Delaware Group Income Funds (the “Trust”) is organized as a Delaware statutory trust and offers four Series: Delaware Corporate Bond Fund, Delaware Delchester Fund, Delaware Extended Duration Bond Fund and Delaware High-Yield Opportunities Fund. These financial statements and the related notes pertain to Delaware Delchester Fund (the “Fund”). The Trust is an open-end investment company. The Fund is considered diversified under the Investment Company Act of 1940, as amended, and offers Class A, Class B, Class C, Class R and Institutional Class shares. Class A shares are sold with a front-end sales charge of up to 4.50%. Class A share purchases of $1,000,000 or more will incur a contingent deferred sales charge (CDSC) of 1% if redeemed during the first year and 0.50% during the second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial advisor a commission on the purchase of those shares. Class B shares are sold with a CDSC that declines from 4% to zero depending upon the period of time the shares are held. Class B shares will automatically convert to Class A shares on a quarterly basis approximately eight years after purchase. Class C shares are sold with a CDSC of 1%, if redeemed during the first 12 months. Class R and Institutional Class shares are not subject to a sales charge and are offered for sale exclusively to certain eligible investors. Effective at the close of business on May 31, 2007, the Fund no longer accepts new purchases of Class B shares other than dividend reinvestments and certain permitted exchanges. As of July 31, 2007, Class R has not commenced operations.
The investment objective of the Fund is to seek total return and, as a secondary objective, high current income.
The following accounting policies are in accordance with U.S. generally accepted accounting principles and are consistently followed by the Fund.
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 “Fair Value Measurements” (Statement 157). Statement 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. Statement 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. Statement 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of Statement 157 to have an impact on the amounts reported in the financial statements.
On July 13, 2006, the FASB released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. Recent Securities and Exchange Commission (SEC) guidance allows implementing FIN 48 in the Fund’s net asset value calculations as late as the Fund’s last net asset value calculation in the first required financial statement reporting period. As a result, the Fund will incorporate FIN 48 in its semiannual report on January 31, 2008. Although the Fund’s tax positions are currently being evaluated, management does not expect the adoption of FIN 48 to have a material impact on the Fund’s financial statements.
1. Significant Accounting Policies (continued)
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other — Expenses directly attributable to the Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated amongst such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Discounts and premiums are amortized to interest income over the lives of the respective securities. Realized gains (losses) on paydowns of mortgage- and asset-backed securities are classified as interest income. The Fund declares dividends daily from net investment income and pays such dividends monthly and declares and pays distributions from net realized gain on investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash balances are maintained, which are used to offset custody fees. The expense paid under this arrangement is included in custodian fees on the Statement of operations with the corresponding expense offset shown as “expense paid indirectly.”
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee which is calculated daily at the rate of 0.65% on the first $500 million of average daily net assets of the Fund, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on average daily net assets in excess of $2.5 billion.
Effective December 1, 2006, DMC has contractually agreed to waive that portion, if any, of its management fee and reimburse the Fund to the extent necessary to ensure that annual operating expense, exclusive of taxes, interest, brokerage fees, 12b-1 plan expenses, certain insurance costs and non-routine expenses or costs, including but not limited to, those relating to reorganization, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings and liquidations, do not exceed 0.87% of average daily net assets of the Fund through November 30, 2007. Prior to December 1, 2006, DMC had contractually agreed to waive its fees in order to prevent such expenses from exceeding 0.91% of the average daily net assets of the Fund.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting, administration, dividend disbursing and transfer agent services. The Fund pays DSC a monthly fee computed at the annual rate of 0.04% of the Fund’s average daily net assets for accounting and administration services. The Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.30% of the average daily net assets of the Class A shares, 1.00% of the average daily net assets of the Class B and C shares, and 0.60% of the average daily net assets of Class R shares. Institutional Class shares pay no distribution and service expenses. DDLP has contracted to limit 12b-1 fees through November 30, 2007 in order to prevent 12b-1 fees of Class R shares from exceeding 0.50% of average daily net assets.
The Board of Trustees has adopted a formula for calculating 12b-1 plan fees for the Fund’s Class A shares that went into effect on June 1, 1992. The total 12b-1 fees to be paid by Class A shareholders of the Fund will be the sum of 0.10% of the average daily net assets representing shares that were acquired prior to June 1, 1992 and 0.30% of the average daily net assets representing shares that were acquired on or after June 1, 1992. All Class A shareholders will bear 12b-1 fees at the same rate, the blended rate based upon the allocation of the 0.10% and 0.30% rates described above.
At July 31, 2007, the Fund had liabilities payable to affiliates as follows:
| Investment management fee payable to DMC | $164,141 |
| Dividend disbursing, transfer agent, accounting | |
| and administration fees and other expenses | |
| payable to DSC | 51,290 |
| Distribution fee payable to DDLP | 84,935 |
| Other expenses payable to DMC and affiliates* | 9,494 |
| *DMC, as part of its administrative services, pays operating expenses on behalf of the Fund and is reimbursed on a periodic basis. Such expenses include items such as printing of shareholder reports, fees for audit, legal and tax services, registration fees and trustees’ fees. |
As provided in the investment management agreement, the Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to the Fund by DMC and/or its affiliates’ employees.
For the year ended July 31, 2007, the Fund was charged $14,760 for internal legal and tax services provided by DMC and/or its affiliates’ employees. For the year ended July 31, 2007, DDLP earned $24,144 for commissions on sales of the Fund’s Class A shares. For the year ended July 31, 2007, DDLP received gross CDSC commissions of $94, $22,533, and $975 on redemption of the Fund’s Class A, Class B, and Class C shares, respectively, and these commissions were entirely used to offset up-front commissions previously paid by DDLP to broker-dealers on sales of those shares.
Trustees’ fees and benefits include expenses accrued by the Fund for each Trustee’s retainer, per meeting fees and retirement benefits. Independent Trustees with over five years of uninterrupted service were eligible to participate in a retirement plan that provided for the payment of benefits upon retirement. The amount of the retirement benefit was determined based on factors set forth in the plan, including the number of years of service. On November 16, 2006, the Board of Trustees of the Fund unanimously voted to terminate the retirement plan. Payments equal to the net present value of the earned benefits were made in 2007 to those independent Trustees so entitled. The retirement benefit payout for the Fund was $36,574.
(continues) 21
Notes to financial statements
Delaware Delchester Fund
2. Investment Management, Administration Agreements and Other Transactions with Affiliates (continued)
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust. These officers and trustees are paid no compensation by the Fund.
3. Investments
For the year ended July 31, 2007, the Fund made purchases of $448,783,428 and sales of $464,877,846 of investment securities other than short-term investments.
At July 31, 2007, the cost of investments for federal income tax purposes was $275,163,676. At July 31, 2007, net unrealized depreciation was $8,194,661, of which $6,153,744 related to unrealized appreciation of investments and $14,348,405 related to unrealized depreciation of investments.
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. generally accepted accounting principles. Additionally, net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. The tax character of dividends and distributions paid during the years ended July 31, 2007 and 2006 was as follows:
| | Year Ended |
| | 7/31/07 | | 7/31/06 |
| Ordinary income | $ | 23,647,804 | | $ | 22,831,013 |
5. Components of Net Assets on a Tax Basis
As of July 31, 2007, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 909,241,958 | |
| Undistributed ordinary income | | 708,853 | |
| Capital loss carryforwards | | (632,013,200 | ) |
| Unrealized depreciation of investments | | (8,194,661 | ) |
| Net assets | $ | 269,742,950 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales, interest accrual on defaulted bonds, tax treatment of market discount and premium on debt instruments and the treatment of credit default swap contracts.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of market discount and premium on certain debt instruments, paydowns gain (loss) on mortgage- and asset-backed securities and credit default swap contracts. Results of operations and net assets were not affected by these reclassifications. For the year ended July 31, 2007, the Fund recorded the following reclassifications:
| Undistributed net investment income | | $824,147 | |
| Accumulated net realized gain (loss) | | (824,147 | ) |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $6,349,309 was utilized in 2007. Capital loss carryforwards remaining at July 31, 2007 will expire as follows: $116,446,115 expires in 2008, $284,053,994 expires in 2009, $211,481,773 expires in 2010 and $20,031,318 expires in 2011.
6. Capital Shares
Transactions in capital shares were as follows:
| | Year Ended |
| | 7/31/07 | | 7/31/06 |
| Shares sold: | | | | | |
| Class A | 15,627,110 | | | 19,221,892 | |
| Class B | 1,001,258 | | | 1,023,016 | |
| Class C | 2,565,471 | | | 2,266,941 | |
| Institutional Class | 6,685,058 | | | 1,561,744 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | |
| Class A | 3,349,709 | | | 3,156,106 | |
| Class B | 253,925 | | | 390,108 | |
| Class C | 213,403 | | | 199,497 | |
| Institutional Class | 587,386 | | | 377,850 | |
| | 30,283,320 | | | 28,197,154 | |
| Shares repurchased: | | | | | |
| Class A | (23,248,153 | ) | | (34,377,137 | ) |
| Class B | (4,627,919 | ) | | (6,578,407 | ) |
| Class C | (1,340,765 | ) | | (3,473,709 | ) |
| Institutional Class | (5,526,749 | ) | | (2,230,435 | ) |
| | (34,743,586 | ) | | (46,659,688 | ) |
| Net decrease | (4,460,266 | ) | | (18,462,534 | ) |
For the years ended July 31, 2007 and 2006, 2,596,219 Class B shares were converted to 2,599,975 Class A shares valued at $8,843,193 and 2,331,339 Class B shares were converted to 2,334,775 Class A shares valued at $7,633,584, respectively. The respective amounts are included in Class B redemptions and Class A subscriptions in the table above and the Statements of changes in net assets.
7. Line of Credit
The Fund, along with certain other funds in the Delaware Investments® Family of Funds (the “Participants”), participates in a $225,000,000 revolving line of credit facility to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. The Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The Fund had no amounts outstanding as of July 31, 2007, or at any time during the year then ended.
8. Swap Contracts
The Fund may enter into interest rate swap contracts, index swap contracts and credit default swap (“CDS”) contracts in accordance with its investment objectives. The Fund may use interest rate swaps to adjust the Fund’s sensitivity to interest rates or to hedge against changes in interest rates. Index swaps may be used to gain exposure to markets that the Fund invests in, such as the corporate bond market. The Fund may also use index swaps as a substitute for futures or options contracts if such contracts are
22
8. Swap Contracts (continued)
not directly available to the Fund on favorable terms. The Fund may enter into CDS contracts in order to hedge against a credit event, to enhance total return or to gain exposure to certain securities or markets.
An interest rate swap involves payments received by the Fund from another party based on a variable or floating interest rate, in return for making payments based on a fixed interest rate. An interest rate swap can also work in reverse with the Fund receiving payments based on a fixed interest rate and making payments based on a variable or floating interest rate. Interest rate swaps may be used to adjust the Fund’s sensitivity to interest rates or to hedge against changes in interest rates. Periodic payments on such contracts are accrued daily and recorded as unrealized appreciation/depreciation on swap contracts. Upon periodic payment/ receipt or termination of the contract, such amounts are recorded as realized gains or losses on swap contracts.
Index swaps involve commitments to pay interest in exchange for a market linked return based on a notional amount. To the extent the total return of the security, instrument or basket of instruments underlying the transaction exceeds the offsetting interest obligation, the Fund will receive a payment from the counterparty. To the extent the total return of the security, instrument or basket of instruments underlying the transaction falls short of the offsetting interest obligation, the Fund will make a payment to the counterparty. The change in value of swap contracts outstanding, if any, is recorded as unrealized appreciation or depreciation daily. A realized gain or loss is recorded on maturity or termination of the swap contract.
A CDS contract is a risk-transfer instrument through which one party (the “purchaser of protection”) transfers to another party (the “seller of protection”) the financial risk of a Credit Event (as defined in the CDS agreement), as it relates to a particular reference security or basket of securities (such as an index). In exchange for the protection offered by the seller of protection, the purchaser of protection agrees to pay the seller of protection a periodic amount at a stated rate that is applied to the notional amount of the CDS contract. In addition, an upfront payment may be made or received by the Fund in connection with an unwinding or assignment of a CDS contract. Upon the occurrence of a Credit Event, the seller of protection would pay the par (or other agreed-upon) value of the referenced security (or basket of securities) to the counterparty.
During the year ended July 31, 2007, the Fund entered into CDS contracts as a purchaser and seller of protection. Periodic payments on such contracts are accrued daily and recorded as unrealized gains or losses on swap contracts. Upon payment, such amounts are recorded as realized gains or losses on swap contracts. Upfront payments made or received in connection with CDS contracts are amortized over the expected life of the CDS contracts as realized losses (gains) on swap contracts. The change in value of CDS contracts is recorded as unrealized appreciation or depreciation daily. A realized gain or loss is recorded upon a Credit Event or the maturity or termination of the agreement.
Credit default swaps may involve greater risks than if the Fund had invested in the referenced obligation directly. Credit default swaps are subject to general market risk, liquidity risk, counterparty risk and credit risk. If the Fund enters into a CDS contract as a purchaser of protection and no credit event occurs, its exposure is limited to the periodic payments previously made to the counterparty.
Because there is no organized market for swap contracts, the value of open swaps may differ from that which would be realized in the event the Fund terminated its position in the agreement. Risks of entering into these contracts include the potential inability of the counterparty to meet the terms of the contracts. This type of risk is generally limited to the amount of favorable movement in the value of the underlying security, instrument, or basket of instruments, if any, at the day of default. Risks also arise from potential losses from adverse market movements and such losses could exceed the unrealized amounts shown on the Statement of net assets.
9. Securities Lending
The Fund, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with Mellon Bank N.A (“Mellon”). Initial security loans made pursuant to the Lending Agreement are required to be secured by U.S. government obligations and/or cash collateral not less than 102% of the market value of the securities issued in the United States. With respect to each loan, if the aggregate market value of the collateral held on any business day is less than the aggregate market value of the securities which are the subject of such loan, the borrower will be notified to provide additional collateral not less than the applicable collateral requirements. Cash collateral received is invested in a collective investment vehicle (“Collective Trust”) established by Mellon for the purpose of investment on behalf of clients participating in its securities lending programs. The Collective Trust invests in fixed income securities, with a weighted average maturity not to exceed 90 days, rated in one of the top two tiers by Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. or repurchase agreements collateralized by such securities. However, in the event of default or bankruptcy by the lending agent, realization and/or retention of the collateral may be subject to legal proceedings. In the event the borrower fails to return loaned securities and the collateral received is insufficient to cover the value of the loaned securities and provided such collateral shortfall is not the result of investment losses, the lending agent has agreed to pay the amount of the shortfall to the Fund, or at the discretion of the lending agent, replace the loaned securities. The Fund continues to record dividends on the securities loaned and is subject to change in value of the securities loaned that may occur during the term of the loan. The Fund has the right under the Lending Agreement to recover the securities from the borrower on demand. The security lending agent and the borrower retain a portion of the earnings from the collateral investments. The Fund records security lending income net of such allocation. At July 31, 2007, the Fund had no securities on loan.
10. Credit and Market Risk
The Fund invests a portion of its assets in high yield fixed income securities, which carry ratings of BB or lower by Standard & Poor’s Ratings Group and/or Ba or lower by Moody’s Investors Service, Inc. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
(continues) 23
Notes to financial statements
Delaware Delchester Fund
10. Credit and Market Risk (continued)
The Fund may invest up to 15% of its total assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board of Trustees has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund’s limitation on investments in illiquid assets. Rule 144A and illiquid securities have been identified on the Statement of Net Assets.
11. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
12. Termination of New Purchases of Class B Shares
As of the close of business on May 31, 2007, each Fund in the Delaware Investments® Family of Funds no longer accepts new or subsequent investments in Class B shares of the funds, other than a reinvestment of dividends or capital gains or permitted exchanges. Existing shareholders of Class B shares may continue to hold their Class B shares, reinvest dividends into Class B shares, and exchange their Class B shares of one Delaware Investments® Fund (each a Fund) for Class B shares of another Fund, as permitted by existing exchange privileges. Existing Class B shareholders wishing to make subsequent purchases in a Fund’s shares will be permitted to invest in other classes of the Fund, subject to that class’ pricing structure and eligibility requirements, if any.
For Class B shares outstanding as of May 31, 2007 and Class B shares acquired upon reinvestment of dividends or capital gains, all Class B share attributes, including the CDSC schedules, conversion to Class A schedule, and distribution and service (12b-1) fees, will continue in their current form. However, as of the close of business on May 31, 2007, reinvestment of redeemed shares with respect to Class B shares (which, as described in the prospectus, permits you to reinvest within 12 months of selling your shares and have any CDSC you paid on such shares credited back to your account) has been discontinued. In addition, because the Fund’s or its distributor’s ability to assess certain sales charges and fees is dependent on the sale of new shares, the termination of new purchases of Class B shares could ultimately lead to the elimination and/or reduction of such sales charges and fees. The Fund may not be able to provide shareholders with advance notice of the reduction in these sales charges and fees. You will be notified via a Prospectus Supplement if there are any changes to any attributes, sales charges, or fees.
13. Change of Custodian
On July 26, 2007, Mellon Bank, N.A., One Mellon Center, Pittsburgh, PA 15285, became the Fund’s Custodian. Prior to July 26, 2007, JPMorgan Chase served as the Fund’s Custodian.
14. Tax Information (Unaudited)
The information set forth below is for the Fund’s fiscal year as required by federal laws. Shareholders, however, must report distributions on a calendar year basis for income tax purposes, which may include distributions for portions of two fiscal years of a fund. Accordingly, the information needed by shareholders for income tax purposes will be sent to them in January of each year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2007, the Fund designates distributions paid during the year as follows:
| (A) | | (B) | | |
| Long-Term Capital | | Ordinary Income | | Total |
| Gains Distributions | | Distributions* | | Distributions |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) |
| — | | 100% | | 100% |
(A) and (B) are based on a percentage of the Fund’s total distributions.
| * | For the fiscal year ended July 31, 2007, certain interest income paid by the Fund, determined to be Qualified Interest Income may be subject to relief from U.S. withholding for foreign shareholders, as provided by the American Jobs Creation Act of 2004. For the fiscal year ended July 31, 2007, the Fund has designated maximum distributions of Qualified Interest Income of $23,647,804. |
24
Report of independent
registered public accounting firm
To the Shareholders and Board of Trustees
Delaware Group Income Funds – Delaware Delchester Fund
We have audited the accompanying statement of net assets and statement of assets and liabilities of Delaware Delchester Fund (one of the series constituting Delaware Group Income Funds) (the “Fund”) as of July 31, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Delaware Delchester Fund series of Delaware Group Income Funds at July 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Philadelphia, Pennsylvania
September 24, 2007
25
Other Fund information (unaudited)
Delaware Delchester Fund
Board Consideration of Delaware Delchester Fund Investment Advisory Agreement
At a meeting held on May 16-17, 2007 (Annual Meeting), the Board of Trustees (Board), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for the Delaware Delchester Fund (Fund). In making its decision, the Board considered information furnished throughout the year at regular Board meetings, including reports detailing Fund performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contracts. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (DMC) included materials provided by DMC and its affiliates (Delaware Investments) concerning, among other things, the level of services provided to the Fund, the costs of such services to the Fund, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Meeting, the Board separately received and reviewed in mid-January 2007 independent historical and comparative reports prepared by Lipper Inc. (Lipper), an independent statistical compilation organization. The Lipper reports compared the Fund’s investment performance and expenses with those of other comparable mutual funds. The Board requested and received certain information regarding management’s policy with respect to advisory fee levels and its philosophy with respect to breakpoints; the structure of portfolio manager compensation; the investment manager’s profitability; and any constraints or limitations on the availability of securities in certain investment styles which might inhibit DMC’s ability to fully invest in accordance with Fund policies.
In considering information relating to the approval of the Fund’s advisory agreement, the independent Trustees received assistance and advice from and met separately with independent counsel. While attention was given to all information furnished, the following discusses under separate headings the primary factors taken into account by the Board in its contract renewal considerations.
Nature, Extent And Quality of Service. Consideration was given to the services provided by Delaware Investments to the Fund and its shareholders. In reviewing the nature, extent and quality of services, the Board emphasized reports furnished to it throughout the year at regular Board Meetings covering matters such as the relative performance of the Fund, compliance of portfolio managers with the investment policies, strategies and restrictions for the Fund, the compliance of management personnel with the Code of Ethics adopted throughout the Delaware Investments® Family of Funds complex and the adherence to fair value pricing procedures as established by the Board. The Board noted that it was pleased with the current staffing of the Fund’s investment advisor and the emphasis placed on research in the investment process. Favorable consideration was given to DMC’s efforts to maintain, and in some instances increase, financial and human resources committed to fund matters. The Board also considered the transfer agent and shareholder services provided to Fund shareholders by Delaware Investments’ affiliate, Delaware Service Company, Inc. (DSC), noting DSC’s commitment to maintain a high level of service and the continuing expenditures by Delaware Investments to improve the delivery of shareholder services. During 2006, management conducted extensive research into alternatives that could further improve the quality and cost of delivering investment accounting services to the Fund. The Board noted the extent of benefits provided to Fund shareholders for being part of the Delaware Investments Family of Funds, including the privilege to exchange fund investments between the same class of shares without a sales charge, the ability to reinvest Fund dividends into other funds and the privilege to combine holdings in other funds to obtain a reduced sales charge. The Board was satisfied with the nature, extent and quality of the overall services provided by Delaware Investments.
Investment Performance. The Board considered the investment performance of DMC and the Fund. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular weight was given to the Lipper reports furnished for the Annual Meeting. The Lipper reports prepared for the Fund showed the investment performance of its Class A shares in comparison to a group of similar funds as selected by Lipper (Performance Universe). A fund with the best performance ranked first, and a fund with the poorest ranked last. The highest/best performing 25% of funds in the Performance Universe make up the first quartile; the next 25% - the second quartile; the next 25% - the third quartile; and the poorest/worst performing 25% of funds in the Performance Universe make up the fourth quartile. Comparative annualized performance for the Fund was shown for the past one-, three-, five- and 10-year periods ended December 31, 2006. The Board also considered comparative annualized performance for the Fund for the same periods ended October 31, 2006. The performance comparison presented below is based upon the December 31, 2006 information. The Board noted its objective that the Fund’s performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Fund and the Board’s view of such performance.
The Performance Universe for the Fund consisted of the Fund and all retail and institutional high current yield funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one-, three- and five-year periods was in the first quartile of its Performance Universe. The report further showed that the Fund’s total return for the 10-year period was in the fourth quartile. The Board was satisfied with the significant improvement in recent years.
26
Board Consideration of Delaware Delchester Fund Investment Advisory Agreement (continued)
Comparative Expenses. The Board considered expense comparison data for the Delaware Investments® Family of Funds as of October 31, 2006. Management provided the Board with information on pricing levels and fee structures for the Fund. The Board focused particularly on the comparative analysis of the effective management fees and total expense ratios of the Fund and the effective management fees and expense ratios of a group of similar funds as selected by Lipper (Expense Group). In reviewing comparative costs, the Fund’s contractual management fee and the actual management fee incurred by the Fund were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Fund) and actual management fees (as reported by each fund) of other funds within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Fund’s total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Class A shares and compared total expenses including 12b-1 and non-12b-1 service fees. The Board also considered fees paid to Delaware Investments for non-management services. The Board noted its objective to limit the Fund’s total expense ratio to an acceptable range as compared to the median of the Expense Group. The following paragraph summarizes the expense results for the Fund and the Board’s view of such expenses.
The expense comparisons for the Fund showed that its actual management fee was in the quartile with the lowest expenses of its Expense Group and its total expenses were in the quartile with the second highest expenses of its Expense Group. The Board gave favorable consideration to the Fund’s management fee, but noted that the Fund’s total expenses were not in line with the Board’s objective. In evaluating the total expenses, the Board considered waivers in place through November 2007 and recent initiatives implemented by management, such as the outsourcing of certain transfer agency services, creating an opportunity for a reduction in expenses. The Board was satisfied with management’s efforts to improve the Fund’s total expense ratio and bring it in line with the Board’s objective.
Management Profitability. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Fund. In this respect, the Board reviewed the Investment Management Profitability Analysis that addressed the overall profitability of Delaware Investments’ business in providing management and other services to each of the individual funds and the Delaware Investments Family of Funds as a whole. Specific attention was given to the methodology followed in allocating costs for the purpose of determining profitability. Management stated that the level of profits of Delaware Investments, to a certain extent, reflected operational cost savings and efficiencies initiated by Delaware Investments. The Board considered Delaware Investments’ efforts to improve services provided to fund shareholders and to meet additional regulatory and compliance requirements resulting from recent Securities and Exchange Commission initiatives. The Board also considered the extent to which Delaware Investments might derive ancillary benefits from fund operations, including the potential for procuring additional business as a result of the prestige and visibility associated with its role as service provider to the Delaware Investments Family of Funds and the benefits from allocation of fund brokerage to improve trading efficiencies. The Board found that the management fees were reasonable in light of the services rendered and the level of profitability of Delaware Investments.
Economies of Scale. The Trustees considered whether economies of scale are realized by Delaware Investments as the Fund’s assets increase and the extent to which any economies of scale are reflected in the level of management fees charged. The Trustees took into account the standardized advisory fee pricing and structure, approved by the Board and shareholders and again reviewed by the Board this year, which includes breakpoints. Breakpoints in the advisory fee occur when the advisory fee rate is reduced on assets in excess of specified levels. This results in a lower advisory fee than would otherwise be the case on all assets when those asset levels specified are exceeded. The Board noted that the fee under the Fund’s management contract fell within the standard structure. Although the Fund has not reached a size at which it can take advantage of breakpoints, the Board recognized that the fee was structured so that when the Fund grows, economies of scale may be shared.
27
Board of trustees/directors
and officers addendum
Delaware Investments® Family of Funds
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | | Number of | |
| | | | | Portfolios in Fund | Other |
| Name, | | | | Complex Overseen | Directorships |
| Address, | Position(s) | Length of | Principal Occupation(s) | by Trustee | Held by |
| and Birth Date | Held with Fund(s) | Time Served | During Past 5 Years | or Officer | Trustee or Officer |
| Interested Trustees | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 82 | Director — |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Kaydon Corp. |
| Philadelphia, PA | Chief Executive | | at different times at | | |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| | Trustee | Chief Executive Officer | | | |
| April 14, 1963 | | since August 1, 2006 | | | |
| Independent Trustees | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 82 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (April 2007–Present) |
| | | | Morgan Stanley & Co. | | |
| October 4, 1947 | | | (January 1984–March 2004) | | |
| John A. Fry | Trustee | Since | President — | 82 | Director — |
| 2005 Market Street | | January 2001 | Franklin & Marshall College | | Community Health |
| Philadelphia, PA | | | (June 2002–Present) | | Systems |
| 19103 | | | | | |
| | | | Executive Vice President — | | Director — |
| May 28, 1960 | | | University of Pennsylvania | | Allied Barton |
| | | | (April 1995–June 2002) | | Security Holdings |
| Anthony D. Knerr | Trustee | Since | Founder and Managing Director — | 82 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| |
| December 7, 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Chief Investment Officer — | 82 | None |
| 2005 Market Street | | March 2005 | Assurant, Inc. | | |
| Philadelphia, PA | | | (Insurance) | | |
| 19103 | | | (2002–2004) | | |
| |
| June 24, 1947 | | | | | |
| Ann R. Leven | Trustee | Since | Consultant — | 82 | Director and |
| 2005 Market Street | | October 1989 | ARL Associates | | Audit Committee |
| Philadelphia, PA | | | (Financial Planning) | | Chairperson — Andy |
| 19103 | | | (1983–Present) | | Warhol Foundation |
| |
| November 1, 1940 | | | | | Director and Audit |
| | | | | | Committee Chair — |
| | | | | | Systemax, Inc. |
28
| | | | | Number of | |
| | | | | Portfolios in Fund | Other |
| Name, | | | | Complex Overseen | Directorships |
| Address, | Position(s) | Length of | Principal Occupation(s) | by Trustee | Held by |
| and Birth Date | Held with Fund(s) | Time Served | During Past 5 Years | or Officer | Trustee or Officer |
| Independent Trustees (continued) | | | | |
| Thomas F. Madison | Trustee | Since | President and Chief | 82 | Director — |
| 2005 Market Street | | May 19973 | Executive Officer — | | CenterPoint Energy |
| Philadelphia, PA | | | MLM Partners, Inc. | | |
| 19103 | | | (Small Business Investing | | Director and Audit |
| | | | and Consulting) | | Committee Chair — |
| February 25, 1936 | | | (January 1993–Present) | | Digital River, Inc. |
| |
| | | | | | Director and Audit |
| | | | | | Committee Member — |
| | | | | | Rimage |
| | | | | | Corporation |
| |
| | | | | | Director — Valmont |
| | | | | | Industries, Inc. |
| Janet L. Yeomans | Trustee | Since | Treasurer | 82 | None |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | |
| Philadelphia, PA | | | Vice President — Mergers & Acquisitions | | |
| 19103 | | | (January 2003–January 2006), and | | |
| | | Vice President | | |
| | | (July 1995–January 2003) | | |
| | | | 3M Corporation | | |
| July 31, 1948 | | | | | |
| | | | Ms. Yeomans has held | | |
| | | | various management positions | | |
| | | | at 3M Corporation since 1983. | | |
| J. Richard Zecher | Trustee | Since | Founder — | 82 | Director and Audit |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | | Director and Audit |
| July 3, 1940 | | | Founder — | | Committee Member — |
| | | | Sutton Asset Management | | Oxigene, Inc. |
| | | | (Hedge Fund) | | |
| | | | (September 1996–Present) | | |
| Officers | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 82 | None4 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | | October 2005 | since 2000. | | |
| December 2, 1963 | | | | | |
| David P. O’Connor | Senior Vice | Senior Vice President, | David P. O’Connor has served in | 82 | None4 |
| 2005 Market Street | President, | General Counsel, and | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Chief Legal Officer | capacities at different times | | |
| 19103 | and Chief | since | at Delaware Investments. | | |
| | Legal Officer | October 2005 | | | |
| February 21, 1966 | | | | | |
| John J. O’Connor | Senior Vice President | Treasurer | John J. O’Connor has served in | 82 | None4 |
| 2005 Market Street | and Treasurer | since | various executive capacities | | |
| Philadelphia, PA | | February 2005 | at different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| June 16, 1957 | | | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 82 | None4 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 1, 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| | Officer | | | | |
| October 4, 1963 | | | | | |
| 1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
| 2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
| 3 In 1997, several funds managed by Voyageur Fund Managers, Inc. (the “Voyageur Funds”) were incorporated into the Delaware Investments Family of Funds. Mr. Madison served as a director of the Voyageur Funds from 1993 until 1997. |
| 4 David F. Connor, David P. O’Connor, John J. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. John J. O’Connor also serves in a similar capacity for Lincoln Variable Insurance Products Trust, an investment company that has several portfolios sub-advised by the registrant’s investment advisor and whose investment advisor is an affiliated person of the registrant’s investment advisor. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
29
About the organization
This annual report is for the information of Delaware Delchester Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware Delchester Fund and the Delaware Investments® Performance Update for the most recently completed calendar quarter. The prospectus sets forth details about charges, expenses, investment objectives, and operating policies of the investment company. You should read the prospectus carefully before you invest. The figures in this report represent past results that are not a guarantee of future results. The return and principal value of an investment in the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
| Board of trustees Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA Thomas L. Bennett
Private Investor
Rosemont, PA John A. Fry
President
Franklin & Marshall College
Lancaster, PA Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA Ann R. Leven
Consultant
ARL Associates
New York, NY Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ | Affiliated officers David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA David P. O’Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA John J. O’Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA | Contact information Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA National distributor
Delaware Distributors, L.P.
