Series
Period
Year Ended 12/31 5/1/97(1)
------------------------------------------- through
1999 1998 12/31/97
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $12.840 $10.000
Income from investment operations
Net investment income 0.065 0.051
Net realized and net unrealized gain on investments 1.880 2.789
----- -----
Total from investment operations 1.945 2.840
----- -----
Less dividends and distributions
Dividends from net investment income (0.050) none
Distributions from net realized gain on investments (0.185) none
------- ----
Total dividends and distributions (0.235) none
------- ----
Net asset value, end of period $14.550 $12.840
======= =======
Total return(2) 15.45% 28.40%
Ratios and supplemental data
Net assets, end of period (000 omitted) $26,962 $7,800
Ratio of expenses to average net assets 0.83% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.89% 1.40%
Ratio of net investment income to average net assets 0.80% 1.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 0.74% 0.53%
Portfolio turnover 30% 52%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
136
<PAGE>
Strategic Income Series
Our investment strategies
Strategic Income Series is a type of fixed income fund that invests in three
distinct sectors of the fixed income market as it pursues its investment
objective of providing high current income and total return. Certain economic
and market events generally may have a greater impact on certain types of bonds.
By spreading the portfolio assets among three key types of bonds, we strive to
reduce the affect that such events might have on the portfolio. The foundation
of our strategy is the belief that when one or more bond sectors are not
performing well, the others may continue to provide high income and appreciation
potential, helping to support the Series' performance.
Following are the three key sectors we focus on as well as our general
investment approach in each sector:
o U.S. government and high-quality corporate bonds are selected primarily on
the basis of their income potential. In periods of slower U.S. economic
growth, these bonds might also provide a stabilizing influence on the
portfolio which could enhance total return.
o U.S. high-yield corporate bonds are primarily used to increase the
portfolio's income potential. These bonds are of lower quality and involve
the risk that the companies issuing them may not be able to pay interest or
repay principal. However, we carefully select the high-yield bonds for the
portfolio after evaluating both the company's fundamental strength and the
bond's liquidity.
o Foreign bonds are used to add diversification to the portfolio. Because
foreign markets are often affected by different economic cycles than the
U.S., foreign bonds may experience performance cycles that are different as
well. In selecting foreign bonds for the portfolio, we strive to manage the
risk associated with foreign investing through a thorough analysis of the
bond's issuer and the inflation trends in the country where the bond is
issued.
In determining how much of the portfolio to allocate to each sector, we review
economic and market conditions and interest rate trends as well as the potential
risks and rewards associated with each sector. As little as 20% or as much as
60% of the Series' assets may be invested in each fixed-income sector. In
addition, the Series may invest up to 10% of its assets in U.S. equity
securities.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
137
<PAGE>
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation.
Securities we typically invest in
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Strategic Income Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
High-yield corporate bonds: Debt obligations issued by a The Series may invest up to 60% of net assets in high-yield
corporation and rated lower than investment grade by a corporate bonds. Emphasis is typically on those rated BB or Ba
nationally recognized statistical ratings organization by an NRSRO.
(NRSRO) such as S&P or Moody's. High-yield bonds are
issued by corporations that have poor credit quality and We carefully evaluate an individual company's financial
may have difficulty repaying principal and interest. situation, its management, the prospects for its industry and
the technical factors related to its bond offering. Our goal is
to identify those companies that we believe will be able to
repay their debt obligations in spite of poor ratings. The
Series may invest in unrated bonds if we believe their credit
quality is comparable to the rated bonds we are permitted to
invest in. Unrated bonds may be more speculative in nature than
rated bonds.
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities: Direct U.S. obligations The Series may invest up to 60% of net assets in direct U.S.
including bills, notes, bonds as well as other debt government obligations; however, these securities will typically
securities issued by the U.S. Treasury and securities of be a smaller percentage of the portfolio because they generally
U.S. government agencies or instrumentalities. do not offer as high a level of current income as other
fixed-income securities the Series may invest in.
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities: Fixed-income securities that We may invest up to 60% of net assets in government-related
represent pools of mortgages, with investors receiving mortgage-backed securities or fully collateralized privately
principal and interest payments as the underlying issued mortgage-backed securities.
mortgage loans are paid back. Many are issued and
guaranteed against default by the U.S. government or its We may invest in mortgage-backed securities issued by private
agencies or instrumentalities, such as the Federal Home companies whether or not the securities are 100% collateralized.
Loan Mortgage Corporation, Fannie Mae and the Government However, these securities must be rated in one of the four
National Mortgage Association. Others are issued by highest categories by an NRSRO at the time of purchase. The
private financial institutions, with some fully privately issued securities we invest in are either CMOs or
collateralized by certificates issued or guaranteed by REMICs (see below).
the government or its agencies or instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations (CMOs): Privately See mortgage-backed securities above.
issued mortgage-backed bonds whose underlying value is
the mortgages that are grouped into different pools
according to their maturity.
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage investment conduits (REMICs): See mortgage-backed securities above.
Privately issued mortgage-backed bonds whose underlying
value is a fixed pool of mortgages secured by an
interest in real property. Like CMOs, REMICs offer
different pools.
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities: Bonds or notes backed by We invest only in asset-backed securities rated in one of the
accounts receivables including home equity, automobile four highest categories by an NRSRO.
or credit loans.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
138
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
Strategic Income Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment grade corporate bonds: Debt obligations Debt securities within the top three categories comprise what
issued by a corporation, rated in one of the four are known as high-grade bonds and are regarded as having a
highest categories by an NRSRO (or, if unrated, that we strong ability to pay principal and interest. Securities in the
believe are of equal quality). fourth category are known as medium-grade bonds and are regarded
as having an adequate capacity to pay principal and interest but
with greater vulnerability to adverse economic conditions and
speculative characteristics.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign government securities: Securities issued by We may invest in foreign government securities and primarily
foreign governments or supranational entities. A focus on better quality bonds with investment-grade credit
supranational entity is an entity established or ratings.
financially supported by the national governments of one
or more countries. The International Bank for However, up to 15% of the Series' assets may also be invested in
Reconstruction and Development (more commonly known as foreign government securities issued by emerging or developing
the World Bank) is one example of a supranational countries, which may be lower rated, including securities rated
entity. below investment grade.
We may also invest in securities issued by supranational
entities, which are typically of higher quality.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign corporate bonds: Debt obligations issued by a We may invest in both rated and unrated securities of foreign
foreign corporation. corporations. We may invest both in investment grade securities
and non-investment grade (i.e., those rated BB or lower by S&P
or Fitch, Ba or lower by Moody's, or similarly rated by another
NRSRO.)
- ------------------------------------------------------------------------------------------------------------------------------------
Zero coupon bonds and pay-in-kind bonds: Zero coupon We may invest in zero coupon bonds and payment in kind bonds,
securities are debt obligations which do not entitle the though we do not expect this to be a significant component of
holder to any periodic payments of interest prior to our strategy. The market prices of these bonds are generally
maturity or a specified date when the securities begin more volatile than the market prices of securities that pay
paying current interest. Therefore, they are issued and interest periodically and are likely to react to changes in
traded at a price lower than their face amounts or par interest rates to a greater degree than interest-paying bonds
value. Payment-in-kind bonds pay interest or dividends having similar maturities and credit quality. They may have
in the form of additional bonds or preferred stock. certain tax consequences which, under certain conditions, could
be adverse to the Fund.
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Equity securities: Common stocks, preferred stocks Up to 10% of the Series' assets may be invested in U.S. equity
(including adjustable rate preferred stocks) and other securities.
equity securities, such as convertible securities and
warrants. We would select only equity securities that were consistent with
the Series' objective of high current income and total return.
- ------------------------------------------------------------------------------------------------------------------------------------
Options and futures: Options represent a right to buy or At times when we anticipate adverse conditions, we may want to
sell a security or group of securities at an agreed upon protect gains on securities without actually selling them. We
price at a future date. The purchaser of an option may might use options or futures to neutralize the effect of any
or may not choose to go through with the transaction. price declines, without selling the bond or bonds, or as a hedge
against changes in interest rates.
Futures contracts are agreements for the purchase or
sale of securities at a specified price, on a specified Use of these strategies can increase the operating costs of the
date. Unlike an option, a futures contract must be Series and can lead to loss of principal.
executed unless it is sold before the settlement date.
Options and futures are generally considered to be
derivative securities.
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</TABLE>
139
<PAGE>
<TABLE>
<CAPTION>
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Securities How we use them
Strategic Income Series
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<S> <C>
Investment company securities: In some foreign We may invest in either closed-end or open-end investment
countries, investments by a mutual fund may only be made companies consistent with the 1940 Act requirements. These
through investments in closed-end investment companies investments involve an indirect payment of a portion of the
that in turn invest in the securities of such countries. other investment companies' expenses, including advisory fees.
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Brady bonds: These are debt securities issued under the We may invest in Brady Bonds. We believe that the economic
framework of the Brady Plan, an initiative announced by reforms undertaken by countries in connection with the issuance
the U.S. Treasury Secretary, Nicholas F. Brady in 1989, of Brady Bonds makes the debt of countries that have issued
as a mechanism for debtor nations to restructure their Brady Bonds or those that have announced plans to issue them a
outstanding external indebtedness (generally, commercial viable opportunity for investment.
bank debt).
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency, foreign currency contracts or forward We may invest in securities issued in any currency and may hold
contracts: A forward contract involves an obligation to foreign currency.
purchase or sell a specific currency at a future date at
a price set at the time of the contract. Forward Although the Series values its assets daily in terms of U.S.
contracts are used to "lock-in" the price of a security dollars, we do not convert our holdings of foreign currencies
that will be purchased or sold, in terms of U.S. dollars into U.S. dollars on a daily basis. We may, however, from time
or other currencies. to time, purchase or sell foreign currencies and/or engage in
forward foreign currency transactions in order to expedite
settlement of portfolio transactions and to minimize currency
value fluctuations. We may conduct foreign currency transactions
on a cash basis at the spot rate prevailing in the foreign
currency exchange market or through a forward foreign currency
contract or forward contract. By entering into these
transactions, the Series attempts to protect against a possible
loss resulting from an adverse change in currency exchange rates
during the period between when a security is purchased or sold
and the date on which payment is made or received.
These transactions may increase the Series' expenses.
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Repurchase agreements: An agreement between a buyer, Typically, we use repurchase agreements as a short-term
such as the Series, and a seller of securities in which investment for the Series' cash position. In order to enter into
the seller agrees to buy the securities back within a these repurchase agreements, the Series must have collateral of
specified time at the same price the buyer paid for at least 102% of the repurchase price. The Series will only
them, plus an amount equal to an agreed upon interest enter into repurchase agreements in which the collateral is
rate. Repurchase agreements are often viewed as composed of U.S. government securities.
equivalent to cash.
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Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible
resale is restricted under securities law. for resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
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</TABLE>
140
<PAGE>
<TABLE>
<CAPTION>
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Securities How we use them
Strategic Income Series
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<S> <C>
Interest rate swap and index swap agreements: In an Interest rate swaps may be used to adjust the Fund's sensitivity
interest rate swap, a series receives payments from to interest rates by changing its duration. We may also use
another party based on a floating interest rate in interest rate swaps to hedge against changes in interest rates.
return for making payments based on a fixed interest We use index swaps to gain exposure to markets that the Fund
rate. An interest rate swap can also work in reverse, invests in, such as the corporate bond market. We may also use
with a series receiving payments based on a fixed index swaps as a substitute for futures, options or forward
interest rate and making payments based on a floating contracts if such contracts are not directly available to the
interest rate. In an index swap, a series receives gains Fund on favorable terms.
or incurs losses based on the total return of an index,
in exchange for making fixed or floating interest rate Interest rate swaps and index swaps will be considered illiquid
payments to another party. securities (see below).
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Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold within seven days at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
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</TABLE>
Please see the Statement of Additional Information for additional descriptions
on these securities.
Lending securities
Strategic Income Series may lend up to 25% of its assets to qualified brokers,
dealers and institutional investors for their use in security transactions.
Borrowing from banks
Strategic Income Series may borrow money as a temporary measure for
extraordinary purposes or to facilitate redemptions. To the extent that it does
so, the Series may be unable to meet its investment objective. The Series will
not borrow money in excess of one-third of the value of its net assets.
Purchasing securities on a when-issued or delayed delivery basis
Strategic Income Series may buy or sell securities on a when-issued or delayed
delivery basis; that is, paying for securities before delivery or taking
delivery at a later date. The Series will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily.
Portfolio turnover
We anticipate that Strategic Income Series' annual portfolio turnover will
exceed 100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year. High turnover can
result in increased transaction costs and tax liability.
141
<PAGE>
The risks of investing in Strategic Income Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Strategic Income Series. Please see the Statement
of Additional Information for further discussion of these risks and the other
risks not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Strategic Income Series
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on bonds
securities in a certain market--like the stock or bond that we believe will continue to pay interest regardless of
market--will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor bond market or interest rate movements and generally do not
confidence trade for short-term purposes.
Index swaps are subject to the same market risks as the We may hold a substantial part of the Series' assets in cash or
investment market or sector that the index represents. cash equivalents as a temporary defensive strategy. To the
Depending on the actual movements of the index and how extent it holds cash or cash equivalents, the Series may be
well the portfolio managers forecast those movements, a unable to achieve its investment objective.
series could experience a higher or lower return than
anticipated. In evaluating the use of an index swap, we carefully consider
how market changes could affect the swap and how that compares
to us investing directly in the market the swap is intended to
represent.
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Industry and security risk is the risk that the value of We diversify the Series assets across three distinct sectors of
securities in a particular industry or the value of an the bond market and among a wide variety of individual issuers.
individual stock or bond will decline because of
changing expectations for the performance of that
industry or for the individual company issuing the stock
or bond.
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Interest rate risk is the risk that securities will The Series is subject to interest rate risk. We cannot eliminate
decrease in value if interest rates rise. The risk is that risk, but we do strive to manage it by monitoring economic
greater for bonds with longer maturities than for those conditions.
with shorter maturities.
The Series will not invest in interest rate or index swaps with
Swaps may be particularly sensitive to interest rate maturities of more than two years. Each business day we will
changes. Depending on the actual movements of interest calculate the amount the Series must pay for any swaps it holds
rates and how well the portfolio managers anticipate and will segregate enough cash or other liquid securities to
them, a series could experience a higher or lower return cover that amount.
than anticipated. 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 necessarily be offset by the fixed-rate payments it
is entitled to receive under the swap agreement.
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</TABLE>
142
<PAGE>
<TABLE>
<CAPTION>
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Risks How we strive to manage them
Strategic Income Series
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<S> <C>
Credit risk The possibility that a bond's issuer (or an Our careful, credit-oriented bond selection and our commitment
entity that insures the bond) will not be able to make to hold a diversified selection of high-yield bonds are designed
timely payments of interest and principal. to manage this risk.
Investing in so-called "junk" or "high-yield" bonds It is likely that protracted periods of economic uncertainty
entails the risk of principal loss, which may be greater would cause increased volatility in the market prices of
than the risk involved in investment grade bonds. high-yield bonds, an increase in the number of high-yield bond
High-yield bonds are sometimes issued by companies whose defaults and corresponding volatility in the Series' net asset
earnings at the time the bond is issued are less than value.
the projected debt payments on the bonds.
Our holdings of high quality investment grade bonds are less
Some analysts believe a protracted economic downturn subject to credit risk and may help to balance any credit
would severely disrupt the market for high-yield bonds, problems experienced by individual high-yield bond issuers or
adversely affect the value of outstanding bonds and foreign issuers.
adversely affect the ability of high-yield issuers to
repay principal and interest. When selecting dealers with whom we would make interest rate or
index swap agreements, we focus on those with high quality
ratings and do careful credit analysis before investing.
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and options risk is the possibility that a We will use options and futures for defensive purposes, such as
series may experience a significant loss if it employs to protect gains in the portfolio without actually selling the
an option or futures strategy related to a security or a security or to neutralize the impact of interest rate changes.
market index and that security or index moves in the We will not use futures and options for speculative reasons or
opposite direction from what the portfolio managers in an effort to enhance return.
anticipated. Futures and options also involve additional
expenses, which could reduce any benefit or increase any
loss to a fund from using the strategy.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be The Series will attempt to reduce foreign investing risks
adversely affected by political instability (including through portfolio diversification, credit analysis and attention
governmental seizures or nationalization of assets), to trends in the world economies, industries and financial
changes in currency exchange rates, foreign economic markets.
conditions or inadequate regulatory and accounting
standards. Foreign markets may also be less efficient, We carefully evaluate the political and economic situations in
less liquid, have greater price volatility, less the countries where we invest and take these risks into account
regulation and higher transaction costs than U.S. before we select securities for the portfolio. However, there is
markets. no way to eliminate foreign risks when investing
internationally.
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Foreign government securities risks involve the ability Strategic Income Series attempts to reduce the risks associated
of a foreign government or government related issuer to with investing in foreign governments by limiting the portion of
make timely and ultimate payments on its external debt portfolio assets that may be invested in such securities.
obligations. This ability to make payments will 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.
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</TABLE>
143
<PAGE>
<TABLE>
<CAPTION>
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Risks How we strive to manage them
Strategic Income Series
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<S> <C>
Currency risk is the risk that the value of an We may try to hedge currency risk by purchasing foreign currency
investment may be negatively affected by changes in exchange contracts. By agreeing to purchase or sell foreign
foreign currency exchange rates. Adverse changes in securities at a pre-set price on a future date, the Series
exchange rates may reduce or eliminate any gains strive to protect the value of the stock it owns from future
produced by investments that are denominated in foreign changes in currency rates. We will use forward currency exchange
currencies and may increase any losses. contracts only for defensive measures, not to enhance portfolio
returns. However, there is no assurance that a strategy such as
this will be successful.
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging markets risk is the possibility that the risks While the Strategic Income Series may purchase securities of
associated with international investing will be greater issuers in any foreign country, developed and emerging, no more
in emerging markets than in more developed foreign than 15% of the Series' assets may be invested in direct
markets because, among other things, emerging markets obligations of issuers located in emerging market countries.
may have less stable political and economic
environments.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot A less liquid secondary market may have an adverse effect on our
be readily sold within seven days at approximately the ability to dispose of particular issues, when necessary, to meet
price that a series values them. the Series' liquidity needs or in response to a specific event,
such as the declining creditworthiness of the issuer. In
The high-yield secondary market is particularly striving to manage this risk, we evaluate the size of a bond
susceptible to liquidity problems when the institutions, issuance as a way to anticipate its likely liquidity level.
such as mutual funds and certain financial institutions
that dominate it temporarily stop buying bonds for We may invest only 10% of net assets in illiquid securities,
regulatory, financial or other reasons. excluding Rule 144A securities described above.
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Valuation risk A less liquid secondary market as We will strive to manage this risk by carefully evaluating
described above makes it more difficult to obtain individual bonds and by limiting the amount of the portfolio
precise valuations of the high-yield securities in its that can be allocated to privately placed high-yield securities.
portfolio. During periods of reduced liquidity, judgment
plays a greater role in valuing high-yield securities.
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Legislative and regulatory risk: The United States We monitor the status of regulatory and legislative proposals to
Congress has from time to time taken or considered evaluate any possible effects they might have on the Series'
legislative actions that could adversely affect the portfolio.
high-yield bond market. For example, Congressional
legislation, has, with some exceptions, generally
prohibited federally insured savings and loan
institutions from investing in high-yield securities.
Regulatory actions have also affected the high-yield
market. Similar actions in the future could reduce
liquidity for high-yield issues, reduce the number of
new high-yield securities being issued and could make it
more difficult for a fund to attain its investment
objective.
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</TABLE>
Investment manger and sub-adviser
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. Delaware International
Advisers is the Series' sub-adviser. Subject to the overall supervision of
manager, the sub-adviser manages the international sector of the Series'
portfolio and furnishes the manager with investment recommendations, asset
allocation advice, research and other investment services regarding foreign
securities.
144
<PAGE>
For its services to the Series, the Series paid the manager and sub-adviser an
aggregate fee of [0.00%] of average daily net assets for the last fiscal year,
reflecting the waiver of fees by the manager.
Portfolio managers
Paul A. Matlack and Paul Grillo have primary responsibility for making
day-to-day investment decisions for Strategic Income Series. Christopher A. Moth
and Joanna Bates have primary responsibility for making day-to-day investment
decisions for Strategic Income Series regarding its investments in foreign
securities. In making investment decisions for the Series, Mr. Moth and Ms.
Bates regularly consult with David G. Tilles and four global fixed-income team
members.
Paul A. Matlack, Vice President/Senior Portfolio Manager, is a graduate of the
University of Pennsylvania with an MBA in Finance from George Washington
University. He began his career at Mellon Bank as a credit specialist, and later
served as a corporate loan officer for Mellon Bank and then Provident National
Bank. He has primary responsibility for allocating Strategic Income Series'
assets among the fixed-income and equity sectors and for making day-to-day
investment decisions for the Series regarding its investments in the high-yield
sector. He is a CFA charterholder. Mr. Matlack has been a member of Strategic
Income Series' management team since its inception.
Paul Grillo, Vice President/Portfolio Manager, holds a BA in Business Management
from North Carolina State University and an MBA in Finance from Pace University.
Prior to joining Delaware Investments in 1993, he served as mortgage strategist
and trader at the Dreyfus Corporation. He also served as a mortgage strategist
and portfolio manager for the Chemical Investment Group and as financial analyst
at the Chemical Bank. Mr. Grillo is a CFA charterholder. He has primary
responsibility for making day-to-day investment decisions for the Series
regarding its investments in investment grade securities. Mr. Grillo has been a
member of Strategic Income Series' management team since its inception.
Christopher A. Moth, Director, Senior Portfolio Manager, Head of Investment
Strategy of Delaware International Advisers Ltd., is a graduate of The City
University London. He joined Delaware International in 1992. He previously
worked at the Guardian Royal Exchange where he was responsible for technical
analysis, quantitative models and projections. Mr. Moth has been awarded the
certificate in Finance and Investment from the Institute of Actuaries in London.
Mr. Moth became Co-Manager of the Series in July 1999.
Joanna Bates, Senior Portfolio Manager, Credit and Emerging Markets of Delaware
International Advisers Ltd., is a graduate of London University. She joined the
Fixed Income team at Delaware International in June 1997. Prior to that she was
Associate Director, Fixed Interest at Hill Samuel Investment Management Ltd.
which she joined in 1990. She had previously worked at Fidelity International
and Save & Prosper as a fund manager and analyst for global bond markets. Ms.
Bates is an associate of the Institute of Investment Management and Research.
Ms. Bates became Co-Manager of the Series in July 1999.
David G. Tilles, Managing Director and Chief Investment Officer of Delaware
International Advisers Ltd., was educated at the Sorbonne, Warwick University
and Heidelberg University. Prior to joining Delaware International Advisers in
1990 as Managing Director and Chief Investment Officer, he spent 16 years with
Hill Samuel Investment Management Group in London, serving in a number of
investment capacities. His most recent position prior to joining Delaware
International Advisers was Chief Investment Officer of Hill Samuel Investment
Management Ltd.
145
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. All "per share" information reflects financial results
for a single Series share. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). This information has been audited by Ernst & Young
LLP, whose report, along with the Series' financial statements, is included in
the Series' annual report, which is available upon request by calling
800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Period
Strategic Income Series 5/1/97(1)
through
Year Ended 12/31 12/31/97
----------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $10.620 $10.000
Income from investment operations
Net investment income(2) 0.832 0.523
Net realized and unrealized gain (loss) on investments, foreign (0.557) 0.097
currencies and futures contracts ------- -------
Total from investment operations 0.275 0.620
------- -------
Less dividends and distributions
Dividends from net investment income (0.270) none
Distributions from net realized gain on investments (0.025) none
------- -------
Total dividends and distributions (0.295) none
------- -------
Net asset value, end of period $10.600 $10.620
======= =======
Total return(3) 2.63% 6.20%
Ratios and supplemental data
Net assets, end of period (000 omitted) $20,571 $8,606
Ratio of expenses to average net assets 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.81% 1.23%
Ratio of net investment income to average net assets 7.90% 7.44%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 7.89% 7.01%
Portfolio turnover 143% 70%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of commencement of operations; ratios have been annualized but total
return has not been annualized.
(2) Per share information was based on the average shares outstanding method.
(3) Total return does not reflect expenses
that apply to Separate Accounts or to the related insurance policies and
inclusion of these charges would reduce total return figures for all periods
shown. Total return reflects expense limitations in effect for the Series.
146
<PAGE>
Trend Series
Our investment strategies
We strive to identify small companies that offer above-average opportunities for
long-term price appreciation because they are poised to benefit from changing
and dominant trends within society or the political arena. In striving to
identify such companies, we will evaluate a company's managerial skills, product
development and sales and earnings.
Companies in the early stages of their development often offer the greatest
opportunities for rising share prices. The key to investing successfully in
small companies is to invest in them before their stock price matches their
growth potential. In striving to do this, Trend Series studies:
o the operational history of the company;
o its strategic focus; and
o its competitive environment.
The Series uses a bottom-up approach to stock selection that seeks market
leaders, strong product cycles, innovative concepts and industry trends. We look
at price-to-earnings ratios, estimated growth rates, market capitalization and
cashflow as we strive to determine how attractive a company is relative to other
companies.
We also rely on our own research in selecting companies for the portfolio. That
research might include one-on-one meetings with executives, company competitors,
industry experts and customers. Our goal is to select companies that are likely
to perform well over an extended time frame.
Because there is added risk when investing in small companies, which may still
be in their early developmental stages, we maintain a well-diversified
portfolio, typically holding a mix of different stocks, representing a wide
array of industries.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
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<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation, and may pay
dividends as well.
<TABLE>
<CAPTION>
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Securities How we use them
Trend Series
<S> <C>
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Common stocks: Securities that represent shares of ownership Generally, we invest 85% to 100% of net assets in common stock
in a corporation. Stockholders participate in the with at least 65% in small, growth-oriented companies.
corporation's profits and losses, proportionate to the
number of shares they own.
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American Depositary Receipts: ADRs are issued by a U.S. bank We may hold ADRs when we believe they offer greater appreciation
and represent the bank's holdings of a stated number of potential than U.S. securities.
shares of a foreign corporation. An ADR entitles the holder
to all dividends and capital gains earned by the underlying
foreign shares. ADRs are bought and sold the same as U.S.
securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series will only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible for
resale is restricted under securities law. resale only among certain institutional buyers without
registration. These are commonly known as Rule 144A Securities.
Restricted securities that are determined to be illiquid may not
exceed the Series' 10% limit on illiquid securities, which is
described below.
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities,
market, and cannot be easily sold, if at all, at including repurchase agreements with maturities of over seven
approximately the price that the Series has valued them. days.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Trend Series may also invest in other securities including convertible
securities, warrants, preferred stocks, and bonds. Trend Series may invest a
portion of its net assets in foreign securities; however, the manager has no
present intention of doing so. Please see the Statement of Additional
Information for additional descriptions and risk information on these securities
as well as those listed in the table above. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities
Trend Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Purchasing securities on a when-issued or delayed delivery basis
Trend Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Borrowing from banks
Trend Series may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets.
Portfolio turnover
We anticipate that Trend Series' annual portfolio turnover may be greater than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year. High turnover can
result in increased transaction costs and tax liability.
148
<PAGE>
The risks of investing in Trend Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in Trend Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Risks How we strive to manage them
Trend Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on stocks we
securities in a certain market -- like the stock or bond believe can appreciate over an extended time frame regardless of
market -- will decline in value because of factors such as interim market fluctuations. We do not try to predict overall
economic conditions, future expectations or investor stock market movements and though we may hold securities for any
confidence. amount of time, we typically do not trade for short-term purposes.
We may hold a substantial part of Trend Series' assets in cash or
cash equivalents as a temporary, defensive strategy. To the extent
it holds cash or cash equivalents, the Series may be unable to
achieve its investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Industry and security risk is the risk that the value of We limit the amount of Trend Series' assets invested in any one
securities in a particular industry or the value of an industry and in any individual security. We also follow a rigorous
individual stock or bond will decline because of changing selection process before choosing securities and continuously
expectations for the performance of that industry or for the monitor them while they remain in the portfolio.
individual company issuing the stock.
- ------------------------------------------------------------------------------------------------------------------------------------
Small company risk is the risk that prices of smaller Trend Series maintains a well-diversified portfolio, selects
companies may be more volatile than larger companies because stocks carefully and monitors them continuously.
of limited financial resources or dependence on narrow
product lines.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk is the risk that securities will decrease We analyze each company's financial situation and its cash flow to
in value if interest rates rise. The risk is generally determine the company's ability to finance future expansion and
associated with bonds; however, because smaller companies operations. The potential effect that rising interest rates might
often borrow money to finance their operations, they may be have on a stock is taken into consideration before the stock is
adversely affected by rising interest rates. purchased.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign risk is the risk that foreign securities may be We typically invest only a small portion of the Series' portfolio
adversely affected by political instability, changes in in foreign corporations through American Depositary Receipts. We
currency exchange rates, foreign economic conditions or do not invest directly in foreign securities. When we do purchase
inadequate regulatory and accounting standards. ADRs, they are generally denominated in U.S. dollars and traded on
a U.S. exchange.
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity risk is the possibility that securities cannot be We limit exposure to illiquid securities.
readily sold, or can only be sold within seven days at
approximately the price that the Series has valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
149
<PAGE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. For its services to the
Series, the manager was paid [0.00%] of average daily net assets for the last
fiscal year, reflecting the waiver of fees by the manager.
Portfolio manager
Gerald S. Frey has primary responsibility for making day-to-day investment
decisions for the Trend Series. When making investment decisions for the Series,
Mr. Frey regularly consults with Marshall T. Bassett, John A. Heffern, Jeffrey
W. Hynoski, Steven T. Lampe and Lori P. Wachs.
Gerald S. Frey, Senior Vice President/Senior Portfolio Manager, has 23 years'
experience in the money management business and holds a BA in Economics from
Bloomsburg University and attended Wilkes College and New York University. Prior
to joining Delaware Investments in 1996, he was a Senior Director with Morgan
Grenfell Capital Management in New York. Mr. Frey has been senior portfolio
manager for the Series since its inception.