Philadelphia, PA Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094 For shareholders
800 523-1918 For securities dealers and financial
institutions representatives only
800 362-7500 Web site
www.delawareinvestments.com |
Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries.The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; and (ii) on the Commission’s Web site at http://www.sec.gov. In addition, a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities and the Fund’s Schedule of Investments are available without charge on the Fund’s Web site at http://www.delawareinvestments.com. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C.; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Fund’s Web site at http://www.delawareinvestments.com; and (ii) on the Commission’s Web site at http://www.sec.gov.
30
Get shareholder reports and prospectuses online instead of in the mail.
> Visit www.delawareinvestments.com/edelivery
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Register for Account Access today! Please visit us at www.delawareinvestments.com, select Individual Investors, and click Account Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through Friday from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any questions.
| (2179) | Printed in the USA |
| AR-024 [7/07] CGI 9/07 | MF-07-08-038 PO12156 |
| | |
| | Annual Report | Delaware |
| | | High-Yield Opportunities |
| | Fund |
| | July 31, 2007 |
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Fixed income mutual fund
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Table of contents
| | > Portfolio management review | 1 |
| > Performance summary | 4 |
| > Disclosure of Fund expenses | 6 |
| > Sector allocation and credit quality breakdown | 7 |
| > Statement of net assets | 8 |
| > Statement of assets and liabilities | 14 |
| > Statement of operations | 15 |
| > Statements of changes in net assets | 16 |
| > Financial highlights | 17 |
| > Notes to financial statements | 22 |
| > Report of independent registered public accounting firm | 27 |
| > Other Fund information | 28 |
| > Board of trustees/directors and officers addendum | 30 |
| > About the organization | 32 |
Funds are not FDIC insured and are not guaranteed. It is possible to lose the principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series of Delaware Management
Business Trust, which is a registered investment advisor.
© 2007 Delaware Distributors, L.P.
Portfolio management review
Delaware High-Yield Opportunities Fund
August 24, 2007
The managers of Delaware High-Yield Opportunities Fund provided the answers to the questions below as a review of the Fund’s activities for the fiscal year that ended July 31, 2007. Please see page 2 to learn more about the portfolio managers.
Q: You assumed portfolio management responsibilities for the Fund in May 2007. Have the Fund’s goals and strategies changed?
A: The Fund’s goals and strategies have not changed. We invest primarily in high-yielding corporate bonds rated BB or lower by Standard and Poor’s, or similarly rated by another national recognized statistical rating organization, such as Moody’s Investors Services or Fitch. High-yield bonds or “junk” bonds involve greater risks than investment-grade bonds. We may also invest in unrated bonds if we judge them to be of comparable quality. Unrated bonds may be more speculative in nature than rated bonds. We will select bonds primarily based on the income potential they offer and on our evaluation of the bond issuer’s ability to make interest payments and repay principal.
We may also invest in equity securities, foreign government securities, and corporate bonds of foreign issuers. Though not expected to be a significant component of our strategy under normal circumstances, we may also invest in investment-grade corporate bonds, U.S. government securities, and high quality commercial paper.
Q: What was the investment climate like for high yield fixed income investments during the fiscal year ended July 31, 2007?
A: During the fiscal year, the fundamentals of the economy were relatively strong. Although economic growth softened in the fourth quarter of 2006 and the first quarter of 2007, the economy grew at a 4.0% annual rate in the second quarter of 2007. Unemployment remained relatively low, consumer spending was fairly strong, and we continued to see solid economic growth overseas. While the Federal Reserve continued to voice concerns about inflation, the central bank kept the Federal funds rate — the rate banks charge each other for overnight loans — at 5.25%. This environment provided a positive backdrop for high yield bonds; and for most of the period, investors favored the attractive yields that lower-quality high yield securities provided.
Over the last few months of the period, concerns about rising defaults in subprime mortgages — loans made to less creditworthy borrowers — began to dominate the financial markets. As homeowners defaulted on their mortgages, investors began selling the securities that back these mortgages and generally lost confidence in the riskiest parts of the fixed income market. As a result, investors sold their lower quality holdings and moved into higher quality assets.
Q: How did the Fund perform over the fiscal year?
A: Delaware High-Yield Opportunities Fund delivered positive returns for the fiscal year ended July 31, 2007. Class A shares returned 7.82% at net asset value and 2.98% at the maximum offer price (both figures represent all distributions reinvested). By comparison the Bear Stearns High Yield Index, which serves as the Fund’s benchmark, gained 6.73% during the same period. The Fund’s peers in the Lipper High Current Yield Funds category produced a gain of 6.21%.
For complete, annualized performance for Delaware High-Yield Opportunities Fund, please see the table on page 4.
Q: What broad strategies influenced Fund performance during the fiscal year?
A: As in the past, security selection was the primary focus of our investment approach. We used our in-depth research to uncover what we consider to be attractively valued securities throughout the high yield universe, emphasizing company-specific characteristics and influences, rather than following a theme or making sector “bets.” Over the year, we generally favored B-rated credits over higher-quality credits, given the additional yield compensation for the risk accepted. Higher-quality high yield names have also tended to trade aggressively. In some cases, well inside or on top of investment-grade
The views expressed are current as of the date of this report and are subject to change.
(continues) 1
Portfolio management review
Delaware High-Yield Opportunities Fund
August 24, 2007
levels and thus high yield was prone to some interest rate sensitivity. Until recently, refinancing activity was high and we therefore employed a strategy in the portfolio that focused on “yield-to-call opportunities,” situations where a bond is being priced by the market based on its call date, or the date at which the issuer can redeem the bond early.
We believe these efforts helped the Fund outperform the benchmark at net asset value for the one-year period ended July 31, 2007.
Our investments in telecommunications companies were among the best performers of the year, with the bonds of Cricket Communications, Qwest Communications, and Charter Communications adding substantially to returns. Hexion Specialty Chemicals and Tube City IMS Corporation, which provides raw materials to steel companies, also benefited results for the period. Conversely, Compression Poly, Finova Group, and UGS Capital Corporation were disappointing. Consequently, these holdings were sold before the end of the fiscal year.
Q: At the end of the fiscal year, how was the Fund positioned?
A: The fixed income markets became volatile in the last weeks of the fiscal period. As questions emerged about the backlog of high yield loans and bonds, there was concern in the market about where demand might come from. We believe we were able to anticipate this volatility. We reduced exposure late in 2006 to positions that we believe were the most susceptible to the market’s repricing of risk. This included subordinated debt and holdings that may be “underfollowed” by analysts.
Currently, we generally remain cautious in our investment outlook and have a limited appetite for increased exposure or risk in the face of market volatility in July. We anticipate continuing to examine economic indicators, the equity markets and the quality and structure of new deals before considering a bullish posture again.
Fund managers
Thomas H. Chow, CFA
Senior Vice President, Senior Portfolio Manager
Mr. Chow is a member of the firm’s taxable fixed income portfolio management team with primary responsibility for portfolio construction and strategic asset allocation. His experience includes significant exposure to asset liability management strategies and credit risk opportunities. Prior to joining Delaware Investments in 2001, he was a trader of high grade and high yield securities, and was involved in the portfolio management of collateralized bond obligations (CBOs) and insurance portfolios at SunAmerica/AIG from 1997 to 2001. Before that, he was an analyst, trader, and portfolio manager at Conseco Capital Management from 1989 to 1997. Mr. Chow received a bachelor’s degree in business analysis from Indiana University, and he is a Fellow of Life Management Institute.
Kevin P. Loome, CFA
Senior Vice President, Senior Portfolio Manager, Head of High Yield Investments
Mr. Loome is head of the High Yield fixed income team, responsible for portfolio construction and strategic asset allocation of all high yield fixed income assets. Prior to joining Delaware Investments in August 2007, Mr. Loome spent 11 years at T. Rowe Price, starting as an analyst and leaving the firm as a portfolio manager. He began his career with Morgan Stanley as a corporate finance analyst in the New York and London offices. Mr. Loome received his bachelor’s degree in commerce from the University of Virginia and earned an MBA from the Tuck School of Business at Dartmouth.
2
Fixed Income Glossary
Basis point: 1/100 of a percentage point, or 0.01%. Basis points are often used to measure changes in, or differences between, yields.
Bond: A debt security, like an IOU, issued by a company, municipality, or government agency. In return for lending money to the issuer, a bond buyer generally receives fixed periodic interest payments and repayment of the loan amount on a specified maturity date.
Bond ratings: Evaluations of creditworthiness by independent agencies such as Moody’s, Standard & Poor’s, and Fitch. Rating may range from Aaa or AAA (highest quality) to D (lowest quality). Bonds rated Baa/BBB or better are considered investment grade. Bonds rated Ba/BB or lower are noninvestment grade and commonly known as junk bonds, or high yield bonds.
Callable bond: A bond that may be redeemed at the request of the issuer prior to the stated maturity date.
Coupon rate: The interest rate that is paid to the investor over the life of the bond.
Derivative: A security with a value correlated to the performance of an underlying investment.
Duration: A measurement of a fixed income investment’s sensitivity to changes in interest rates. The larger the number, the greater the likely price change for a given change in interest rates.
Fed funds rate: The percentage of interest that banks charge to lend money to each other. The rate, which fluctuates, is a good indicator of general interest rate trends.
Maturity: The length of time until a bond issuer must repay the underlying loan principal to the bondholder.
Par value: The face value of a bond. It is also referred to as the principle value. When a bond reaches maturity, the holder receives this value, regardless of what was paid for the bond.
Pre-refunded bonds: Bonds that have been refinanced and are secured by U.S. Treasury bonds, held in an escrow account.
Tax-exempt bond: Exempt from federal or state income tax, state taxes, or local property tax.
Treasury yield curve: This is a curve on a graph that depicts the difference between short and long-term bond yields across the duration spectrum. It is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. It is also used to assess broad market trends, as well as potential changes in economic output and growth.
3
Performance summary
Delaware High-Yield Opportunities Fund
The performance data quoted represent past performance; past performance does not guarantee future results. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Please obtain the performance data for the most recent month end by calling 800 523-1918 or visiting our Web site at www.delawareinvestments.com/performance. Current performance may be lower or higher than the performance data quoted.
You should consider the investment objectives, risks, charges, and expenses of the investment company carefully before investing. The Delaware High-Yield Opportunities Fund prospectus contains this and other important information about the investment company. Please request a prospectus through your financial advisor or by calling 800 523-1918 or visiting our Web site at www.delawareinvestments.com. Read the prospectus carefully before you invest or send money.
A rise or fall in interest rates can have a significant impact on bond prices and the net asset value (NAV) of the Fund. Funds that invest in bonds may lose their value as interest rates rise, and an investor may lose principal.
Effective May 24, 2007, portfolio management responsibilities for the Fund changed. Current managers are listed in this report. Please see the prospectus, as supplemented, which contains important information regarding the investment manager for the Fund.
| Fund Performance | | | | |
| Average annual total returns | | | | |
| Through July 31, 2007 | 1 year | 5 years | 10 years | Lifetime |
| Class A (Est. Dec. 30, 1996) | | | | |
| Excluding sales charge | +7.82% | +13.31% | +6.34% | +7.01% |
| Including sales charge | +2.98% | +12.28% | +5.85% | +6.54% |
| | | | | |
| Class B (Est. Feb. 17, 1998) | | | | |
| Excluding sales charge | +7.08% | +12.54% | N/A | +4.89% |
| Including sales charge | +3.08% | +12.35% | N/A | +4.89% |
| | | | | |
| Class C (Est. Feb. 17, 1998) | | | | |
| Excluding sales charge | +7.07% | +12.53% | N/A | +4.77% |
| Including sales charge | +6.07% | +12.53% | N/A | +4.77% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted below, and they are subject to change. Performance for Class B and C shares, excluding sales charges, assumes either that contingent deferred sales charges did not apply or that the investment was not redeemed.
An expense limitation was in effect for all classes during the periods shown in the Fund Performance chart and in the Performance of a $10,000 Investment chart on the next page. Performance would have been lower had the expense limitation not been in effect.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares are sold with a maximum front-end sales charge of up to 4.50% and have an annual distribution and service fee of up to 0.30% of average daily net assets. Class B shares are sold with a contingent deferred sales charge that declines from 4.00% to zero depending on the period of time the shares are held. Class B shares will automatically convert to Class A shares on a quarterly basis approximately eight years after purchase. They are also subject to an annual distribution and service fee of 1.00% of average daily net assets. Effective at the close of business on May 31, 2007, no new or subsequent investments are allowed in Class B shares of the Delaware Investments® Family of Funds, except through a reinvestment of dividends or capital gains or permitted exchanges. Please see the prospectus supplement for additional information.
Class C shares are sold with a contingent deferred sales charge of 1.00% if redeemed during the first 12 months. They are also subject to an annual distribution and service fee of 1.00% of average daily net assets.
Please see the fee table in the prospectus and your financial professional for a more complete explanation of sales charges.
Management has contracted to reimburse expenses and/or waive its management fees through Nov. 30, 2007, as described in the most recent prospectus. The most recent prospectus designated the Fund’s net expense ratios for Class A, B, C, R, and Institutional Class shares as 1.13%, 1.83%, 1.83%, 1.33%, and 0.83%, respectively. Total operating expenses for Class A, B, C, R, and Institutional Class shares were designated as 1.29%, 1.99%, 1.99%, 1.59%, and 0.99%, respectively.
The average annual total return for the 1-year, 3-year, and lifetime periods ended July 31, 2007, for the Delaware High-Yield Opportunities Fund Class R shares was 7.59%, 8.09%, and 9.66%, respectively. Class R shares were first made available on June 2, 2003, and are available only for certain retirement plan products. They are sold without a sales charge and have an annual distribution and service fee of up to 0.60% of average daily net assets, but such fee is currently subject to a contractual cap of 0.50% of average daily net assets through Nov. 30, 2007.
4
The average annual total returns for the 1-year, 5-year, 10-year, and lifetime periods ended July 31, 2007, for Delaware High-Yield Opportunities Fund Institutional Class shares were 8.15%, 13.66%, 6.65%, and 7.30%, respectively. Institutional Class shares were first made available Dec. 30, 1996, and are available without sales or asset-based distribution charges only to certain eligible institutional accounts.
The performance table on the previous page and the graph below do not reflect the deduction of taxes the shareholder would pay on Fund distributions or redemptions of Fund shares.
High yielding noninvestment grade bonds involve higher risk than investment grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.
| Fund basics |
| As of July 31, 2007 |
| |
| Fund objective |
| The Fund seeks total return and, as a secondary objective, high |
| current income. |
| |
| Total Fund net assets |
| $178 million |
| |
| Number of holdings |
| 246 |
| Fund start date | | |
| Dec. 30, 1996 | | |
| |
| | Nasdaq symbols | CUSIPs |
| Class A | DHOAX | 245908876 |
| Class B | DHOBX | 245908868 |
| Class C | DHOCX | 245908850 |
| Class R | DHIRX | 245908736 |
| Institutional Class | DHOIX | 245908843 |
Performance of a $10,000 Investment
Average annual total returns from July 31, 1997 through July 31, 2007
| | Starting value (July 31, 1997) | Ending value (July 31, 2007) |
| Delaware High-Yield Opportunities Fund — A Shares | $9,550 | $17,626 |
| Bear Stearns High Yield Index | $10,000 | $17,187 |
Chart assumes $10,000 invested on July 31, 1997, and includes the effect of a 4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and expenses. Chart also assumes $10,000 invested in the Bear Stearns High Yield Index as of July 31, 1997. The Bear Stearns High Yield Index measures the performance of domestic high yield bonds. An index is unmanaged and does not reflect the costs of operating a mutual fund, such as the costs of buying, selling, and holding securities. You cannot invest directly in an index.