Marshall T. Bassett, Vice President/Portfolio Manager, joined Delaware
Investments in 1997. In his most recent position, he served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small
growth companies. Prior to that, he was a trust officer at Sovran Bank and Trust
Company. He received a bachelor's degree and an MBA from Duke University.
John A. Heffern, Vice President, Portfolio Manager, earned bachelors and MBA
degrees at the University of North Carolina at Chapel Hill. He joined Delaware
Investments in 1997. He previously was a Senior Vice President, Equity Research
at NatWest Securities Corporation's Specialty Financial Services unit. Before
that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President/Portfolio Manager, joined Delaware
Investments in 1998. Previously, he served as a Vice President at Bessemer Trust
Company in the mid and large capitalization growth group, where he specialized
in the areas of science, technology, and telecommunications. Prior to that, Mr.
Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management. Mr.
Hynoski holds a BS in Finance from the University of Delaware and an MBA with a
concentration in Investments/Portfolio Management and Financial Economics from
Pace University.
Steven T. Lampe, Vice President, Portfolio Manager, received a bachelor's degree
in Economics and an MBA degree with a concentration in Finance from the
University of Pennsylvania's Wharton School. He joined Delaware Investments in
1995 and covers the financial services and business services sectors for small
and mid-capitalization growth stocks. He previously served as a tax/audit
manager at Price Waterhouse, specializing in financial services firms. Mr. Lampe
is a Certified Public Accountant.
Lori P. Wachs, Vice President/Portfolio Manager, joined Delaware Investments in
1992 from Goldman Sachs, where she was an equity analyst for two years. She is a
graduate of the University of Pennsylvania's Wharton School, where she majored
in Finance and Oriental Studies.
150
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the Series'
financial performance. This represents the rate that an investor would have
earned or lost on an investment in the Series (assuming reinvestment of all
dividends and distributions). All "per share" information reflects financial
results for a single Series share. This information has been audited by Ernst &
Young LLP, whose report, along with the Series' financial statements, is
included in the Series' annual report, which is available upon request by
calling 800.523.1918.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Trend Series
Year Ended 12/31
---------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $17.380 $14.560 $14.020 $10.160
Income (loss) from investment operations
Net investment income 0.006 0.019 0.050 0.098
Net realized and unrealized gain (loss) on investments 2.736 3.031 1.380 3.852
----- ----- ----- -----
Total from investment operations 2.742 3.050 1.430 3.950
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.020) (0.050) (0.090) (0.090)
Distributions from net realized gain on investments (0.342) (0.180) (0.800) none
------- ------- ------- ----
Total dividends and distributions (0.362) (0.230) (0.890) (0.090)
------- ------- ------- -------
Net asset value, end of year $19.760 $17.380 $14.560 $14.020
======= ======= ======= =======
Total return(1) 16.04% 21.37% 11.00% 39.21%
Ratios and supplemental data
Net assets, end of period (000 omitted) $168,251 $118,276 $56,423 $20,510
Ratio of expenses to average net assets 0.81% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.85% 0.88% 0.92% 0.96%
Ratio of net investment income to average net assets 0.03% 0.16% 0.56% 1.03%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly (0.01%) 0.08% 0.44% 0.87%
Portfolio turnover 121% 125% 112% 76%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return does not reflect expenses that apply to Separate Accounts or to
the related insurance policies and inclusion of these charges would reduce total
return figures for all periods shown. Total return reflects expense limitations
in effect for the Series.
151
<PAGE>
U.S. Growth Series
Our investment strategies
U.S. Growth Series seeks to maximize capital appreciation. We invest primarily
in common stocks and though we have the flexibility to invest in companies of
all sizes, we generally focus on medium-sized and large and companies. Our goal
is to own companies with the potential to grow earnings faster than the U.S.
economy in general. We look for companies that have:
o low dividend yields;
o strong balance sheets; and
o high expected earnings growth rates relative to their industry.
There are a number of catalysts that might increase a company's potential for
accelerated earnings growth. Our disciplined, research-intensive selection
process is designed to identify earnings catalysts such as:
o management changes;
o new products;
o structural changes in the economy; or
o corporate restructurings and turnaround situations.
We maintain a diversified portfolio representing a number of different
industries. Such an approach helps to minimize the impact that any one security
or industry could have on the portfolio if it were to experience a period of
slow or declining earnings growth.
Because our objective is capital appreciation, the amount of dividend income
that a stock provides is only an incidental consideration for us.
U.S Growth Series uses the same investment strategy as U.S. Growth Fund, a
separate fund in the Delaware Investments Family of Funds, although performance
may differ depending on such factors as the size of the funds and the timing of
investments and redemptions.
The Series' investment objective is non-fundamental. This means that the Board
of Trustees may change the objective without obtaining shareholder approval. If
the objective were changed, we would notify shareholders before the change in
the objective became effective.
152
<PAGE>
The securities we typically invest in
Stocks offer investors the potential for capital appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
U.S. Growth Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks: Securities that represent shares of ownership Generally, we invest 85% to 100% of the Series' net assets in
in a corporation. Stockholders participate in the common stock of companies that we think have appreciation
corporation's profits and losses, proportionate to the potential. We may invest in companies of all sizes, but typically
number of shares they own. focus on medium and large-size companies.
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign securities and American Depositary Receipts: The Series may invest up to 20% of its assets in securities of
Securities of foreign entities issued directly or, in the foreign issuers. Such foreign securities may be traded on a
case of American Depositary Receipts (ADRs), through a U.S. foreign exchange, or they may be in the form of American
bank. ADRs represent a bank's holding of a stated number of Depositary Receipts (ADRs). Direct ownership of foreign securities
shares of a foreign corporation. An ADR entitles the holder will typically not be a significant part of our strategy. We may,
to all dividends and capital gains earned by the underlying however own ADRs when we think they offer greater appreciation
foreign shares. ADRs are bought and sold in the same way as potential than domestic stocks.
U.S. securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements: An agreement between a buyer, such as Typically, we use repurchase agreements as a short-term investment
the Series, and a seller of securities in which the seller for the Series' cash position. In order to enter into these
agrees to buy the securities back within a specified time at repurchase agreements, the Series must have collateral of at least
the same price the buyer paid for them, plus an amount equal 102% of the repurchase price. The Series would only enter into
to an agreed upon interest rate. Repurchase agreements are repurchase agreements in which the collateral is composed of U.S.
often viewed as equivalent to cash. government securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest in privately placed securities that are eligible for
resale is restricted under securities law. resale only among certain institutional buyers without
registration, including Rule 144A Securities. Restricted
securities that are determined to be illiquid may not exceed the
Series' 10% limit on illiquid securities, which is described
below.
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready We may invest up to 10% of net assets in illiquid securities.
market, and cannot be easily sold within seven days at
approximately the price that a fund has valued them.
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed-income securities: Securities that may include debt We may invest up to 35% of the Series' assets in debt securities,
securities, bonds, convertible bonds, as well as, bonds, convertible bonds, preferred stocks and convertible
non-investment grade fixed-income securities. preferred stock. We may also invest up to 10% of this portion in
non-investment grade bonds if we believe that doing so would help
us to meet the Series' objective.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
153
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
U.S. Growth Series
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Options and Futures: Options represent a right to buy or We might use options or futures to neutralize the effect of any
sell a security or group of securities at an agreed upon anticipated price declines, without selling the security. We might
price at a future date. The purchaser of an option may or also use options or futures to gain exposure to a particular
may not choose to go through with the transaction. market segment without purchasing individual securities in that
segment particularly if we had excess cash that we wanted to
Writing a covered call option on a security obligates the invest quickly.
owner of the security to sell it at an agreed upon price on
an agreed upon date (usually no more than nine months in the When writing call options we will only write covered call options
future.) The owner of the security receives a premium - call options on securities we actually own.
payment from the purchaser of the call, but if the security
appreciates to a price greater than the agreed upon selling Use of these strategies can increase the operating costs of the
price, a series would lose out on those gains. Series and can lead to loss of principal.
Futures contracts are agreements for the purchase or sale of
securities at a specified price, on a specified date. Unlike
an option, a futures contract must be executed unless it is
sold before the settlement date.
Options and futures are generally considered to be
derivative securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Series may also invest in other securities including U.S. government
securities, futures and options. Please see the Statement of Additional
Information for additional descriptions and risk information on these securities
as well as those listed in the table above. You can find additional information
about the investments in the Series' portfolio in the annual or semi-annual
shareholder report.
Lending securities
The Series may lend up to 25% of its assets to qualified dealers and
institutional investors for their use in security transactions.
Borrowing from banks
The Series may borrow money as a temporary measure for extraordinary purposes or
to facilitate redemptions. To the extent that it does so, the Series may be
unable to meet its investment objective. The Series will not borrow money in
excess of one-third of the value of its net assets. Whenever these borrowings,
including reverse repurchase agreements, exceed 5% of the value of the Series'
total assets, the Series will not purchase any securities.
Purchasing securities on a when-issued or delayed delivery basis
The Series may buy or sell securities on a when-issued or delayed delivery
basis; that is, paying for securities before delivery or taking delivery at a
later date. The Series will designate cash or securities in amounts sufficient
to cover its obligations, and will value the designated assets daily.
Portfolio turnover
We anticipate that the Series' annual portfolio turnover may be greater than
100%. A turnover rate of 100% would occur if the Series sold and replaced
securities valued at 100% of its net assets within one year. High turnover can
result in increased transaction costs and tax liability.
154
<PAGE>
Temporary defensive positions
For temporary defensive purposes, the Series may invest up to 100% of its assets
in money market instruments when the manager or sub-adviser determines that
market conditions warrant. The Series may also hold a portion of its assets in
cash for liquidity purposes. To the extent that it does so, the Series may be
unable to meet its investment objective.
155
<PAGE>
The risks of investing in the Series
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in the Series you should
carefully evaluate the risks. An investment in the Series typically provides the
best results when held for a number of years. The following are the chief risks
you assume when investing in U.S. Growth Series. Please see the Statement of
Additional Information for further discussion of these risks and the other risks
not discussed here.
<TABLE>
<CAPTION>
- ----------------------------------------- -----------------------------------------------------------------------------------------
Risks How we strive to manage them
U.S. Growth Series
- ----------------------------------------- -----------------------------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or We maintain a long-term investment approach and focus on stocks we believe can
a majority of the securities in a appreciate over an extended time frame regardless of interim market
certain market -- like the stock or fluctuations. We do not try to predict overall stock market movements and
bond market -- will decline in value generally do not trade for short-term purposes.
because of factors such as economic
conditions, future expectations or We may hold a substantial part of the Series' assets in cash or cash equivalents
investor confidence. as a temporary, defensive strategy. To the extent it holds cash or cash
equivalents, the Series may be unable to achieve its investment objective.
- ----------------------------------------- -----------------------------------------------------------------------------------------
Industry and security risk is the We limit the amount of U.S. Growth Series' assets invested in any one industry
risk that the value of securities in and in any individual security.
a particular industry or the value
of an individual stock or bond will
decline because of changing
expectations for the performance of
that industry or for the individual
company issuing the stock or bond.
- ----------------------------------------- -----------------------------------------------------------------------------------------
Foreign risk is the risk that We are permitted to invest up to 20% of the Series' portfolio in foreign
foreign securities may be adversely securities. When we do purchase foreign securities, they are generally American
affected by political instability, Depositary Receipts which are denominated in U.S. dollars and traded on U.S.
changes in currency exchange rates, stock exchanges.
foreign economic conditions or
inadequate regulatory and accounting
standards.
- ----------------------------------------- -----------------------------------------------------------------------------------------
Liquidity risk is the possibility We limit exposure to illiquid securities to 15% of net assets.
that securities cannot be readily
sold within seven days at
approximately the price that the
Series values them.
- ----------------------------------------- -----------------------------------------------------------------------------------------
Credit risk is the possibility that Fixed-income securities are not typically a significant component of our
a bond' issuer (or an entity that strategy. However, when we do invest in fixed-income securities, we will not
insures the bond) will be unable to hold more than 10% of net assets in high-yield, non-investment grade bonds. This
make timely payments of interest and limitation, combined with our careful, credit-oriented bond selection and our
principle. commitment to hold a diversified selection of high-yield bonds are designed to
manage this risk.
- ----------------------------------------- -----------------------------------------------------------------------------------------
</TABLE>
156
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------- -----------------------------------------------------------------------------------------
Risks How we strive to manage them
U.S. Growth Series
- ----------------------------------------- -----------------------------------------------------------------------------------------
<S> <C>
Futures and options risk is the We will not use futures and options for speculative reasons. We may use options
possibility that a fund may and futures to protect gains in the portfolio without actually selling a
experience a loss if it employs an security. We may also use options and futures to quickly invest excess cash so
options or futures strategy related that the portfolio is generally fully invested.
to a security or a market index and
that security or index moves in the
opposite direction from what the
manager anticipated. Futures and
options also involve additional
expenses, which could reduce any
benefit or increase any loss that a
fund gains from using the strategy.
- ----------------------------------------- -----------------------------------------------------------------------------------------
</TABLE>
Investment manger
The Series is managed by Delaware Management Company. Delaware Management
Company makes investment decisions for the Series, manages the Series' business
affairs and provides daily administrative services. The Series will pay Delaware
Management Company the following fee on an annual basis: 0.65% on the first $500
million of average daily net assets; 0.60% on the next $500 million; 0.55% on
the next $1.5 billion and 0.50% on assets in excess of $2.5 billion.
Portfolio managers
Frank Houghton and Rufus Winton have primary responsibility for making
investment decisions for U.S. Growth Series.
Frank Houghton, [ ] of Delaware,
joined Delaware in March 2000. Prior to joining Delaware, Mr. Houghton was
President and Portfolio Manager of Lynch & Mayer, Inc., which he joined in 1990
and became President in 1999. Prior to joining Lynch & Mayer, Inc., Mr. Houghton
was Chairman of BMI Capital from 1984 to1990, a Portfolio Manager at Neuberger &
Berman from 1977 to 1984 and a Partner at Oppenheimer & Co., Inc. from
1969-1977. Mr. Houghton received a BBA from Manhattan College and attended New
York University Graduate School of Business Administration.
Rufus Winton, [ ] of Delaware,
joined Delaware in March 2000. Prior to joining Delaware, Mr. Winton was Senior
Vice President and Portfolio Manager of Lynch & Mayer, Inc., which he joined in
1993. Prior to joining Lynch & Mayer, Inc., Mr. Winton was a Planning Analyst at
Northwest Airlines, Inc., Director of Business development at Postal Automation
Inc. and a Manager in Mortgage-Backed Securities Sales at Citicorp Investment
Bank. He received a BA in Economics from Connecticut College in 1982 and an MBA
from Kellogg Graduate School of Management in 1991, where he was an Amoco
Scholar.
157
<PAGE>
Who's who?
The following describes the various organizations involved with managing,
administering, and servicing the Series.
Board of trustees A mutual fund is governed by a board of trustees which has
oversight responsibility for the management of the fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor and others that perform services for the
fund. At least 40% of the board of trustees must be independent of the fund's
investment manager and distributor. These independent fund trustees, in
particular, are advocates for shareholder interests.
Investment managers
Delaware Management Company, One Commerce Square, Philadelphia, PA 19103
Delaware International Advisers Ltd., Third Floor, 80 Cheapside, London, England
EC2V 6EE
An investment manager is a company responsible for selecting portfolio
investments consistent with objectives and policies stated in the mutual fund's
prospectus. The investment manager places portfolio orders with broker/dealers
and is responsible for obtaining the best overall execution of those orders. A
written contract between a mutual fund and its investment manager specifies the
services the manager performs. Most management contracts provide for the manager
to receive an annual fee based on a percentage of the fund's average net assets.
The manager is subject to numerous legal restrictions, especially regarding
transactions between itself and the funds it advises.
Delaware Management Company and its predecessors have been managing the funds in
Delaware Investments since 1938. On December 31, 1999, Delaware Management
Company and its affiliates within Delaware Investments, including Delaware
International Advisers Ltd., were managing in the aggregate more than $00
billion in assets in the various institutional or separately managed
(approximately $00,000,000,000) and investment company (approximately
$00,000,00,000) accounts. Delaware International Advisers began operating in
1990 and manages global and international institutional and mutual fund
accounts. Delaware Management Company is a series of Delaware Management
Business Trust, which is an indirect, wholly owned subsidiary of Delaware
Management Holdings, Inc.
Sub-advisers
Lincoln Investment Management, Inc., 200 E. Berry Street, Fort Wayne,
Indiana 46802
Vantage Investment Advisors, 630 Fifth Avenue, New York, NY 10111 Delaware
International Advisers Ltd., Third Floor, 80 Cheapside, London, England EC2V 6EE
A sub-adviser is a company generally responsible for the management of the
fund's assets. They are selected and supervised by the investment manager.
Portfolio managers Portfolio managers are employed by the investment managers or
sub-advisers to make investment decisions for individual portfolios on a
day-to-day basis. See "Information about individual Series" for information
about the portfolio managers of the various series.
Distributor
Delaware Distributors, L.P., 1818 Market Street, Philadelphia, PA 19103
Shares of the Series are only sold to separate accounts of insurance companies
used in connection with variable annuity or variable life products.
Custodian
The Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn, NY 11245
Mutual funds are legally required to protect their portfolio securities and most
funds place them with a custodian, typically a qualified bank custodian who
segregates fund securities from other bank assets.
158
<PAGE>
Important Information about all Series
Share Classes
Each Series has two classes of shares, Class 1 and Class 2. Each Class is
identical except that Class 2 has a distribution plan or "rule 12b-1" plan. The
12b-1 plan allows the Fund to pay distribution fees of up to 0.30% (currently
0.15%) per year to those who sell and distribute Class 2 shares and provide
services to shareholders and contract owners. Because these fees are paid out of
Class 2's assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
Purchase and redemption of shares
Shares are sold only to separate accounts of life companies at net asset value.
(See Valuation of shares.) Redemptions will be effected by the separate accounts
at the net asset value next determined after receipt of the order to meet
obligations under the variable contracts. Cash Reserve Series is managed to
maintain a constant $10 per share net asset value although there is no assurance
that this objective can be achieved. Contract owners do not deal directly with
the Fund with respect to the acquisition or redemption of Series shares.
Valuation of shares
The price you pay for shares will depend on when we receive your purchase order.
If we or an authorized agent receive your order before the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time) on a
business day, you will pay that day's closing share price which is based on the
Series' net asset value. If we receive your order after the close of regular
trading, you will pay the next business day's price. A business day is any day
that the New York Stock Exchange is open for business. We reserve the right to
reject any purchase order.
We determine a Series' net asset value (NAV) per share at the close of regular
trading of the New York Stock Exchange each business day that the Exchange is
open. We calculate this value by adding the market value of all the securities
and assets a Series' portfolio, deducting all liabilities, and dividing the
resulting number by the number of shares outstanding. The result is the net
asset value per share. We price securities and other assets for which market
quotations are available at their market value. We price debt securities on the
basis of valuations provided to us by an independent pricing service that uses
methods approved by the board of trustees. Any investments that have a maturity
of less than 60 days we price at amortized cost. For all other securities, we
use methods approved by the board of trustees that are designed to price
securities at their fair market value.
A significant portion of the portfolio securities of the Emerging Markets,
Global Bond, International Equity and Strategic Income Series are listed on
foreign exchanges. From time to time, other Series may also hold securities that
are listed on foreign exchanges. These foreign exchanges may trade on weekends
or days when the Series do not price their shares. As a result, the NAV of these
Series may change on days when you will not be able to purchase or redeem shares
of the Series.
Dividends, distributions and taxes
For the Capital Reserves and Cash Reserve Series, dividends, if any, 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.
For the Balanced and Growth and Income Series, dividends, if any, are paid
quarterly. Capital gain distributions, if any, normally will be made following
the close of the fiscal year.
For the Convertible Securities, Devon, Emerging Markets, Global Bond, Growth
Opportunities, High Yield, International Equity, REIT, Select Growth Small Cap
Value, Social Awareness, Strategic Income, Trend and U.S. Growth Series,
dividends and capital gain distributions, if any, are distributed annually.
We automatically reinvest all dividends and any capital gains.
159
<PAGE>
A Series will not be subject to federal income tax to the extent its earnings
are distributed. The Fund intends to distribute substantially all of the
respective Series' net investment income and net capital gains. Shareholders may
be proportionately liable for taxes on income and gains of the Series but
shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them, and the Fund will inform shareholders of the
amount and nature of such income or gains.
Please refer to the prospectus for the variable insurance contract for
additional tax information relevant to such contracts.
Additional information about the Series' investments is available in the Series'
Annual and Semi-Annual Reports to shareholders. In the Series annual reports you
will find a discussion of the market conditions and investment strategies that
significantly affected the Series' performance during its last fiscal period.
You can find more detailed information about the Series in the current Statement
of Additional Information (SAI), which we have filed electronically with the
Securities and Exchange Commission (SEC) and which is legally a part of this
prospectus. You may obtain a free copy of the Statement of Additional
Information by writing to us at 1818 Market Street, Philadelphia, PA 19103, or
call toll-free 800.523.1918.
You can find reports and other information about the Series on the EDGAR
Database on the SEC web site (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by e-mailing the SEC at
[email protected] or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. Information about the Series, including their
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. You can get information on the public
reference room by calling the SEC at 1.202.942.8090.
Investment Company Act File No. 811-5162
160
<PAGE>
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 Global Advisors, Inc.
630 Fifth Avenue
New York, NY 10111
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 [GRAPHIC OMITTED]
Philadelphia, PA 19103 -----------------
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
DELAWARE GROUP
PREMIUM FUND
1818 Market Street
Philadelphia, PA 19103
TABLE OF CONTENTS
Cover Page 1
Investment Objectives and Policies 3
Accounting and Tax Issues 34
Performance Information 38
Trading Practices and Brokerage 48
Offering Price 52
Dividends and Realized Securities Profits Distributions 54
Taxes 55
Investment Management Agreements and Sub-Advisory Agreements 56
Officers and Trustees 64
General Information 79
Appendix A--Description of Ratings 81
Financial Statements
3
<PAGE>
Delaware Group Premium Fund ("Premium Fund" or the "Fund") is a
diversified, open-end management investment company that is intended to meet a
wide range of investment objectives with its separate Portfolios ("Series").
Each Series is in effect a separate fund issuing its own shares.
The shares of the Fund are sold only to separate accounts of life
insurance companies ("life companies"). The separate accounts are used in
conjunction with variable annuity contracts and variable life insurance policies
("variable contracts"). The separate accounts invest in shares of the various
Series in accordance with allocation instructions received from contract owners.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectuses of
the Fund dated May 1, 1999 and October 15, 1999, as they may be amended from
time to time. It should be read in conjunction with the prospectuses for the
variable contracts and the Fund. Part B is not itself a prospectus but is, in
its entirety, incorporated by reference into the Fund's Prospectuses. The Fund's
Prospectuses may be obtained by writing or calling your investment dealer or by
contacting the Series' national distributor, Delaware Distributors, L.P. (the
"Distributor"), 1818 Market Street, Philadelphia, PA 19103. The Funds' financial
statements, the notes relating thereto, the financial highlights and the report
of independent auditors are incorporated by reference from the Annual Report
into this Part B. The Annual Report will accompany any request for Part B. The
Annual Report can be obtained, without charge, by calling 800-523-1918.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Series are below. There can be no
assurance that the objectives of any Series will be realized.
Balanced Series (formerly Delaware Balanced Series) seeks a
balance of capital appreciation, income and preservation of
capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are
believed to demonstrate potential for income and capital
growth. This Series has the same objective and investment
disciplines as Delaware Balanced Fund of Delaware Group Equity
Funds I, a separate fund in the Delaware Investments family,
in that, as a "balanced" fund, the Series, consistent with its
objective, invests at least 25% of its assets in fixed-income
securities and the remainder primarily in equity securities.
Capital Reserves Series seeks a high stable level of current
income while minimizing fluctuations in principal by investing
in a diversified portfolio of short- and intermediate-term
securities.
Cash Reserve Series seeks the highest level of income
consistent with preservation of capital and liquidity through
investments in short-term money market instruments. This
Series has the same objective and investment disciplines as
Delaware Cash Reserve Fund of Delaware Group Cash Reserve,
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 investment adviser believes have the
potential for above-average dividend increases over time.
Under normal circumstances, the Series will invest at least
65% of its total assets in dividend paying common stocks. This
Series has the same objective and investment disciplines as
Delaware Devon Fund of Delaware Group Equity Funds I, a
separate fund in the Delaware Investments family.
Emerging Markets Series seeks to achieve long-term capital
appreciation. The Series seeks to achieve its objective by
investing primarily in equity series of issuers located in
emerging countries. The Series is an international fund. As
such, under normal market conditions, at least 65% of the
Series' assets will be invested in equity securities of
issuers organized or having a majority of their assets or
deriving a majority of their operating income in at least
three countries that are considered to be emerging or
developing. This Series has the same objective and investment
disciplines as Delaware Emerging Markets Fund of Delaware
Group Global & International Funds, a separate fund in the
Delaware Investments family.
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Global Bond Series seeks current income consistent with
preservation of principal by investing primarily in
fixed-income securities that may also provide the potential
for capital appreciation. This Series is a global fund, as
such, at least 65% of the Series' assets will be invested in
fixed-income securities of issuers organized or having a
majority of their assets in or deriving a majority of their
operating income in at least three different countries, one of
which may be the United States. This Series has the same
objective and investment disciplines as Delaware Global Bond
Fund of Delaware Group Global & International Funds, a
separate fund in the Delaware Investments family.
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 of
Delaware Group Equity Funds II, 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
of Delaware Group Equity Funds IV, 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 of Delaware Group Global & International Funds,
a separate fund in the Delaware Investments family, in that it
invests in a broad range of equity securities of foreign
issuers including common stocks, preferred stocks, convertible
securities and warrants, consistent with the Series'
objective.
REIT Series seeks to achieve maximum long-term total return.
Capital appreciation is a secondary objective. It seeks to
achieve its objectives by investing in securities of companies
primarily engaged in the real estate industry. This Series has
the same objective and investment discipline as The Real
Estate Investment Trust Portfolio and The Real Estate
Investment Trust Portfolio II of Delaware Pooled Trust,
separate funds in the Delaware Investments family, which also
invest in securities of companies primarily engaged in the
real estate industry.
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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 of
Voyageur Mutual Funds III, 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 of Delaware Group Equity Funds
V, a separate fund in the Delaware Investments family.
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 of Delaware Group Equity Funds II, a
separate fund in the Delaware Investments family.
Strategic Income Series seeks high current income and total
return. The Series seeks to achieve its objective by using a
multi-sector investment approach, investing primarily in three
sectors of the fixed-income securities markets: high yield,
higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign
fixed-income securities. In addition, the Series may invest in
U.S. equity securities. This Series has the same objective and
investment disciplines as Delaware Strategic Income Fund of
Delaware Group Income Funds, a separate fund in the Delaware
Investments family.
Trend Series seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible
securities of emerging and other growth-oriented companies.
These securities will have been judged to be responsive to
changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective.
This Series has the same objective and investment disciplines
as Delaware Trend Fund of Delaware Group Equity Funds III, a
separate fund in the Delaware Investments family.
U.S. Growth Series seeks to maximize capital appreciation The
Series seeks to achieve its investment objective by investing
in companies of all sizes which have low dividend yields,
strong balance sheets and high expected earnings growth rates
relative to their industry. This Series has the same objective
and investment disciplines as Delaware U.S. Growth Fund of
Delaware Group Adviser Funds, a separate fund in the
Delaware Investments family.
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INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions -- The Fund has adopted the
following restrictions for each Series which cannot be changed without approval
by the holders of a "majority" of the respective Series' outstanding shares,
which is a vote by the holders of the lesser of a) 67% or more of the voting
securities present in person or by proxy at a meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy; or b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time a Series purchases securities.
Each Series may not:
1. With respect to each Series, except the REIT Series, make
investments that will result in the concentration (as that term may be defined
in the Investment Company Act of 1940 ("1940 Act"), any rule or order
thereunder, or U.S. Securities and Exchange Commission ("SEC") staff
interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does not
limit the Portfolio from investing in obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or in tax-exempt securities
or certificates of deposit. The REIT Series will concentrate its investments in
the real estate industry. The REIT Series otherwise makes investments that will
result in the concentration (as that term may be defined in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof) of its
investments in the securities of issuers primarily engaged in the same industry,
provided that this restriction does not limit the Series from investing in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or in tax-exempt securities or certificates of deposit. In
addition, the Cash Reserve Series may concentrate its investments in bankers'
acceptances of banks with over one billion dollars in assets or bank holding
companies whose securities are rated A-2 or better by Standard & Poor's Ratings
Group ("S&P") or P-2 or better by Moody's Investors Service, Inc. ("Moody's").
2. Borrow money or issue senior securities, except as the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof, may permit.
3. Underwrite the securities of other issuers, except that the
Portfolio may engage in transactions involving the acquisition, disposition or
resale of its portfolio securities, under circumstances where it may be
considered to be an underwriter under the Securities Act of 1933.
4. With respect to each Series, purchase or sell real estate, unless
acquired as a result of ownership of securities or other instruments and
provided that this restriction does not prevent the Series from investing in
issuers which invest, deal or otherwise engage in transactions in real estate or
interests therein, or investing in securities that are secured by real estate or
interests therein.
5. Purchase or sell physical commodities, unless acquired as a result
of ownership of securities or other instruments and provided that this
restriction does not prevent the Series from engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities.
6. Make loans, provided that this restriction does not prevent the
Portfolio from purchasing debt obligations, entering into repurchase agreements,
loaning its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
In addition to the fundamental policies and investment restrictions
described above, and the various general investment policies described in the
prospectus, each Series will be subject to the following investment
restrictions, which are considered non-fundamental and may be changed by the
Board of Trustees without shareholder approval.
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1. The Series are permitted to invest in other investment companies,
including open-end, closed-end or unregistered investment companies, either
within the percentage limits set forth in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof, or without regard to percentage
limits in connection with a merger, reorganization, consolidation or other
similar transaction. However, none of the Series, may operate as a "fund of
funds" which invests primarily in the shares of other investment companies as
permitted by Section 12(d)(1)(F) or (G) of the 1940 Act, if its own shares are
utilized as investments by such a "fund of funds."
2. A Series may not invest more than 15% of its net assets in
securities which it cannot sell or dispose of in the ordinary course of business
within seven days at approximately the value at which the Series has valued the
investment.
Additional Nonfundamental Investment Restrictions -- Each Series
(except as noted) is subject to the following investment restrictions, which are
considered non-fundamental and may be changed by the Board of Trustees
without shareholder approval. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities.
Each Series (other than 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 Fund, 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.
4. Purchase any security issued by any other investment company (except
in connection with a merger, consolidation or offer of exchange) if after such
purchase it would: (a) own more than 3% of the voting stock of such company, (b)
own securities of such company having a value in excess of 5% of a Series'
assets or (c) own securities of investment companies having an aggregate value
in excess of 10% of a Series' assets. Any such purchase shall be at the
customary brokerage commission. The limitations set forth in this restriction do
not apply to purchases by International Equity Series of securities issued by
closed-end investment companies, all of which must be at the customary brokerage
commission.
5. Make any investment in real estate unless necessary for office space
or the protection of investments already made. (This restriction does not
preclude a Series' purchase of securities secured by real estate or interests
therein, or securities issued by companies which invest in real estate or
interests therein, including real estate investment trusts.)
6. Purchase securities on margin, make short sales of securities or
maintain a net short position (except that a Series may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities). This restriction shall not prohibit the Series from satisfying
margin requirements with respect to futures transactions.
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7. Invest in interests in oil, gas or other mineral exploration or
development programs, commodities or commodities contracts. This restriction
shall not prohibit International Equity, Small Cap Value and Trend Series from
entering into futures contracts or options thereon, to the extent that not more
than 5% of its assets are required as futures contract margin deposits and
premiums on options and only to the extent that obligations under such contracts
and transactions represent not more than 20% of the Series' assets.
8. Borrow money in excess of one-third of the value of its net assets
and then only as a temporary measure for extraordinary purposes or to facilitate
redemptions. The Series have no intention of increasing their net income through
borrowing. Any borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of a Series' assets, asset coverage of at
least 300% is required. In the event that such asset coverage shall at any time
fall below 300%, the Series shall, within three days thereafter (not including
Sunday and holidays) or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount of its
borrowings to an extent that the asset coverage of such borrowings shall be at
least 300%. A Series will not pledge more than 15% of its net assets. A Series
shall not issue senior securities as defined in the Investment Company Act of
1940 (the "1940 Act"), except for notes to banks.
9. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with each Series' investment
objective and policies are considered loans and except that each Series may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for their use relating to short sales or other security transactions.
10. Invest more than 5% of the value of its total assets in securities of
companies less than three years old. Such three-year period shall include the
operation of any predecessor company or companies.
11. Invest more than 25% of its total assets in any particular industry,
except that a Series may invest more than 25% of the value of its total assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certificates of deposit and bankers' acceptances of banks
with over one billion dollars in assets or bank holding companies whose
securities are rated A-2 or better by S&P or P-2 or better by Moody's.
12. Act as an underwriter of securities of other issuers, except that a
Series may acquire restricted or not readily-marketable securities under
circumstances where, if such securities are sold, a Series might be deemed to be
an underwriter for the purposes of the Securities Act of 1933.
13.Each Series will not invest in warrants valued at lower of cost or
market exceeding 5% of a Series' net assets. Included within that amount, but
not to exceed 2% of a Series' net assets, may be warrants not listed on the New
York Stock Exchange or American Stock Exchange. This restriction shall not apply
to International Equity Series.
14. The Money Market Series will not invest more than 25% of its assets in
foreign banks which are subject to the same regulation as United States banks or
to foreign branches of United States banks where such a bank is liable for the
obligations of the branch.
While such Series are permitted under certain circumstances to borrow
money, they do not normally do so. No investment securities will be purchased
while a Series has an outstanding borrowing. The Fund has undertaken, for so
long as required by California Regulatory Authority and so long as insurance
policy premiums or proceeds of contracts sold in California are used to purchase
Fund shares, each Series will not borrow money in excess of 25% of the value of
its net assets.
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In addition, 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.
3. Make loans other than by the purchase of all or a portion of a
publicly or privately distributed issue of bonds, debentures or other debt
securities of the types commonly offered publicly or privately and purchased by
financial institutions (including repurchase agreements), whether or not the
purchase was made upon the original issuance of the securities, and except that
each Series may loan its assets to qualified broker/dealers or institutional
investors.
4. Engage in underwriting of securities of other issuers, except that
portfolio securities, including securities purchased in private placements, may
be acquired under circumstances where, if sold, the Series might be deemed to be
an underwriter under the Securities Act of 1933. No limit is placed on the
proportion of the Series' assets which may be invested in such securities.
5. Borrow money or issue senior securities, except to the extent
permitted by the 1940 Act or any rule or order thereunder or interpretation
thereof. Subject to the foregoing, each Series may engage in short sales,
purchase securities on margin, and write put and call options.
6. Purchase or sell physical commodities or physical commodity
contracts, including physical commodity option or futures contracts in a
contract market or other futures market.
7. Purchase or sell real estate; provided that the Series may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
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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 Securities Act of 1933. No limit is placed on the
proportion of the Series' assets which may be invested in such securities.
4. Borrow money or issue senior securities, except to the extent
permitted by the 1940 Act or any rule or order thereunder or interpretation
thereof. Subject to the foregoing, the Series may engage in short sales,
purchase securities on margin, and write put and call options.
5. Purchase or sell physical commodities or physical commodity
contracts, including physical commodity option or futures contracts in a
contract market or other futures market.
6. Purchase or sell real estate; provided, that the Series may invest
in securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein; provided further, that the
Series may own real estate directly as a result of a default on securities the
Series owns.
7. Invest for the purpose of acquiring control of any company.
8. To the extent that the Series invests in securities of other
investment companies, it will only do so in accordance with the provisions of
the Investment Company Act in effect at the time of the investment.
9. Invest in interests in oil, gas and other mineral leases or other
mineral exploration or development programs.
10. Purchase securities on margin except short-term credits that may be
necessary for the clearance of purchases and sales of securities. This
restriction does not apply to the purchase of futures or options contracts.
Money Market Instruments
The Capital Reserves Series may, from time to time, invest all or part
of its available assets in money market instruments maturing in one year or
less. Cash Reserve Series will invest all of its available assets in instruments
which have a remaining maturity of 13 months or less at the time of acquisition
and which will otherwise meet the maturity, quality and diversification
conditions with which taxable money market funds must comply. The types of
instruments which these Series may purchase are described below:
1. U.S. Government Securities--Securities issued or guaranteed by the
U.S. government, including Treasury Bills, Notes and bonds.
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2. U.S. Government Agency Securities--Obligations issued or guaranteed
by agencies or instrumentalities of the U.S. government whether supported by the
full faith and credit of the U.S. Treasury or the credit of a particular agency
or instrumentality.
3. Bank Obligations--Certificates of deposit, bankers' acceptances and
other short-term obligations of U.S. commercial banks and their overseas
branches and foreign banks of comparable quality, provided each such bank
combined with its branches has total assets of at least one billion dollars, and
certificates and issues of domestic savings and loan associations of one billion
dollars in assets whose deposits are insured by the Federal Deposit Insurance
Corporation. Any obligations of foreign banks shall be denominated in U.S.
dollars. Obligations of foreign banks and obligations of overseas branches of
U.S. banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. In particular, a foreign country could impose exchange
controls which might delay the release of proceeds from that country. Such
deposits are not covered by the Federal Deposit Insurance Corporation. Because
of conflicting laws and regulations, an issuing bank could maintain that
liability for an investment is solely that of the overseas branch which could
expose the Series to a greater risk of loss. The Series will only buy short-term
instruments in nations where these risks are minimal. The Series will consider
these factors along with other appropriate factors in making an investment
decision to acquire such obligations and will only acquire those which, in the
opinion of management, are of an investment quality comparable to other debt
securities bought by the Series. Either Series may invest more than 25% of its
assets in foreign banks except that this limitation shall not apply to United
States branches of foreign banks which are subject to the same regulations as
United States banks or to foreign branches of United States banks where such a
bank is liable for the obligations of the branch. This policy may be changed by
the Board of Trustees without shareholder approval.
Cash Reserve Series is subject to certain maturity, quality and
diversification conditions applicable to taxable money market funds. Thus, if a
bank obligation or, as relevant, its issuer is considered to be rated at the
time of the proposed purchase, it or, as relevant, its issuer must be so rated
in one of the two highest rating categories by at least two
nationally-recognized statistical rating organizations or, if such security or,
as relevant, its issuer is not so rated, the purchase of the security must be
approved or ratified by the Board of 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.
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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.
The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors such
as changes in interest rates or the concentration of collateral in a particular
geographic area. Therefore, the yield may be difficult to predict and actual
yield to maturity may be more or less than the anticipated yield to maturity.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entities
issuing the securities are insulated from the credit risk of the originator or
affiliated entities, and the amount of credit support provided to the
securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payments of the obligations on at
least some of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Series will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payments of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
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Average Weighted Maturity
The Capital Reserves Series ordinarily maintains its average dollar
weighted portfolio maturity within the five to seven year range, but not in
excess of ten years. However, many of the securities in which the Series invests
will have remaining maturities in excess of seven years. The Series may purchase
individual securities with a remaining maturity of up to 15 years.
Some of the securities in the Series' portfolio may have periodic
interest rate adjustments based upon an index such as the 91-day Treasury Bill
rate. This periodic interest rate adjustment tends to lessen the volatility of
the security's price. With respect to securities with an interest rate
adjustment period of one year or less, the Series will, when determining average
weighted maturity, treat such a security's maturity as the amount of time
remaining until the next interest rate adjustment.
Instruments such as GNMA, FNMA and FHLMC securities and similar
securities backed by amortizing loans generally have shorter effective
maturities than their stated maturities. This is due to changes in amortization
caused by demographic and economic forces such as interest rate movements. These
effective maturities are calculated based upon historical payment patterns. For
purposes of determining the Series' average weighted maturity, the maturities of
such securities will be calculated based upon the issuing agency's payment
factors using industry-accepted valuation models.
Mortgage-Backed Securities
The Capital Reserves, Balanced, Strategic Income, Devon and REIT
Series may invest in mortgage-backed securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or government sponsored
corporations or those issued by certain private, non-government corporations,
such as financial institutions. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. The Series may
invest in such private-backed securities, but the REIT Series will do so (i)
only if the securities are 100% collateralized at the time of issuance by
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and (ii) currently, only if they are rated at the time of
purchase in the two highest grades by a nationally-recognized statistical rating
agency.
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.
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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 Code, and/or to maintain exemptions from the
1940 Act.
The Series' investments in REITs present certain further risks that are
unique and in addition to the risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of the
underlying property owned by the REITs, while mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent on management skills,
are not diversified, and are subject to the risks of financing projects. REITs
whose underlying assets include long-term health care properties, such as
nursing, retirement and assisted living homes, may be impacted by federal
regulations concerning the health care industry.
REITs (especially mortgage REITs) are also subject to interest rate
risks -- when interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently
and in a limited volume, and may be subject to more abrupt or erratic price
movements than other securities.
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 and
debt securities are senior to common stocks in a corporation's capital
structure, although convertible securities are usually subordinated to similar
nonconvertible securities. Convertible and debt securities provide a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
the convertible security's underlying common stock. Just as with debt
securities, convertible securities tend to increase in market value when
interest rates decline and tend to decrease in value when interest rates rise.
However, the price of a convertible security is also influenced by the market
value of the security's underlying common stock and tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. Common stock acquired by the
Series upon conversion of a convertible security will generally be held for so
long as the investment manager anticipates such stock will provide the Series
with opportunities which are consistent with the Series' investment objectives
and policies.
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The Series may invest in convertible debentures without regard to
rating categories. Investing in convertible debentures that are rated below
investment grade or unrated but of comparable quality entails certain risks,
including the risk of loss of principal, which may be greater than the risks
involved in investing in investment grade convertible debentures. Under rating
agency guidelines, lower rated securities and comparable unrated securities will
likely have some quality and protective characteristics that are outweighed by
large uncertainties or major risk exposures to adverse conditions.
The Series may have difficulty disposing of such lower rated
convertible debentures because the trading market for such securities may be
thinner than the market for higher rated convertible debentures. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary trading market for higher rated securities. The lack of
a liquid secondary market as well as adverse publicity with respect to these
securities, may have an adverse impact on market price and the Series' ability
to dispose of particular issues in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Series to obtain accurate market quotations for purposes of pricing the Series'
portfolio and calculating its net asset value. The market behavior of
convertible securities in lower rating categories is often more volatile than
that of higher quality securities. Lower quality convertible securities are
judged by Moody's and S&P to have speculative elements or characteristics; their
future cannot be considered as well assured and earnings and asset protection
may be moderate or poor in comparison to investment grade securities.
In addition, such lower quality securities face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions,
which could lead to inadequate capacity to meet timely payments. The market
values of securities rated below investment grade tend to be more sensitive to
company specific developments and changes in economic conditions than higher
rated securities. Issuers of these securities are often highly leveraged, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. In
addition, such issuers may not have more traditional methods of financing
available to them, and may be unable to repay debt at maturity by refinancing.
These Series may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stock
("PERCS"), which provide an investor with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Upon the conversion date, most PERCS convert into common stock of the
issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after a predetermined number of years the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, each PERCS would convert to one share of common stock. If, however, the
issuer's common stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive less than one full
share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However, if called early, the issuer may pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
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The Series may also invest in other enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock.
Zero Coupon Bonds and Pay-In-Kind Bonds
The Global Bond, Strategic Income, Convertible Securities and REIT
Series may invest in zero coupon bonds. The market prices of zero coupon
securities are generally more volatile than the market prices of securities that
pay interest periodically and are likely to respond to changes in interest rates
to a greater degree than do non-zero coupon securities having similar maturities
and credit quality. Current federal income tax law requires that a holder of a
taxable zero coupon security report as income each year the portion of the
original issue discount of such security that accrues that year, even though the
holder receives no cash payments of interest during the year. The Series have
qualified as regulated investment companies under the Code. Accordingly, during
periods when the Series receive no interest payments on their zero coupon
securities, they will be required, in order to maintain their desired tax
treatment, to distribute cash approximating the income attributable to such
securities. Such distribution may require the sale of portfolio securities to
meet the distribution requirements and such sales may be subject to the risk
factor discussed above.
The Strategic Income Series may invest in pay-in-kind ("PIK") bonds.
PIK bonds pay interest through the issuance to holders of additional securities.
PIK bonds are generally considered to be more interest-sensitive than income
bearing bonds, to be more speculative than interest-bearing bonds, and to have
certain tax consequences similar to zero coupon bonds which could, under certain
circumstances, be adverse to the Series.
Interest Rate 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. The 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.
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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 Manager presently intends to purchase swaps with maturities of six to twelve
months, and in no event greater than two years.
The Series may also engage in index swaps, also called total return
swaps. In an index swap, the 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 Fund 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 the Series wished 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, the Fund has reduced the duration of the notional
amount invested from a longer term to six months over the life of the swap
agreement.
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. The Fund could
replicate exposure to the corporate bond market, however, by engaging in an
index swap in which the Fund gains exposure to a corporate bond index in return
for paying a LIBOR-based floating interest rate.
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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 Fund
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 the 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 the 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.
The 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 the 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.
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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). The Series will therefore treat all swaps as subject to their
limitation on illiquid investments. For purposes of calculating these percentage
limitations, the 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.
Interest Rate Swaps
In order to attempt to protect the Global Bond Series' investments from
interest rate fluctuations, the Series may engage in interest rate swaps. The
Series intends to use interest rate swaps as a hedge and not as a speculative
investment. Interest rate swaps involve the exchange by the Series with another
party of their respective rights to receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Series holds an
interest-paying security whose interest rate is reset once a year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset daily. Such a swap position would offset
changes in the value of the underlying security because of subsequent changes in
interest rates. This would protect the Series from a decline in the value of the
underlying security due to rising rates, but would also limit its ability to
benefit from falling interest rates.
The Series may enter into interest rate swaps on either an asset-based
or liability-based basis, depending upon whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Series receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch as
these hedging transactions are entered into for non-speculative purposes and not
for the purpose of leveraging the Series' investments, Delaware International
and the Series believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The net amount of the excess, if any, of the Series' obligations over its
entitlement with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Custodian Bank. If the Series enters
into an interest rate swap on other than a net basis, the Series would maintain
a segregated account in the full amount accrued on a daily basis of the Series'
obligations with respect to the swap. See Foreign Securities and Foreign
Currency Transactions, above and Special Risk Considerations, below.
When-Issued, "When, As and If Issued" and Delayed Delivery Securities and
Forward Commitments
Consistent with their respective objectives, the Series may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. The Series may also purchase
securities on a "when, as and if issued" basis under which the issuance of the
security depends upon the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring. When such transactions
are negotiated, the price is fixed at the time of commitment, but delivery and
payment can take place a month or more after the date of the commitment. The
Series will establish a segregated account with its custodian bank in which it
will continually maintain cash or cash equivalents or other portfolio securities
equal in value to commitments to purchase securities on a when-issued, "when, as
and if issued," delayed delivery or forward commitment basis.
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While the Series will only purchase securities on a when-issued, "when,
as and if issued," delayed delivery or forward commitment basis with the
intention of acquiring the securities, the Series may sell the securities before
the settlement date if it is deemed advisable. The securities so purchased or
sold are subject to market fluctuation and no interest accrues to the purchaser
during this period. At the time a Series makes the commitment to purchase or
sell securities on a when-issued, "when, as and if issued," delayed delivery or
forward commitment basis, it will record the transaction and thereafter reflect
the value, each day, of the security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.
Liquidity and Rule 144A Securities
In order to assure that each Series has sufficient liquidity, no Series
may invest more than 10% of its net assets in illiquid assets (except
Convertible Securities, REIT, 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,
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, 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 Securities Act of 1933
("1933 Act"). Rule 144A permits many privately placed and legally restricted
securities to be freely traded among certain institutional buyers such as the
Series. Investing in Rule 144A Securities could have the effect of increasing
the level of illiquidity of a Series to the extent that qualified institutional
buyers become uninterested, for a time, in purchasing these securities.
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, 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,
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 of the Fund's 18 Series may, from time to time, enter into
repurchase transactions which are at least 102% collateralized by U.S.
government securities, except that the International Equity, Global Bond and
Emerging Markets Series may accept as collateral any securities in which such
Series may invest. Repurchase agreements are instruments under which securities
are purchased from a bank or securities dealer with an agreement by the seller
to repurchase the securities. Under a repurchase agreement, the purchaser
acquires ownership of the security but the seller agrees, at the time of sale,
to repurchase it at a mutually agreed-upon time and price. The Series will take
custody of the collateral under repurchase agreements. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred. The resale price is in excess of the purchase
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price and reflects an agreed-upon market rate unrelated to the coupon rate or
maturity of the purchase security. Such transactions afford an opportunity for
the Series to invest temporarily available cash. The Series' risk is limited to
the seller's ability to buy the security back at the agreed-upon sum at the
agreed-upon time, since the repurchase agreement is secured by the underlying
obligation. Should such an issuer default, the investment managers believe that,
barring extraordinary circumstances, the Series will be entitled to sell the
underlying securities or otherwise receive adequate protection for its interest
in such securities, although there could be a delay in recovery. The Series
consider the creditworthiness of the bank or dealer from whom it purchases
repurchase agreements. The Series will monitor such transactions to assure that
the value of the underlying securities subject to repurchase agreements is at
least equal to the repurchase price. The underlying securities will be limited
to those described above.
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the Investment
Company Act of 1940 to allow the funds in the Delaware Investments family
jointly to invest cash balances. Each Series of the Fund may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described above.
Portfolio Loan Transactions
Each of the Fund's 18 Series, except for Cash Reserve Series, may loan
up to 25% of its assets to qualified broker/dealers or institutional investors
for their use relating to short sales or other security transactions.
It is the understanding of the Series' respective investment manager
that the staff of the SEC permits portfolio lending by registered investment
companies if certain conditions are met. These conditions are as follows: 1)
each transaction must have 100% collateral in the form of cash, short-term U.S.
government securities, or irrevocable letters of credit payable by banks
acceptable to the Fund from the borrower; 2) this collateral must be valued
daily and should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Series; 3) the Series must be
able to terminate the loan after notice, at any time; 4) the Series must receive
reasonable interest on any loan, and any dividends, interest or other
distributions on the lent securities, and any increase in the market value of
such securities; 5) the Series may pay reasonable custodian fees in connection
with the loan; 6) the voting rights on the lent securities may pass to the
borrower; however, if the Trustees of the Fund know that a material event
will occur affecting an investment loan, they must either terminate the loan in
order to vote the proxy or enter into an alternative arrangement with the
borrower to enable the 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 the Fund's 18 Series are authorized and intend to invest
in foreign securities, investors should recognize that investing in securities
of foreign issuers involves certain considerations, including those set forth in
the Prospectuses, which are not typically associated with investing in United
States issuers. Since the stocks of foreign companies are frequently denominated
in foreign currencies, and since the Series may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the Series will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The investment policies of certain of the Series permit them to
enter into forward foreign currency exchange contracts and various related
currency transactions in order to hedge the Series' holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
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There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by a Series. Payment of
such interest equalization tax, if imposed, would reduce such Series' rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Series by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non-equity options are
generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986 (the "Code"), as amended, and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts a Series may make or enter into will
be subject to the special currency rules described above.
Foreign Currency Transactions
In connection with a Series' investment in foreign securities, a Series
may purchase or sell currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of portfolio transactions and to
minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A Series will account for
forward contracts by marking to market each day at daily exchange rates.
When a Series enters into a forward contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, the amount of foreign
currency approximating the value of some or all of that Series' assets
denominated in such foreign currency, the Series' custodian bank or subcustodian
will place cash or liquid high grade debt securities in a separate account of
the Series in an amount not less than the value of such Series' total assets
committed to the consummation of such forward contracts. If the additional cash
or securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Series' commitments with respect to
such contracts.
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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, Strategic
Income, Emerging Markets and Convertible Securities Series may enter into
foreign currency futures contracts. (Unless otherwise specified, interest rate
futures contracts, securities and securities index futures contracts and foreign
currency futures contracts are collectively referred to as "futures contracts.")
Such investment strategies will be used as a hedge and not for speculation.
Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a Series' current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Series may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Series' securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When a Series is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Series intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be closed
out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
Series' current or intended investments in fixed-income securities. For example,
if a Series owned long-term bonds and interest rates were expected to increase,
that Series might sell interest rate futures contracts. Such a sale would have
much the same effect as selling some of the long-term bonds in that Series'
portfolio. However, since the futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique allows
a Series to hedge its interest rate risk without having to sell its portfolio
securities. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Series' interest rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the net asset value of that Series from declining as much as it
otherwise would have. On the other hand, if interest rates were expected to
decline, interest rate futures contracts could be purchased to hedge in
anticipation of subsequent purchases of long-term bonds at higher prices.
Because the fluctuations in the value of the interest rate futures contracts
should be similar to those of long-term bonds, a Series could protect itself
against the effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became available or the
market had stabilized. At that time, the interest rate futures contracts could
be liquidated and that Series' cash reserve could then be used to buy long-term
bonds on the cash market.
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 Delaware Management Company ("Delaware
Management") or Delaware International Advisers Ltd. ("Delaware International"),
as applicable, the historical relationship among foreign currencies suggests
that a Series may achieve protection against fluctuations in currency exchange
rates similar to that described above at a reduced cost through the use of a
futures contract relating to a currency other than the U.S. dollar or the
currency in which the foreign security is denominated. Such "cross hedging" is
subject to the same risks as those described above with respect to an
unanticipated increase or decline in the value of the subject currency relative
to the dollar.
Options on Futures Contracts--Each of International Equity, Small Cap
Value, Trend, Global Bond, Strategic Income, Emerging Markets, Convertible
Securities, REIT, Select Growth and U.S. Growth Series may purchase and write
options on the types of futures contracts that Series could invest in.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in the Series'
portfolio. If the futures price at expiration of the option is below the
exercise price, a Series will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Series' portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the futures contract. If
the futures price at expiration of the put option is higher than the exercise
price, a Series will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities which
the Series intends to purchase. If a put or call option a Series has written is
exercised, the Series will incur a loss which will be reduced by the amount of
the premium it receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value of its options
on futures positions, a Series' losses from exercised options on futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Series may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected marketwide decline or changes in interest or exchange
rates, a Series could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. If the market decline does not
occur, the Series will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Series will increase
prior to acquisition, due to a market advance or changes in interest or exchange
rates, a Series could purchase call options on futures contracts, rather than
purchasing the underlying futures contracts. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Series will suffer a loss equal to
the price of the call, but the securities which the Series intends to purchase
may be less expensive.
Options on Foreign Currencies
International Equity, Global Bond, Strategic Income, Emerging Markets,
Convertible Securities, REIT and U.S. Growth Series may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
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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.
Options
Each of the Fund's 18 Series, except for Cash Reserve Series, may write
call options and purchase put options on a covered basis only. International
Equity, Global Bond, Emerging Markets, Convertible Securities, REIT, Select
Growth and U.S. Growth Series may also purchase call options. The Series also
may enter into closing transactions with respect to such options transactions.
No Series will engage in option transactions for speculative purposes.
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To the extent authorized to engage in option transactions, the Series
may invest in options that are Exchange listed and International Equity, Global
Bond, Emerging Markets, Convertible Securities, REIT, Select Growth and U.S.
Growth Series may also invest in options that are traded over-the-counter. The
other Series reserve the right to invest in over-the-counter options upon
written notice to their shareholders. The Series will enter into an option
position only if there appears to be a liquid market for such options. However,
there can be no assurance that a liquid secondary market will be maintained.
Thus, it may not be possible to close option positions and this may have an
adverse impact on a Series' ability to effectively hedge its securities.
A. Covered Call Writing--A Series may write covered call options from
time to time on such portion of its portfolio, without limit, as the respective
investment manager determines is appropriate in seeking to obtain the Series'
investment objective. A call option gives the purchaser of such option the right
to buy, and the writer, in this case the Series, has the obligation to sell the
underlying security at the exercise price during the option period. The
advantage to a Series of writing covered calls is that the Series receives a
premium which is additional income. However, if the security rises in value, the
Series may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to such options, the Series may enter into closing
purchase transactions. A closing purchase transaction is one in which the
Series, when obligated as a writer of an option, terminates its obligation by
purchasing an option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether the
net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part by a decline in the market value of the underlying security.
If a call option expires unexercised, the Series will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Series will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
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A Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Series will normally have expiration dates between one
and nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
B. Purchasing Put Options--A Series may invest up to 2% of its total
assets in the purchase of put options. The Series will, at all times during
which it holds a put option, own the security covered by such option.
A put option purchased by the Series gives it the right to sell one of
its securities for an agreed price up to an agreed date. The Series intend to
purchase put options in order to protect against a decline in market value of
the underlying security below the exercise price less the premium paid for the
option ("protective puts"). The ability to purchase put options will allow a
Series to protect unrealized gain in an appreciated security in its portfolio
without actually selling the security. If the security does not drop in value,
the Series will lose the value of the premium paid. A Series may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option. Such sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions. A
closing sale transaction is one in which a Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
C. Purchasing Call Options--International Equity, Global Bond, Emerging
Markets, Convertible Securities, REIT, 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.
The Series may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased. The
Series will realize a profit from a closing sale transaction if the price
received on the transaction is more than the premium paid to purchase the
original call option; the Series will realize a loss from a closing sale
transaction if the price received on the transaction is less than the premium
paid to purchase the original call option.
Although the Series will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on an
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the result that the Series would have
to exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any value
to the Series.
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D. Options on Stock Indices--The Growth Opportunities, International
Equity, Small Cap Value, Trend, Global Bond, Emerging Markets, Convertible
Securities, REIT, Select Growth and U.S. Growth Series also may write call
options and purchase put options on certain stock indices and enter into closing
transactions in connection therewith. A stock index assigns relative values to
the common stocks included in the index with the index fluctuating with changes
in the market values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss to the Series on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, Growth Opportunities, International Equity,
Small Cap Value, Trend, Global Bond, Emerging Markets, Convertible Securities,
REIT, Select Growth and U.S. Growth Series may offset positions in stock
index options prior to expiration by entering into a closing transaction on an
Exchange or may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
so included. Some stock index options are based on a broad market index such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on stock indices are currently
traded on the following Exchanges among others: The Chicago Board Options
Exchange, New York Stock Exchange and American Stock Exchange.
The Series' ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the Series' portfolio securities. Since the Series' portfolio will
not duplicate the components of an index, the correlation will not be exact.
Consequently, the Series bear the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an Exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on the Series' ability to effectively
hedge its securities. The Series will enter into an option position only if
there appears to be a liquid secondary market for such options.
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Growth Opportunities, International Equity, Small Cap Value, Trend,
Global Bond, Emerging Markets, Convertible Securities, REIT, Select Growth
and U.S. Growth Series will not engage in transactions in options on stock
indices for speculative purposes but only to protect appreciation attained, to
offset capital losses and to take advantage of the liquidity available in the
option markets.
E. Writing Covered Puts--Convertible Securities, REIT, 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.
Investment Company Securities
Any investments that Social Awareness Series makes in either closed-end
or open-end investment companies will be limited by the 1940 Act, and would
involve an indirect payment of a portion of the expenses, including advisory
fees, of such other investment companies. Under the 1940 Act's current
limitations, the Series may not (1) own more than 3% of the voting stock of
another investment company; (2) invest more than 5% of the Series' total assets
in the shares of any one investment company; nor (3) invest more than 10% of the
Series' total assets in shares of other investment companies. If a Series elects
to limit its investment in other investment companies to closed-end investment
companies, the 3% limitation described above is increased to 10%. These
percentage limitations also apply to the Series' investments in unregistered
investment companies.