Past performance is not a guarantee of future results.
5
Disclosure of Fund expenses
For the period February 1, 2007 to July 31, 2007
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period February 1, 2007 to July 31, 2007.
Actual Expenses
The first section of the table shown, “Actual Fund Return,” provides information about actual account values and actual expenses. You may use the information in this section of the table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second section of the table shown, “Hypothetical 5% Return,” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The Fund’s expenses shown in the table reflect fee waivers in effect. The expenses shown in the table assume reinvestment of all dividends and distributions.
Delaware High-Yield Opportunities Fund
Expense Analysis of an Investment of $1,000
| | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 2/1/07 to |
| | 2/1/07 | | 7/31/07 | | Ratio | | 7/31/07* |
| Actual Fund Return | | | | | | | |
| Class A | $1,000.00 | | $991.30 | | 1.13% | | $5.58 |
| Class B | 1,000.00 | | 990.10 | | 1.83% | | 9.03 |
| Class C | 1,000.00 | | 987.80 | | 1.83% | | 9.02 |
| Class R | 1,000.00 | | 992.60 | | 1.33% | | 6.57 |
| Institutional Class | 1,000.00 | | 992.80 | | 0.83% | | 4.10 |
| Hypothetical 5% Return (5% return before expenses) | | |
| Class A | $1,000.00 | | $1,019.19 | | 1.13% | | $5.66 |
| Class B | 1,000.00 | | 1,015.72 | | 1.83% | | 9.15 |
| Class C | 1,000.00 | | 1,015.72 | | 1.83% | | 9.15 |
| Class R | 1,000.00 | | 1,018.20 | | 1.33% | | 6.66 |
| Institutional Class | 1,000.00 | | 1,020.68 | | 0.83% | | 4.16 |
| * | | “Expenses Paid During Period” are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
6
Sector allocation and credit quality breakdown
Delaware High-Yield Opportunities Fund
As of July 31, 2007
Sector designations may be different than the sector designations presented in other Fund materials.
| | Percentage |
| Sector | of Net Assets |
| Commercial Mortgage-Backed Securities | 0.44% | |
| Corporate Bonds | 85.77% | |
| Basic Industry | 9.57% | |
| Brokerage | 1.81% | |
| Capital Goods | 4.51% | |
| Consumer Cyclical | 9.24% | |
| Consumer Non-Cyclical | 4.67% | |
| Energy | 9.15% | |
| Financials | 0.75% | |
| Media | 9.02% | |
| Real Estate | 1.86% | |
| Services Cyclical | 13.61% | |
| Services Non-Cyclical | 8.14% | |
| Technology & Electronics | 1.89% | |
| Telecommunications | 8.75% | |
| Utilities | 2.80% | |
| Emerging Markets Bonds | 0.31% | |
| Senior Secured Loans | 7.51% | |
| Common Stock | 1.74% | |
| Warrant | 0.00% | |
| Total Value of Securities | 95.77% | |
| Receivables and Other Assets Net of Liabilities | 4.23% | |
| Total Net Assets | 100.00% | |
| | |
| Credit Quality Breakdown | | |
| (as a % of fixed income investments) | | |
| AAA | 3.67% | |
| BBB | 1.85% | |
| BB | 16.40% | |
| B | 58.41% | |
| CCC | 16.60% | |
| D | 0.37% | |
| Not Rated | 2.70% | |
| Total | 100.00% | |
7
Statement of net assets
Delaware High-Yield Opportunities Fund
July 31, 2007
| | Principal | | Value |
| | Amount (U.S. $) | | (U.S. $) |
| Commercial Mortgage-Backed Securities – 0.44% | | |
| #First Union National Bank | | | |
| Commercial Mortgage | | | |
| Series 2001-C2 L 144A | | | |
| 6.46% 1/12/43 | $ 800,000 | | $ 788,324 |
| Total Commercial Mortgage-Backed | | | |
| Securities (cost $811,969) | | | 788,324 |
| |
| Corporate Bonds – 85.77% | | | |
| Basic Industry – 9.57% | | | |
| AK Steel | | | |
| 7.75% 6/15/12 | 375,000 | | 373,125 |
| 7.875% 2/15/09 | 275,000 | | 276,375 |
| #Algoma Acquisition 144A | | | |
| 9.875% 6/15/15 | 325,000 | | 308,750 |
| Bowater | | | |
| 6.50% 6/15/13 | 250,000 | | 202,500 |
| 9.00% 8/1/09 | 225,000 | | 222,188 |
| 9.50% 10/15/12 | 1,250,000 | | 1,181,250 |
| Freeport McMoRan Copper & | | | |
| Gold 8.25% 4/1/15 | 1,000,000 | | 1,050,000 |
| Georgia-Pacific 8.875% 5/15/31 | 1,945,000 | | 1,857,474 |
| Hexion US Finance | | | |
| 9.75% 11/15/14 | 1,385,000 | | 1,488,875 |
| Lyondell Chemical | | | |
| 8.00% 9/15/14 | 705,000 | | 757,875 |
| 8.25% 9/15/16 | 245,000 | | 269,500 |
| 10.50% 6/1/13 | 75,000 | | 81,375 |
| #MacDermid 144A 9.50% 4/15/17 | 1,055,000 | | 965,325 |
| #Momentive Performance Materials | | | |
| 144A 9.75% 12/1/14 | 775,000 | | 747,875 |
| Norske Skog Canada | | | |
| 8.625% 6/15/11 | 2,055,000 | | 1,854,638 |
| ‡#Port Townsend Paper 144A | | | |
| 11.00% 4/15/11 | 950,000 | | 413,250 |
| Potlatch 13.00% 12/1/09 | 850,000 | | 964,351 |
| #Sappi Papier Holding 144A | | | |
| 7.50% 6/15/32 | 1,765,000 | | 1,550,411 |
| ‡Solutia 6.72% 10/15/37 | 770,000 | | 627,550 |
| #Steel Dynamics 144A | | | |
| 6.75% 4/1/15 | 400,000 | | 382,000 |
| Tube City IMS 9.75% 2/1/15 | 1,160,000 | | 1,133,900 |
| Witco 6.875% 2/1/26 | 365,000 | | 304,775 |
| | | | 17,013,362 |
| Brokerage – 1.81% | | | |
| E Trade Financial 8.00% 6/15/11 | 675,000 | | 691,875 |
| #HUB International Holdings 144A | | | |
| 10.25% 6/15/15 | 400,000 | | 346,000 |
| LaBranche | | | |
| 9.50% 5/15/09 | 825,000 | | 820,875 |
| 11.00% 5/15/12 | 1,380,000 | | 1,359,300 |
| | | | 3,218,050 |
| Capital Goods – 4.51% | | | |
| Baldor Electric 8.625% 2/15/17 | 325,000 | | 334,750 |
| Berry Plastics Holding | | | |
| 8.875% 9/15/14 | 1,420,000 | | 1,370,300 |
| CPG International 10.50% 7/1/13 | 700,000 | | 682,500 |
| Graham Packaging | | | |
| 9.875% 10/15/14 | 375,000 | | 354,375 |
| Greenbrier 8.375% 5/15/15 | 170,000 | | 168,300 |
| #Hawker Beechcraft Acquisition | | | |
| 144A 9.75% 4/1/17 | 735,000 | | 729,488 |
| Interface 10.375% 2/1/10 | 1,590,000 | | 1,661,550 |
| Intertape Polymer 8.50% 8/1/14 | 670,000 | | 606,350 |
| #Mueller Water Products 144A | | | |
| 7.375% 6/1/17 | 260,000 | | 244,400 |
| Smurfit-Stone Container | | | |
| Enterprises 8.00% 3/15/17 | 875,000 | | 822,500 |
| Trimas 9.875% 6/15/12 | 1,041,000 | | 1,041,000 |
| | | | 8,015,513 |
| Consumer Cyclical – 9.24% | | | |
| Accuride 8.50% 2/1/15 | 375,000 | | 358,125 |
| Carrols 9.00% 1/15/13 | 1,360,000 | | 1,292,000 |
| Ford Motor Credit | | | |
| 7.375% 10/28/09 | 700,000 | | 676,131 |
| 7.80% 6/1/12 | 800,000 | | 762,429 |
| Ÿ8.11% 1/13/12 | 475,000 | | 453,967 |
| General Motors | | | |
| 6.375% 5/1/08 | 1,225,000 | | 1,209,688 |
| 8.375% 7/15/33 | 1,350,000 | | 1,117,125 |
| Global Cash Access 8.75% 3/15/12 | 440,000 | | 451,000 |
| GMAC 6.875% 9/15/11 | 150,000 | | 139,606 |
| #Goodyear Tire & Rubber 144A | | | |
| 8.625% 12/1/11 | 740,000 | | 756,650 |
| #KAR Holdings 144A 10.00% 5/1/15 | 1,655,000 | | 1,464,674 |
| Lear 8.75% 12/1/16 | 1,425,000 | | 1,325,250 |
| #Michaels Stores 144A | | | |
| 11.375% 11/1/16 | 1,005,000 | | 974,850 |
| Neiman Marcus Group PIK | | | |
| 9.00% 10/15/15 | 775,000 | | 811,813 |
| NPC International 9.50% 5/1/14 | 1,050,000 | | 971,250 |
| #OSI Restaurant Partners 144A | | | |
| 10.00% 6/15/15 | 360,000 | | 315,000 |
| #TRW Automotive 144A | | | |
| 7.00% 3/15/14 | 60,000 | | 56,400 |
| 7.25% 3/15/17 | 35,000 | | 32,550 |
| #USI Holdings 144A 9.75% 5/15/15 | 675,000 | | 644,625 |
8
| | Principal | | Value |
| | Amount (U.S. $) | | (U.S. $) |
| Corporate Bonds (continued) | | | |
| Consumer Cyclical (continued) | | | |
| Visteon 8.25% 8/1/10 | $1,880,000 | | $ 1,673,199 |
| #Vitro 144A 9.125% 2/1/17 | 985,000 | | 950,525 |
| | | | 16,436,857 |
| Consumer Non-Cyclical – 4.67% | | | |
| Chiquita Brands International | | | |
| 8.875% 12/1/15 | 775,000 | | 670,375 |
| Constellation Brands | | | |
| 8.125% 1/15/12 | 700,000 | | 707,000 |
| Cott Beverages USA | | | |
| 8.00% 12/15/11 | 625,000 | | 609,375 |
| DEL Laboratories 8.00% 2/1/12 | 895,000 | | 805,500 |
| National Beef Packing | | | |
| 10.50% 8/1/11 | 1,025,000 | | 1,030,125 |
| Pilgrim’s Pride | | | |
| 8.375% 5/1/17 | 1,905,000 | | 1,819,275 |
| 9.625% 9/15/11 | 775,000 | | 791,469 |
| #Pinnacle Foods Finance 144A | | | |
| 10.625% 4/1/17 | 1,520,000 | | 1,337,600 |
| Smithfield Foods 7.75% 7/1/17 | 225,000 | | 218,250 |
| True Temper Sports | | | |
| 8.375% 9/15/11 | 385,000 | | 323,400 |
| | | | 8,312,369 |
| Energy – 9.15% | | | |
| Bluewater Finance | | | |
| 10.25% 2/15/12 | 500,000 | | 525,625 |
| Chesapeake Energy | | | |
| 6.625% 1/15/16 | 1,330,000 | | 1,260,175 |
| Compton Petroleum Finance | | | |
| 7.625% 12/1/13 | 1,835,000 | | 1,724,899 |
| #Dynergy Holdings 144A | | | |
| 7.75% 6/1/19 | 435,000 | | 378,450 |
| El Paso 7.00% 6/15/17 | 500,000 | | 482,741 |
| #El Paso Performance-Linked Trust | | | |
| 144A 7.75% 7/15/11 | 400,000 | | 413,000 |
| #Energy Partners 144A | | | |
| 9.75% 4/15/14 | 510,000 | | 487,050 |
| Geophysique-Veritas | | | |
| 7.50% 5/15/15 | 125,000 | | 122,500 |
| 7.75% 5/15/17 | 645,000 | | 632,100 |
| #Hilcorp Energy I 144A | | | |
| 7.75% 11/1/15 | 1,250,000 | | 1,175,000 |
| 9.00% 6/1/16 | 625,000 | | 625,000 |
| Inergy Finance | | | |
| 6.875% 12/15/14 | 425,000 | | 397,375 |
| 8.25% 3/1/16 | 200,000 | | 201,000 |
| KCS Energy 7.125% 4/1/12 | 375,000 | | 369,375 |
| Kinder Morgan Finance | | | |
| 5.35% 1/5/11 | 50,000 | | 48,218 |
| #Lukoil International Finance 144A | | | |
| 6.356% 6/7/17 | 100,000 | | 94,410 |
| 6.656% 6/7/22 | 100,000 | | 93,000 |
| Mariner Energy 8.00% 5/15/17 | 525,000 | | 496,125 |
| Massey Energy 6.625% 11/15/10 | 255,000 | | 239,063 |
| #OPTI Canada 144A | | | |
| 7.875% 12/15/14 | 300,000 | | 295,500 |
| 8.25% 12/15/14 | 400,000 | | 402,000 |
| PetroHawk Energy | | | |
| 9.125% 7/15/13 | 965,000 | | 998,775 |
| Plains Exploration & Production | | | |
| 7.00% 3/15/17 | 560,000 | | 502,600 |
| #Regency Energy Partners 144A | | | |
| 8.375% 12/15/13 | 1,025,000 | | 1,060,875 |
| ŸSecunda International | | | |
| 13.36% 9/1/12 | 600,000 | | 613,500 |
| #Seitel 144A 9.75% 2/15/14 | 1,055,000 | | 991,700 |
| #Stallion Oilfield Services 144A | | | |
| 9.75% 2/1/15 | 475,000 | | 463,125 |
| #VeraSun Energy 144A | | | |
| 9.375% 6/1/17 | 870,000 | | 796,050 |
| Whiting Petroleum 7.25% 5/1/13 | 410,000 | | 385,400 |
| | | | 16,274,631 |
| Financials – 0.75% | | | |
| #ABH Financial 144A | | | |
| 8.20% 6/25/12 | 280,000 | | 270,900 |
| #TemirBank 144A 9.50% 5/21/14 | 535,000 | | 509,588 |
| TNK-BP Finance 6.625% 3/20/17 | 560,000 | | 531,104 |
| Unum Group 5.859% 5/15/09 | 25,000 | | 25,174 |
| | | | 1,336,766 |
| Media – 9.02% | | | |
| CCH I 13.50% 1/15/14 | 2,265,000 | | 2,253,675 |
| Charter Communications Holdings | | | |
| 13.50% 1/15/11 | 1,950,000 | | 2,003,625 |
| Dex Media West 9.875% 8/15/13 | 800,000 | | 844,000 |
| Idearc 8.00% 11/15/16 | 755,000 | | 719,138 |
| Insight Communications | | | |
| 12.25% 2/15/11 | 450,000 | | 466,875 |
| Insight Midwest 9.75% 10/1/09 | 1,350,000 | | 1,350,000 |
| #LBI Media 144A 8.50% 8/1/17 | 475,000 | | 463,125 |
| Mediacom Capital 9.50% 1/15/13 | 3,000,000 | | 2,977,499 |
| =Porttown 10.85% 9/30/07 | 460,526 | | 455,921 |
| #Quebecor World 144A | | | |
| 9.75% 1/15/15 | 1,070,000 | | 1,032,550 |
| RH Donnelley 8.875% 1/15/16 | 520,000 | | 508,300 |
| Time Warner Telecom Holdings | | | |
| 9.25% 2/15/14 | 525,000 | | 539,438 |
| #Univision Communications PIK | | | |
| 144A 9.75% 3/15/15 | 1,340,000 | | 1,226,100 |
| Vertis 10.875% 6/15/09 | 360,000 | | 340,200 |
| WMG Acquisition 7.375% 4/15/14 | 955,000 | | 859,500 |
| | | | 16,039,946 |
| Real Estate – 1.86% | | | |
| American Real Estate Partners | | | |
| 8.125% 6/1/12 | 915,000 | | 882,975 |
| BF Saul REIT 7.50% 3/1/14 | 1,855,000 | | 1,855,000 |
(continues) 9
Statement of net assets
Delaware High-Yield Opportunities Fund
| | Principal | | Value |
| Amount (U.S. $) | | (U.S. $) |
| Corporate Bonds (continued) | | | |
| Real Estate (continued) | | | |
| #Realogy 144A 12.375% 4/15/15 | $ 250,000 | | $ 210,000 |
| Rouse 7.20% 9/15/12 | 345,000 | | 359,302 |
| | | | 3,307,277 |
| Services Cyclical – 13.61% | | | |
| American Airlines 6.817% 5/23/11 | 50,000 | | 49,250 |
| #Aramark 144A | | | |
| 8.50% 2/1/15 | 1,250,000 | | 1,184,375 |
| Ÿ8.856% 2/1/15 | 25,000 | | 23,375 |
| #Bristow Group 144A 7.50% 9/15/17 | 800,000 | | 796,000 |
| #Cardtronics 144A 9.25% 8/15/13 | 525,000 | | 506,625 |
| Corrections Corporation of America | | | |
| 7.50% 5/1/11 | 375,000 | | 376,875 |
| FTI Consulting 7.625% 6/15/13 | 1,850,000 | | 1,831,499 |
| #Galaxy Entertainment Finance 144A | | | |
| 9.875% 12/15/12 | 1,455,000 | | 1,562,305 |
| Gaylord Entertainment | | | |
| 8.00% 11/15/13 | 950,000 | | 945,250 |
| Harrah’s Operating 6.50% 6/1/16 | 560,000 | | 412,231 |
| Hertz 8.875% 1/1/14 | 800,000 | | 804,000 |
| ¶H-Lines Finance Holdings | | | |
| 11.00% 4/1/13 | 1,175,000 | | 1,172,063 |
| Horizon Lines 9.00% 11/1/12 | 550,000 | | 587,125 |
| Isle of Capri Casinos 9.00% 3/15/12 | 945,000 | | 991,069 |
| Kansas City Southern de Mexico | | | |
| 9.375% 5/1/12 | 1,325,000 | | 1,404,500 |
| Kansas City Southern Railway | | | |
| 9.50% 10/1/08 | 450,000 | | 464,063 |
| Majestic Star Casino | | | |
| 9.50% 10/15/10 | 1,350,000 | | 1,370,250 |
| Mandalay Resort Group | | | |