Unseasoned Companies
Social Awareness Series may invest in relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid growth
is expected to be above average. Securities of unseasoned companies present
greater risks than securities of larger, more established companies. The
companies in which the Series may invest may have relatively small revenues,
limited product lines, and may have a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing or favorable
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terms, or they may be developing or marketing new products or services for which
markets are not yet established and may never become established. Due these and
other factors, small companies may suffer significant losses as well as realize
substantial growth, and investments in such companies tend to be volatile and
are therefore speculative.
In addition, as a matter of non-fundamental policy, Social Awareness
Series will adhere to a Social Criteria strategy:
Vantage will utilize the Social Investment Database published by KLD in
determining whether a company is engaged in any activity precluded by the
Series' Social Criteria. The Social Investment Database reflects KLD's
determination of the extent to which a company's involvement in the activities
prohibited by the Social Criteria is significant enough to merit a concern or a
major concern. Significance may be determined on the basis of percentage of
revenue generated by, or the size of the operations attributable to, activities
related to such Social Criteria, or other factors selected by KLD. The social
screening undergoes continual refinement and modification.
Pursuant to the Social Criteria presently in effect, the Series will
not knowingly invest in or hold securities of companies which engage in:
1. Activities which result or are likely to result in damage to
the natural environment;
2. The production of nuclear power, the design or construction of
nuclear power plants, or the manufacture of equipment for the
production of nuclear power;
3. The manufacture of, or contracting for, military weapons; or
4. The liquor, tobacco or gambling industries.
Because of its Social Criteria, the Series may not be able to take the
same advantage of certain investment opportunities as do funds which do not have
Social Criteria. Only securities of companies not excluded by any of the Social
Criteria will be eligible for consideration for purchase by the Series according
to its objective and policies described in the Prospectus.
The Series will commence the orderly sale of securities of a company
when it is determined by Vantage Investment Advisors ("Vantage") that such
company no longer adheres to the Social Criteria. The Series will sell such
securities in a manner so as to minimize any adverse affect on the Series'
assets. Typically, such sales will be made within 90 days from the date of
Vantage's determination, unless a sale within the 90 day period would produce a
significant loss to the overall value of the Series' assets.
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.
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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 Fund to value its
portfolio securities and the Fund's ability to dispose of these lower-rated debt
securities.
Since the risk of default is higher for lower-quality securities, the
investment manager's and/or sub-adviser's research and credit analysis is an
integral part of managing any securities of this type held by the Series. In
considering investments for the Series, the investment manager and/or
sub-adviser will attempt to identify those issuers of high-yielding securities
whose financial condition is adequate to meet future obligations, has improved,
or is expected to improve in the future. The investment manager's and/or
sub-adviser's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer. There can be no assurance that
such analysis will prove accurate.
The Series may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of shareholders.
Mortgage Dollar Rolls
U.S. Growth Series may enter into mortgage "dollar rolls" in which the
Series sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. Dollar roll transactions
consist of the sale by the Series of mortgage-backed securities, together with a
commitment to purchase similar, but not necessarily identical, securities at a
future date. Any difference between the sale price and the purchase price is
netted against the interest income foregone on the securities to arrive at an
implied borrowing (reverse repurchase) rate. Alternatively, the sale and
purchase transactions which constitute the dollar roll can be executed at the
same price, with the Series being paid a fee as consideration for entering into
the commitment to purchase. Dollar rolls may be renewed prior to cash settlement
and initially may involve only a firm commitment agreement by the Fund to buy a
security. If the broker/dealer to whom the Series sells the security becomes
insolvent, the Series' right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Series is required to repurchase may be worth
less than the security that the Series originally held, and the return earned by
the Series with the proceeds of a dollar roll may not exceed transaction costs.
The Series will place U.S. government or other liquid, high quality assets in a
segregated account in an amount sufficient to cover its repurchase obligation.
Over-the-Counter Options and Illiquid Securities
U.S. Growth Series may deal in over-the-counter ("OTC") options. The
Series understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The Series, the
investment manager, and the sub-adviser disagree with this position and have
found the dealers with which they engage in OTC options transactions generally
agreeable to and capable of entering into closing transactions. The Series has
adopted procedures for engaging in OTC options for the purpose of reducing any
potential adverse impact of such transactions upon the liquidity of its
portfolio.
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As part of these procedures the Series will engage in OTC options
transactions only with primary dealers that have been specifically approved by
the Fund's Board of Trustees and the investment manager and/or sub-advisers
believe that the approved dealers should be agreeable and able to enter into
closing transactions if necessary and, therefore, present minimal credit risks
to the Series. The Series anticipates entering into written agreements with
those dealers to whom the Series may sell OTC options, pursuant to which the
Series would have the absolute right to repurchase the OTC options from such
dealers at any time at a price determined pursuant to a formula set forth in
certain no action letters published by the SEC staff. The Series will not engage
in OTC options transactions if the amount invested by the Fund in OTC options
plus, with respect to OTC options written by the Series, the amounts required to
be treated as illiquid pursuant to the terms of such letters (and the value of
the assets used as cover with respect to OTC option sales which are not within
the scope of such letters), plus the amount invested by the Series in illiquid
securities, would exceed 15% of the Series' total assets. OTC options on
securities other than U.S. government securities may not be within the scope of
such letters and, accordingly, the amount invested by the Series in OTC options
on such other securities and the value of the assets used as cover with respect
to OTC option sales regarding such non-U.S. government securities will be
treated as illiquid and subject to the 15% limitation on the Series' net assets
that may be invested in illiquid securities. See Liquidity and Rule 144A
Securities, above.
Combined Transactions
U.S. Growth Series may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single transaction, as
part of a single or combined strategy when, in the opinion of the investment
manager and/or sub-adviser, it is in the best interests of the Series to do so.
A combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the investment manager's and/or sub-adviser's judgment
that the combined strategies will reduce risk or otherwise more effectively
achieve the desired portfolio management goal, it is possible that the
combination will instead increase such risks or hinder achievement of the
portfolio management objective.
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
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entered into for good faith hedging purposes, the investment manager and the
Series believe such obligations do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. The Series will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or is determined to be of equivalent credit
quality by the investment manager and/or sub-adviser. If there is a default by
the counterparty, the Series may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agent utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments
U.S. Growth Series may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Series might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed-income
instruments are linked.
Reverse Repurchase Agreements
U.S. Growth Series is authorized to enter into reverse repurchase
agreements. A reverse repurchase agreement is the sale of a security by the
Series and its agreement to repurchase the security at a specified time and
price. The Series will maintain in a segregated account with the Custodian cash,
cash equivalents or U.S. government securities in an amount sufficient to cover
its obligations under reverse repurchase agreements with broker/dealers (but no
collateral is required on reverse repurchase agreements with banks). Under the
1940 Act, reverse repurchase agreements may be considered borrowings by the
Series; accordingly, the Series will limit its investments in reverse repurchase
agreements, together with any other borrowings, to no more than one-third of its
total assets. The use of reverse repurchase agreements by the Series creates
leverage which increases the Series' investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the costs of the agreements, the Series' earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or net asset value would decline faster
than otherwise would be the case.
"Roll" Transactions
U.S. Growth Series may engage in "roll" transactions. A "roll"
transaction is the sale of securities together with a commitment (for which the
Series may receive a fee) to purchase similar, but not identical, securities at
a future date. Under the 1940 Act, these transactions may be considered
borrowings by the Series; accordingly, the Series will limit its use of these
transactions, together with any other borrowings, to no more than one-fourth of
its total assets. The Series will segregate liquid assets such as cash, U.S.
government securities or other high grade debt obligations in an amount
sufficient to meet its payment obligations in these transactions. Although these
transactions will not be entered into for leveraging purposes, to the extent the
Series' aggregate commitments under these transactions exceed its holdings of
cash and securities that do not fluctuate in value (such as short-term money
market instruments), the Series temporarily will be in a leveraged position
(i.e., it will have an amount greater than its net assets subject to market
risk). Should the market value of the Series' portfolio securities decline while
the Series is in a leveraged position, greater depreciation of its net assets
would likely occur than were it not in such a position. As the Series' aggregate
commitments under these transactions increase, the opportunity for leverage
similarly increases.
Variable and Floating Rate Notes
Variable rate master demand notes, in which U.S. Growth Series may
invest, are unsecured demand
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notes that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate according to the terms of the instrument. The
Series will not invest over 5% of its assets in variable rate master demand
notes. Because master demand notes are direct lending arrangements between the
Series and the issuer, they are not normally traded. Although there is no
secondary market in the notes, the Series may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the period of time remaining
until the principal amount can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Series will be determined by
the Series' investment manager and/or sub-adviser under guidelines established
by the Series' Board of 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 and/or
sub-adviser, if any, will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate note purchased by the Series,
the Series may re-sell the note at any time to a third party. The absence of
such an active secondary market, however, could make it difficult for the Series
to dispose of the variable or floating rate note involved in the event the
issuer of the note defaulted on its payment obligations, and the Series could,
for this or other reasons, suffer a loss to the extent of the default. Variable
or floating rate notes may be secured by bank letters of credit.
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Series' total assets only if such notes
are subject to a demand feature that will permit the Series to demand payment of
the principal within seven days after demand by the Series. If not rated, such
instruments must be found by the Series' investment manager and/or sub-adviser
under guidelines established by the Fund's Board of 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.
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
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securities prior to maturity in order to realize gains or losses or to shorten
the average maturity if it deems such actions appropriate to maintain a stable
net asset value. While the Series will make every effort to maintain a fixed net
asset value of $10 per share, there can be no assurance that this objective will
be achieved.
While the Series intends to hold its investments until maturity when
they will be redeemable at their full principal value plus accrued interest, it
may attempt, from time to time, to increase its yield by trading to take
advantage of market variations. Also, revised evaluations of the issuer or
redemptions may cause sales of portfolio investments prior to maturity or at
times when such sales might otherwise not be desirable. The Series' right to
borrow to facilitate redemptions may reduce but does not guarantee a reduction
in the need for such sales. The Series will not purchase new securities while
any borrowings are outstanding. See Dividends and Realized Securities Profits
Distributions and Taxes for effect of any capital gains distributions.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Series invests.
In the event of an increase in current interest rates, a national credit crisis
or if one or more of the issuers became insolvent prior to the maturity of the
instruments, principal values could be adversely affected. Investments in
obligations of foreign banks and of overseas branches of U.S. banks may be
subject to less stringent regulations and different risks than those of U.S.
domestic banks. The rate of return and the net asset value will be affected by
such other factors as sales of portfolio securities prior to maturity and the
Series' operating expenses.
Concentration
In applying the Series' fundamental policy concerning concentration
that is described above, it is a matter of non-fundamental policy that: (i)
utility companies will be divided according to their services, for example, gas,
gas transmission, electric and telephone will each be considered a separate
industry; (ii) financial service companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; and (iii) asset
backed securities will be classified according to the underlying assets securing
such securities.
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ACCOUNTING AND TAX ISSUES
When a Series writes a call, or purchases a put option, an amount equal
to the premium received or paid by it is included in the Series' assets and
liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently "marked
to market" to reflect the current market value of the option written. The
current market value of a written option is the last sale price on the principal
Exchange on which such option is traded or, in the absence of a sale, the mean
between the last bid and asked prices. If an option which a Series has written
expires on its stipulated expiration date, a Series recognizes a capital gain.
If a Series enters into a closing purchase transaction with respect to an option
which a Series has written, a Series realizes a gain (or loss if the cost of the
closing transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which a
Series has written is exercised, a Series realizes a capital gain or loss from
the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received.
The premium paid by a Series for the purchase of a put option is
recorded in the Series' assets and liabilities as an investment and subsequently
adjusted daily to the current market value of the option. For example, if the
current market value of the option exceeds the premium paid, the excess would be
unrealized appreciation and, conversely, if the premium exceeds the current
market value, such excess would be unrealized depreciation. The current market
value of a purchased option is the last sale price on the principal Exchange on
which such option is traded or, in the absence of a sale, the mean between the
last bid and asked prices. If an option which a Series has purchased expires on
the stipulated expiration date, a Series realizes a short-term or long-term
capital loss for federal income tax purposes in the amount of the cost of the
option. If a Series exercises a put option, it realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
Options on Certain Stock Indices--Accounting for options on certain
stock indices will be in accordance with generally accepted accounting
principles. The amount of any realized gain or loss on closing out such a
position will result in a realized gain or loss for tax purposes. Such options
held by the Growth Opportunities, International Equity, Small Cap Value, Trend,
Global Bond, Emerging Markets, Convertible Securities, REIT, Select Growth and
U.S. Growth Series at the end of each fiscal year will be required to be "marked
to market" for federal income tax purposes. Sixty percent of any net gain or
loss recognized on such deemed sales or on any actual sales will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
Other Tax Requirements--Each Series has qualified, or intends to
qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"). As such, a Series will not be subject to federal
income tax, or to any excise tax, to the extent its earnings are distributed as
provided in the Code and it satisfies other requirements relating to the sources
of its income and diversification of its assets.
In order to qualify as a regulated investment company for federal
income tax purposes, a Series must meet certain specific requirements,
including:
(i) The Series must maintain a diversified portfolio of securities,
wherein no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Series' total
assets, and, with respect to 50% of the Series' total assets, no investment
(other than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Series' total assets;
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(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:
39
<PAGE>
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Series accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the Series actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of its disposition are
also treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of the Series' net investment company taxable income, which, in turn, will
affect the amount of income to be distributed to you by the Series.
If the Series' Section 988 losses exceed the Series' other net
investment company taxable income during a taxable year, the Series generally
will not be able to make ordinary dividend distributions to you for that year,
or distributions made before the losses were realized will be recharacterized as
return of capital distributions of federal income tax purposes, rather than as
an ordinary dividend or capital gain distribution. If a distribution is treated
as a return of capital, your tax basis in your Series shares will be reduced by
a like amount (to the extent of such basis), and any excess of the distribution
over your tax basis in your Series shares will be treated as capital gain to
you.
The 1997 Act generally requires that foreign income be translated into
U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than two
years after the taxable year to which they relate. This new law may require the
Series to track and record adjustments to foreign taxes paid on foreign
securities in which it invests. Under the Series' current reporting procedure,
foreign security transactions are recorded generally at the time of each
transaction using the foreign currency spot rate available for the date of each
transaction. Under the new law, the Series will be required to record a fiscal
year end (and at calendar year end for excise tax purposes) an adjustment that
reflects the difference between the spot rates recorded for each transaction and
the year-end average exchange rate for all of the Series' foreign securities
transactions. There is a possibility that the mutual fund industry will be given
relief from this new provision, in which case no year-end adjustments will be
required.
The Series may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of the
Series at the end of its fiscal year are invested in securities of foreign
corporations, the Series may elect to pass-through to you your pro rata share of
foreign taxes paid by the Series. If this election is made, you will be: (i)
required to include in your gross income your pro rata share of foreign source
income (including any foreign taxes paid by the Series) and (ii) entitled to
either deduct your share of such foreign taxes in computing your taxable income
or to claim a credit for such taxes against your U.S. income tax, subject to
certain limitations under the Code. You will be informed by the Fund at the end
of each calendar year regarding the availability of any such foreign tax credits
and the amount of foreign source income (including any foreign taxes paid by the
Series). If the Series elects to pass-through to you the foreign income taxes
that it has paid, you will be informed at the end of the calendar year of the
amount of foreign taxes paid and foreign source income that must be included on
your federal income tax return. If the Series invests 50% or less of its total
assets in securities of foreign corporations, it will not be entitled to
pass-through to you your pro-rata shares of foreign taxes paid by the Series. In
this case, these taxes will be taken as a deduction by the Series, and the
income reported to you will be the net amount after these deductions. The 1997
Act also simplifies the procedures by which investors in funds that invest in
foreign securities can claim tax credits on their individual income tax returns
for the foreign taxes paid by the Series. These provisions will allow investors
who pay foreign taxes of $300 or less on a single return or $600 or less on a
joint return during any year (all of which must be reported on IRS Form 1099-DIV
from the Series to the investor) to claim a tax credit against their U.S.
federal income tax for the amount of foreign taxes paid by the Series. This
process will allow you, if you qualify, to bypass the burdensome and detailed
reporting requirements on the foreign tax credit schedule (Form 1116) and report
your foreign taxes paid directly on page 2 of Form 1040. This simplified
procedure was not available until calendar year 1998.
40
<PAGE>
Investment in Passive Foreign Investment Company Securities--The Series
may invest in shares of foreign corporations which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a Series receives an "excess distribution" with
respect to PFIC stock, the Series itself may be subject to U.S. federal income
tax on a portion of the distribution, whether or not the corresponding income is
distributed by the Series to you. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Series held the PFIC shares. The Series itself will be subject to tax
on the portion, if any, of an excess distribution that is so allocated to prior
Series taxable years, and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
Series. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain distribution might have been classified as capital gain. This may
have the effect of increasing Series distributions to you that are treated as
ordinary dividends rather than long-term capital gain dividends.
A Series may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Series generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market the Series' PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. The Series would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction would be
limited to the amount of any net mark-to-market gains previously included with
respect to that particular PFIC security. If the Series were to make this second
PFIC election, tax at the Series level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the
amount of tax payable by the Series (if any), the amounts distributable to you
by the Series, the time at which these distributions must be made, and whether
these distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares
of a foreign corporation are acquired to ascertain that the foreign corporation
is a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the Series acquires shares in that corporation. While
the Series will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so and
it reserves the right to make such investments as a matter of its fundamental
investment policy.
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.
41
<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 High Yield, Capital Reserves and Cash Reserve Series are declared
daily from net investment income, dividends for Global Bond Series are declared
quarterly and dividends for Strategic Income Series are declared annually. Yield
will fluctuate as income earned fluctuates. On ________, 2000, the Series' name
was changed from Delchester Series 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. Performance shown in this section is
that of the Class 1 shares of the Series, which do not carry a 12b-1 fee.
Performance of Class 1 shares and Class 2 shares will be substantially similar
because the shares are invested in the same portfolio of securities and will
differ only to the extent of the Class 2 12b-1 fee.
From time to time, the Fund may state each Series' total return in
advertisements and other types of literature. Any statements of total return
performance data will be accompanied by information on the Series' average
annual total rate of return over the most recent one-year period, five-year
period and ten-year period or lifetime period, if applicable. Each Series may
also advertise aggregate and average total return information over additional
periods of time.
Each Series' average annual total rate of return is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000;
T = average annual total return;
n = number of years;
ERV = redeemable value of the hypothetical $1,000
purchase at the end of the period.
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes all distributions are
reinvested at net asset value.
42
<PAGE>
The performance of the Class 1 shares of the Series, 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.
Average Annual Total Return
<TABLE>
<CAPTION>
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
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>
Balanced
(Inception 7/28/88)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Capital Reserves
(Inception 7/28/88)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Cash Reserve
(Inception 7/28/88)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Convertible Securities
(Inception 5/1/97)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Devon
(Inception 5/1/97)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Emerging Markets
(Inception 5/1/97)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Global Bond
(Inception 5/2/96)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Growth and Income
(Inception 7/28/88)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Growth Opportunities
(Inception 5/12/91)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
High Yield
(Inception 7/28/88)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
International Equity
(Inception 10/29/92)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
REIT Series
(Inception 5/4/98)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Small Cap Value
(Inception 12/27/93)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Social Awareness
(Inception 5/1/97)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Strategic Income
(Inception 5/1/97)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Trend
(Inception 12/27/93)
------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
</TABLE>
* The respective investment manager elected to waive voluntarily the portion
of its annual compensation under its Investment Management Agreement with
each Series to limit operating expenses of the Series to the amounts noted
under Investment Management Agreements and Sub-Advisory Agreements. In the
absence of such voluntary waiver, performance would have been affected
negatively.
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.
43
<PAGE>
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 Class 1 shares of High Yield, Capital Reserves and Strategic Income
Series as of December 31, 1999 using this formula were 0.00%, 0.00% and 0.00%,
respectively.
Yield quotations are based on the offering price determined by the
Series' net asset value on the last day of the period and will fluctuate
depending on the period covered.
Cash Reserve Series may also quote its current yield in advertisements
and investor communications.
Yield calculation for Cash Reserve Series begins with the value of a
hypothetical account of one share at the beginning of a seven-day period; this
is compared with the value of that same account at the end of the same period
(including shares purchased for the account with dividends earned during the
period). The net change in the account value is generally the net income earned
per share during the period, which consists of accrued interest income plus or
minus amortized purchase discount or premium, less all accrued expenses
(excluding expenses reimbursed by the investment manager) but does not include
realized gains or losses or unrealized appreciation or depreciation.
The current yield of Cash Reserve Series represents the net change in
this hypothetical account annualized over 365 days. In addition, a shareholder
may achieve a compounding effect through reinvestment of dividends which is
reflected in the effective yield shown below.
44
<PAGE>
The following is an example, for purposes of illustration only, of the
current and effective yield calculations for Class 1 shares of Cash Reserve
Series for the seven-day period ended June 30, 1999.
<TABLE>
<CAPTION>
<S> <C>
Value of a hypothetical account with one share at the beginning of the period $10.00000000
Value of the same account at the end of the period 10.00000000
Net change in account value .00000000*
Base period return = net change in account value/beginning account value .000000000
Current yield [base period return x (365/7)] 0.00%**
365/7
Effective yield (1 + base period) - 1 0.00%***
</TABLE>
Weighted average life to maturity of the portfolio on December 31, 1999 was
00 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 Fund is an open-end investment company and
that there is no guarantee that the net asset value or any stated rate of return
will remain constant. Investment performance is not insured. Investors comparing
results of Cash Reserve Series with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by Cash Reserve Series. Although Cash Reserve Series
determines the yield on the basis of a seven-calendar-day period, it may, from
time to time, use a different time span.
Other funds of the money market type may calculate their yield on a
different basis and the yield quoted by the Series could vary upward or downward
if another method of calculation or base period were used.
Investors should note that income earned and dividends paid by 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.
45
<PAGE>
Comparative Information
From time to time, each Series may also quote its actual total return
performance, dividend results and other performance information in advertising
and other types of literature. This information may be compared to that of other
mutual funds with similar investment objectives and to stock, bond and other
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of a Series may be compared to data prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., or to the S&P 500 Index,
the Dow Jones Industrial Average, the Morgan Stanley Capital International
(MSCI), Europe, Australia and Far East (EAFE) Index, the MSCI Emerging Markets
Free Index, or the Salomon Brothers World Government Bond Index. Performance
also may be compared to the performance of unmanaged indices compiled or
maintained by statistical research firms such as Lehman Brothers or Salomon
Brothers, Inc.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well as
unmanaged indices compiled and maintained by these firms, will be used in
preparing comparative illustrations. In addition, the performance of multiple
indices compiled and maintained by these firms may be combined to create a
blended performance result for comparative purposes. Generally, the indices
selected will be representative of the types of securities in which a Series may
invest and the assumptions that were used in calculating the blended performance
will be described.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare a Series'
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The S&P 500 and
the Dow Jones Industrial Average are industry-accepted unmanaged indices of
generally-conservative securities used for measuring general market performance.
Similarly, the MSCI EAFE Index, the MSCI Emerging Markets Free Index, and the
Salomon Brothers World Government Bond Index are industry-accepted unmanaged
indices of equity securities in developed countries and global debt securities,
respectively, used for measuring general market performance. The total return
performance reported for these indices will reflect the reinvestment of all
distributions on a quarterly basis and market price fluctuations. The indices do
not take into account any sales charges or other fees. A direct investment in an
unmanaged index is not possible.
46
<PAGE>
Comparative information on the Consumer Price Index may also be
included in advertisements or other literature. The Consumer Price Index, as
prepared by the U.S. Bureau of Labor Statistics, is the most commonly used
measure of inflation. It indicates the cost fluctuations of a representative
group of consumer goods. It does not represent a return from an investment.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. As well, current industry rate and yield
information on all industry available fixed-income securities, as reported
weekly by The Bond Buyer, may also be used in preparing comparative
illustrations.
Each Series may also promote its yield and/or total return performance
and use comparative performance information computed by and available from
certain industry and general market research and publications, such as Lipper
Analytical Services, Inc., IBC/Donoghue's Money Market Report and Morningstar,
Inc.
The performance of multiple indices compiled and maintained by
statistical research firms, such as Morgan Stanley, Salomon Brothers and Lehman
Brothers, may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the types of
securities in which the Series may invest and the assumptions that were used in
calculating the blended performance will be described.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Series may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Series. The Series may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Series may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Series (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments or global or international investments),
economic and political conditions, the relationship between sectors of the
economy and the economy as a whole, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements, sales literature,
communications to shareholders or other materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Series), as well as the views as to current market, economic,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
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
47
<PAGE>
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.
48
<PAGE>
The following table is an example, for purposes of illustration only,
of cumulative total return performance for the Class 1 shares of the Series
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.
<TABLE>
<CAPTION>
Cumulative Total Return
- ------------------------------------------------------------------------------------------------------------------------------
Series* 3 months 6 months 9 months 1 year 3 years 5 years 10 years Life of Fund
ended ended ended ended ended ended ended
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>
Balanced
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------
Capital Reserves
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Reserve
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------
Convertible Securities
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Devon
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Global Bond
(Inception 5/2/96)
- ------------------------------------------------------------------------------------------------------------------------------
Growth and Income
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities
(Inception 7/12/91)
- ------------------------------------------------------------------------------------------------------------------------------
High Yield
(Inception 7/28/88)
- ------------------------------------------------------------------------------------------------------------------------------
International Equity
(Inception 10/29/92)
- ------------------------------------------------------------------------------------------------------------------------------
REIT
(Inception 5/4/98)
- ------------------------------------------------------------------------------------------------------------------------------
Select Growth
(Inception 5/1/99)
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Value
(Inception 12/27/93)
- ------------------------------------------------------------------------------------------------------------------------------
Social Awareness
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Strategic Income
(Inception 5/1/97)
- ------------------------------------------------------------------------------------------------------------------------------
Trend
(Inception 12/27/93)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Growth Series
(Inception 11/ /99)
- ------------------------------------------------------------------------------------------------------------------------------
</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.
49
<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.
50
<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.
51
<PAGE>
TRADING PRACTICES AND BROKERAGE
The Fund or, in the case of International Equity, Global Bond and
Emerging Markets Series, Delaware International, selects banks, brokers or
dealers to execute transactions on behalf of the Series for the purchase or sale
of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have banks,
brokers or dealers execute transactions at best execution. Best execution refers
to many factors, including the price paid or received for a security, the
commission charged, the promptness and reliability of execution, the
confidentiality and placement accorded the order and other factors affecting the
overall benefit obtained by the account on the transaction. The Fund pays
reasonably competitive brokerage commission rates based upon the professional
knowledge of the investment manager's trading department as to rates paid and
charged for similar transactions throughout the securities industry. In some
instances, the Fund pays a minimal share transaction cost when the transaction
presents no difficulty. Some trades are made on a net basis where the Fund
either buys the securities directly from the dealer or sells them to the dealer.
In these instances, there is no direct commission charged, but there is a spread
(the difference between the buy and sell price) which is in the equivalent of a
commission.
During the fiscal years ended December 31, 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>
Balanced Series $120,307 $165,591
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Convertible Securities Series(1) $5,517 $10,155
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Devon Series(1) $21,022 $83,285
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Emerging Markets Series(1) $28,640 $21,763
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Growth and Income Series $518,762 $1,020,668
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Growth Opportunities Series $270,393 $308,645
- -------------------------------- ------------------------------ ------------------------------ ----------------------
International Equity Series $215,242 $121,978
- -------------------------------- ------------------------------ ------------------------------ ----------------------
REIT Series(2) N/A $13,326
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Select Growth Series(3) N/A N/A
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Small Cap Value Series $119,689 $198,194
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Social Awareness Series(1) $7,416 $25,636
- -------------------------------- ------------------------------ ------------------------------ ----------------------
Trend Series $182,867 $269,355
- -------------------------------- ------------------------------ ------------------------------ ----------------------
U.S. Growth Series(4) N/A N/A
- -------------------------------- ------------------------------ ------------------------------ ----------------------
</TABLE>
(1) Commenced operations on May 1, 1997.
(2) Commenced operations on May 4, 1998.
(3) Commenced operations on May 1, 1999.
(4) Commenced operations on November , 1999.
52
<PAGE>
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.
<PAGE>
During the fiscal year ended December 31, 1998, portfolio transactions
of the following Series in the amounts listed below, resulting in brokerage
commissions in the amounts listed below were directed to brokers for brokerage
and research services provided:
--------------------------------------------------------------------------
Portfolio Brokerage
--------------------------------------------------------------------------
Transactions Commissions
--------------------------------------------------------------------------
Amounts Amounts
--------------------------------------------------------------------------
Balanced Series
--------------------------------------------------------------------------
Convertible Securities Series
--------------------------------------------------------------------------
Devon Series
--------------------------------------------------------------------------
Emerging Markets Series
--------------------------------------------------------------------------
Growth and Income Series
--------------------------------------------------------------------------
Growth Opportunities Series
--------------------------------------------------------------------------
International Equity Series
--------------------------------------------------------------------------
REIT Series
--------------------------------------------------------------------------
Select Growth Series (1)
--------------------------------------------------------------------------
Small Cap Value Series
--------------------------------------------------------------------------
Social Awareness Series
--------------------------------------------------------------------------
Trend Series
--------------------------------------------------------------------------
U.S. Growth Series (2)
--------------------------------------------------------------------------
(1) Commenced operations on May 1, 1999.
(2) Commenced operations on November , 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 Fund believes that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the respective investment manager which constitute in some part brokerage and
research services used by the respective investment manager in connection with
its investment decision-making process and constitute in some part services used
by the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In such cases,
the respective investment manager will make a good faith allocation of brokerage
and research services and will pay out of its own resources for services used by
the respective investment manager in connection with administrative or other
functions not related to its investment decision-making process. In addition, so
long as no fund is disadvantaged, portfolio transactions which generate
commissions or their equivalent are allocated to broker/dealers who provide
daily portfolio pricing services to the Fund and to other funds in the Delaware
Investments family. Subject to best execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
53
<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 Fund'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 Fund may place orders with
broker/dealers which have agreed to defray certain expenses of the funds in the
Delaware Investments family, such as custodian fees, and may, at the request of
the Distributor, give consideration to sales of such funds shares as a factor in
the selection of brokers and dealers to execute Series portfolio transactions.
Portfolio Turnover
The rate of portfolio turnover will not be a limiting factor when
portfolio changes are deemed appropriate for each Series. Given the respective
Series' investment objectives, the Fund anticipates that the annual portfolio
turnover rates are not expected to exceed 100% for the Growth and Income,
International Equity, Global Bond, Strategic Income, Emerging Markets, Devon,
Social Awareness and REIT Series, 200% for the Capital Reserves, and Balanced
Series, and may exceed 100% for the Growth Opportunities, High Yield, Small
Cap Value, Trend and U.S. Growth Series and 200% for the Convertible Securities
Series. It is possible that in any particular year market conditions or other
factors might result in portfolio activity at a greater rate than anticipated.
The portfolio turnover rate of each Series is calculated by dividing the lesser
of purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Series
during the particular fiscal year, exclusive of securities whose maturities at
the time of acquisition are one year or less.
The degree of portfolio activity may affect brokerage costs incurred by
each Series. A turnover rate of 100% would occur, for example, if all the
investments in a Series' portfolio at the beginning of the year were replaced by
the end of the year. In investing to achieve their respective objective, a
Series may hold securities for any period of time. Portfolio turnover will also
be increased if a Series writes a large number of call options which are
subsequently exercised. The turnover rate also may be affected by cash
requirements from redemptions and repurchases of Series' shares.
54
<PAGE>
The portfolio turnover rates for the Series noted below for the past
two fiscal years were as follows:
------------------------------------------------------------------------
Year Ended Year Ended
------------------------------------------------------------------------
Series December 31, 1999 December 31, 1998
------ ------------------ -----------------
Balanced Series 94%
------------------------------------------------------------------------
Capital Reserves Series 166%
------------------------------------------------------------------------
Convertible Securities Series 77%
------------------------------------------------------------------------
Devon Series 34%
------------------------------------------------------------------------
Emerging Markets Series 38%
------------------------------------------------------------------------
Global Bond Series 79%
------------------------------------------------------------------------
Growth and Income Series 81%
------------------------------------------------------------------------
Growth Opportunities Series 142%
------------------------------------------------------------------------
High Yield Series 86%
------------------------------------------------------------------------
International Equity Series 5%
------------------------------------------------------------------------
REIT Series 39%*
------------------------------------------------------------------------
Select Growth Series ** N/A
------------------------------------------------------------------------
Small Cap Value Series 45%
------------------------------------------------------------------------
Social Awareness Series 30%
------------------------------------------------------------------------
Strategic Income Series 143%
------------------------------------------------------------------------
Trend Series 121%
------------------------------------------------------------------------
U.S. Growth Series *** N/A
------------------------------------------------------------------------
* Annualized. Commenced operations on May 4, 1998.
** Annualized. Commenced operations on May 1, 1999.
*** Annualized. Commenced operations on November , 1999.
55
<PAGE>
OFFERING PRICE
The offering price of shares is the net asset value per share next to
be determined after an order is received. The purchase of shares becomes
effective at the close of business on the day on which the investment is
received from the life company and after any dividend is declared. Dividends, if
any, begin to accrue on the next business day. There is no sales charge.
The purchase will be effected at the net asset value next computed
after the receipt of Federal Funds provided they are received by the close of
regular trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern
time) on days when such exchange is open. The New York Stock Exchange is
scheduled to be open Monday through Friday throughout the year except for New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. When the New York
Stock Exchange is closed, the Fund will generally be closed, pricing
calculations will not be made and purchase and redemption orders will not be
processed. In the event of changes in SEC or the Fund's change in time of
closing, the Fund reserves the right to price at a different time, to price more
often than once daily or to make the offering price effective at a different
time.
An example showing how to calculate the net asset value per share is
included in the Series' financial statements which are incorporated by reference
into this Part B.
The net asset value per share is computed by adding the value of all
securities and other assets in a Series' portfolio, deducting any liabilities of
that Series and dividing by the number of that Series' shares outstanding.
Expenses and fees are accrued daily. Each Series' net asset value per share is
computed by adding the value of all the securities and other assets in the
Series' portfolio, deducting any liabilities of the Series, and dividing by the
number of Fund shares outstanding. Expenses and fees are accrued daily. In
determining a Series' total net assets, portfolio securities primarily listed or
traded on a national or foreign securities exchange, except for bonds, are
valued at the last sale price on that exchange. Exchange traded options are
valued at the last reported sale price or, if no sales are reported, at the mean
between bid and asked prices. Non-exchange traded options are valued at fair
value using a mathematical model. Futures contracts are valued at their daily
quoted settlement price. Securities not traded on a particular day,
over-the-counter securities, and government and agency securities are valued at
the mean value between bid and asked prices. Money market instruments having a
maturity of less than 60 days are valued at amortized cost. Debt securities
(other than short-term obligations) are valued on the basis of valuations
provided by a pricing service when such prices are believed to reflect the fair
value of such securities. Foreign securities and the prices of foreign
securities denominated in foreign currencies are translated to U.S. dollars at
the mean between the bid and offer quotations of such currencies based on rates
in effect as of the close of the London Stock Exchange. Use of a pricing service
has been approved by the Board of 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. Subject to the foregoing,
securities for which market quotations are not readily available and other
assets are valued at fair value as determined in good faith and in a method
approved by the Board of Trustees.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Series of securities owned by it is not reasonably
practical, or it is not reasonably practical for a Series fairly to value its
assets, or in the event that the Securities and Exchange Commission has provided
for such suspension for the protection of shareholders, the Fund may postpone
payment or suspend the right of redemption or repurchase. In such case, the
shareholder may withdraw a request for redemption or leave it standing as a
request for redemption at the net asset value next determined after the
suspension has been terminated.
56
<PAGE>
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.
57
<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Dividends for the High Yield and Capital Reserves Series are
declared daily and paid monthly. Short-term capital gains distributions, if any,
may be paid with the dividend; otherwise, any distributions from net realized
securities profits normally will be distributed following the close of the
fiscal year. The Fund's fiscal year ends on December 31.
For the Growth and Income, Balanced and Global Bond Series, the Fund
will make payments from the Series' net investment income quarterly.
Distributions from the respective Series' net realized securities profits, if
any, normally will be made following the close of the fiscal year.
For the Select Growth, Convertible Securities, Growth
Opportunities, Devon, International Equity, Small Cap Value, Trend, Emerging
Markets, Social Awareness, Strategic Income, REIT and U.S. Growth Series, the
Fund will make payments from the Series' net income and net realized securities
profits, if any, once a year.
All dividends and distributions are automatically reinvested in
additional Series shares.
Cash Reserve Series
The Fund declares a dividend of this Series' net investment income on a
daily basis, to shareholders of record at the time of the previous calculation
of the Series' net asset value, each day that the Fund is open for business.
Payment of dividends will be made monthly. The amount of net investment income
will be determined at the time the offering price and net asset value are
determined (see Offering Price), and shall include investment income accrued,
less the estimated expenses of the Series incurred since the last determination
of net asset value. Gross investment income consists principally of interest
accrued and, where applicable, net pro-rata amortization of premiums and
discounts since the last determination. The dividend declared at the time the
offering price and net asset value are determined, as noted above, will be
deducted immediately before the net asset value calculation is made. See
Offering Price. Net investment income earned on days when the Fund is not open
will be declared as a dividend on the next business day. An investor begins
earning dividends when payments for shares purchased are converted into Federal
Funds and are available for investment.
To the extent necessary to maintain a $10 per share net asset value,
the Board of 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.
58
<PAGE>
TAXES
Each Series has qualified, or intends to qualify, as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code").
As such, a Series will not be subject to federal income tax to the extent its
earnings are distributed and it satisfies other requirements relating to the
sources of its income and diversification of its assets.
Each Series of the Fund is treated as a single tax entity, and any
capital gains and losses for each series are calculated separately. It is the
Series' policy to pay out substantially all net investment income and net
realized gains to relieve the Fund of federal income tax liability on that
portion of its income paid to shareholders under the Internal Revenue Code.
The Series does not have a fixed policy with regard to distributions of
realized securities profits when such realized securities profits may be offset
by capital losses carried forward. Presently, however, the Series intends to
offset realized securities profits to the extent of the capital losses carried
forward.
All dividends out of net investment income, together with distributions
from short-term capital gains, will be taxable to those shareholders who are
subject to income taxes as ordinary income. (These distributions may be eligible
for the dividends-received deductions for corporations.) Any net long-term
capital gains distributed to those shareholders who are subject to income tax
will be taxable as such, regardless of the length of time a shareholder has
owned their shares.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), as revised by
the Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998
Act") and the Omnibus Consolidated and Emergency Supplemental Appropriations
Act, a Series is required to track its sales of portfolio securities and to
report its capital gain distributions to you according to the following
categories:
Long-term capital gains": gains on securities sold after December 31,
1997 and held for more than 12 months as capital assets in the hands of
the holder are taxed at the 20% rate when distributed to shareholders
(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.
59
<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-ADVISORY AGREEMENTS
Delaware Management Company ("Delaware Management"), located at One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103, furnishes
investment management services to Growth and Income, 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 Fund'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 $00 billion in
assets in the various institutional or separately managed (approximately
$00,000,000,000) and investment company ($00,000,000,000) accounts. Delaware
Management is a series of Delaware Management Business Trust. Delaware
Management changed its form of organization from a corporation to a business
trust on March 1, 1998.
The Investment Management Agreements for 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 Fund who are not parties thereto or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The Agreements are terminable without penalty on 60 days' notice by
the Trustees of the Fund or by the respective investment manager. The Agreements
will terminate automatically in the event of their assignments.
60
<PAGE>
Under the Investment Management Agreement, Delaware Management or
Delaware International is entitled to receive an annual fee equal to the
following percentage rates of the average daily net assets of a Series:
- --------------------------------------------------------------------------------
Series Management Fee Rate
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Select Growth Series 0.75% on the first $500 million
Convertible Securities Series 0.70% on the next $500 million
Growth Opportunities Series 0.65% in the next $1.5 billion
Global Bond Series 0.60% on assets in excess of $2.5 billion
REIT Series
Small Cap Value Series
Social Awareness Series
Trend Series
- --------------------------------------------------------------------------------
Growth and Income Series* 0.65% on the first $500 million
Balanced Series 0.60% on the next $500 million
High Yield Series 0.55% in the next $1.5 billion
Devon Series 0.50% on assets in excess of $2.5 billion
Strategic Income Series
U.S. Growth Series
- --------------------------------------------------------------------------------
Emerging Markets Series 1.25% on the first $500 million
1.20% on the next $500 million
1.15% in the next $1.5 billion
1.10% on assets in excess of $2.5 billion
- --------------------------------------------------------------------------------
International Equity Series 0.85% on the first $500 million
0.80% on the next $500 million
0.75% in the next $1.5 billion
0.70% on assets in excess of $2.5 billion
- --------------------------------------------------------------------------------
* Delaware Management has agreed to voluntarily waive its management fee
so as not to exceed an annual rate of 0.60% of average daily net
assets.
The respective investment manager administers the affairs of and is
ultimately responsible for the investment management of each of the Series to
which it provides investment management services. In addition, Delaware
Management pays the salaries of all Trustees, officers and employees who are
affiliated with both it and the Fund.
61
<PAGE>
Subject to the overall supervision of Delaware Management, Delaware
International manages the international sector of Strategic Income Series'
portfolio and furnishes Delaware Management with investment recommendations,
asset allocation advice, research and other investment services with respect to
foreign securities. For the services provided to Delaware Management, Delaware
Management pays the Sub-Adviser a fee equal to one-third of the fee paid to
Delaware Management under the terms of Strategic Income Series' Investment
Management Agreement.
Pursuant to the terms of Sub-Advisory Agreements with Delaware
Management, Vantage Investment Advisors ("Vantage") participates in the
management of Social Awareness Series' assets. Vantage is responsible for
day-to-day investment management of the Series, makes investment decisions for
the Series in accordance with the Series' investment objectives and stated
policies and places orders on behalf of the Series to effect the investment
decisions made. Delaware Management continues to have ultimate responsibility
for all investment advisory services in connection with the management of the
Series pursuant to the Investment Management Agreement and supervises Vantage's
performance of such services. For the services provided to Delaware Management,
Delaware Management pays Vantage a fee equal to (i) 0.25% of average daily net
assets up to $20 million; (ii) 0.35% of average daily net assets on the next $30
million; and (iii) 0.40% of average daily net assets over $50 million. Vantage's
address is 630 Fifth Avenue, New York, NY 10111.
Lincoln Investment Management, Inc. ("Lincoln"), a wholly owned
subsidiary of Lincoln National Corporation ("Lincoln National"), acts as
sub-adviser to Delaware Management with respect to REIT Series. In its capacity
as sub-adviser, Lincoln furnishes Delaware Management with investment
recommendations, asset allocation advice, research, economic analysis and other
investment services with respect to the securities in which the Series may
invest. Lincoln receives 30% of the advisory fee paid to Delaware Management for
acting as sub-adviser to Delaware Management with respect to the Series.
Lincoln's address is 200 E. Berry Street, Fort Wayne, Indiana 46802.
62
<PAGE>
On December 31, 1999, the total net assets of the Fund were
$0,000,000,000, broken down as follows:
----------------------------------------
Balanced Series
----------------------------------------
Capital Reserves Series
----------------------------------------
Cash Reserve Series
----------------------------------------
Convertible Securities Series
----------------------------------------
Devon Series
----------------------------------------
Emerging Markets Series
----------------------------------------
Global Bond Series
----------------------------------------
Growth and Income Series
----------------------------------------
Growth Opportunities Series
----------------------------------------
High Yield Series
----------------------------------------
International Equity Series
----------------------------------------
REIT Series
----------------------------------------
Select Growth Series
----------------------------------------
Small Cap Value Series
----------------------------------------
Social Awareness Series
----------------------------------------
Strategic Income Series
----------------------------------------
Trend Series
----------------------------------------
U.S. Growth Series
----------------------------------------
<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 $968,768 paid 595,126 paid
- ---------------------------------------------------------------------------------------------------------------------
Capital Reserves Series $208,577 paid $166,300 paid
- ---------------------------------------------------------------------------------------------------------------------
Cash Reserve Series $212,479 paid $149,023 paid
- ---------------------------------------------------------------------------------------------------------------------
Convertible Securities Series(1) $46,042 earned $14,026 earned
$46,042 paid -0- paid
-0- waived $14,026 waived
- ---------------------------------------------------------------------------------------------------------------------
Devon Series(1) $218,772 earned $31,110 earned
$216,267 paid $25,236 paid
$2,505 waived $5,8874 waived
- ---------------------------------------------------------------------------------------------------------------------
Emerging Markets Series(1) $71,160 earned $26,327 earned
$61,148 paid $8,587 paid
$10,012 waived $27,740 waived
- ---------------------------------------------------------------------------------------------------------------------
Global Bond Series(2) $141,939 earned $109,310 earned
$125,844 paid $68,076 paid
$16,095 waived $41,234 waived
- ---------------------------------------------------------------------------------------------------------------------
Growth and Income Series $3,018,521 paid $1,640,377 paid
- ---------------------------------------------------------------------------------------------------------------------
Growth Opportunities Series $846,793 earned $716,228 earned
$781,882 paid $646,908 paid
$64,911 waived $69,320 waived
- ---------------------------------------------------------------------------------------------------------------------
High Yield Series $689,099 paid $483,877 paid
- ---------------------------------------------------------------------------------------------------------------------
International Equity Series $1,679,911 earned $1,304,340 earned
$1,651,181 paid $1,207,677 paid
$28,730 waived $96,663 waived
- ---------------------------------------------------------------------------------------------------------------------
REIT Series(3) $15,449 earned N/A
$11,895 paid
$3,554 waived
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Series December 31, 1999 December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Select Growth Series(4) earned N/A N/A
paid
waived
- ---------------------------------------------------------------------------------------------------------------------
Small Cap Value Series $706,066 earned $380,405 earned
$680,359 paid $328,056 paid
$25,707 waived $252,349 waived
- ---------------------------------------------------------------------------------------------------------------------
Social Awareness Series(1) $117,271 earned $20,293 earned
$108,502 paid $3,692 paid
$8,769 waived $16,601 waived
- ---------------------------------------------------------------------------------------------------------------------
Strategic Income Series(1) $101,453 earned $21,320 earned
$100,002 paid $7,271 paid
$1,451 waived $14,049 waived
- ---------------------------------------------------------------------------------------------------------------------
Trend Series $1,025,600 earned $622,149 earned
$977,521 paid $558,331 paid
$48,079 waived $63,818 waived
- ---------------------------------------------------------------------------------------------------------------------
U.S. Growth Series (5) earned N/A N/A
paid
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 1, 1999.
(5) Commenced operations on November , 1999.
64
<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 year ended December 31, 1998, Delaware International received $33,334 for
such services. During the period May 1, 1997 (date of commencement of
operations) through December 31, 1997, Vantage received $5,449 from Delaware
Management for serving as Sub-Adviser to the Social Awareness Series and for the
fiscal year ended December 31, 1998, Vantage received $39,620 for such services.
During the period May 4, 1998 (date of commencement of operations through
December 31, 1998, Lincoln received $4,635 from Delaware Management for serving
as Sub-Adviser to the REIT Series.
Except for those expenses borne by the respective investment manager
under the Investment Management Agreements and the Distributor under the
Distribution Agreements, each Series is responsible for all of its own expenses.
Among others, these include the Series' proportionate share of rent and certain
other administrative expenses; the investment management fees; transfer and
dividend disbursing agent fees and costs; custodian expenses; federal securities
registration fees; proxy costs; and the costs of preparing prospectuses and
reports sent to shareholders.
65
<PAGE>
Beginning May 1, 1998 (May 1, 1999 for Select Growth Series and
October 15, 1999 for U.S. Growth Series), Delaware Management elected
voluntarily to waive its fee and pay the expenses of a Series to the extent
necessary to ensure that a Series' annual operating expenses, exclusive of
12b-1 Plan fees, taxes, interest, brokerage commissions and extraordinary
expenses, do not exceed the following percentages of average daily net assets
through [April 30, 2000]:
--------------------------------------------------------
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, 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 through [April 30, 2000]:
--------------------------------------------------------
Emerging Markets Series 1.50%
--------------------------------------------------------
Global Bond Series 0.85%
--------------------------------------------------------
International Equity Series 0.95%
--------------------------------------------------------
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,
66
<PAGE>
Delaware International elected voluntarily to waive its fee and pay the expenses
of International Equity to the extent necessary to ensure that the Series'
annual operating expenses, exclusive of taxes, interest, brokerage commissions
and extraordinary expenses, did not exceed 0.95% of average daily net assets
through April 30, 1998.
Prior to May 1, 1998, Delaware International elected voluntarily to
waive its fee and pay the expenses of the Emerging Markets Series to the extent
necessary to ensure that the Series' annual operating expenses, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses, did not
exceed 1.50% of average daily net assets from the commencement of operations
through April 30, 1998.
Distribution and Service
Delaware Distributors, L.P., located at 1818 Market Street,
Philadelphia, PA 19103, serves as the Fund's national distributor pursuant to
Distribution Agreements.
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,
Premium Fund has adopted a separate plan for Class 2 shares of each Series (the
"Plan"). The Plan permits the Fund 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 Fund and its
shareholders and, ultimately the Fund's beneficial contract owners.
The Plan permit the Fund, pursuant to its Distribution Agreement, to
pay out of the assets of Class 2 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 Fund may make payments from the 12b-1 Plan fees of Class 2 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 Premium Fund.
The maximum aggregate fee payable by the Fund under the Plan, and a
Fund's Distribution Agreements, is on an annual basis, up to 0.30% of average
daily net assets of Class 2 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 Fund's
Board of Trustees has initially set the fee at an annual rate of 0.15% of Class
2's average daily net assets.
While payments pursuant to the Plans currently may not exceed 0.15%
annually (and may never exceed 0.30% annually) with respect to Class 2 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 Fund'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 Class 2 shares would be borne by such persons without
any reimbursement from such Class.
67
<PAGE>
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 all been
approved by the Board of Trustees of Premium Fund, including a majority of the
trustees who are not "interested persons" (as defined in the 1940 Act) of the
Fund 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 Class 2 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
the 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 Premium Fund 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 Premium Fund 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 Fund'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.
68
<PAGE>
OFFICERS AND TRUSTEES
The business and affairs of the Fund are managed under the direction of
its Board of Trustees.
Certain officers and Trustees of the Fund hold identical positions
in each of the other funds in the Delaware Investments family.
DMH Corp., Delvoy, Inc., Delaware Management Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Management Company, Inc., Delaware Investment Advisers (a series of Delaware
Management Business Trust), Delaware Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware Management Trust Company,
Delaware International Holdings Ltd., Founders Holdings, Inc., Delaware
International Advisers Ltd., Delaware Capital Management, Inc. and Retirement
Financial Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH, Delaware Management and Delaware International
are now indirect, wholly owned subsidiaries, and subject to the ultimate
control, of Lincoln National. Lincoln National, with headquarters in Fort Wayne,
Indiana, is a diversified organization with operations in many aspects of the
financial services industry, including insurance and investment management.
69
<PAGE>
Trustees and principal officers of the Fund are noted below along
with their ages and their business experience for the past five years. Unless
otherwise noted, the address of each officer and Trustee is One Commerce
Square, Philadelphia, PA 19103.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Trustee and Officer Business Experience
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
*Wayne A. Stork (62) Chairman, Director/Trustee of the Fund and each of the other 32
investment companies in the Delaware Investments family.
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, 1999, Mr.
Stork has served in various executive capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
* Trustee affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
70
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Trustee and Officer Business Experience
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
*David K. Downes (60)
President, Chief Executive Officer, Chief Financial Officer and
Director/Trustee of the Fund and each of the other 32 investment
companies in the Delaware Investments family.
President and Director of Delaware Management Company, Inc.
President of Delaware Management Company (a series of Delaware
Management Business Trust)
President, Chief Executive Officer and Director of Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer and Director of
Delaware Service Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and
Director of Delaware International Holdings Ltd.
Chairman and Director of Delaware Management Trust Company and
Retirement Financial Services, Inc.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer of Delaware Management Holdings, Inc., Founders CBO
Corporation, Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of DMH Corp., Delaware Distributors, Inc.,
Founders Holdings, Inc. and Delvoy, Inc.
Executive Vice President and Trustee of Delaware Management
Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Downes has served in various
executive capacities at different times within the Delaware
organization.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
* Trustee affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
71
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Trustee Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Walter P. Babich (72) Director/Trustee the Fund and each of the other 32 investment companies in the
Delaware Investments family
460 North Gulph Road, King of Prussia, PA 19406
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and from 1988 to
1991, he was a partner of I&L Investors.
- ------------------------------------------------------------------------------------------------------------------------------------
John H. Durham (62) Director/Trustee of the Fund and 18 other investment companies in the Delaware
Investments family
Private Investor.
P.O. Box 819, Gwynedd Valley, PA 19437
Mr. Durham served as Chairman of the Board of each fund in the Delaware
Investments family from 1986 to 1991; President of each fund from 1977 to 1990; and
Chief Executive Officer of each fund from 1984 to 1990. Prior to 1992, with respect to
Delaware Management Holdings, Inc., Delaware Management Company, Delaware
Distributors, Inc. and Delaware Service Company, Inc., Mr. Durham served as a
director and in various executive capacities at different times. He was also a Partner of
Complete Care Services from 1995 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr (61) Director/Trustee of the Fund and each of the 32 other investment companies in the
Delaware Investments family.
500 Fifth Avenue, New York, NY 10110
Founder and Managing Director, Anthony Knerr & Associates
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and Treasurer of
Columbia University, New York. From 1987 to 1989, he was also a lecturer in
English at the University. In addition, Mr. Knerr was Chairman of The Publishing
Group, Inc., New York, from 1988 to 1990. Mr. Knerr founded The Publishing
Group, Inc. in 1988.
- ------------------------------------------------------------------------------------------------------------------------------------
Ann R. Leven (59) Director/Trustee of the Fund and each of the other 32 other investment companies in
the Delaware Investments family
785 Park Avenue, New York, NY 10021
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>
72
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Director Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Thomas F. Madison (64) Director/Trustee of the Funds and each of the other 32 investment companies in the
Delaware Investments family
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402
President and Chief Executive Officer, MLM Partners, Inc.
Mr. Madison has also been Chairman of the Board of Communications Holdings, Inc.
since 1996. From February to September 1994, Mr. Madison served as Vice
Chairman--Office of the CEO of The Minnesota Mutual Life Insurance Company and
from 1988 to 1993, he was President of U.S. WEST Communications--Markets.
- ------------------------------------------------------------------------------------------------------------------------------------
Charles E. Peck (74) Director/Trustee of the Fund and each of the other 32 investment companies in the
Delaware Investments family
P.O. Box 1102, Columbia, MD 21044
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of The
Ryland Group, Inc., Columbia, MD.
- ------------------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans (51) Director/Trustee of the Fund and 32 other investment companies in the Delaware
Investments family.
Building 220-13W-37, St. Paul, MN 55144
Vice President and Treasurer, 3M Corporation.
From 1987-1994, Ms. Yeomans was Director of Benefit Funds and Financial Markets
for the 3M Corporation; Manager of Benefit Fund Investments for the 3M
Corporation, 1985-1987; Manager of Pension Funds for the 3M Corporation, 1983-
1985; Consultant--Investment Technology Group of Chase Econometrics, 1982-1983;
Consultant for Data Resources, 1980-1982; Programmer for the Federal Reserve Bank
of Chicago, 1970-1974.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard G. Unruh, Jr. (60) Executive Vice President and Chief Investment Officer, Equity of the Fund, each of the
other 32 investment companies in the Delaware Investments family
Chief Executive Officer/Chief Investment Officer of Delaware Investment Advisers (a series of
Delaware Management Business Trust)
Executive Vice President of Delaware Management Holdings, Inc. and Delaware Capital
Management, Inc.
Executive Vice President/Chief Investment Officer of Delaware Management Company (a series of
Delaware Management Business Trust)
Executive Vice President and Trustee of Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive capacities at
different times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin (46) Executive Vice President and Chief Investment Officer, Fixed Income of the Fund and each of
the other 32 investment companies in the Delaware Investments family.
Director of Delaware Management Holdings, Inc. and Founders CBO Corporation.
Executive Vice President/Chief Investment Officer, DMC-Fixed Income of Delaware Management
Company (a series of Delaware Management Business Trust)
Executive Vice President/Chief Investment Officer, DIA-Fixed Income of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Management Business Trust and Delaware Capital
Management, Inc.
Mr. McMeekin joined Delaware Investments in 1999. During the past five years, he has
also served in various executive capacities for Lincoln National Corporation.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard J. Flannery (42) Executive Vice President/General Counsel of the Fund and each of the other 32 investment
companies in the Delaware Investments family, Delaware Management Holdings, Inc., Delaware
Distributors, L.P., Delaware Management Company (a series of Delaware Management Business
Trust), Delaware Investment Advisers (a series of Delaware Management Business Trust) and
Founders CBO Corporation.
Executive Vice President/General Counsel and Director of Delaware International Holdings Ltd.,
Founders Holdings, Inc., Delvoy, Inc., DMH Corp., Delaware Management Company, Inc.,
Delaware Service Company, Inc., Delaware Capital Management, Inc., Retirement Financial
Services, Inc., Delaware Distributors, Inc. and Delaware Management Trust Company.
Executive Vice President and Trustee of Delaware Management Business Trust.
Director of Delaware International Advisers Ltd.
Director of HYPPCO Finance Company Ltd.
During the past five years, Mr. Flannery has served in various executive capacities at
different times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Eric E. Miller (46) Senior Vice President/Deputy General Counsel and Secretary of the Fund and each of the
other 32 investment companies in Delaware Investments.
Senior Vice President/Deputy General Counsel and Assistant Secretary of Delaware
Management Holdings, Inc., DMH Corp., Delvoy, Inc., Delaware Management Company,
Inc., Delaware Management Business Trust, Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust), Delaware Service Company, Inc., Delaware
Capital Management, Inc., Retirement Financial Services, Inc., Delaware Distributors,
Inc., Delaware Distributors, L.P. and Founders Holdings, Inc.
During the past five years, Mr. Miller has served in various executive capacities at
different times within Delaware Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph H. Hastings (50) Senior Vice President/Corporate Controller of the Fund and each of the other 32
investment companies in the Delaware Investments family and Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Senior Vice President/Corporate Controller and Treasurer of Delaware Management
Holdings, Inc., DMH Corp., Delvoy , Inc., Delaware Management Company, Inc.,
Delaware Management Business Trust, Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware Capital Management, Inc.,
Delaware International Holdings Ltd., Founders Holdings, Inc. and Delaware
Management Business Trust
Executive Vice President/Chief Financial Officer/Treasurer of Delaware Management
Trust Company
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
Chief Financial Officer of Retirement Financial Services, Inc.
During the past five years, Mr. Hastings has served in various executive capacities at
different times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof (37) Senior Vice President and Treasurer of the Fund and each of the other 32 investment
companies in the Delaware Investments family.
Senior Vice President/Investment Accounting of Delaware Management Company (a
series of Delaware Management Business Trust), Delaware Service Company, Inc. and
Delaware Capital Management, Inc. and Founders Holdings, Inc.
Senior Vice President and Treasurer/ Investment Accounting of Delaware Distributors,
L.P. and Delaware Investment Advisers (a series of Delaware Management Business
Trust)
Senior Vice President/Manager of Investment Accounting of Delaware International
Holdings, Inc.