| 9.375% 2/15/10 | 340,000 | | 349,350 |
| 9.50% 8/1/08 | 725,000 | | 754,000 |
| MGM Mirage 7.50% 6/1/16 | 305,000 | | 285,175 |
| #Mobile Services Group 144A | | | |
| 9.75% 8/1/14 | 525,000 | | 553,875 |
| ‡Northwest Airlines 10.00% 2/1/09 | 215,000 | | 28,488 |
| #Penhall International 144A | | | |
| 12.00% 8/1/14 | 650,000 | | 692,250 |
| #Pokagon Gaming Authority 144A | | | |
| 10.375% 6/15/14 | 1,745,000 | | 1,875,874 |
| #Rental Service 144A 9.50% 12/1/14 | 1,650,000 | | 1,616,999 |
| Seabulk International | | | |
| 9.50% 8/15/13 | 465,000 | | 498,713 |
| Station Casinos 6.625% 3/15/18 | 1,080,000 | | 869,400 |
| ¶Town Sports International | | | |
| 11.00% 2/1/14 | 550,000 | | 508,750 |
| Wheeling Island Gaming | | | |
| 10.125% 12/15/09 | 1,445,000 | | 1,470,288 |
| Williams Scotsman 8.50% 10/1/15 | 200,000 | | 216,000 |
| | | | 24,200,017 |
| Services Non-Cyclical – 8.14% | | | |
| #Aleris International 144A | | | |
| 10.00% 12/15/16 | 800,000 | | 720,000 |
| Allied Waste North America | | | |
| 7.375% 4/15/14 | 475,000 | | 450,063 |
| 7.875% 4/15/13 | 625,000 | | 621,875 |
| 9.25% 9/1/12 | 150,000 | | 156,188 |
| Casella Waste Systems | | | |
| 9.75% 2/1/13 | 1,925,000 | | 1,953,875 |
| #Community Health Systems 144A | | | |
| 8.875% 7/15/15 | 485,000 | | 473,481 |
| CRC Health 10.75% 2/1/16 | 1,970,000 | | 2,107,899 |
| Geo Subordinate 11.00% 5/15/12 | 800,000 | | 792,000 |
| HCA 6.50% 2/15/16 | 720,000 | | 558,000 |
| #HCA PIK 144A 9.625% 11/15/16 | 85,000 | | 84,575 |
| HealthSouth 10.75% 6/15/16 | 1,370,000 | | 1,390,550 |
| #Universal Hospital Services PIK | | | |
| 144A 8.50% 6/1/15 | 650,000 | | 589,875 |
| US Oncology | | | |
| 9.00% 8/15/12 | 270,000 | | 270,000 |
| 10.75% 8/15/14 | 725,000 | | 735,875 |
| #US Oncology Holdings PIK 144A | | | |
| 9.797% 3/15/12 | 1,375,000 | | 1,278,750 |
| ¶Vanguard Health Holding | | | |
| 11.25% 10/1/15 | 1,575,000 | | 1,157,625 |
| WCA Waste 9.25% 6/15/14 | 1,135,000 | | 1,146,350 |
| | | | 14,486,981 |
| Technology & Electronics – 1.89% | | | |
| #Freescale Semiconductor 144A | | | |
| 8.875% 12/15/14 | 1,175,000 | | 1,078,063 |
| 10.125% 12/15/16 | 450,000 | | 398,250 |
| MagnaChip Semiconductor | | | |
| 8.00% 12/15/14 | 1,450,000 | | 884,500 |
| Solectron Global Finance | | | |
| 8.00% 3/15/16 | 805,000 | | 845,250 |
| Sungard Data Systems | | | |
| 10.25% 8/15/15 | 150,000 | | 150,750 |
| | | | 3,356,813 |
| Telecommunications – 8.75% | | | |
| ‡Allegiance Telecom 11.75% 2/15/08 | 255,000 | | 129,413 |
| American Tower 7.125% 10/15/12 | 1,035,000 | | 1,019,475 |
| #Broadview Networks Holdings | | | |
| 144A 11.375% 9/1/12 | 700,000 | | 710,500 |
| ŸCentennial Communications | | | |
| 11.11% 1/1/13 | 650,000 | | 663,000 |
| Cricket Communications | | | |
| 9.375% 11/1/14 | 1,000,000 | | 991,250 |
| #Digicel 144A 9.25% 9/1/12 | 700,000 | | 710,500 |
| #Digicel Group 144A | | | |
| 8.875% 1/15/15 | 2,105,000 | | 1,941,863 |
| Ÿ#Hellas Telecommunications | | | |
| Luxembourg II 144A | | | |
| 11.11% 1/15/15 | 1,200,000 | | 1,194,000 |
10
| | Principal | | Value |
| | Amount (U.S. $) | | (U.S. $) |
| Corporate Bonds (continued) | | | |
| Telecommunications (continued) | | | |
| Hughes Network Systems | | | |
| 9.50% 4/15/14 | $2,390,000 | | $ 2,389,999 |
| ¶Inmarsat Finance | | | |
| 10.375% 11/15/12 | 1,175,000 | | 1,098,625 |
| #Level 3 Financing 144A | | | |
| 8.75% 2/15/17 | 875,000 | | 809,375 |
| #MetroPCS Wireless 144A | | | |
| 9.25% 11/1/14 | 735,000 | | 723,975 |
| NTL Cable 9.125% 8/15/16 | 795,000 | | 806,925 |
| Qwest | | | |
| 7.50% 10/1/14 | 825,000 | | 812,625 |
| Ÿ8.61% 6/15/13 | 475,000 | | 494,000 |
| Rural Cellular | | | |
| 9.875% 2/1/10 | 600,000 | | 625,500 |
| Ÿ11.106% 11/1/12 | 250,000 | | 253,750 |
| Triton PCS 8.50% 6/1/13 | 195,000 | | 196,950 |
| | | | 15,571,725 |
| Utilities – 2.80% | | | |
| ‡#Calpine 144A 8.496% 7/15/09 | 606,050 | | 642,413 |
| Elwood Energy 8.159% 7/5/26 | 716,746 | | 724,850 |
| Midwest Generation | | | |
| 8.30% 7/2/09 | 474,476 | | 486,338 |
| Mirant Americas Generation | | | |
| 8.30% 5/1/11 | 1,280,000 | | 1,260,800 |
| Mirant North America | | | |
| 7.375% 12/31/13 | 1,075,000 | | 1,075,000 |
| Orion Power Holdings | | | |
| 12.00% 5/1/10 | 725,000 | | 790,250 |
| | | | 4,979,651 |
| Total Corporate Bonds | | | |
| (cost $159,149,811) | | | 152,549,958 |
| |
| Emerging Markets Bonds – 0.31% | | | |
| #True Move 144A | | | |
| 10.75% 12/16/13 | 525,000 | | 556,500 |
| Total Emerging Markets Bonds | | | |
| (cost $523,634) | | | 556,500 |
| |
| «Senior Secured Loans – 7.51% | | | |
| Allied Waste North America | | | |
| 7.73% 3/28/14 | 150,000 | | 146,250 |
| Aramark 7.08% 1/26/14 | 230,000 | | 217,120 |
| Building Materials Holding | | | |
| 8.11% 11/10/13 | 450,000 | | 427,500 |
| Claires Stores 8.36% 5/7/14 | 175,000 | | 160,125 |
| Community Health Systems | | | |
| Tranche B 7.61% 7/2/14 | 750,503 | | 719,233 |
| Tranche DD 7.61% 7/2/14 | 49,497 | | 47,363 |
| Cricket Communications | | | |
| 7.94% 6/16/13 | 175,000 | | 169,094 |
| DaimlerChrysler | | | |
| 11.01% 7/1/12 | 575,000 | | 546,250 |
| 13.51% 7/1/13 | 700,000 | | 665,000 |
| Fontainebleau | | | |
| Tranche B 8.67% 6/6/14 | 216,667 | | 206,781 |
| Tranche DD 8.67% 6/6/14 | 108,333 | | 101,563 |
| Ford Motor 8.36% 11/29/13 | 696,000 | | 656,850 |
| Freescale Semiconductor | | | |
| 7.37% 12/1/13 | 175,000 | | 162,400 |
| General Motors 7.725% 11/17/13 | 995,000 | | 956,444 |
| Georgia Pacific Term Tranche B | | | |
| 7.115% 12/22/12 | 200,000 | | 190,141 |
| Goodyear Tire 7.10% 4/30/10 | 425,000 | | 403,750 |
| Graceway Pharmaceuticals | | | |
| 8.105% 5/3/11 | 100,000 | | 96,500 |
| Michaels Stores 7.625% 10/11/13 | 204,485 | | 190,853 |
| NE Energy 7.87% 11/1/13 | 200,000 | | 196,250 |
| Pinnacle Foods Finance | | | |
| 8.21% 4/2/14 | 150,000 | | 142,875 |
| Rental Service 8.87% 11/21/13 | 400,000 | | 382,000 |
| Spirit Finance 8.36% 5/23/13 | 425,000 | | 414,375 |
| Stallion Oilfield Services | | | |
| 10.86% 6/12/13 | 525,000 | | 517,125 |
| Surgical Care Affiliates | | | |
| 10.64% 12/29/14 | 175,000 | | 166,250 |
| Talecris Biotherapeutics 2nd Lien | | | |
| 11.86% 12/6/14 | 625,000 | | 634,375 |
| Telesat Canada 9.00% 2/14/08 | 1,350,000 | | 1,349,999 |
| Time Warner Telecom Holdings | | | |
| 7.62% 1/7/13 | 300,000 | | 291,750 |
| Tribune 8.32% 5/30/14 | 300,000 | | 270,752 |
| Tribune 8.49% 5/17/09 | 275,000 | | 267,094 |
| United Airlines 7.375% 2/1/14 | 300,000 | | 281,001 |
| Univision Communications | | | |
| 7.605% 9/15/14 | 400,000 | | 369,250 |
| US Airways Group 7.86% 3/23/14 | 275,000 | | 262,075 |
| Wind Acquisition PIK | | | |
| 12.60% 12/7/11 | 1,230,043 | | 1,242,343 |
| Windstream | 525,000 | | 509,250 |
| Total Senior Secured Loans | | | |
| (cost $13,637,062) | | | 13,359,981 |
| | Number of | | |
| | Shares | | |
| Common Stock – 1.74% | | | |
| †Adelphia | 800,000 | | 262,000 |
| †Adelphia Recovery Trust | | | |
| Series ACC-1 | 785,138 | | 69,092 |
| Series Arahova | 576,304 | | 270,863 |
| †@=ÕAvado Brands | 906 | | 0 |
| †Century Communications | 1,325,000 | | 1,217 |
| †Charter Communications Class A | 27,000 | | 109,620 |
| †Foster Wheeler | 6,783 | | 762,313 |
| †Mirant | 10,059 | | 380,532 |
(continues) 11
Statement of net assets
Delaware High-Yield Opportunities Fund
| | Number of | | Value | |
| | Shares | | (U.S. $) | |
| Common Stock (continued) | | | | |
| †Northwest Airlines | 5,166 | | $ 90,049 | |
| †Petrojarl ADR | 1,491 | | 18,437 | |
| †Petroleum Geo-Services ADR | 4,473 | | 107,166 | |
| †Time Warner Cable Class A | 26,489 | | 1,012,411 | |
| †USGen | 250,000 | | 0 | |
| Total Common Stock (cost $1,991,838) | | | 3,083,700 | |
| | |
| Warrant – 0.00% | | | | |
| †#Solutia 144A, exercise price $7.59, | | | | |
| expiration date 7/15/09 | 450 | | 0 | |
| Total Warrant (cost $38,281) | | | 0 | |
| | |
| Total Value of Securities – 95.79% | | | | |
| (cost $176,152,595) | | | 170,338,463 | |
| Receivables and Other Assets | | | | |
| Net of Liabilities – 4.23% | | | 7,514,600 | |
| Net Assets Applicable to 41,727,090 | | | | |
| Shares Outstanding – 100.00% | | | $177,853,063 | |
| | |
| Net Asset Value – Delaware High-Yield Opportunities Fund | | | |
| Class A ($102,419,881 / 24,030,687 Shares) | | | $4.26 | |
| Net Asset Value – Delaware High-Yield Opportunities Fund | | | |
| Class B ($12,445,770 / 2,922,968 Shares) | | | | $4.26 | |
| Net Asset Value – Delaware High-Yield Opportunities Fund | | | |
| Class C ($27,179,078 / 6,372,993 Shares) | | | | $4.26 | |
| Net Asset Value – Delaware High-Yield Opportunities Fund | | | |
| Class R ($9,251,657 / 2,167,013 Shares) | | | | $4.27 | |
| Net Asset Value – Delaware High-Yield Opportunities Fund | | | |
| Institutional Class ($26,556,677 / 6,233,429 Shares) | | | $4.26 | |
| | |
| Components of Net Assets at July 31, 2007: | | | |
| Shares of beneficial interest | | | | |
| (unlimited authorization – no par) | | | $186,701,488 | |
| Undistributed net investment income | | | 122,952 | |
| Accumulated net realized loss on investments | | (3,171,953 | ) |
| Net unrealized depreciation of investments | | | (5,799,424 | ) |
| Total net assets | | | $177,853,063 | |
| # | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. At July 31, 2007, the aggregate amount of Rule 144A securities equaled $44,719,918, which represented 25.14% of the Fund’s net assets. See Note 9 in “Notes to Financial Statements.” |
| | |
| ‡ | Non-income producing security. Security is currently in default. |
| | |
| Ÿ | Variable rate security. The rate shown is the rate as of July 31, 2007. |
| | |
| ¶ | Step coupon bond. Indicates security that has a zero coupon that remains in effect until a predetermined date at which time the stated interest rate becomes effective. |
| | |
| † | Non-income producing security for the year ended July 31, 2007. |
| | |
| @ | Illiquid security. At July 31, 2007, the aggregate amount of illiquid securities equaled $0, which represented 0.00% of the Fund’s net assets. See Note 9 in “Notes to Financial Statements.” |
| | |
| « | Senior Secured Loans generally pay interest at rates which are periodically redetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the prime rate offered by one or more United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate (‘LIBOR’) and (iii) the certificate of deposit rate. Senior Secured Loans may be subject to restrictions on resale. |
| | |
| Õ | Restricted Security. Investment in a security not registered under the Securities Act of 1933, as amended. This security has certain restrictions on resale which may limit its liquidity. At July 31, 2007, the aggregate amount of the restricted security equaled $0 or 0.00% of the Fund’s net assets. See Note 9 in “Notes to Financial Statements.” |
| | |
| = | Security is being fair valued in accordance with the Fund’s fair valuation policy. At July 31, 2007, the aggregate amount of fair valued securities equaled $455,921, which represented 0.26% of the Fund’s net assets. See Note 1 in “Notes to Financial Statements.” |
Summary of Abbreviations:
ADR — American Depositary Receipts
CDS — Credit Default Swap
PIK — Pay-in-Kind
REIT — Real Estate Investment Trust
Net Asset Value and Offering Price Per Share –
Delaware High-Yield Opportunities Fund | |
| Net asset value Class A (A) | $4.26 |
| Sales charge (4.50% of offering price) (B) | 0.20 |
| Offering price | $4.46 |
| (A) | | Net asset value per share, as illustrated, is the amount which would be paid upon redemption or repurchase of shares. |
| | | |
| (B) | | See the current prospectus for purchases of $100,000 or more. |
12
| | | | | |
| The following swap contracts were outstanding at July 31, 2007: | | | | |
| | |
| Swap Contracts1 | | | | | | | | | | |
| | |
| Credit Default Swap Contracts | | | | | | | | |
| | | | | Annual | | | | Unrealized |
| Swap Counterparty & | | Notional | | Protection | | Termination | | Appreciation |
| Referenced Obligation | | Amount | | Payments | | Date | | (Depreciation) |
| Protection Purchased: | | | | | | | | | | |
| Goldman Sachs | | | | | | | | | | |
| CDX.NA.IG. | | | | | | | | | | |
| HVOL 8-1 | | $1,450,000 | | 0.75% | | 6/20/12 | | | $ (3,794 | ) |
| Lehman Brothers | | | | | | | | | | |
| CDX.NA, XO-8 | | 1,427,500 | | 1.40% | | 6/20/12 | | | 19,455 | |
| | | | | | | | | | $15,661 | |
| Protection Sold: | | | | | | | | | | |
| Lehman Brothers | | | | | | | | | | |
| Residential Capital | | | | | | | | | | |
| 5 yr CDS | | $220,000 | | 4.60% | | 9/20/12 | | | $— | |
| | | | | | | | | | | |
| The use of swap contracts involves elements of market risk and risks in excess of the amount recognized in the financial statements. The notional amounts presented above represent the Fund’s total exposure in such contracts, whereas only the net unrealized appreciation (depreciation) is reflected in the Fund’s net assets. |
1See Note 8 in ”Notes to Financial Statements.”