Senior Vice President and Assistant Treasurer of Founders CBO Corporation
Before joining Delaware Investments in 1995, Mr. Bishof was a Vice President for
Bankers Trust, New York, NY from 1994 to 1995, a Vice President for CS First Boston
Investment Management, New York, NY from 1993 to 1994 and an Assistant Vice
President for Equitable Capital Management Corporation, New York, NY from 1987 to
1993.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Gerald S. Frey (54) Senior Vice President/Senior Portfolio Manager of the Fund, of the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a series
of Delaware Management Business Trust), Delaware Investment Advisers (a series of
Delaware Management Business Trust) and Delaware Capital Management, Inc.
Before joining Delaware Investments in 1996, Mr. Frey was a Senior Director with
Morgan Grenfell Capital Management, New York, NY from 1986 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Frank X. Morris (39) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of
Delaware Management Business Trust) and Delaware Investment Advisers (a series of
Delaware Management Business Trust)
Before joining Delaware Investments in 1997, he served as vice president and director
of equity research at PNC Asset Management. Mr. Morris is president of the Financial
Analysis Society of Philadelphia and is a member of the Association of Investment
Management and Research and the National Association of Petroleum Investment Analysts.
- ------------------------------------------------------------------------------------------------------------------------------------
John B. Fields (54) Senior Vice President/Senior Portfolio Manager of the Fund, the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Delaware Capital Management, Inc.
Trustee of Delaware Management Business Trust.
During the past five years, Mr. Fields has served in various capacities within the
Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Gary A. Reed (45) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of series of
Delaware Management Business Trust) and Delaware Capital Management, Inc.
During the past five years, Mr. Reed has served in such capacities within the Delaware
organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Gerald T. Nichols (42) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Vice President/Senior Portfolio Manager t of Founders Holdings, Inc.
Treasurer/Assistant Secretary and Director of Founders CBO Corporation.
During the past five years, Mr. Nichols has served in various capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Paul A. Matlack (40) Vice President/Senior Portfolio Manager of the Fund, the other 32 investment companies
in the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Vice President/Senior Portfolio Manager of Founders Holdings, Inc.
President and Director of Founders CBO Corporation.
During the past five years, Mr. Matlack has served in various capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher S. Beck (42) Vice President/Senior Portfolio Manager of the Fund, and the other 32 investment
companies in the Delaware Investments family, Delaware Management Company (a series of
Delaware Management Business Trust) and Delaware Investment Advisers (a series of
series of Delaware Management Business Trust).
Before joining Delaware Investments in 1997, Mr. Beck managed the Small Cap Fund for
two years at Pitcairn Trust Company. Prior to 1995, he was Director of Research at
Cypress Capital Management in Wilmington and Chief Investment Officer of the University
of Delaware Endowment Fund.
- ------------------------------------------------------------------------------------------------------------------------------------
Damon J. Andres (30) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust) 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 ( ) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior to joining Delaware Investments in 1997, Mr. Basset served as Vice President in
Morgan Stanley Asset Management's Emerging Growth Group, where he analyzed small growth
companies. Prior to that, he was a trust officer at Sovran Bank and Trust Company.
- ------------------------------------------------------------------------------------------------------------------------------------
John A. Heffern ( ) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior to joining Delaware Investments in 1997, Mr. Heffern was a Senior Vice President,
Equity Research at NatWest Securities Corporation's Specialty Finance Services unit.
Prior to that, he was a Principal and Senior Regional Bank Analyst at Alex. Brown &
Sons.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Jeffrey W. Hynoski ( ) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior to joining Delaware Investments in 1998, Mr. Hynoski served as a Vice President
at Bessemer Trust Company in the mid and large capitalization growth group, where he
specialized in the areas of science, technology, and telecommunications. Prior to that,
Mr. Hynoski held positions at Lord Abbett & Co. and Cowen Asset Management.
- ------------------------------------------------------------------------------------------------------------------------------------
Lori P. Wachs ( ) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
During the past five years, Ms. Wachs has served in various capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Paul Grillo (40) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of series of
Delaware Management Business Trust) and Delaware Capital Management, Inc.
During the past five years, Mr. Grillo has served in various capacities at different
times within the Delaware organization.
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Trotman (49) Vice President/Portfolio Manager of the Fund, and the other 32 investment companies in
the Delaware Investments family, Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of series of
Delaware Management Business Trust).
Prior joining Delaware Investments in 1995, he was Vice President and Director of
Investment Research at Independence Capital Management. Before that, he held
credit-related positions at Marine Midland Bank, U.S. Steel Corporation, and Amerada
Hess.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
The following is a compensation table listing for each Trustee entitled to
receive compensation, the aggregate compensation received from the Fund and the
total compensation received from all Delaware Investments funds for the fiscal
year ended December 31, 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 Fund receive compensation from the Fund.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual from the Investment
Compensation as Part of Benefits Companies
received from Fund Upon in Delaware
Name(3) the Fund Expenses Retirement(1) Investments(2)
------- -------- ---------------- ------------- --------------
<S> <C>
Ann R. Leven None $38,000
Walter P. Babich None $38,000
Anthony D. Knerr None $38,000
Charles E. Peck None $38,000
Thomas F. Madison None $38,000
John H. Durham None $32,180
Janet L. Yeomans (4) None $38,000
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director/trustee who, at the
time of his or her retirement from the Board, has attained the age of
70 and served on the Board for at least five continuous years, is
entitled to receive payments from each investment company in the
Delaware Investments family for which he or she serves as a director or
trustee for a period equal to the lesser of the number of years that
such person served as a director or trustee or the remainder of such
person's life. The amount of such payments will be equal, on an annual
basis, to the amount of the annual retainer that is paid to
directors/trustees of each investment company at the time of such
person's retirement. If an eligible director/trustee retired as of
December 31, 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 director or trustee, based on the number of investment
companies in the Delaware Investments family as of that date.
(2) Each independent director/trustee (other than John H. Durham) currently
receives a total annual retainer fee of $38,000 for serving as a
director or trustee for all 33 investment companies in Delaware
Investments, plus $3,143 for each Board Meeting attended. John H.
Durham currently receives a total annual retainer fee of $32,180 for
serving as a director or trustee for 19 investment companies in
Delaware Investments, plus $1,810 for each Board Meeting attended Ann
R. Leven, Charles E. Peck, Anthony D. Knerr and Thomas F. Madison serve
on the Fund's audit committee; Ms. Leven is the chairperson. Members of
the audit committee currently receive additional annual compensation of
$5,000 from all investment companies, in the aggregate, with the
exception of the chairperson, who receives $6,000.
(3) W. Thacher Longstreth served as an independent Trustee of the
Fund during the period January 1, 1999 through March 17, 1999, the
date on which he retired. For this period, Mr. Longstreth received
$000 from the Fund and $00,000 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.
79
<PAGE>
As of March 31, 2000, management believes the following accounts
held 5% of record or more of the outstanding shares of each Series of the Fund.
Management has no knowledge of beneficial ownership of the Fund's shares:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Series Name and Address of Account Share Amount Percentage
- -----------------------------------------------------------------------------------------------------------------------------
Growth and Income Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
High Yield Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Capital Reserves Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Balanced Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Cash Reserve Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
International Equity Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Trend Series Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Small Cap Value Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Global Bond Series Lincoln National Life Company
Separate Account - C
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
SMA Life Assurance Company Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Strategic Income Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Devon Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln Life Variable Annuity
Account N
1300 S. Clinton Street
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Emerging Markets Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln Life Variable Annuity Account N
1300 S Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
Convertible Securities Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
Convertible Securities Series Chicago Trust Company
For the Sole Benefit of
Lincoln National Corp
Employee Ret. Plan
C/o Marshall and Ilsley Trust Co.
P.O. Box 2977
Milwaukee, WI 53201
- -----------------------------------------------------------------------------------------------------------------------------
Social Awareness Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account N
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Series Name and Address of Account Share Amount Percentage
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
REIT Series The Travelers SEP Acct. TM2 for
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183
- -----------------------------------------------------------------------------------------------------------------------------
SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
Lincoln National Life Company
Separate Account - C Seed Account
1300 South Clinton Street
P.O. Box 2340
Fort Wayne, IN 46801
- -----------------------------------------------------------------------------------------------------------------------------
REIT Series The Travelers SEP Acct. ABD2 for
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183
- -----------------------------------------------------------------------------------------------------------------------------
Select Growth Series SMA Life Assurance Company
Separate Account VA-K
Attn: Jay Burke N344
440 Lincoln Street
Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
GENERAL INFORMATION
The Fund, 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 Investment Company Act of 1940 (the "1940 Act"). Global Bond,
Emerging Markets and REIT Series operate as nondiversified funds as defined by
the 1940 Act.
Delaware Management is the investment manager of each Series of the
Fund other than International Equity, Global Bond and Emerging Markets Series.
Delaware International is the investment manager of International Equity, Global
Bond and Emerging Markets Series. Delaware Management or its affiliate, Delaware
International, manages the other funds in the Delaware Investments family. While
investment decisions for each Series are made independently from those of the
other funds and accounts, investment decisions for such other funds and accounts
may be made at the same time as investment decisions for the Series.
Access persons and advisory persons of the Delaware Investments family
of funds, as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who
provide services to Delaware Management, Delaware International or their
affiliates, are permitted to engage in personal securities transactions subject
to the exceptions set forth in Rule 17j-1 and the following general restrictions
and procedures: (1) certain blackout periods apply to personal securities
transactions of those persons; (2) transactions must receive advance clearance
and must be completed on the same day as the clearance is received; (3) certain
persons are prohibited from investing in initial public offerings of securities
and other restrictions apply to investments in private placements of securities;
(4) opening positions by certain covered persons in certain securities may only
be closed-out at a profit after a 60-day holding period has elapsed; and (5) the
Compliance Officer must be informed periodically of all securities transactions
and duplicate copies of brokerage confirmations and account statements must be
supplied to the Compliance Officer.
Delaware Distributors, L.P. acts as national distributor for the Fund
and for the other mutual funds in the Delaware Investments family.
In addition, Delaware Service Company, Inc., an affiliate of Delaware
Management, acts as shareholder servicing, dividend disbursing and transfer
agent for the Fund and for the other mutual funds in the Delaware Investments
family. Compensation is fixed at a flat dollar amount each year and is approved
by the Board of 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 Fund's advisory
relationship with Delaware Management or its distribution relationship with
Delaware Distributors, L.P., Delaware Management and its affiliates could cause
the Fund to delete the words "Delaware Group" from the Fund's name.
85
<PAGE>
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 1, 1999. U.S. Growth Series commenced
operations on November , 1999.
EURO
Several European countries are participating in the European Economic
and Monetary Union, which established a common European currency for
participating countries. This currency is commonly known as the "Euro." Each
participating country replaced its previous currency with the Euro on January 1,
1999. Additional European countries may elect to participate after that date. In
addition, full implementation of the Euro will extend over a period of several
years. Initial implementation of the Euro occurred on January 1, 1999 without
disruption of services provided to each Series. Each Series' service providers
cooperated over the implementation weekend and following weeks to reconcile
their records and procedures. Going forward, if a Series is invested in
securities of participating countries or countries that elect to participate at
a later date, it could be adversely affected if the computer systems used by its
applicable service providers are not properly prepared to handle the
implementation of this single currency through completion of the process or the
adoption of the Euro by additional countries in the future.
Capitalization
Each Series offers two classes of shares, class 1 and class 2.
Additional classes of shares may be offered in the future.
The Fund 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 Fund, each Series would
vote separately on any matter which affects only that Series, such as investment
objective and policy or action to dissolve the Series, and as otherwise
prescribed by the 1940 Act. Shares of each Series have a priority in that
Series' assets, and in gains on and income from the portfolio of that Series.
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 class 1 may not vote on any matter affecting Plans under Rule 12b-1 that
apply to class 2. Shares have no preemptive rights, are fully transferable and,
when issued, are fully paid and nonassessable. All shares participate equally in
dividends, and upon liquidation would share equally.
Noncumulative Voting
Series shares have noncumulative voting rights which means that the
holders of more than 50% of the shares of the Fund voting for the election of
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 Securities and Exchange
Commission ("SEC"). Shareholders may obtain a copy of the Registration Statement
by contacting the SEC in Washington, DC.
86
<PAGE>
APPENDIX A--DESCRIPTION OF RATINGS
Commercial Paper
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from Duff and Phelps, Inc.'s description of its two highest
ratings: Category 1--Top Grade: Duff 1-Plus--Highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or ready
access to alternative sources of funds, is clearly outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations. Duff 1--Very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are minor. Duff 1-Minus--High
certainty of timely payment. Liquidity factors are strong and supported by good
fundamental protection factors. Risk factors are very small. Category 2--Good
Grade: Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds' needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Excerpts from Fitch Investors Service, Inc.'s description of its two
highest ratings: F-1--Highest grade commercial paper assigned this rating is
regarded as having the strongest degree of assurance for timely payment.
F-2--Very good grade issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than the strongest issues.
Bonds
Excerpts from Moody's description of its bond ratings: Aaa--judged to
be the best quality. They carry the smallest degree of investment risk;
Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations; Baa--considered
as medium grade obligations. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; Ba--judged to
have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B--generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small; Caa--are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest; Ca--represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C--the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
87
<PAGE>
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for Delaware Group
Premium Fund and, in its capacity as such, audits the annual financial
statements contained in the Series' Annual Reports. Each Series' Statement of
Net Assets, Statement of Operations, Statement of Changes in Net Assets,
Financial Highlights and Notes to Financial Statements, as well as the reports
of Ernst & Young LLP, independent auditors, for the fiscal year ended December
31, 1999 are included in the Series' Annual Reports to shareholders. The
financial statements and financial highlights, the notes relating thereto and
the reports of Ernst & Young LLP listed above are incorporated by reference from
the Annual Reports into this Part B.
88
<PAGE>
PART C
------
Other Information
-----------------
Item 23 Exhibits
(a) Agreement and Declaration of Trust.
(1) Agreement and Declaration of Trust (December 17,
1998) incorporated into this filing by reference to
Post-Effective Amendment No. 29 filed December 14,
1999.
(2) Certificate of Trust (December 17, 1998) incorporated
into this filing by reference to Post-Effective
Amendment No. 29 filed December 14, 1999.
(b) By-Laws. By-Laws (December 17, 1998) incorporated into this
filing by reference to Post-Effective Amendment No. 29 filed
December 14, 1999.
(c) Copies of All Instruments Defining the Rights of Holders.
(1) Agreement and Declaration of Trust. Articles III, V,
and VI of the Agreement and Declaration of Trust
incorporated into this filing by reference to
Post-Effective Amendment No. 29 filed December 14,
1999.
(2) By-Laws. Article II of By-Laws incorporated into
this filing by reference to Post-Effective Amendment
No. 29 filed December 14, 1999.
(d) Investment Management Agreements.
(1) Form of Investment Management Agreement (December
1999) between Delaware Management Company (a series
of Delaware Management Business Trust) and the
registrant incorporated into this filing by reference
to Post-Effective Amendment No. 29 filed December 14,
1999.
(2) Form of Investment Management Agreement (December
1999) between Delaware International Advisers, Ltd.
and the Registrant incorporated into this filing by
reference to Post-Effective Amendment No. 29 filed
December 14, 1999.
(3) Form of Sub-Advisory Agreement (December 1999)
between Delaware Management Company (a series of
Delaware Management Business Trust) and Delaware
International Advisers Ltd. on behalf of Strategic
Income Series incorporated into this filing by
reference to Post-Effective Amendment No. 29 filed
December 14, 1999.
<PAGE>
(4) Form of Sub-Advisory Agreement (December 1999)
between Delaware Management Company (a series of
Delaware Management Business Trust) and Vantage
Global Advisors, Inc. on behalf of Social Awareness
Series incorporated into this filing by reference to
Post-Effective Amendment No. 29 filed December 14,
1999.
(5) Form of Sub-Advisory Agreement (December 1999)
between Delaware Management Company (a series of
Delaware Management Business Trust) and Lincoln
Investment Management, Inc. on behalf of REIT Series
incorporated into this filing by reference to
Post-Effective Amendment No. 29 filed December 14,
1999.
(6) Form of Sub-Advisory Agreement (December 1999)
between Delaware Management Company (a series of
Delaware Management Business Trust) and Lynch &
Mayer, Inc. on behalf of U.S. Growth Series
incorporated into this filing by reference to
Post-Effective Amendment No. 29 filed December 14,
1999.
(e) Distribution Agreement.
(1) Form of Distribution Agreement (2000) between
Delaware Distributors, L.P. and the Registrant on
behalf of each Series attached as Exhibit.
(f) Not applicable.
(g) Custodian Agreements.
(1) Form of Custodian Agreement (December 1999) (Module)
between The Chase Manhattan Bank and the Registrant
incorporated into this filing by reference to
Post-Effective Amendment No. 18 filed October 29,
1996.
(i) Form of Amendment (December 1999) to
Custodian Agreement between The Chase
Manhattan Bank and the Registrant on behalf
of each Series incorporated into this filing
by reference to Post-Effective Amendment No.
22 filed January 15, 1998.
(2) Form of Securities Lending Agreement (December 1999)
between The Chase Manhattan Bank and the Registrant
incorporated into this filing by reference to
Post-Effective Amendment No. 18 filed October 29,
1996.
<PAGE>
(h) Other Material Contracts.
(1) Form of Shareholders Services Agreement (December
1999) between Delaware Service Company, Inc. and the
Registrant on behalf of Money Market Series (renamed
Cash Reserve Series) incorporated into this filing by
reference to Post-Effective Amendment No. 18 filed
October 29, 1996.
(2) Form of Amended and Restated Shareholder Services
Agreement (December 1999) between Delaware Service
Company, Inc. and the Registrant on behalf of High
Yield Series, Capital Reserves Series, Equity/Income
Series (renamed Growth and Income Series), Multiple
Strategy Series (renamed Delaware Balanced Series and
to be renamed Balanced Series), Growth Series
(renamed DelCap Series and to be renamed Growth
Opportunities Series), International Equity Series,
Value Series (renamed Small Cap Value Series),
Emerging Growth Series (renamed Trend Series), Global
Bond Series, Strategic Income Series, Devon Series,
Emerging Markets Series, Convertible Securities
Series, Quantum Series (renamed Social Awareness
Series), REIT Series, Aggressive Growth Series (to be
renamed Select Growth Series) and U.S. Growth Series
incorporated into this filing by reference to
Post-Effective Amendment No. 27 filed July 30, 1999.
(5) Form of Delaware Group of Funds Fund Accounting
Agreement (August 19, 1996) (Module) between Delaware
Service Company, Inc. and the Registrant incorporated
into this filing by reference to Post-Effective
Amendment No. 18 filed October 29, 1996.
(i) Opinion of Counsel. Incorporated into this filing by reference
to Post-Effective Amendment No. 29 filed December 14, 1999.
(j) Consent of Auditors. To be filed by Amendment.
(k-l) Not applicable.
(m) Plan under Rule 12b-1. Form of Plan under Rule 12b-1 (2000)
attached as Exhibit.
(n) Rule 18f-3 Plan. Form of Rule 18f-3 Plan (2000) attached as
Exhibit.
(o) Other: Trustees' Power of Attorney. Incorporated into this
filing by reference to Post-Effective Amendment No. 22 to the
Registration Statement of Delaware Group Global &
International Funds filed November 22, 1999.
Item 24. Persons Controlled by or under Common Control with Registrant.
None.
Item 25. Indemnification. Article VI of the By-Laws incorporated into this
filing by reference to Post-Effective Amendment No. 29 filed
December 14, 1999.
<PAGE>
Item 26. Business and Other Connections of Investment Adviser.
(a) Delaware Management Company ("Delaware Management"), a series
of Delaware Management Business Trust, serves as investment manager to the
Registrant and also serves as investment manager or sub-adviser to certain of
the other funds in the Delaware Investments family (Delaware Group Equity Funds
I, Delaware Group Equity Funds II, Delaware Group Equity Funds III, Delaware
Group Equity Funds IV, Delaware Group Equity Funds V, Delaware Group Government
Fund, Delaware Group Income Funds, Delaware Group Limited-Term Government Funds,
Inc., Delaware Group Cash Reserve, Delaware Group Tax-Free Fund, Delaware Group
State Tax-Free Income Trust, Delaware Group Tax-Free Money Fund, Delaware Group
Global & International Funds, Delaware Pooled Trust, Delaware Group Adviser
Funds, Delaware Group Dividend and Income Fund, Inc., Delaware Group Global
Dividend and Income Fund, Inc., Delaware Group Foundation Funds, Voyageur
Tax-Free Funds, Voyageur Intermediate Tax-Free Funds, Voyageur Insured Funds,
Voyageur Funds, Voyageur Investment Trust, Voyageur Investment Trust II,
Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual Funds III,
Voyageur Arizona Municipal Income Fund, Inc., Voyageur Colorado Insured
Municipal Income Fund, Inc., Voyageur Florida Insured Municipal Income Fund,
Voyageur Minnesota Municipal Fund, Inc., Voyageur Minnesota Municipal Fund II,
Inc. and Voyageur Minnesota Municipal Fund III, Inc.). In addition, certain
officers of Delaware Management also serve as directors/trustees of the other
Delaware Investments funds, and certain officers are also officers of these
other funds. A company indirectly owned by Delaware Management's indirect parent
company acts as principal underwriter to the mutual funds in the Delaware
Investments family (see Item 27 below) and another such company acts as the
shareholder services, dividend disbursing, accounting servicing and transfer
agent for all of the mutual funds in the Delaware Investments family.
<PAGE>
The following persons serving as directors or officers of Delaware
Management Company have held the following positions during the past two years:
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Charles E. Haldeman, Jr. (1) Chief Executive Officer of Delaware Management Company (a series of Delaware
Management Business Trust); Chief Executive Officer of Delaware Management
Business Trust; Director of Delaware Management Holdings, Inc.; Chief Executive
Officer and Director of DMH Corp.; Chief Executive Officer and Director of
Delvoy, Inc.; Chief Executive Officer and Director of Delaware Management
Company, Inc.; Director of Delaware Service Company, Inc.
- -------------------------------------------- -------------------------------------------------------------------------------------
David K. Downes President of Delaware Management Company (a series of Delaware Management
Business Trust); President, Chief Executive Officer and Director of Delaware
Capital Management, Inc.; Director of Delaware International Advisers Ltd.;
President, Chief Executive Officer, Chief Financial Officer and Trustee/Director
of the Registrant and each of the other investment companies in the Delaware
Investments family; President and Director of Delaware Management Company, Inc.;
Chairman, President, Chief Executive Officer and Director of Delaware Service
Company, Inc.; President, Chief Operating Officer, Chief Financial Officer and
Director of Delaware International Holdings Ltd.; President, Chief Operating
Officer and Director of Delaware General Management, Inc.; Chairman and Director
of Delaware Management Trust Company and Retirement Financial Services, Inc.;
Executive Vice President, Chief Operating Officer, Chief Financial Officer of
Delaware Management Holdings, Inc., Founders CBO Corporation, Delaware
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, Chief
Operating Officer, Chief Financial Officer and Trustee of Delaware Management
Business Trust
Chief Executive Officer and Director of Forewarn, Inc. since 1993, 8 Clayton
Place, Newtown Square, PA
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Richard J. Flannery Executive Vice President/General Counsel of the Registrant and each of the other
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;
Director of Delaware International Advisers Ltd.; 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, General Counsel and Trustee of Delaware Management Business Trust;
Director of HYPPCO Finance Company Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd., Elverton, PA;
Director and Member of Executive Committee of Stonewall Links, Inc. since 1991,
Bulltown Rd., Elverton, PA
- -------------------------------------------- -------------------------------------------------------------------------------------
Richard G. Unruh Executive Vice President/Chief Investment Officer of Delaware Management Company
(a series of Delaware Management Business Trust); Director of Delaware
International Advisers Ltd.; Executive Vice President and Chief Investment
Officer, Equity of the Registrant and each of the other 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 and Trustee of
Delaware Management Business Trust
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company
since 1989, 2040 Market Street, Philadelphia, PA; Board of Directors, Chairman
of Finance Committee, AAA Mid Atlantic, Inc. since 1989, 2040 Market Street,
Philadelphia, PA; Board of Directors, Metron, Inc. since 1995, 11911 Freedom
Drive, Reston, VA
- -------------------------------------------- -------------------------------------------------------------------------------------
H. Thomas McMeekin(2) Executive Vice President of Delaware Management Business Trust; 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 of Delaware Capital Management, Inc.; Executive Vice President and
Director of Delaware Management Holdings, Inc.; Executive Vice President and
Chief Investment Officer, Fixed Income of the Registrant and each of the other
investment companies in the Delaware Investments family.
- -------------------------------------------- -------------------------------------------------------------------------------------
William E. Dodge(3) Executive Vice President/Chief Investment Officer, DMC-Equity of Delaware
Management Company (a series of Delaware Management Trust Company); Executive
Vice President of Delaware Management Business Trust; President/Chief
Investment Officer, DIA-Equity of Delaware Investment Advisers (a series of
Delaware Management Business Trust) ; Executive Vice President of Delaware
Capital Management, Inc.
- -------------------------------------------- -------------------------------------------------------------------------------------
John C.E. Campbell Executive Vice President/Global Marketing & Client Services of Delaware Management
Company (a series of Delaware Management Business Trust) and Delaware Investment
Advisers (a series of Delaware Management Business Trust); Director of Delaware
International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Douglas L. Anderson Senior Vice President/Operations of Delaware Management Company (a series of
Delaware Management Business Trust; Senior Vice President/Operations of Delaware
Service Company, Inc.; Senior Vice President/Operations of Retirement Financial
Services, Inc.; Senior Vice President/Operations of Delaware Management Trust
Company.
- --------------------------------------------- -------------------------------------------------------------------------------------
Michael P. Bishof Senior Vice President/Investment Accounting of Delaware Management Company (a series
of Delaware Management Business Trust), Delaware Service Company, Inc. and Delaware
Capital Management, Inc., Delaware Distributors L.P. and Founders Holdings, Inc.;
Senior Vice President and Treasurer of the Registrant and each of the other
investment companies in the Delaware Investments family; Senior Vice President and
Treasurer/ Investment Accounting of Delaware Investment Advisers (a series of
Delaware Management Business Trust); Senior Vice President/Manager of Investment
Accounting of Delaware International Holdings, Inc.; Senior Vice President and
Assistant Treasurer of Founders CBO Corporation
- --------------------------------------------- -------------------------------------------------------------------------------------
Lisa O. Brinkley Senior Vice President/Compliance Director of Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Management Holdings, Inc., DMH Corp.,
Delvoy, Inc., Delaware Management Company, Inc., 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., the Registrant and each of the other investment
companies in the Delaware Investments family; Senior Vice President/Compliance
Director/Assistant Secretary of Delaware Management Trust Company
- --------------------------------------------- -------------------------------------------------------------------------------------
Robert J. DiBraccio Senior Vice President/Head of Equity Trading of Delaware Management Company (a
series of Delaware Management Business Trust); Senior Vice President/Head of
Equity Trading of Delaware Investment Advisers (a series of Delaware Management
Business Trust); Senior Vice President/Head of Equity Trading of Delaware Capital
Management, Inc.
- --------------------------------------------- -------------------------------------------------------------------------------------
John B. Fields Senior Vice President/Senior Portfolio Manager of Delaware Management Company (a
series of Delaware Management Business Trust); Trustee of Delaware Management
Business Trust; Senior Vice President/Senior Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Senior Vice
President/Senior Portfolio Manager of Delaware Capital Management, Inc.; Senior Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family.
- --------------------------------------------- -------------------------------------------------------------------------------------
Gerald S. Frey Senior Vice President/Senior Portfolio Manager of the Registrant and each of the
other 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.
- --------------------------------------------- -------------------------------------------------------------------------------------
Susan L. Hanson Senior Vice President/Global Marketing and Client Services of Delaware Management
Company (a series of Delaware Management Business Trust); Senior Vice
President/Global Marketing and Client Services of Delaware Investment Advisers (a
series of Delaware Management Business Trust)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Joseph H. Hastings 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 Capital Management,
Inc. and Delaware Management Business Trust; Senior Vice President/Corporate
Controller of the Registrant and each of the other investment companies in the
Delaware Investments family and Delaware Investment Advisers (a series of 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.
- -------------------------------------------- -------------------------------------------------------------------------------------
Joanne O. Hutcheson Senior Vice President/Human Resources of Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Management Holdings, Inc., DMH Corp.,
Delvoy, Inc., Delaware Management Company, Inc., Delaware Management Business Trust,
Delaware Investment Advisers (a series of Delaware Management Business Trust),
Delaware Service Company, Inc., Delaware Capital Management, Inc., Delaware
Retirement Financial Services, Inc., Delaware Management Trust Company, Delaware
Distributors, Inc., Delaware Distributors, L.P., Delaware General Management, Inc.
and the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Karina J. Ivstan Senior Vice President/Strategic Planning of Delaware Management Company (a series of
Delaware Management Business Trust); Senior Vice President/Strategic Planning of
Delaware Management Holdings, Inc.; Senior Vice President/Strategic Planning of
Delaware Management Business Trust; Senior Vice President/Strategic Planning of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Senior
Vice President/Strategic Planning of Delaware Service Company, Inc.; Senior Vice
President/Strategic Planning of Delaware Capital Management, Inc.; Senior Vice
President/Strategic Planning of Retirement Financial Services, Inc.; Senior Vice
President/Strategic Planning of Delaware Management Trust Company; Senior Vice
President/Strategic of Delaware Distributors, L.P.; Senior Vice President/Strategic
Planning of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Richelle S. Maestro Senior Vice President, Deputy General Counsel and Secretary of Delaware Management
Company (a series of Delaware Management Business Trust), Delaware Management
Holdings, Inc., DMH Corp., Delaware Management Business Trust, Delaware Investment
Advisers (a series of Delaware Management Business Trust), Retirement Financial
Services, Inc., Delaware Distributors, Inc., Delaware Distributors, L.P., Delaware
Management Trust Company, Delaware International Holdings Ltd., Delvoy, Inc.,
Delaware Management Company, Inc., Delaware Service Company, Inc., Delaware Capital
Management, Inc., Founders Holdings, Inc. and Delaware General Management, Inc.;
Secretary of Founders CBO Corporation; Senior Vice President, Deputy General Counsel
and Assistant Secretary of the Registrant and each of the other investment companies
in the Delaware Investments family
General Partner of Tri-R Associates since 1989, 10001 Sandmeyer Lane, Philadelphia,
PA.
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Eric E. Miller Senior Vice President, Deputy General Counsel and Assistant Secretary of Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Management Holdings, Inc., DMH Corp., Delvoy, Inc., Delaware Management Company,
Inc., 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.; Senior Vice President, Deputy General Counsel and Secretary of the Registrant
and each of the other investment companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Paul M. Ross Senior Vice President/Global Marketing and Client Services of Delaware Management
Company (a series of Delaware Management Business Trust); Senior Vice
President/Global Marketing and Client Services of Delaware Investment Advisers (a
series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
James L. Shields Senior Vice President, Chief Information Officer of Delaware Management Company (a
series of Delaware Management Business Trust); Senior Vice President, Chief
Information Officer of Delaware Investment Advisers (a series of Delaware Management
Business Trust); Senior Vice President, Chief Information Officer of Delaware Service
Company, Inc.; Senior Vice President, Chief Information Officer of Delaware Capital
Management Company, Inc.; Senior Vice President, Chief Information Officer of
Retirement Financial Services, Inc.; Senior Vice President, Chief Information Officer
of Delaware Distributors, L.P.
- -------------------------------------------- -------------------------------------------------------------------------------------
Gary T. Abrams Vice President/Equity Trading of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Equity Trading of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Christopher S. Adams Vice President/Equity Analyst of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Equity Analyst of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Robert L. Arnold Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of Delaware Capital Management, Inc.; Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Marshall T. Bassett Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of each fund in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Christopher S. Beck Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of each fund in the Delaware Investments family.
Trustee of New Castle County Pension Board since October 1992, Wilmington DE.
- -------------------------------------------- -------------------------------------------------------------------------------------
Richard E. Beister Vice President/Trading Operations of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Trading Operations of Delaware
Investment Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Vincent A. Brancaccio Vice President/Equity Trader of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Equity Trader of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Michael P. Buckley Vice President/Portfolio Manager/Senior Municipal Analyst of Delaware Management
Company (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager/Senior Municipal Analyst of Delaware Investment Advisers (a series of
Delaware Management Business Trust); Vice President/Portfolio Manager/Senior
Municipal Analyst of the Registrant and each of the other investment companies in the
Delaware Investments family
- ------------------------------------------- -------------------------------------------------------------------------------------
MaryEllen M. Carrozza Vice President/Client Services of Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust), Delaware General Management and the Registrant and each
of the other investment companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Stephen R. Cianci Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Mitchell L. Conery Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Timothy G. Connors Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Patrick P. Coyne Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of Delaware Capital Management, Inc.; Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
George E. Deming Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
James P. Dokas Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/ Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Michael J. Dugan Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Roger A. Early Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Joel A. Ettinger Vice President/Taxation of Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Management Holdings, Inc., DMH Corp., Delvoy,
Inc., Delaware Management Company, Inc., Delaware Management Business Trust, Delaware
Investment Advisers (a series of Delaware Management Business Trust);Vice
President/Taxation of Delaware Service Company, Inc., Delaware Capital Management,
Inc., Retirement Financial Services, Inc., Delaware Distributors, Inc., Delaware
Distributors, L.P., Founders Holdings, Inc., Founders CBO Corporation, Delaware
General Management, Inc. and the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Charles E. Fish Vice President/Equity Trader of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Equity Trader of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Joseph Fiorilla Vice President/Performance Analyst of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Performance Analyst of Delaware
Investment Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
James A. Furgele Vice President/Investment Accounting of Delaware Management Company (a series of
Delaware Management Business Trust);Vice President/Investment Accounting of Delaware
Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Investment Accounting of Delaware Service Company, Inc.; Vice
President/Investment Accounting of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Thomas C. Gariepy(4) Vice President/Director of Corporate Communications of Delaware Management Company (a
series of Delaware Management Business Trust); Vice President/Director of Corporate
Communications of Delaware Investment Advisers (a series of Delaware Management
Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Stuart M. George Vice President/Equity Trading of Delaware Management Company (a series of Delaware
Management Business Trust);Vice President/Equity Trading of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Andrea Giles Vice President/Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Portfolio Manager Delaware
Investment Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Barry Gladstein Vice President/Business Manager of Delaware Management Company (a series of Delaware
Management Business Trust);Vice President/Business Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Paul Grillo Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Brian T. Hannon Vice President of Delaware Management Company (a series of Delaware Management
Business Trust); Vice President of Delaware Investment Advisers (a series of Delaware
Management Business Trust); Vice President/Senior Portfolio Manager of the Registrant
and each of the other investment companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
John A. Heffern Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Stuart N. Hosansky Vice President/Senior Credit Analyst of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Credit Analyst of the
Registrant and each of the other investment companies in the Delaware Investments
family
- -------------------------------------------- -------------------------------------------------------------------------------------
Elizabeth H. Howell Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Jeffrey W. Hynoski Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust);Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust);Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Cynthia Isom Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Audrey E. Kohart Vice President/Assistant Controller/Corporate Accounting of Delaware Management
Company (a series of Delaware Management Business Trust); Vice President/Assistant
Controller/Corporate Accounting of Delaware Investment Advisers (a series of Delaware
Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Steven T. Lampe Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/ Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Philip Y. Lin Vice President, Associate General Counsel and Assistant Secretary of Delaware
Management Company (a series of Delaware Management Business Trust); Vice President,
Associate General Counsel and Assistant Secretary of Delaware Investment Advisers (a
series of Delaware Management Business Trust); Vice President, Associate General
Counsel and Assistant Secretary of Delaware Service Company, Inc.; Vice President,
Associate General Counsel and Assistant Secretary of Delaware Capital Management,
Inc.; Vice President, Associate General Counsel and Assistant Secretary of Retirement
Financial Services, Inc.; Vice President, Associate General Counsel and Assistant
Secretary of Delaware Management Trust Company; Vice President, Associate General
Counsel and Assistant Secretary of Delaware Distributors, L.P.; Vice President,
Associate General Counsel and Assistant Secretary of the Registrant and each of the
other investment companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Michael D. Mabry Vice President, Associate General Counsel and Assistant Secretary of Delaware
Management Company (a series of Delaware Management Business Trust); Vice President,
Associate General Counsel and Assistant Secretary of Delaware Investment Advisers (a
series of Delaware Management Business Trust); Vice President, Associate General
Counsel and Assistant Secretary of Delaware Service Company, Inc.; Vice President,
Associate General Counsel and Assistant Secretary of Delaware Capital Management,
Inc.; Vice President, Associate General Counsel and Assistant Secretary of Retirement
Financial Services, Inc.; Vice President, Associate General Counsel and Assistant
Secretary of Delaware Distributors, L.P.; Vice President, Associate General Counsel
and Assistant Secretary of Delaware Management Holdings, Inc.; Vice President,
Associate General Counsel and Assistant Secretary of the Registrant and each of the
other investment companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Paul A. Matlack Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of Founders Holdings, Inc., President and Director
of Founders CBO Corporation; Vice President/Senior Portfolio Manager of the
Registrant and each of the other investment companies in the Delaware Investments
family.
- -------------------------------------------- -------------------------------------------------------------------------------------
Andrew M. McCullagh, Jr. Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Francis X. Morris Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Gerald T. Nichols Vice President/Senior Portfolio Manager of Delaware Management Company (a series
of Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of Founders Holdings, Inc., Treasurer, Assistant
Secretary and Director of Founders CBO Corporation; Vice President/Senior Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Robert A. Norton, Jr. Vice President/Research Analyst of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Research Analyst of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
David P. O'Connor Vice President, Associate General Counsel and Assistant Secretary of Delaware
Management Company (a series of Delaware Management Business Trust); Vice President,
Associate General Counsel and Assistant Secretary of Delaware Investment Advisers (a
series of Delaware Management Business Trust);Vice President, Associate General
Counsel and Assistant Secretary of Delaware Service Company, Inc.; Vice President,
Associate General Counsel and Assistant Secretary of Delaware Capital Management,
Inc.; Vice President, Associate General Counsel and Assistant Secretary of Retirement
Financial Services, Inc.; Vice President, Associate General Counsel and Assistant
Secretary of Delaware Distributors, L.P.; Vice President, Associate General Counsel
and Assistant Secretary of Delaware Management Holdings, Inc.; Vice President,
Associate General Counsel and Assistant Secretary of the Registrant and each of the
other investment companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Donald G. Padilla Vice President/Assistant Controller/Assistant Treasurer of Delaware Management
Company (a series of Delaware Management Business Trust, DMH Corp., Delvoy, Inc.,
Delaware Management Company, Inc., 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 Management Trust Company, Delaware Distributors, L.P.,
Delaware General Management, Inc.; Assistant Vice President/Assistant Controller of
Delaware International Holdings Ltd.; Assistant Vice President/Assistant Controller
of Founders Holdings, Inc.
- -------------------------------------------- -------------------------------------------------------------------------------------
Gary A. Reed Vice President/Senior Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/Senior Portfolio Manager of
Delaware Investment Advisers (a series of Delaware Management Business Trust); Vice
President/Senior Portfolio Manager of the Registrant and each of the other investment
companies in the Delaware Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Richard Salus Vice President/Assistant Controller of Delaware Management Company (a series of
Delaware Management Business Trust), Delaware Investment Advisers (a series of
Delaware Management Business Trust), Delaware Management Trust Company, Delaware
International Holdings Ltd. and Delaware General Management, Inc.
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
Richard D. Siedel Vice President/Assistant Controller/Manager, Payroll of Delaware Management Company
(a series of Delaware Management Business Trust); Vice President/Assistant
Controller/Manager, Payroll of Delaware Investment Advisers (a series of Delaware
Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
Michael T. Taggart Vice President/Facilities and Administration Services of Delaware Management Company
(a series of Delaware Management Business Trust); Vice President/Facilities and
Administration Services of Delaware Investment Advisers (a series of Delaware
Management Business Trust); Vice President/Facilities and Administration Services of
Delaware Service Company, Inc.; Vice President/Facilities and Administration Services
of Delaware Distributors, L.P.
- -------------------------------------------- -------------------------------------------------------------------------------------
Thomas J. Trotman Vice President/Portfolio Manager of Delaware Management Company (a series of Delaware
Management Business Trust); Vice President/Portfolio Manager of Delaware Investment
Advisers (a series of Delaware Management Business Trust); Vice President/Portfolio
Manager of the Registrant and each of the other investment companies in the Delaware
Investments family
- -------------------------------------------- -------------------------------------------------------------------------------------
Lori P. Wachs Vice President/ Portfolio Manager of Delaware Management Company (a series of
Delaware Management Business Trust); Vice President/ Portfolio Manager of Delaware
Investment Advisers (a series of Delaware Management Business Trust); Vice President/
Portfolio Manager of the Registrant and each of the other investment companies in the
Delaware Investments family
- ------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
*Business Address is 1818 Market Street, Philadelphia, PA 19103.
- --------------------------------------------------------------------------------
(1) PRINCIPAL/PARTNER/DIRECTOR, Cooke & Bieler, Inc., Philadelphia, PA
1976-1998. PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR, United Asset
Management, Boston, MA, March 1998-January 2000.
(2) PRESIDENT AND DIRECTOR, Lincoln Investment Management, Inc. 1987 to
present. EXECUTIVE VICE PRESIDENT/CHIEF INVESTMENT OFFICER of Lincoln
National Corporation 1992 to present.
(3) PRESIDENT, DIRECTOR OF MARKETING AND SENIOR PORTFOLIO MANAGER, Marvin &
Palmer Associates, Wilmington, DE 1996-1998.
(4) VICE PRESIDENT/DIRECTOR OF PUBLIC RELATIONS, Liberty Funds Distributor,
Inc., Boston, MA, 1996-1998.
- --------------------------------------------------------------------------------
<PAGE>
(b) Delaware International Advisers Ltd. ("Delaware International")
serves as sub-investment adviser to Strategic Income Series of the Registrant
and also serves as investment manager or sub-investment adviser to certain of
the other funds in the Delaware Investments family (Delaware Group Global
Dividend and Income Fund, Inc., Delaware Group Global & International Funds,
Delaware Pooled Trust, Delaware Group Income Funds, and Delaware Group Adviser
Funds) and other institutional accounts. Information regarding the officers
and directors of Delaware International and the positions they have held with
the Registrant during the past two fiscal years is provided below.
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
G. Roger H. Kitson* Vice Chairman and Director of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
David G. Tilles* Managing Director/Chief Investment Officer and Director of Delaware
International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Elizabeth A. Desmond* Senior Portfolio Manager and Director of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
John Emberson* Finance Director/Company Secretary/Compliance Officer and Chief Operating Officer of
Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Clive A. Gillmore* Senior Portfolio Manager/Deputy Managing Director and Director of Delaware
International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Nigel G. May* Senior Portfolio Manager and Director of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Hamish O. Parker* Senior Portfolio Manager and Director of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Robert Akester* Senior Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Fiona A. Barwick* Senior Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Joanna Bates* Senior Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Joshua H. Brooks* Senior Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Gavin A. Hall* Senior Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
John Kirk* Senior Portfolio Manager and Director of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
W. Hywel Morgan* Senior Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Christopher A. Moth* Senior Portfolio Manager and Director of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Richard J. Ginty* Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
R. Emma Lewis* Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
Hugh A. Serjeant* Portfolio Manager of Delaware International Advisers Ltd.
- -------------------------------------------- -------------------------------------------------------------------------------------
John C. E. Campbell** Director of Delaware International Advisers Ltd.; Executive Vice President/Global
Marketing & Client Services of Delaware Management Company (a series of Delaware
Management Business Trust) and Delaware Investment Advisers (a series of Delaware
Management Business Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
George E. Deming** Director of Delaware International Advisers Ltd.; Vice President/Senior Portfolio
Manager of Delaware Management Company (a series of Delaware Management Business
Trust) and Delaware Investment Advisers (a series of Delaware Management Business
Trust)
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- -------------------------------------------------------------------------------------
Positions and Offices with Delaware Management Company and its affiliates
Name and Principal Business Address* and other Positions and Offices Held
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C>
David K. Downes** Director of Delaware International Advisers Ltd.; President, Chief Executive Officer,
Chief Financial Officer and Director/Trustee of the Registrant and each of the other
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
Chief Executive Officer and Director of Forewarn, Inc. since 1993, 8 Clayton Place,
Newtown Square, PA
- -------------------------------------------- -------------------------------------------------------------------------------------
Richard J. Flannery** Director of Delaware International Advisers Ltd.; Executive Vice President/General
Counsel of the Registrant and each of the other investment companies in the Delaware
Investments family, Delaware Management Holdings, Inc., Delaware Distributors, L.P.,
Delaware Management Company (a series of Delaware Management Business Trust),
Delaware Investment Advisers (a series of Delaware Management Business Trust) and
Founders CBO Corporation; Executive Vice President/General Counsel and Director of
Delaware International Holdings Ltd., Founders Holdings, Inc., Delvoy, Inc., DMH
Corp., Delaware Management Company, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., Retirement Financial Services, Inc., Delaware Distributors,
Inc. and Delaware Management Trust Company.; Executive Vice President and Trustee of
Delaware Management Business Trust; Director of HYPPCO Finance Company Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd., Elverton, PA;
Director and Member of Executive Committee of Stonewall Links, Inc. since 1991,
Bulltown Rd., Elverton, PA
- -------------------------------------------- -------------------------------------------------------------------------------------
Richard G. Unruh** Director of Delaware International Advisers Ltd.; Executive Vice President/Chief
Investment Officer of Delaware Management Company (a series of Delaware Management
Business Trust); Executive Vice President and Chief Investment Officer, Equity of the
Registrant and each of the other 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 and Trustee of Delaware Management Business Trust
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company since
1989, 2040 Market Street, Philadelphia, PA; Board of Directors, Chairman of Finance
Committee, AAA Mid Atlantic, Inc. since 1989, 2040 Market Street, Philadelphia, PA;
Board of Directors, Metron, Inc. since 1995, 11911 Freedom Drive, Reston, VA
- -------------------------------------------- -------------------------------------------------------------------------------------
</TABLE>
* Business address of each is Third Floor, 80 Cheapside, London, England EC2V
6EE.
** Business address of each is 1818 Market Street, Philadelphia, PA 19103.
(c) Vantage Global Advisors, Inc. ("Vantage"), 630 Fifth Avenue, New York,
NY 10111, is an indirect, wholly owned subsidiary of Lincoln National
Corporation and an affiliate of Delaware Management Company, Inc. Vantage
provides investment advice to pension plans, endowments, insurance and
commingled products. Vantage serves as sub-investment adviser to the Social
Awareness Series (formerly named Quantum Series). The directors and officers of
Vantage are listed below. Unless otherwise indicated, the principal business
address of each person is 630 Fifth Avenue, New York, NY 10111.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------- -----------------------------------------------------------------------------------
Positions and Offices with Vantage Global Advisors, Inc. and its Principal
Name and Principal Business Address Affiliates and Other Positions and Offices Held
- ---------------------------------------------- -----------------------------------------------------------------------------------
<S> <C>
Roger Sayler(1) President and Chief Executive Officer of Vantage Global Advisors, Inc.
- ---------------------------------------------- -----------------------------------------------------------------------------------
*Dennis A. Blume Director of Vantage Global Advisors, Inc.
Vice President and Director of Lincoln Investment Management, Inc. since 1985, 200
East Berry Street, Fort Wayne, IN; Director of Lynch & Mayer, Inc. since 1996, 520
Madison Avenue, New York, NY
- ---------------------------------------------- -----------------------------------------------------------------------------------
Kevin S. Lee Vice President/Controller/Compliance Officer
- ---------------------------------------------- -----------------------------------------------------------------------------------
Christopher P. Harvey Vice President
- ---------------------------------------------- -----------------------------------------------------------------------------------
Yi Feng Yang Vice President
- ---------------------------------------------- -----------------------------------------------------------------------------------
Perry D. Keck Senior Vice President
- ---------------------------------------------- -----------------------------------------------------------------------------------
Enrique DeJesus Chang Senior Vice President
- ---------------------------------------------- -----------------------------------------------------------------------------------
**H. Thomas McMeekin Director of Vantage Global Advisers, Inc.
Executive Vice President of Delaware Management Business Trust; Executive Vice
President /Chief Investment Officer DMC-Fixed Income of Delaware Management Company
(a series of Delaware Management Business Trust); Executive Vice President of
Delaware Capital Management, Inc.; Executive Vice President and Director of
Delaware Management Holdings, Inc.; Executive Vice President and Chief Investment
Officer, Fixed Income of each Funds in the Delaware Investments family.
- ---------------------------------------------- -----------------------------------------------------------------------------------
Bruce D. Barton(2) Director of Vantage Global Advisors Inc.
President and Chief Executive Officer of Delaware Distributors, L.P. since 1996,
1818 Market Street, Philadelphia, PA
- ---------------------------------------------- -----------------------------------------------------------------------------------
</TABLE>
(1) MANAGING DIRECTOR/GLOBAL HEAD OF DERIVATIVES, J.P. Morgan Investment
Management prior to 1999.
(2) SENIOR VICE PRESIDENT AND DIRECTOR, Lincoln National Investment Companies
February 1996 to October 1996; VICE PRESIDENT, Lincoln National Corporation
May 1992 to October 1996.
* Business address is 200 East Berry Street Fort Wayne, IN 46802.
** Business address is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
(d) Lincoln Investment Management Company, Inc. serves as sub-adviser to
the REIT Series. Lincoln Investment Management Company, Inc. also serves as
sub-adviser to Delaware Pooled Trust, Inc. In addition, Lincoln Investment
Management Company, Inc. serves as investment manager to Lincoln National
Convertible Securities Fund, Inc., Lincoln National Income Fund, Inc., Lincoln
National Aggressive Growth Fund, Inc., Lincoln National Bond Fund, Inc., Lincoln
National Capital Appreciation Fund, Inc., Lincoln National Equity-Income Fund,
Inc., Lincoln National Global Asset Allocation Fund, Inc., Lincoln National
Growth and Income Fund, Inc., Lincoln National International Fund, Inc., Lincoln
National Managed Fund, Inc., Lincoln National Money Market Fund, Inc., Lincoln
National Social Awareness Fund, Inc., Lincoln National Special Opportunities
Fund, Inc. and to other clients. Lincoln Investment Management Company, Inc. is
registered with the Securities and Exchange Commission as an investment adviser
and has acted as an investment adviser to investment companies for over 40
years.
Information regarding the officers and directors of Lincoln Investment
Management Company, Inc. and the positions they held during the past two years
follows:
<TABLE>
<CAPTION>
Positions and Offices with Lincoln Investment Management Company, Inc. and its
Name and Principal Business Address Affiliates and Other Positions and Offices Held
- ----------------------------------------------- ----------------------------------------------------------------------------------
<S> <C>
***H. Thomas McMeekin President & Director of Lincoln Investment Management, Inc.; Executive Vice
President (previously Senior Vice President) and Chief Investment Officer of
Lincoln National Corporation; and Director of The Lincoln National Life
Insurance Company, Lincoln National Investments, Inc., Delaware Management
Holdings, Inc., Lincoln National Investment Companies, Inc. and Vantage Global
Advisors, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Dennis A. Blume Vice President of Lincoln Investment Management, Inc.; and Director of Vantage
Global Advisors, Inc
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Steven R. Brody Vice President and Director of Lincoln Investment Management, Inc.; Vice
President of The Lincoln National Life Insurance Company
- ----------------------------------------------- ----------------------------------------------------------------------------------
*David A. Berry Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Philip C. Byrde Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Patrick R. Chasey Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Janet C. Chrzan Vice President/Treasurer of Lincoln Investment Management, Inc., Lincoln
National Corporation, LNC Equity Sales Corporation; Treasurer of Lincoln
National Investments, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*David C. Fischer Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
Mark S. Forman Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Robert C. Franzino Vice President/Portfolio Manager of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Luc N. Girard Vice President and Actuary of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Walter M. Korinke Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*James M. Keefer Vice President and General Counsel and Director of Lincoln Investment
Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Howard R. Lodge Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*David J. Miller Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*David C. Patch Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Regina N. Rohrbacher Compliance Officer of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Cynthia A. Rose Corporate Secretary of Lincoln Investment Management, Inc. and Lincoln
National Life Insurance Company.
- ----------------------------------------------- ----------------------------------------------------------------------------------
*Jay M. Yentis Portfolio Manager/Second Vice President of Lincoln Investment Management, Inc.
- ----------------------------------------------- ----------------------------------------------------------------------------------
</TABLE>
* Business address is 200 East Berry Street, Fort Wayne, IN 46802.
** Business address is 1300 S. Clinton Street, Fort Wayne, IN 46802.
*** Business address is 1818 Market Street, Philadelphia, PA 19103.
Item 27. Principal Underwriters.
(a) Delaware Distributors, L.P. serves as principal underwriter for
all the mutual funds in the Delaware Investments family.
(b) Information with respect to each director, officer or partner of
principal underwriter:
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Business Address* Positions and Offices with Underwriter Positions and Offices with Registrant
- ----------------------------------------- -------------------------------------------- -----------------------------------------
<S> <C> <C>
Delaware Distributors, Inc. General Partner None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Delaware Investment Advisers Limited Partner None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Delaware Capital Management, Inc. Limited Partner None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Bruce D. Barton President and Chief Executive Officer None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
David K. Downes Executive Vice President/Chief Operating President and Chief Executive Officer/
Officer/Chief Financial Officer Chief Financial Officer/Chief Operating
Officer and Trustee
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Richard J. Flannery Executive Vice President/General Counsel Executive Vice President/General Counsel
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Diane M. Anderson Senior Vice President/Retirement Operations None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Michael P. Bishof Senior Vice President/Treasurer/ Senior Vice President/Treasurer
Investment Accounting
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Daniel J. Brooks III Senior Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Terrence P. Cunningham Senior Vice President/National Sales None
Director, Financial Institutions
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Joseph H. Hastings Senior Vice President/Treasurer/ Senior Vice President/Corporate
Corporate Controller Controller
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Joanne O. Hutcheson Senior Vice President/Human Resources Senior Vice President/Human Resources
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Bradley L. Kolstoe Senior Vice President/Western Division None
Sales, Independent Plannner and Insurance
Channel
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Richelle S. Maestro Senior Vice President/Deputy General Senior Vice President/Deputy General
Counsel/ Secretary Counsel/ Secretary
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Mac Macaulliffe Senior Vice President/Divisional None
Sales Manager
- ----------------------------------------- -------------------------------------------- -----------------------------------------
J. Chris Meyer Senior Vice President/Director, None
Product Management
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Eric E. Miller Senior Vice President/Deputy General Senior Vice President/Deputy General
Counsel/Assistant Secretary Counsel/Secretary
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Stephen C. Nell Senior Vice President/National None
Retirement Sales
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Henry W. Orvin Senior Vice President/Eastern Divisional None
Sales Manager
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Christopher H. Price Senior Vice President/Channel Manager, None
Insurance
- ----------------------------------------- -------------------------------------------- -----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Business Address* Positions and Offices with Underwriter Positions and Offices with Registrant
- ----------------------------------------- -------------------------------------------- -----------------------------------------
<S> <C> <C>
Thomas E. Sawyer Senior Vice President/Director, None
National Sales
- ----------------------------------------- -------------------------------------------- -----------------------------------------
James L. Shields Senior Vice President/Chief Information None
Officer
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Steven Sorenson Senior Vice President/National Director, None
Independent Planner Channel
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Richard P. Allen Vice President/Wholesaler, Midwest None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
David P. Anderson, Jr. Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Jeffrey H. Arcy Vice President/Wholesaler, South East None
Region
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Patrick A. Bearss Vice President/Wholesaler - Midwest None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Gabriella Bercze Vice President/Wholesaler, Financial None
Institutions
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Larry D. Bridwell Vice President/Financial Institutions None
Wholesaler
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Lisa O. Brinkley Vice President/Compliance Director Vice President/Compliance Director
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Terrance L. Bussard Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Daniel H. Carlson Vice President/Marketing Services None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Larry Carr Vice President/Variable Annuity Sales None
Manager
- ----------------------------------------- -------------------------------------------- -----------------------------------------
William S. Carroll Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Matthew Coldren Vice President/National Accounts None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Patrick A Connelly Vice President/Registered Investment None
Adviser Sales
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Jessie V. Emery Vice President/Marketing Communications None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Joel A. Ettinger Vice President/Taxation Vice President/Taxation
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Edward A. Foley Vice President/Marketing Communications None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Susan T. Friestedt Vice President/Retirement Services None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Douglas R. Glennon Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Darryl S. Grayson Vice President/Director, Internal Sales None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Rhonda J. Guido Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Ronald A. Haimowitz Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Business Address* Positions and Offices with Underwriter Positions and Offices with Registrant
- ----------------------------------------- -------------------------------------------- -----------------------------------------
<S> <C> <C>
Edward J. Hecker Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
John R. Herron Vice President/Variable Annuity Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Steven N. Horton Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Dinah J. Huntoon Vice President/Product Manager, Equities None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Karina J. Istvan Vice President/Strategic Planning Vice President/Strategic Planning
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Christopher L. Johnston Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Michael J. Jordan Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Carolyn Kelly Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Richard M. Koerner Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Ellen M. Krott Vice President/Marketing None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
John LeBoeuf Vice President/Independent Planner and None
Insurance Sales-East
- ----------------------------------------- -------------------------------------------- -----------------------------------------
SooHee Lee Vice President/Fixed Income & None
International Product Management
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Philip Y. Lin Vice President/Associate General Counsel/ Vice President/Associate General Counsel/
Assistant Secretary Assistant Secretary
- ----------------------------------------- -------------------------------------------- -----------------------------------------
John R. Logan Vice President/Wholesaler, Financial None
Institutions
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Michael D. Mabry Vice President/Associate General Counsel/ Vice President/Associate General Counsel/
Assistant Secretary Assistant Secretary
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Theodore T. Malone Vice President/ Independent Planner and None
Insurance Sales Wholesaler
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Debbie Marler Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Raymond G. McCarthy Vice President/National Accounts, None
Independent Planner & Insurance Channel
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Joanne C. McCranie Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Gregory J. McMillan Vice President/National Accounts None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Nathan W. Medin Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Scott L. Metzger Vice President/Business Development None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Jamie L. Meyer Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Roger J. Miller Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Business Address* Positions and Offices with Underwriter Positions and Offices with Registrant
- ----------------------------------------- -------------------------------------------- -----------------------------------------
<S> <C> <C>
Christopher W. Moore Vice President/Variable Annuity Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Andrew F. Morris Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Patrick L. Murphy Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Scott E. Naughton Vice President/Independent Planner & None
Insurance Wholesaler
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Julie Nusbaum Vice President/Wholesaler, Financial None
Institutions
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Julie A. Nye Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Daniel J. O'Brien Vice President/Insurance Products None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
David P. O'Connor Vice President/Associate General Vice President/Associate General
Counsel/Assistant Secretary Counsel/Assistant Secretary
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Joseph T. Owczarek Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Otis S. Page Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Mary Ellen Pernice-Fadden Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Eric Preus Vice President/Wrap Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Philip G. Rickards Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Laura E. Roman Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Robert A. Rosso Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Terri Lynn Sabby Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Richard Salus Vice President/Assistant Controller None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Linda D. Shulz Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Gordon E. Searles Vice President/Client Services None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Catherine A. Seklecki Vice President/Retirement Sales None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
John C. Shalloe Vice President/Wrap Fee Wholesaler, None
Western Region
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Edward B. Sheridan Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Kimberly Spangler Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Robert E. Stansbury Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Stephanie R. Szabo Vice President/Retirement Marketing None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Michael T. Taggart Vice President/Facilities and None
Administration Services
- ----------------------------------------- -------------------------------------------- -----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Business Address* Positions and Offices with Underwriter Positions and Offices with Registrant
- ----------------------------------------- -------------------------------------------- -----------------------------------------
<S> <C> <C>
Julia R. Vander Els Vice President/Retirement Plan None
Communications
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Wayne W. Wagner Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
John A. Wells Vice President/Marketing Technology None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Courtney S. West Vice President/Institutional Sales None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Andrew J. Whitaker Vice President/Wholesaler, Financial None
Institutions
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Scott Whitehouse Vice President/Wholesaler None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Wesley Williams Vice President/Wholesaler
- ----------------------------------------- -------------------------------------------- -----------------------------------------
Theodore V. Wood Vice President/Technical Systems Officer None
- ----------------------------------------- -------------------------------------------- -----------------------------------------
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
(c) Inapplicable.