See accompanying notes
13
Statement of assets and liabilities
Delaware High-Yield Opportunities Fund
July 31, 2007
| Assets: | |
| Investments at value (cost $176,152,595) | $170,338,463 |
| Cash | 13,926,184 |
| Receivable for securities sold | 4,283,144 |
| Interest receivable | 3,487,515 |
| Subscriptions receivable | 2,218,539 |
| Credit default swap contracts, at value (including up front payment of $151,169)1 | 166,830 |
| Total assets | 194,420,675 |
| |
| Liabilities: | |
| Payable for securities purchased | 11,532,075 |
| Liquidations payable | 4,353,794 |
| Accrued protection payments on credit default swaps | 3,600 |
| Distributions payable | 355,060 |
| Due to manager and affiliates | 185,013 |
| Other accrued expenses | 58,274 |
| Swap fees payable | 79,796 |
| Total liabilities | 16,567,612 |
| |
| Total Net Assets | $177,853,063 |
1 See Note 8 in “Notes to Financial Statements.”
See accompanying notes
14
Statement of operations
Delaware High-Yield Opportunities Fund
Year Ended July 31, 2007
| Investment Income: | | | | | |
| Interest | $13,510,820 | | | | |
| Dividends | 7,660 | | | | |
| Foreign tax withheld | (632 | ) | | $ 13,517,848 | |
| | |
| Expenses: | | | | | |
| Management fees | 1,048,730 | | | | |
| Distribution expenses – Class A | 260,982 | | | | |
| Distribution expenses – Class B | 137,490 | | | | |
| Distribution expenses – Class C | 225,956 | | | | |
| Distribution expenses – Class R | 31,538 | | | | |
| Dividend disbursing and transfer agent fees and expenses | 283,667 | | | | |
| Accounting and administration expenses | 64,537 | | | | |
| Registration fees | 45,816 | | | | |
| Reports and statements to shareholders | 35,265 | | | | |
| Legal fees | 31,677 | | | | |
| Trustees’ fees and benefits | 23,428 | | | | |
| Audit and tax | 21,007 | | | | |
| Pricing fees | 6,532 | | | | |
| Insurance fees | 5,233 | | | | |
| Custodian fees | 5,146 | | | | |
| Consulting fees | 2,307 | | | | |
| Dues and services | 930 | | | | |
| Trustees’ expenses | 904 | | | | |
| Taxes (other than taxes on income) | 538 | | | 2,231,683 | |
| Less expenses absorbed or waived | | | | (223,225 | ) |
| Less waived distribution expenses – Class R | | | | (5,250 | ) |
| Less expense paid indirectly | | | | (3,162 | ) |
| Total operating expenses | | | | 2,000,046 | |
| Net Investment Income | | | | 11,517,802 | |
| | |
| Net Realized and Unrealized Gain (Loss) on Investments: | | | | | |
| Net realized gain on: | | | | | |
| Investments | | | | 2,250,203 | |
| Swap contracts | | | | 32,087 | |
| Net realized gain | | | | 2,282,290 | |
| Net change in unrealized appreciation/depreciation of investments | | | | (4,751,497 | ) |
| Net Realized and Unrealized Loss on Investments | | | | (2,469,207 | ) |
| | |
| Net Increase in Net Assets Resulting from Operations | | | | $ 9,048,595 | |
See accompanying notes
15
Statements of changes in net assets
Delaware High-Yield Opportunities Fund
| | | Year Ended |
| | | 7/31/07 | | 7/31/06 | |
| Increase (Decrease) in Net Assets from Operations: | | | | | | |
| Net investment income | | $ 11,517,802 | | | $ 8,513,215 | |
| Net realized gain (loss) on investments | | 2,282,290 | | | (47,672 | ) |
| Net change in unrealized appreciation/depreciation of investments | | (4,751,497 | ) | | (2,476,130 | ) |
| Net increase in net assets resulting from operations | | 9,048,595 | | | 5,989,413 | |
| |
| Dividends and Distributions to Shareholders from: | | | | | | |
| Net investment income: | | | | | | |
| Class A | | (6,546,964 | ) | | (5,485,597 | ) |
| Class B | | (944,829 | ) | | (1,054,790 | ) |
| Class C | | (1,542,924 | ) | | (1,177,168 | ) |
| Class R | | (384,992 | ) | | (214,464 | ) |
| Institutional Class | | (2,522,720 | ) | | (844,522 | ) |
| | | (11,942,429 | ) | | (8,776,541 | ) |
| |
| Capital Share Transactions: | | | | | | |
| Proceeds from shares sold: | | | | | | |
| Class A | | 71,566,320 | | | 34,354,450 | |
| Class B | | 3,046,865 | | | 2,092,236 | |
| Class C | | 16,337,198 | | | 5,268,964 | |
| Class R | | 6,782,518 | | | 2,306,896 | |
| Institutional Class | | 43,277,994 | | | 6,327,418 | |
| |
| Net asset value of shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Class A | | 4,487,889 | | | 3,905,915 | |
| Class B | | 422,813 | | | 449,109 | |
| Class C | | 885,150 | | | 623,802 | |
| Class R | | 377,176 | | | 210,938 | |
| Institutional Class | | 2,103,530 | | | 644,516 | |
| | | 149,287,453 | | | 56,184,244 | |
| Cost of shares repurchased: | | | | | | |
| Class A | | (35,120,328 | ) | | (56,093,384 | ) |
| Class B | | (4,653,560 | ) | | (5,212,040 | ) |
| Class C | | (5,843,416 | ) | | (6,694,409 | ) |
| Class R | | (1,448,664 | ) | | (787,376 | ) |
| Institutional Class | | (32,302,737 | ) | | (865,281 | ) |
| | | (79,368,705 | ) | | (69,652,490 | ) |
| Increase (decrease) in net assets derived from capital share transactions | | 69,918,748 | | | (13,468,246 | ) |
| Net Increase (Decrease) in Net Assets | | 67,024,914 | | | (16,255,374 | ) |
| |
| Net Assets: | | | | | | |
| Beginning of year | | 110,828,149 | | | 127,083,523 | |
| End of year (including undistributed (distributions in excess of) | | | | | | |
| net investment income of $122,952 and $(59), respectively) | | $177,853,063 | | | $110,828,149 | |
See accompanying notes
16
Financial highlights
Delaware High-Yield Opportunities Fund Class A
Selected data for each share of the Fund outstanding throughout each period were as follows:
| | | Year Ended |
| | | 7/31/07 | | 7/31/06 | | 7/31/05 | | 7/31/04 | | 7/31/03 | |
| Net asset value, beginning of period | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | | | $3.420 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.321 | | | 0.319 | | | 0.292 | | | 0.335 | | | 0.377 | |
| Net realized and unrealized gain (loss) on investments | | 0.012 | | | (0.090 | ) | | 0.184 | | | 0.243 | | | 0.532 | |
| Total from investment operations | | 0.333 | | | 0.229 | | | 0.476 | | | 0.578 | | | 0.909 | |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.333 | ) | | (0.329 | ) | | (0.326 | ) | | (0.338 | ) | | (0.359 | ) |
| Total dividends and distributions | | (0.333 | ) | | (0.329 | ) | | (0.326 | ) | | (0.338 | ) | | (0.359 | ) |
| |
| Net asset value, end of period | | $4.260 | | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | |
| |
| Total return2 | | 7.82% | | | 5.49% | | | 11.61% | | | 14.97% | | | 28.02% | |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $102,420 | | | $63,405 | | | $82,988 | | | $44,428 | | | $29,385 | |
| Ratio of expenses to average net assets | | 1.13% | | | 1.13% | | | 1.16% | | | 1.13% | | | 1.13% | |
| Ratio of expenses to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 1.27% | | | 1.29% | | | 1.28% | | | 1.38% | | | 1.56% | |
| Ratio of net investment income to average net assets | | 7.24% | | | 7.42% | | | 6.68% | | | 8.05% | | | 10.36% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 7.10% | | | 7.26% | | | 6.56% | | | 7.80% | | | 9.93% | |
| Portfolio turnover | | 149% | | | 151% | | | 229% | | | 644% | | | 832% | |
| | | | | | | | | | | | | | | | |
| 1 The average shares outstanding method has been applied for per share information for the years ended July 31, 2004 and 2003. |
| 2 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been in effect. |
See accompanying notes
(continues) 17
Financial highlights
Delaware High-Yield Opportunities Fund Class B
Selected data for each share of the Fund outstanding throughout each period were as follows:
| | | Year Ended |
| | | 7/31/07 | | 7/31/06 | | 7/31/05 | | 7/31/04 | | 7/31/03 | |
| Net asset value, beginning of period | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | | | $3.420 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.291 | | | 0.289 | | | 0.262 | | | 0.305 | | | 0.352 | |
| Net realized and unrealized gain (loss) on investments | | 0.012 | | | (0.090 | ) | | 0.184 | | | 0.244 | | | 0.532 | |
| Total from investment operations | | 0.303 | | | 0.199 | | | 0.446 | | | 0.549 | | | 0.884 | |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.303 | ) | | (0.299 | ) | | (0.296 | ) | | (0.309 | ) | | (0.334 | ) |
| Total dividends and distributions | | (0.303 | ) | | (0.299 | ) | | (0.296 | ) | | (0.309 | ) | | (0.334 | ) |
| |
| Net asset value, end of period | | $4.260 | | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | |
| |
| Total return2 | | 7.08% | | | 4.75% | | | 10.85% | | | 14.19% | | | 27.14% | |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $12,446 | | | $13,597 | | | $16,661 | | | $15,015 | | | $15,464 | |
| Ratio of expenses to average net assets | | 1.83% | | | 1.83% | | | 1.86% | | | 1.83% | | | 1.83% | |
| Ratio of expenses to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 1.97% | | | 1.99% | | | 1.98% | | | 2.08% | | | 2.26% | |
| Ratio of net investment income to average net assets | | 6.54% | | | 6.72% | | | 5.98% | | | 7.35% | | | 9.66% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 6.40% | | | 6.56% | | | 5.86% | | | 7.10% | | | 9.23% | |
| Portfolio turnover | | 149% | | | 151% | | | 229% | | | 644% | | | 832% | |
| | | | | | | | | | | | | | | | |
| 1 The average shares outstanding method has been applied for per share information for the years ended July 31, 2004 and 2003. |
| 2 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been in effect. |
See accompanying notes
18
Delaware High-Yield Opportunities Fund Class C
Selected data for each share of the Fund outstanding throughout each period were as follows:
| | | Year Ended |
| | | 7/31/07 | | 7/31/06 | | 7/31/05 | | 7/31/04 | | 7/31/03 | |
| Net asset value, beginning of period | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | | | $3.420 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.290 | | | 0.289 | | | 0.262 | | | 0.305 | | | 0.352 | |
| Net realized and unrealized gain (loss) on investments | | 0.012 | | | (0.090 | ) | | 0.184 | | | 0.243 | | | 0.532 | |
| Total from investment operations | | 0.302 | | | 0.199 | | | 0.446 | | | 0.548 | | | 0.884 | |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.302 | ) | | (0.299 | ) | | (0.296 | ) | | (0.308 | ) | | (0.334 | ) |
| Total dividends and distributions | | (0.302 | ) | | (0.299 | ) | | (0.296 | ) | | (0.308 | ) | | (0.334 | ) |
| |
| Net asset value, end of period | | $4.260 | | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | |
| |
| Total return2 | | 7.07% | | | 4.75% | | | 10.84% | | | 14.16% | | | 27.13% | |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $27,179 | | | $16,285 | | | $17,474 | | | $8,824 | | | $5,916 | |
| Ratio of expenses to average net assets | | 1.83% | | | 1.83% | | | 1.86% | | | 1.83% | | | 1.83% | |
| Ratio of expenses to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 1.97% | | | 1.99% | | | 1.98% | | | 2.08% | | | 2.26% | |
| Ratio of net investment income to average net assets | | 6.54% | | | 6.72% | | | 5.98% | | | 7.35% | | | 9.66% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 6.40% | | | 6.56% | | | 5.86% | | | 7.10% | | | 9.23% | |
| Portfolio turnover | | 149% | | | 151% | | | 229% | | | 644% | | | 832% | |
| | | | | | | | | | | | | | | | |
| 1 The average shares outstanding method has been applied for per share information for the years ended July 31, 2004 and 2003. |
| 2 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been in effect. |
See accompanying notes
(continues) 19
Financial highlights
Delaware High-Yield Opportunities Fund Class R
Selected data for each share of the Fund outstanding throughout each period were as follows:
| | | | | 6/2/031 | |
| | | Year Ended | | to | |
| | | 7/31/07 | | 7/31/06 | | 7/31/05 | | 7/31/04 | | 7/31/03 | |
| Net asset value, beginning of period | | $4.270 | | | $4.370 | | | $4.210 | | | $3.970 | | | $3.960 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income2 | | 0.313 | | | 0.310 | | | 0.279 | | | 0.322 | | | 0.050 | |
| Net realized and unrealized gain (loss) on investments | | 0.012 | | | (0.090 | ) | | 0.194 | | | 0.242 | | | 0.010 | |
| Total from investment operations | | 0.325 | | | 0.220 | | | 0.473 | | | 0.564 | | | 0.060 | |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.325 | ) | | (0.320 | ) | | (0.313 | ) | | (0.324 | ) | | (0.050 | ) |
| Total dividends and distributions | | (0.325 | ) | | (0.320 | ) | | (0.313 | ) | | (0.324 | ) | | (0.050 | ) |
| |
| Net asset value, end of period | | $4.270 | | | $4.270 | | | $4.370 | | | $4.210 | | | $3.970 | |
| |
| Total return3 | | 7.59% | | | 5.27% | | | 11.52% | | | 14.55% | | | 1.49% | |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $9,251 | | | $3,704 | | | $2,030 | | | $16 | | | $— | |
| Ratio of expenses to average net assets | | 1.33% | | | 1.33% | | | 1.46% | | | 1.43% | | | 1.43% | |
| Ratio of expenses to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 1.57% | | | 1.59% | | | 1.58% | | | 1.68% | | | 2.25% | |
| Ratio of net investment income to average net assets | | 7.04% | | | 7.22% | | | 6.38% | | | 7.75% | | | 9.57% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 6.80% | | | 6.96% | | | 6.26% | | | 7.50% | | | 8.75% | |
| Portfolio turnover | | 149% | | | 151% | | | 229% | | | 644% | | | 832%4 | |
| | | | | | | | | | | | | | | | |
| 1 Date of commencement of operations; ratios have been annualized and total return has not been annualized. |
| 2 The average shares outstanding method has been applied for per share information for the year ended July 31, 2004 and the period ended July 31, 2003. |
| 3 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total investment return reflects waivers and payment of fees by the manager and distributor, as applicable. Performance would have been lower had the expense limitations not been in effect. |
| 4 Portfolio turnover is representative of the Fund for the entire year. |
See accompanying notes
20
Delaware High-Yield Opportunities Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period were as follows:
| | | Year Ended |
| | | 7/31/07 | | 7/31/06 | | 7/31/05 | | 7/31/04 | | 7/31/03 | |
| Net asset value, beginning of period | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | | | $3.420 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.335 | | | 0.332 | | | 0.306 | | | 0.347 | | | 0.388 | |