Item 28. Location of Accounts and Records.
All accounts and records are maintained in Philadelphia at 1818 Market
Street, Philadelphia, PA 19103 or One Commerce Square, Philadelphia, PA
19103, in London at Third Floor, 80 Cheapside, London, England EC2V 6EE, in
New York at 630 Fifth Avenue, New York, NY 10111, or in Fort Wayne at 200
East Berry Street, Fort Wayne, IN 46802 or 1300 S. Clinton Street, Fort
Wayne, IN 46802.
Item 29. Management Services. None.
Item 30. Undertakings. Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, this Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
this City of Philadelphia, Commonwealth of Pennsylvania on this 17th day of
February 2000.
DELAWARE GROUP PREMIUM FUND
By /s/David K. Downes
--------------------------------
David K. Downes
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------- ---------------------------------------- -----------------
<S> <C> <C>
/s/ David K. Downes President/Chief Executive Officer/Chief February 17, 2000
- --------------------- Operating Officer/Chief Financial
David K. Downes Officer (Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer) and
Trustee
/s/ Wayne A. Stork Trustee February 17, 2000
- ---------------------
Wayne A. Stork
/s/ Walter P. Babich Trustee February 17, 2000
- ---------------------
Walter P. Babich
/s/ John H. Durham Trustee February 17, 2000
- ---------------------
John H. Durham
/s/ Anthony D. Knerr Trustee February 17, 2000
- ---------------------
Anthony D. Knerr
/s/ Ann R. Leven Trustee February 17, 2000
- ---------------------
Ann R. Leven
/s/ Thomas F. Madison Trustee February 17, 2000
- ---------------------
Thomas F. Madison
/s/ Charles E. Peck Trustee February 17, 2000
- ---------------------
Charles E. Peck
/s/ Jan L. Yeomans Trustee February 17, 2000
- ---------------------
Jan L. Yeomans
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Exhibits
to
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
EX-99.E Form of Distribution Agreement (2000)
EX-99.M Form of Plan under Rule 12b-1 (2000)
EX-99.N Form of 18f-3 Plan (2000)
<PAGE>
DELAWARE GROUP PREMIUM FUND
AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
This Amended and Restated Distribution Agreement (the
"Agreement") made as of this ___ day of ____________, 2000 by and between
DELAWARE GROUP PREMIUM FUND, a Delaware business trust (the "Fund"), on behalf
of the separately managed series of its shares, and classes of such series, set
forth in Appendix A hereto, as that Appendix A may be amended from time to time,
and DELAWARE DISTRIBUTORS, L.P. (the "Distributor"), a Delaware limited
partnership. Each series and class covered by this Agreement is referred to
herein individually as a "Series" or "Class," as appropriate.
WITNESSETH
WHEREAS, the Fund is an investment company regulated by
Federal and State regulatory bodies, which presently sells its shares solely to
separate accounts of life insurance companies for the purpose of funding
variable insurance products, and
WHEREAS, the Distributor is engaged in the business of
promoting the distribution of the securities of investment companies and, in
connection therewith and acting solely as agent for such investment companies
and not as principal, advertising, promoting, offering and selling their
securities to the public, and
WHEREAS, the Fund and the Distributor are presently parties to
a Distribution Agreement covering the Fund's various Series, and now wish to
amend and restate such agreement to reflect the Fund's adoption of a multiple
class distribution structure, and
WHEREAS, the Fund desires to enter into an amended and
restated Distribution Agreement with the Distributor on behalf of the Series,
pursuant to which the Distributor shall serve as the national distributor of
each Series' Class 1 and Class 2 shares, which classes may do business under
these or such other names as the Board of Trustees may designate from time to
time, on the terms and conditions set forth below,
NOW, THEREFORE, the parties hereto, intending to be legally
bound hereby, agree as follows:
1. The Fund hereby engages the Distributor to promote the distribution of
the Series' shares and, in connection therewith and as agent for the
Fund and not as principal, to advertise, promote, offer and sell the
Series' shares to the public.
2. (a) The Distributor agrees to serve as distributor of the Series'
shares and, as agent for the Fund and not as principal, to
advertise, promote and use its best efforts to sell the
Series' shares wherever their sale is legal, either through
dealers or otherwise, in such places and in such manner, not
inconsistent with the law and the provisions of this Agreement
and the Fund's Registration Statement under the Securities Act
of 1933, including the Prospectuses contained therein, and the
Statement of Additional Information contained therein as may
be mutually determined by the Fund and the Distributor from
time to time.
<PAGE>
(b) For the Class 1 shares, the Distributor will bear all costs of
financing any activity which is primarily intended to result
in the sale of that class of shares, including, but not
necessarily limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and
mailing of sales literature and distribution of that class of
shares.
(c) For the Class 2 shares, the Fund shall, in addition,
compensate the Distributor, certain insurance companies or
others for services as provided in the Distribution Plan as
adopted on behalf of the Class 2 shares, pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Plan"), a
copy of which as presently in force is attached hereto as
Exhibit "A."
3. (a) The Fund agrees to make available for sale by the Fund through
the Distributor all or such part of the authorized but
unissued shares of the Series as the Distributor shall require
from time to time, and except as provided in Paragraph 3(b)
hereof, the Fund will not sell Series' shares other than
through the efforts of the Distributor.
(b) The Fund reserves the right from time to time (1) to sell and
issue shares other than for cash; (2) to issue shares in
exchange for substantially all of the assets of any
corporation or trust, or in exchange of shares of any
corporation or trust; (3) to pay dividends to its shareholders
in the form of additional shares, or to pay dividends in cash
or in shares at the option of its shareholders, or to sell
shares to existing shareholders to the extent of dividends
payable from time to time in cash, or to split up or combine
its outstanding shares of beneficial interest; (4) to offer
shares for cash to its shareholders as a whole, by the use of
transferable rights or otherwise, and to sell and issue shares
pursuant to such offers; and (5) to act as its own distributor
in any jurisdiction in which the Distributor is not registered
as a broker-dealer.
4. The Fund warrants the following:
(a) The Fund is, or will be, a properly registered investment
company, and any and all Series' shares which it will sell
through the Distributor are, or will be, properly registered
with the Securities and Exchange Commission ("SEC").
(b) The provisions of this Agreement do not violate the terms of
any instrument by which the Fund is bound, nor do they violate
any law or regulation of any body having jurisdiction over the
Fund or its property.
5. (a) The Fund will supply to the Distributor a conformed copy of
the Registration Statement, all amendments thereto, all
exhibits, and each Prospectus and Statement of Additional
Information.
(b) The Fund will register or qualify the Series' shares for sale
in such states as is deemed desirable.
- 2 -
<PAGE>
(c) The Fund, without expense to the Distributor,
(1) will give and continue to give such financial
statements and other information as may be required
by the SEC or the proper public bodies of the states
in which the Series' shares may be qualified;
(2) from time to time, will furnish to the Distributor as
soon as reasonably practicable true copies of its
periodic reports to shareholders;
(3) will promptly advise the Distributor in person or by
telephone or telegraph, and promptly confirm such
advice in writing, (a) when any amendment or
supplement to the Registration Statement becomes
effective, (b) of any request by the SEC for
amendments or supplements to the Registration
Statement or the Prospectuses or for additional
information, and (c) of the issuance by the SEC of
any Stop Order suspending the effectiveness of the
Registration Statement, or the initiation of any
proceedings for that purpose;
(4) if at any time the SEC shall issue any Stop Order
suspending the effectiveness of the Registration
Statement, will make every reasonable effort to
obtain the lifting of such order at the earliest
possible moment;
(5) will from time to time, use its best effort to keep a
sufficient supply of Series' shares authorized, any
increases being subject to the approval of
shareholders as may be required;
(6) before filing any further amendment to the
Registration Statement or to any Prospectus, will
furnish to the Distributor copies of the proposed
amendment and will not, at any time, whether before
or after the effective date of the Registration
Statement, file any amendment to the Registration
Statement or supplement to any Prospectus of which
the Distributor shall not previously have been
advised or to which the Distributor shall reasonably
object (based upon the accuracy or completeness
thereof) in writing;
(7) will continue to make available to its shareholders
(and forward copies to the Distributor) of such
periodic, interim and any other reports as are now,
or as hereafter may be, required by the provisions of
the Investment Company Act of 1940; and
(8) will, for the purpose of computing the offering price
of Series' shares, advise the Distributor within one
hour after the close of the New York Stock Exchange
(or as soon as practicable thereafter) on each
business day upon which the New York Stock Exchange
may be open of the net asset value per share of the
Series' shares of beneficial interest outstanding,
determined in accordance with any applicable
provisions of law and the provisions of the governing
documents, as amended, of the Fund as of the close of
business on such business day. In the event that
prices are to be calculated more than once daily, the
Fund will promptly advise the Distributor of the time
of each calculation and the price computed at each
such time.
- 3 -
<PAGE>
6. The Distributor agrees to submit to the Fund, prior to its use, the
form of all sales literature proposed to be generally disseminated by
or for the Distributor, all advertisements proposed to be used by the
Distributor, all sales literature or advertisements prepared by or for
the Distributor for such dissemination or for use by others in
connection with the sale of the Series' shares, and the form of
dealers' sales contract the Distributor intends to use in connection
with sales of the Series' shares. The Distributor also agrees that the
Distributor will submit such sales literature and advertisements to the
NASD, SEC or other regulatory agency as from time to time may be
appropriate, considering practices then current in the industry. The
Distributor agrees not to use such form of dealers' sales contract or
to use or to permit others to use such sales literature or
advertisements without the written consent of the Fund if any
regulatory agency expresses objection thereto or if the Fund delivers
to the Distributor a written objection thereto.
7. The purchase price of each share sold hereunder shall be the offering
price per share mutually agreed upon by the parties hereto, and as
described in the Fund's Prospectuses, as amended from time to time,
determined in accordance with any applicable provision of law, the
provisions of its governing documents and the Conduct Rules promulgated
by NASD Regulation, Inc.
8. The responsibility of the Distributor hereunder shall be limited to the
promotion of sales of Series' shares. The Distributor shall undertake
to promote such sales solely as agent of the Fund, and shall not
purchase or sell such shares as principal. Orders for Series' shares
and payment for such orders shall be directed to the Fund's agent,
Delaware Service Company, Inc. for acceptance on behalf of the Fund.
The Distributor is not empowered to approve orders for sales of Series'
shares or accept payment for such orders. Sales of Series' shares shall
be deemed to be made when and where accepted by Delaware Service
Company, Inc. on behalf of the Fund.
9. With respect to the apportionment of costs between the Fund and the
Distributor of activities with which both are concerned, the following
will apply:
(a) The Fund and the Distributor will cooperate in preparing the
Registration Statements, the Prospectuses, the Statement of
Additional Information, and all amendments, supplements and
replacements thereto. The Fund will pay all costs incurred in
the preparation of the Fund's Registration Statement,
including typesetting, the costs incurred in printing and
mailing Prospectuses and Annual, Semi-Annual and other
financial reports to its own shareholders and fees and
expenses of counsel and accountants.
(b) The Distributor will pay the costs incurred in printing and
mailing copies of Prospectuses to prospective investors.
(c) The Distributor will pay advertising and promotional expenses,
including the costs of literature sent to prospective
investors.
(d) The Fund will pay the costs and fees incurred in registering
or qualifying the Series' shares with the various states and
with the SEC.
- 4 -
<PAGE>
(e) The Distributor will pay the costs of any additional copies of
Fund financial and other reports and other Fund literature
supplied to the Distributor by the Fund for sales promotion
purposes.
10. The Distributor may engage in other business, provided such other
business does not interfere with the performance by the Distributor of
its obligations under this Agreement.
11. The Fund agrees to indemnify, defend and hold harmless from the assets
of the Series the Distributor and each person, if any, who controls the
Distributor within the meaning of Section 15 of the Securities Act of
1933, from and against any and all losses, damages, or liabilities to
which, jointly or severally, the Distributor or such controlling person
may become subject, insofar as the losses, damages, or liabilities
arise out of the performance of its duties hereunder except that the
Fund shall not be liable for indemnification of the Distributor or any
controlling person thereof for any liability to the Fund or its
security holders to which they would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance
of their duties under this Agreement.
12. Copies of financial reports, Registration Statements and Prospectuses,
as well as demands, notices, requests, consents, waivers, and other
communications in writing which it may be necessary or desirable for
either party to deliver or furnish to the other will be duly delivered
or furnished, if delivered to such party at its address shown below
during regular business hours, or if sent to that party by registered
mail or by prepaid telegram filed with an office or with an agent of
Western Union or another nationally recognized telegraph service, in
all cases within the time or times herein prescribed, addressed to the
recipient at 1818 Market Street, Philadelphia, Pennsylvania 19103, or
at such other address as the Fund or the Distributor may designate in
writing and furnish to the other.
13. This Agreement shall not be assigned, as that term is defined in the
Investment Company Act of 1940, by the Distributor and shall terminate
automatically in the event of its attempted assignment by the
Distributor. This Agreement shall not be assigned by the Fund without
the written consent of the Distributor signed by its duly authorized
officers and delivered to the Fund. Except as specifically provided in
the indemnification provision contained in Paragraph 11 herein, this
Agreement and all conditions and provisions hereof are for the sole and
exclusive benefit of the parties hereto and their legal successors and
no express or implied provision of this Agreement is intended or shall
be construed to give any person other than the Parties hereto and their
legal successors any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provisions herein contained.
14. (a) This Agreement shall remain in force as to any Series for a
period of two years from the date hereof and from year to year
thereafter, but only so long as such continuance is
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 Fund who are not parties hereto or interested
persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval.
- 5 -
<PAGE>
(b) The Distributor may terminate this Agreement on written notice
to the Fund at any time in case the effectiveness of the
Registration Statement shall be suspended, or in case Stop
Order proceedings are initiated by the SEC in respect of the
Registration Statement and such proceedings are not withdrawn
or terminated within thirty days. The Distributor may also
terminate this Agreement at any time by giving the Fund
written notice of its intention to terminate the Agreement at
the expiration of three months from the date of delivery of
such written notice of intention to the Fund.
(c) The Fund may terminate this Agreement at any time on at least
thirty days prior written notice to the Distributor (1) if
proceedings are commenced by the Distributor or any of its
partners for the Distributor's liquidation or dissolution or
the winding up of the Distributor's affairs; (2) if a receiver
or trustee of the Distributor or any of its property is
appointed and such appointment is not vacated within thirty
days thereafter; (3) if, due to any action by or before any
court or any federal or state commission, regulatory body, or
administrative agency or other governmental body, the
Distributor shall be prevented from selling securities in the
United States or because of any action or conduct on the
Distributor's part, sales of the shares are not qualified for
sale. The Fund may also terminate this Agreement at any time
upon prior written notice to the Distributor of its intention
to so terminate at the expiration of three months from the
date of the delivery of such written notice to the
Distributor.
15. The validity, interpretation and construction of this Agreement, and of
each part hereof, will be governed by the laws of the Commonwealth of
Pennsylvania.
16. In the event any provision of this Agreement is determined to be void
or unenforceable, such determination shall not affect the remainder of
the Agreement, which shall continue to be in force.
DELAWARE DISTRIBUTORS, L.P.
By: DELAWARE DISTRIBUTORS, INC.,
General Partner
By:
Name:
Title:
Attest:
Name:
Title:
DELAWARE GROUP PREMIUM FUND
By:
Name:
Title:
Attest:
Name:
Title:
- 6 -
<PAGE>
APPENDIX A
Delaware Group Premium Fund
DISTRIBUTION AGREEMENT
Select Growth Series (formerly Aggressive Growth Series)
Select Growth Series - Class 1
Select Growth Series - Class 2
Capital Reserves Series
Capital Reserves Series - Class 1
Capital Reserves Series - Class 2
Cash Reserve Series
Cash Reserve Series - Class 1
Cash Reserve Series - Class 2
Convertible Securities Series
Convertible Securities Series - Class 1
Convertible Securities Series - Class 2
Balanced Series (formerly Delaware Balanced Series)
Balanced Series - Class 1
Balanced Series - Class 2
Growth Opportunities Series (formerly DelCap Series)
Growth Opportunities Series - Class 1
Growth Opportunities Series - Class 2
High Yield Series (formerly Delchester Series)
High Yield Series - Class 1
High Yield Series - Class 2
Devon Series
Devon Series - Class 1
Devon Series - Class 2
Emerging Markets Series
Emerging Markets Series - Class 1
Emerging Markets Series - Class 2
Global Bond Series
Global Bond Series - Class 1
Global Bond Series - Class 2
- 7 -
<PAGE>
Growth and Income Series (formerly Decatur Total Return Series)
Growth and Income Series - Class 1
Growth and Income Series - Class 2
International Equity Series
International Equity Series - Class 1
International Equity Series - Class 2
REIT Series
REIT Series - Class 1
REIT Series - Class 2
Select Growth Series
Select Growth Series - Class 1
Select Growth Series - Class 2
Small Cap Value Series (formerly Value Series)
Small Cap Value Series - Class 1
Small Cap Value Series - Class 2
Social Awareness Series (formerly Quantum Series)
Social Awareness Series - Class 1
Social Awareness Series - Class 2
Strategic Income Series
Strategic Income Series - Class 1
Strategic Income Series - Class 2
Trend Series
Trend Series - Class 1
Trend Series - Class 2
U.S. Growth Series
U.S. Growth Series - Class 1
U.S. Growth Series - Class 2
- 8 -
<PAGE>
[FORM OF 12b-1 PLAN FOR CLASS 2 SHARES]
Delaware Group Premium Fund
12b-1 Plan
Class 2
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule l2b-l under the Investment Company Act of l940, as amended (the "Act")
by Delaware Group Premium Fund (the "Fund"), on behalf of the separately managed
series of its shares, and classes of such series, set forth in Appendix A
hereto, as that Appendix A may be amended from time to time. Each series and
class covered by this Plan is referred to herein individually as a "Series" or
"Class," as appropriate.
The Plan has been approved by a majority of the Board of Trustees,
including a majority of the Trustees who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Plan or in any agreements related thereto ("non-interested Trustees"), cast in
person at a meeting called for the purpose of voting on such Plan. Such approval
by the Trustees included a determination that in the exercise of reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit each Class and its shareholders.
References to shareholders in this Plan shall include contract holders of any
variable insurance products that invest indirectly in the Fund.
The Fund is an open-end management investment company organized as a
business trust under the laws of the State of Delaware, and is authorized to
issue different series and classes of shares of beneficial interest. The Fund
offers such shares to certain life insurance companies ("Insurance Companies")
for allocation to certain of their separate accounts established for the purpose
of funding variable annuity contracts and variable life insurance policies
(collectively, "Variable Contracts"). Either Delaware Management Company (a
series of Delaware Management Business Trust), or Delaware International
Advisers Ltd. serves as each Series' investment adviser and manager pursuant to
an Investment Management Agreement. Delaware Distributors, L.P. (the
"Distributor") is the principal underwriter and national distributor for each
Series' shares, including shares of the corresponding Classes pursuant to a
Distribution Agreement between the Distributor and the Fund ("Distribution
Agreement").
1
<PAGE>
The Plan provides that:
l. The Fund shall pay to the Distributor, the Insurance Companies, or
others monthly fees not to exceed 0.30% (3/10 of l%) per annum of each Series'
average daily net assets represented by shares of the corresponding Class (the
"Maximum Amount") as may be determined by the Fund's Board of Trustees from time
to time.
2. Each Fund shall pay the Distributor, the Insurance Companies or
others for activities primarily intended to sell Class 2 shares or Variable
Contracts offering Class 2 shares. Payments made under the Plan may be used for,
among other things, the printing of prospectuses and reports used for sales
purposes, preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses. Payments made under
the Plan may also be used to pay Insurance Companies, dealers or others for,
among other things, service fees as defined under NASD Regulation, Inc. rules,
furnishing personal services or such other enhanced services as the Fund or a
Variable Contract may require, or maintaining customer accounts and records.
3. The officers of the Fund, together with the Distributor, shall
furnish to the Board of Trustees of the Fund, for their review, on a quarterly
basis, a written report of the amounts expended under the Plan and the purposes
for which such expenditures were made.
4. This Plan shall take effect as to any Series or Class at such time
as the Distributor shall notify the Fund in writing of the commencement of the
Plan (the "Commencement Date"); thereafter, the Plan shall continue in effect
for a period of more than one year from the Commencement Date only so long as
such continuance is specifically approved at least annually by a vote of the
Board of Trustees of the Fund, and of the non-interested Trustees, cast in
person at a meeting called for the purpose of voting on such Plan.
2
<PAGE>
5. (a) The Plan may be terminated as to any Class at any time by
vote of a majority of the non-interested Trustees or by vote of the variable
insurance contract owners who indirectly control a majority of the outstanding
voting securities of the Class.
(b) The Plan may not be amended to increase materially the
amount to be spent for distribution pursuant to paragraph l thereof without
approval by the vote of the variable insurance contract owners who indirectly
control a majority of the outstanding voting securities of the affected Class.
6. All material amendments to this Plan shall be approved by the
non-interested Trustees in the manner described in paragraph 5 above.
7. So long as the Plan is in effect, the selection and nomination
of the Fund's non-interested Trustees shall be committed to the discretion of
such non-interested Trustees.
8. The definitions contained in Sections 2(a)(19) and 2(a)(42) of the
Act shall govern the meaning of "interested person(s)" and "vote of a majority
of the outstanding voting securities," respectively, for the purposes of this
Plan.
This Plan shall take effect on the Commencement Date, as previously defined.
3
<PAGE>
APPENDIX A
Delaware Group Premium Fund
12b-1 Plan for Class 2
Select Growth Series (formerly Aggressive Growth Series)
Select Growth Series - Class 2
Capital Reserves Series
Capital Reserves Series - Class 2
Cash Reserve Series
Cash Reserve Series - Class 2
Convertible Securities Series
Convertible Securities Series - Class 2
Balanced Series (formerly Delaware Balanced Series)
Balanced Series - Class 2
Growth Opportunities Series (formerly DelCap Series)
Growth Opportunities Series - Class 2
High Yield Series (formerly Delchester Series)
High Yield Series - Class 2
Devon Series
Devon Series - Class 2
Emerging Markets Series
Emerging Markets Series - Class 2
Global Bond Series
Global Bond Series - Class 2
Growth and Income Series (formerly Decatur Total Return Series)
Growth and Income Series - Class 2
International Equity Series
International Equity Series - Class 2
REIT Series
REIT Series - Class 2
Select Growth Series
Select Growth Series - Class 2
Small Cap Value Series (formerly Value Series)
Small Cap Value Series - Class 2
Social Awareness Series (formerly Quantum Series)
Social Awareness Series - Class 2
Strategic Income Series
Strategic Income Series - Class 2
Trend Series
Trend Series - Class 2
U.S. Growth Series
U.S. Growth Series - Class 2
4
<PAGE>
Delaware Group Premium Fund
Multiple Class Plan Pursuant to Rule 18f-3
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Trustees of Delaware Group Premium Fund (the "Fund"), including a
majority of the Trustees who are not interested persons of the Fund, pursuant to
Rule 18f-3 under the Investment Company Act of 1940, as amended (the "Act"). The
Board has determined that the Plan, including the allocation of expenses, is in
the best interests of the Fund as a whole, each series of shares offered by the
Fund (individually and collectively the "Series"), and each class of shares
offered by the Series. The Plan sets forth the provisions relating to the
establishment of multiple classes of shares for each Series. To the extent that
a subject matter set forth in this Plan is covered by the Fund's Agreement and
Declaration of Trust or By-Laws, such governing documents will control in the
event of any inconsistencies with descriptions contained in this Plan.
CLASSES
1. Each Series of the Fund shall offer two classes of shares to be referred
to herein as Class 1 and Class 2. Appendix A to this Plan, as that Appendix may
be amended from time to time, identifies and provides the names of the Series
(and classes thereof) that are covered by this Plan.
2. All shares of the Fund shall be sold solely to the separate accounts of
certain life insurance companies ("Insurance Companies") for the purpose of
funding certain variable annuity and variable life insurance contracts
("Variable Contracts") and to such other investors as are determined to be
eligible to purchase such shares.
SALES CHARGES
3. In accordance with the Rule 12b-1 Plan adopted by the Fund, on behalf of
the Class 2 shares of each Series (the "Class 2 12b-1 Plan"), the Fund shall pay
to Delaware Distributors, L.P. (the "Distributor"), Insurance Companies, or
others a monthly fee not to exceed 0.30% per annum of each Series' average daily
net assets represented by its Class 2 shares, as may be determined by the Fund's
Board of Trustees from time to time.
4. The Class 2 12b-1 Plan may be used to pay the Distributor, Insurance
Companies or others to assist in the promotion and distribution of Class 2
shares or Variable Contracts offering Class 2 shares. Payments made under the
Class 2 12b-1 Plan may be used for, among other things, the printing of
prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution-related
expenses. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things, service fees as defined
under NASD Regulation, Inc. rules, furnishing personal services or such other
enhanced services as the Fund or a Variable Contract may require, or maintaining
customer accounts and records.
1
<PAGE>
5. The Fund has not adopted any Rule 12b-1 Plan for the Class 1 shares of
the Series of the Fund.
6. Class 1 and Class 2 shares are sold without the imposition of any
front-end or contingent deferred sales charges (although the Variable Contracts
are).
ALLOCATION OF EXPENSES
7. The Fund shall allocate to each class of shares of a Series any fees and
expenses incurred by the Fund in connection with the distribution or servicing
of such class of shares under a Rule 12b-1 Plan, if any, adopted for such class.
In addition, the Fund reserves the right, subject to approval by the Fund's
Board of Trustees, to allocate fees and expenses of the following nature to a
particular class of shares of a Series (to the extent that such fees and
expenses actually vary among each class of shares or vary by types of services
provided to each class of shares of the Series):
(i) transfer agency and other recordkeeping costs;
(ii) Securities and Exchange Commission and blue sky registration
or qualification fees;
(iii) printing and postage expenses related to printing and
distributing class specific materials, such as shareholder
reports, prospectuses and proxies to current shareholders of a
particular class or to regulatory authorities with respect to
such class of shares;
(iv) audit or accounting fees or expenses relating solely to such
class;
(v) the expenses of administrative personnel and services as
required to support the shareholders of such class;
(vi) litigation or other legal expenses relating solely to such
class of shares;
(vii) Trustees' fees and expenses incurred as a result of issues
relating solely to such class of shares; and
(viii) other expenses subsequently identified and determined to be
properly allocated to such class of shares.
8. Except for any expenses that are allocated to a particular class as
described in the preceding paragraph, all expenses incurred by a Series will be
allocated to each class of shares of such Series on the basis of the net asset
value of each such class in relation to the net asset value of the Series.
2
<PAGE>
ALLOCATION OF INCOME AND GAINS
9. Income and realized and unrealized capital gains and losses of a Series
will be allocated to each class of shares of such Series on the basis of the net
asset value of each such class in relation to the net asset value of the Series.
CONVERSIONS AND EXCHANGES
10. There are currently no conversion features associated with the Class 1
or Class 2 shares.
11. Shares of either class may be exchangeable for shares of the same class
of another Series of the Fund according to the terms and conditions related to
transfer privileges set forth in the Variable Contract and/or Fund prospectuses,
as they may be amended from time to time.
OTHER PROVISIONS
12. Each class will vote separately with respect to any Rule 12b-1 Plan
related to that class.
13. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the Act and otherwise, will monitor each Series for the
existence of any material conflicts between the interests of all the classes of
shares offered by such Series. The Trustees, including a majority of the
Trustees who are not interested persons of the Fund, shall take such action as
is reasonably necessary to eliminate any such conflict that may develop. The
Fund's investment managers and the Distributor shall be responsible for alerting
the Board to any material conflicts that arise.
14. All material amendments to this Plan must be approved by a majority of
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund.
Effective as of _________________, ______
3
<PAGE>
APPENDIX A
Delaware Group Premium Fund
Multiple Class Plan Pursuant to Rule 18f-3
Select Growth Series (formerly Aggressive Growth Series)
Select Growth Series - Class 1
Select Growth Series - Class 2
Convertible Securities Series
Convertible Securities Series - Class 1
Convertible Securities Series - Class 2
Balanced Series (formerly Delaware Balanced Series)
Balanced Series - Class 1
Balanced Series - Class 2
Growth Opportunities Series (formerly DelCap Series)
Growth Opportunities Series - Class 1
Growth Opportunities Series - Class 2
High Yield Series (formerly Delchester Series)
High Yield Series - Class 1
High Yield Series - Class 2
Devon Series
Devon Series - Class 1
Devon Series - Class 2
Emerging Markets Series
Emerging Markets Series - Class 1
Emerging Markets Series - Class 2
Global Bond Series
Global Bond Series - Class 1
Global Bond Series - Class 2
Growth and Income Series (formerly Decatur Total Return Series)
Growth and Income Series - Class 1
Growth and Income Series - Class 2
International Equity Series
International Equity Series - Class 1
International Equity Series - Class 2
4
<PAGE>
REIT Series
REIT Series - Class 1
REIT Series - Class 2
Select Growth Series
Select Growth Series - Class 1
Select Growth Series - Class 2
Small Cap Value Series (formerly Value Series)
Small Cap Value Series - Class 1
Small Cap Value Series - Class 2
Social Awareness Series (formerly Quantum Series)
Social Awareness Series - Class 1
Social Awareness Series - Class 2
Strategic Income Series
Strategic Income Series - Class 1
Strategic Income Series - Class 2
Trend Series
Trend Series - Class 1
Trend Series - Class 2
U.S. Growth Series
U.S. Growth Series - Class 1
U.S. Growth Series - Class 2
5