| Net realized and unrealized gain (loss) on investments | | 0.012 | | | (0.090 | ) | | 0.184 | | | 0.244 | | | 0.532 | |
| Total from investment operations | | 0.347 | | | 0.242 | | | 0.490 | | | 0.591 | | | 0.920 | |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.347 | ) | | (0.342 | ) | | (0.340 | ) | | (0.351 | ) | | (0.370 | ) |
| Total dividends and distributions | | (0.347 | ) | | (0.342 | ) | | (0.340 | ) | | (0.351 | ) | | (0.370 | ) |
| |
| Net asset value, end of period | | $4.260 | | | $4.260 | | | $4.360 | | | $4.210 | | | $3.970 | |
| |
| Total return2 | | 8.15% | | | 5.80% | | | 11.96% | | | 15.33% | | | 28.40% | |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $26,557 | | | $13,837 | | | $7,931 | | | $1,066 | | | $3,316 | |
| Ratio of expenses to average net assets | | 0.83% | | | 0.83% | | | 0.86% | | | 0.83% | | | 0.83% | |
| Ratio of expenses to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 0.97% | | | 0.99% | | | 0.98% | | | 1.08% | | | 1.26% | |
| Ratio of net investment income to average net assets | | 7.54% | | | 7.72% | | | 6.98% | | | 8.35% | | | 10.66% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to expense limitation and expense paid indirectly | | 7.40% | | | 7.56% | | | 6.86% | | | 8.10% | | | 10.23% | |
| Portfolio turnover | | 149% | | | 151% | | | 229% | | | 644% | | | 832% | |
| | | | | | | | | | | | | | | | |
| 1 The average shares outstanding method has been applied for per share information for the years ended July 31, 2004 and 2003. |
| 2 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total investment return reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been in effect. |
See accompanying notes
21
Notes to financial statements
Delaware High-Yield Opportunities Fund
July 31, 2007
Delaware Group Income Funds (the “Trust”) is organized as a Delaware statutory trust and offers four Series: Delaware Corporate Bond Fund, Delaware Delchester Fund, Delaware Extended Duration Bond Fund and Delaware High-Yield Opportunities Fund. These financial statements and the related notes pertain to Delaware High-Yield Opportunities Fund (the “Fund”). The Trust is an open-end investment company. The Fund is considered diversified under the Investment Company Act of 1940, as amended, and offers Class A, Class B, Class C, Class R and Institutional Class shares. Class A shares are sold with a front-end sales charge of up to 4.50%. Class A share purchases of $1,000,000 or more will incur a contingent deferred sales charge (CDSC) of 1% if redeemed during the first year and 0.50% during the second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial advisor a commission on the purchase of those shares. Class B shares are sold with a CDSC that declines from 4% to zero depending upon the period of time the shares are held. Class B shares will automatically convert to Class A shares on a quarterly basis approximately eight years after purchase. Class C shares are sold with a CDSC of 1%, if redeemed during the first 12 months. Class R and Institutional Class shares are not subject to a sales charge and are offered for sale exclusively to certain eligible investors. Effective at the close of business on May 31, 2007, the Fund no longer accepts new purchases of Class B shares other than dividend reinvestments and certain permitted exchanges.
The investment objective of the Fund is to seek total return and, as a secondary objective, high current income.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles and are consistently followed by the Fund.
Security Valuation — Equity securities, except those traded on the Nasdaq Stock Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time of the regular close of the New York Stock Exchange (NYSE) on the valuation date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq Official Closing Price, which may not be the last sales price. If on a particular day an equity security does not trade, then the mean between the bid and asked prices will be used. Long-term debt securities are valued by an independent pricing service and such prices are believed to reflect the fair value of such securities. Short-term debt securities having less than 60 days to maturity are valued at amortized cost, which approximates market value. Swap contracts and other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Fund’s Board of Trustees. In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures, or with respect to foreign securities, aftermarket trading, or significant events after local market trading (e.g., government actions or pronouncements, trading volume or volatility on markets, exchanges among dealers, or news events).
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 “Fair Value Measurements” (Statement 157). Statement 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. Statement 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. Statement 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of Statement 157 to have an impact on the amounts reported in the financial statements.
Federal Income Taxes — The Fund intends to continue to qualify for federal income tax purposes as a regulated investment company and make the requisite distributions to shareholders. Accordingly, no provision for federal income taxes has been made in the financial statements.
On July 13, 2006, the FASB released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. Recent Securities and Exchange Commission (SEC) guidance allows implementing FIN 48 in the Fund’s net asset value calculations as late as the Fund’s last net asset value calculation in the first required financial statement reporting period. As a result, the Fund will incorporate FIN 48 in its semiannual report on January 31, 2008. Although the Fund’s tax positions are currently being evaluated, management does not expect the adoption of FIN 48 to have a material impact on the Fund’s financial statements.
Class Accounting — Investment income and common expenses are allocated to the classes of the Fund on the basis of “settled shares” of each class in relation to the net assets of the Fund. Realized and unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Distribution expenses relating to a specific class are charged directly to that class.
Repurchase Agreements — The Fund may invest in a pooled cash account along with members of the Delaware Investments® Family of Funds pursuant to an exemptive order issued by the SEC. The aggregate daily balance of the pooled cash account is invested in repurchase agreements secured by obligations of the U.S. government. The respective collateral is held by the Fund’s custodian bank until the maturity of the respective repurchase agreements. Each repurchase agreement is at least 102% collateralized. However, in the event of default or bankruptcy by the counterparty to the agreement, realization of the collateral may be subject to legal proceedings.
22
1. Significant Accounting Policies (continued)
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other — Expenses directly attributable to the Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated amongst such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Discounts and premiums are amortized to interest income over the lives of the respective securities. Realized gains (losses) on paydowns of mortgage- and asset-backed securities are classified as interest income. The Fund declares dividends daily from net investment income and pays such dividends monthly and declares and pays distributions from net realized gain on investments, if any, annually.
The Fund receives earnings credits from its custodian when positive cash balances are maintained, which are used to offset custody fees. The expense paid under this arrangement is included in custodian fees on the Statement of operations with the corresponding expense offset shown as “expense paid indirectly.”
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee which is calculated daily at the rate of 0.65% on the first $500 million of average daily net assets of the Fund, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management fee and reimburse the Fund to the extent necessary to ensure that annual operating expenses, exclusive of taxes, interest, brokerage fees, 12b-1 plan expenses, certain insurance costs and non-routine expenses or costs, including but not limited to, those relating to reorganization, litigation, certain Trustee retirement plan expenses, conducting shareholder meetings and liquidations, do not exceed 0.83% of average daily net assets of the Fund through November 30, 2007.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting, administration, dividend disbursing and transfer agent services. The Fund pays DSC a monthly fee computed at the annual rate of 0.04% of the Fund’s average daily net assets for accounting and administration services. The Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.30% of the average daily net assets of the Class A shares, 1.00% of the average daily net assets of the Class B and C shares, and 0.60% of the average daily net assets of Class R shares. Institutional Class shares pay no distribution and service expenses. DDLP has contracted to limit 12b-1 fees through November 30, 2007 in order to prevent 12b-1 fees of Class R shares from exceeding 0.50% of average daily net assets.
At July 31, 2007, the Fund had liabilities payable to affiliates as follows:
| Investment management fee payable to DMC | $83,941 |
| Dividend disbursing, transfer agent, accounting | |
| and administration fees and other expenses | |
| payable to DSC | 32,612 |
| Distribution fee payable to DDLP | 66,364 |
| Other expenses payable to DMC and affiliates* | 2,096 |
| *DMC, as part of its administrative services, pays operating expenses on behalf of the Fund and is reimbursed on a periodic basis. Such expenses include items such as printing of shareholder reports, fees for audit, legal and tax services, registration fees and trustees’ fees. |
As provided in the investment management agreement, the Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to the Fund by DMC and/or its affiliates’ employees. For the year ended July 31, 2007, the Fund was charged $7,769 for internal legal and tax services provided by DMC and/or its affiliates’ employees. For the year ended July 31, 2007, DDLP earned $60,368 for commissions on sales of the Fund’s Class A shares.
For the year ended July 31, 2007, DDLP received gross CDSC commissions of $669, $22,684, and $2,705 on redemption of the Fund’s Class A, Class B, and Class C shares, respectively, and these commissions were entirely used to offset up-front commissions previously paid by DDLP to broker-dealers on sales of those shares.
Trustees’ fees and benefits include expenses accrued by the Fund for each Trustee’s retainer, per meeting fees and retirement benefits. Independent Trustees with over five years of uninterrupted service were eligible to participate in a retirement plan that provided for the payment of benefits upon retirement. The amount of the retirement benefit was determined based on factors set forth in the plan, including the number of years of service. On November 16, 2006, the Board of Trustees of the Fund unanimously voted to terminate the retirement plan. Payments equal to the net present value of the earned benefits were made in 2007 to those independent Trustees so entitled. The retirement benefit payout for the Fund was $15,429.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust. These officers and trustees are paid no compensation by the Fund.
3. Investments
For the year ended July 31, 2007, the Fund made purchases of $283,244,565 and sales of $220,303,187 of investment securities other than short-term investments.
At July 31, 2007, the cost of investments for federal income tax purposes was $176,818,000. At July 31, 2007, net unrealized depreciation was $6,479,537, of which $2,363,998 related to unrealized appreciation of investments and $8,843,535 related to unrealized depreciation of investments.
(continues) 23
Notes to financial statements
Delaware High-Yield Opportunities Fund
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. generally accepted accounting principles. Additionally, net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. The tax character of dividends and distributions paid during the years ended July 31, 2007 and 2006 was as follows:
| | Year Ended |
| | 7/31/07 | | 7/31/06 |
| Ordinary income | $11,942,429 | | $8,776,541 |
5. Components of Net Assets on a Tax Basis
As of July 31, 2007, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 186,701,488 | |
| Undistributed ordinary income | | 241,110 | |
| Post-October losses | | (7,544 | ) |
| Capital loss carryforwards | | (2,602,454 | ) |
| Unrealized depreciation of investments | | (6,479,537 | ) |
| Net assets | $ | 177,853,063 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales, interest accrual on defaulted bonds, tax treatment of market discount and premium on debt instruments and the treatment of credit default swap contracts.
Post-October losses represent losses realized on investment transactions from November 1, 2006 through July 31, 2007 that, in accordance with federal income tax regulations, the Fund has elected to defer and treat as having arisen in the following fiscal year.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of market discount and premium on certain debt instruments, paydowns gain (loss) on mortgage- and asset-backed securities and the treatment of credit default swap contracts. Results of operations and net assets were not affected by these reclassifications. For the year ended July 31, 2007, the Fund recorded the following reclassifications:
| Undistributed net investment income | $ | 547,638 | |
| Accumulated net realized gain (loss) | | (547,638 | ) |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $1,794,104 was utilized in 2007. Capital loss carryforwards remaining at July 31, 2007 will expire as follows: $2,177,753 expires in 2010 and $424,701 expires in 2014.
6. Capital Shares
Transactions in capital shares were as follows:
| | Year Ended |
| | 7/31/07 | | | 7/31/06 | |
| Shares sold: | | | | | |
| Class A | 16,131,500 | | | 8,017,272 | |
| Class B | 690,363 | | | 486,900 | |
| Class C | 3,683,027 | | | 1,225,582 | |
| Class R | 1,542,551 | | | 536,316 | |
| Institutional Class | 9,813,398 | | | 1,478,455 | |
| |
| Shares issued upon reinvestment of | | | | | |
| dividends and distributions: | | | | | |
| Class A | 1,014,172 | | | 912,687 | |
| Class B | 95,775 | | | 104,992 | |
| Class C | 199,740 | | | 145,725 | |
| Class R | 85,132 | | | 49,237 | |
| Institutional Class | 474,044 | | | 150,666 | |
| | 33,729,702 | | | 13,107,832 | |
| | | | | | |
| |
| Shares repurchased: | | | | | |
| Class A | (7,989,211 | ) | | (13,077,892 | ) |
| Class B | (1,054,471 | ) | | (1,220,940 | ) |
| Class C | (1,328,467 | ) | | (1,556,900 | ) |
| Class R | (327,926 | ) | | (183,002 | ) |
| Institutional Class | (7,300,415 | ) | | (201,040 | ) |
| | (18,000,490 | ) | | (16,239,774 | ) |
| Net increase (decrease) | 15,729,212 | | | (3,131,942 | ) |
For the years ended July 31, 2007 and 2006, 318,849 Class B shares were converted to 318,849 Class A shares valued at $1,416,201 and 87,453 Class B shares were converted to 87,415 Class A shares valued at $373,970, respectively. The respective amounts are included in Class B redemptions and Class A subscriptions in the table above and the Statements of changes in net assets.
7. Line of Credit
The Fund, along with certain other funds in the Delaware Investments® Family of Funds (the “Participants”), participates in a $225,000,000 revolving line of credit facility to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. The Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The Fund had no amounts outstanding as of July 31, 2007, or at any time during the year then ended.
24
8. Swap Contracts
The Fund may enter into interest rate swap contracts, index swap contracts and credit default swap (“CDS”) contracts in accordance with its investment objectives. The Fund may use interest rate swaps to adjust the Fund’s sensitivity to interest rates or to hedge against changes in interest rates. Index swaps may be used to gain exposure to markets that the Fund invests in, such as the corporate bond market. The Fund may also use index swaps as a substitute for futures or options contracts if such contracts are not directly available to the Fund on favorable terms. The Fund may enter into CDS contracts in order to hedge against a credit event, to enhance total return or to gain exposure to certain securities or markets.
An interest rate swap involves payments received by the Fund from another party based on a variable or floating interest rate, in return for making payments based on a fixed interest rate. An interest rate swap can also work in reverse with the Fund receiving payments based on a fixed interest rate and making payments based on a variable or floating interest rate. Interest rate swaps may be used to adjust the Fund’s sensitivity to interest rates or to hedge against changes in interest rates. Periodic payments on such contracts are accrued daily and recorded as unrealized appreciation/depreciation on swap contracts. Upon periodic payment/ receipt or termination of the contract, such amounts are recorded as realized gains or losses on swap contracts.
Index swaps involve commitments to pay interest in exchange for a market linked return based on a notional amount. To the extent the total return of the security, instrument or basket of instruments underlying the transaction exceeds the offsetting interest obligation, the Fund will receive a payment from the counterparty. To the extent the total return of the security, instrument or basket of instruments underlying the transaction falls short of the offsetting interest obligation, the Fund will make a payment to the counterparty. The change in value of swap contracts outstanding, if any, is recorded as unrealized appreciation or depreciation daily. A realized gain or loss is recorded on maturity or termination of the swap contract.
A CDS contract is a risk-transfer instrument through which one party (the “purchaser of protection”) transfers to another party (the “seller of protection”) the financial risk of a Credit Event (as defined in the CDS agreement), as it relates to a particular reference security or basket of securities (such as an index). In exchange for the protection offered by the seller of protection, the purchaser of protection agrees to pay the seller of protection a periodic amount at a stated rate that is applied to the notional amount of the CDS contract. In addition, an upfront payment may be made or received by the Fund in connection with an unwinding or assignment of a CDS contract. Upon the occurrence of a Credit Event, the seller of protection would pay the par (or other agreed-upon) value of the referenced security (or basket of securities) to the counterparty.
During the year ended July 31, 2007, the Fund entered into CDS contracts as a purchaser and seller of protection. Periodic payments on such contracts are accrued daily and recorded as unrealized gains or losses on swap contracts. Upon payment, such amounts are recorded as realized gains or losses on swap contracts. Upfront payments made or received in connection with CDS contracts are amortized over the expected life of the CDS contracts as realized losses (gains) on swap contracts. The change in value of CDS contracts is recorded as unrealized appreciation or depreciation daily. A realized gain or loss is recorded upon a Credit Event or the maturity or termination of the agreement.
Credit default swaps may involve greater risks than if the Fund had invested in the referenced obligation directly. Credit default swaps are subject to general market risk, liquidity risk, counterparty risk and credit risk. If the Fund enters into a CDS contract as a purchaser of protection and no credit event occurs, its exposure is limited to the periodic payments previously made to the counterparty.
Because there is no organized market for swap contracts, the value of open swaps may differ from that which would be realized in the event the Fund terminated its position in the agreement. Risks of entering into these contracts include the potential inability of the counterparty to meet the terms of the contracts. This type of risk is generally limited to the amount of favorable movement in the value of the underlying security, instrument, or basket of instruments, if any, at the day of default. Risks also arise from potential losses from adverse market movements and such losses could exceed the unrealized amounts shown on the Statement of net assets.
9. Credit and Market Risk
The Fund invests a portion of its assets in high yield fixed income securities, which carry ratings of BB or lower by Standard & Poor’s Ratings Group and/or Ba or lower by Moody’s Investors Service, Inc. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
The Fund may invest up to 15% of its total assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board of Trustees has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund’s limitation on investments in illiquid assets. Rule 144A and illiquid securities have been identified on the Statement of Net Assets.
10. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
(continues) 25
Notes to financial statements
Delaware High-Yield Opportunities Fund
11. Termination of New Purchases of Class B Shares
As of the close of business on May 31, 2007, each Fund in the Delaware Investments® Family of Funds no longer accepts new or subsequent investments in Class B shares of the funds, other than a reinvestment of dividends or capital gains or permitted exchanges. Existing shareholders of Class B shares may continue to hold their Class B shares, reinvest dividends into Class B shares, and exchange their Class B shares of one Delaware Investments® Fund (each a Fund) for Class B shares of another Fund, as permitted by existing exchange privileges. Existing Class B shareholders wishing to make subsequent purchases in a Fund’s shares will be permitted to invest in other classes of the Fund, subject to that class’ pricing structure and eligibility requirements, if any.
For Class B shares outstanding as of May 31, 2007 and Class B shares acquired upon reinvestment of dividends or capital gains, all Class B share attributes, including the CDSC schedules, conversion to Class A schedule, and distribution and service (12b-1) fees, will continue in their current form. However, as of the close of business on May 31, 2007, reinvestment of redeemed shares with respect to Class B shares (which, as described in the prospectus, permits you to reinvest within 12 months of selling your shares and have any CDSC you paid on such shares credited back to your account) has been discontinued. In addition, because the Fund’s or its distributor’s ability to assess certain sales charges and fees is dependent on the sale of new shares, the termination of new purchases of Class B shares could ultimately lead to the elimination and/or reduction of such sales charges and fees. The Fund may not be able to provide shareholders with advance notice of the reduction in these sales charges and fees. You will be notified via a Prospectus Supplement if there are any changes to any attributes, sales charges, or fees.
12. Change of Custodian
On July 26, 2007, Mellon Bank, N.A., One Mellon Center, Pittsburgh, PA 15285, became the Fund’s custodian. Prior to July 26, 2007, JPMorgan Chase served as the Fund’s custodian.
13. Tax Information (Unaudited)
The information set forth below is for the Fund’s fiscal year as required by federal laws. Shareholders, however, must report distributions on a calendar year basis for income tax purposes, which may include distributions for portions of two fiscal years of a fund. Accordingly, the information needed by shareholders for income tax purposes will be sent to them in January of each year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2007, the Fund designates distributions paid during the year as follows:
| (A) | | (B) | | |
| Long-Term | | Ordinary | | |
| Capital Gains | | Income | | Total |
| Distributions | | Distributions | | Distributions |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) |
| — | | 100% | | 100% |
| |
| (A) and (B) are based on a percentage of the Fund’s total distributions. |
26
Report of independent
registered public accounting firm
To the Shareholders and Board of Trustees Delaware Group Income Funds – Delaware High-Yield Opportunities Fund
We have audited the accompanying statement of net assets and statement of assets and liabilities of Delaware High-Yield Opportunities Fund (one of the series constituting Delaware Group Income Funds) (the “Fund”) as of July 31, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Delaware High-Yield Opportunities Fund series of Delaware Group Income Funds at July 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
Philadelphia, Pennsylvania
September 24, 2007
27
Other Fund information (unaudited)
Delaware High-Yield Opportunities Fund
Board Consideration of Delaware High-Yield Opportunities Fund Investment Advisory Agreement
At a meeting held on May 16-17, 2007 (Annual Meeting), the Board of Trustees (Board), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for the Delaware High Yield Opportunities Fund (Fund). In making its decision, the Board considered information furnished throughout the year at regular Board meetings, including reports detailing Fund performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contracts. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (Delaware Investments) concerning, among other things, the level of services provided to the Fund, the costs of such services to the Fund, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Meeting, the Board separately received and reviewed in mid-January 2007 independent historical and comparative reports prepared by Lipper Inc. (Lipper), an independent statistical compilation organization. The Lipper reports compared the Fund’s investment performance and expenses with those of other comparable mutual funds. The Board requested and received certain information regarding management’s policy with respect to advisory fee levels and its philosophy with respect to breakpoints; the structure of portfolio manager compensation; the investment manager’s profitability; and any constraints or limitations on the availability of securities in certain investment styles which might inhibit DMC’s ability to fully invest in accordance with Fund policies.
In considering information relating to the approval of the Fund’s advisory agreement, the independent Trustees received assistance and advice from and met separately with independent counsel. While attention was given to all information furnished, the following discusses under separate headings the primary factors taken into account by the Board in its contract renewal considerations.
Nature, Extent and Quality of Service. Consideration was given to the services provided by Delaware Investments to the Fund and its shareholders. In reviewing the nature, extent and quality of services, the Board emphasized reports furnished to it throughout the year at regular Board Meetings covering matters such as the relative performance of the Fund, compliance of portfolio managers with the investment policies, strategies and restrictions for the Fund, the compliance of management personnel with the Code of Ethics adopted throughout the Delaware Investments® Family of Funds complex and the adherence to fair value pricing procedures as established by the Board. The Board noted that it was pleased with the current staffing of the Fund’s investment advisor and the emphasis placed on research in the investment process. Favorable consideration was given to DMC’s efforts to maintain, and in some instances increase, financial and human resources committed to fund matters. The Board also considered the transfer agent and shareholder services provided to Fund shareholders by Delaware Investments’ affiliate, Delaware Service Company, Inc. (DSC), noting DSC’s commitment to maintain a high level of service and the continuing expenditures by Delaware Investments to improve the delivery of shareholder services. During 2006, management conducted extensive research into alternatives that could further improve the quality and cost of delivering investment accounting services to the Fund. The Board noted the extent of benefits provided to Fund shareholders for being part of the Delaware Investments Family of Funds, including the privilege to exchange fund investments between the same class of shares without a sales charge, the ability to reinvest Fund dividends into other funds and the privilege to combine holdings in other funds to obtain a reduced sales charge. The Board was satisfied with the nature, extent and quality of the overall services provided by Delaware Investments.
Investment Performance. The Board considered the investment performance of DMC and the Fund. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular weight was given to the Lipper reports furnished for the Annual Meeting. The Lipper reports prepared for the Fund showed the investment performance of its Class A shares in comparison to a group of similar funds as selected by Lipper (Performance Universe). A fund with the best performance ranked first, and a fund with the poorest ranked last. The highest/best performing 25% of funds in the Performance Universe make up the first quartile; the next 25% - the second quartile; the next 25% - the third quartile; and the poorest/worst performing 25% of funds in the Performance Universe make up the fourth quartile. Comparative annualized performance for the Fund was shown for the past one-, three-, five- and 10-year periods ended December 31, 2006. The Board also considered comparative annualized performance for the Fund for the same periods ended October 31, 2006. The performance comparison presented below is based upon the December 31, 2006 information. The Board noted its objective that the Fund’s performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Fund and the Board’s view of such performance.
The Performance Universe for the Fund consisted of the Fund and all retail and institutional high current yield funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one-, three-, five- and 10-year periods was in the first quartile of its Performance Universe. The Board was very satisfied with performance.
28
Board Consideration of Delaware High-Yield Opportunities Fund Investment Advisory Agreement (continued)
Comparative Expenses. The Board considered expense comparison data for the Delaware Investments® Family of Funds as of October 31, 2006. Management provided the Board with information on pricing levels and fee structures for the Fund. The Board focused particularly on the comparative analysis of the effective management fees and total expense ratios of the Fund and the effective management fees and expense ratios of a group of similar funds as selected by Lipper (Expense Group). In reviewing comparative costs, the Fund’s contractual management fee and the actual management fee incurred by the Fund were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Fund) and actual management fees (as reported by each fund) of other funds within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Fund’s total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Class A shares and compared total expenses including 12b-1 and non-12b-1 service fees. The Board also considered fees paid to Delaware Investments for non-management services. The Board noted its objective to limit the Fund’s total expense ratio to an acceptable range as compared to the median of the Expense Group. The following paragraph summarizes the expense results for the Fund and the Board’s view of such expenses.
The expense comparisons for the Fund showed that its actual management fee and total expenses were in the quartile with the second lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Fund in comparison to its Expense Group as shown in the Lipper report.
Management Profitability. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Fund. In this respect, the Board reviewed the Investment Management Profitability Analysis that addressed the overall profitability of Delaware Investments’ business in providing management and other services to each of the individual funds and the Delaware Investments Family of Funds as a whole. Specific attention was given to the methodology followed in allocating costs for the purpose of determining profitability. Management stated that the level of profits of Delaware Investments, to a certain extent, reflected operational cost savings and efficiencies initiated by Delaware Investments. The Board considered Delaware Investments’ efforts to improve services provided to fund shareholders and to meet additional regulatory and compliance requirements resulting from recent Securities and Exchange Commission initiatives. The Board also considered the extent to which Delaware Investments might derive ancillary benefits from fund operations, including the potential for procuring additional business as a result of the prestige and visibility associated with its role as service provider to the Delaware Investments Family of Funds and the benefits from allocation of fund brokerage to improve trading efficiencies. The Board found that the management fees were reasonable in light of the services rendered and the level of profitability of Delaware Investments.
Economies of Scale. The Trustees considered whether economies of scale are realized by Delaware Investments as the Fund’s assets increase and the extent to which any economies of scale are reflected in the level of management fees charged. The Trustees took into account the standardized advisory fee pricing and structure, approved by the Board and shareholders and again reviewed by the Board this year, which includes breakpoints. Breakpoints in the advisory fee occur when the advisory fee rate is reduced on assets in excess of specified levels. This results in a lower advisory fee than would otherwise be the case on all assets when those asset levels specified are exceeded. The Board noted that the fee under the Fund’s management contract fell within the standard structure. Although the Fund has not reached a size at which it can take advantage of breakpoints, the Board recognized that the fee was structured so that when the Fund grows, economies of scale may be shared.
29
Board of trustees/directors
and officers addendum
Delaware Investments® Family of Funds
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | | Number of | |
| | | | | Portfolios in Fund | Other |
| Name, | | | | Complex Overseen | Directorships |
| Address, | Position(s) | Length of | Principal Occupation(s) | by Trustee | Held by |
| and Birth Date | Held with Fund(s) | Time Served | During Past 5 Years | or Officer | Trustee or Officer |
| Interested Trustees | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 82 | Director — |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Kaydon Corp. |
| Philadelphia, PA | Chief Executive | | at different times at | | |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| | Trustee | Chief Executive Officer | | | |
| April 14, 1963 | | since August 1, 2006 | | | |
| Independent Trustees | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 82 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (April 2007–Present) |
| | | | Morgan Stanley & Co. | | |
| October 4, 1947 | | | (January 1984–March 2004) | | |
| John A. Fry | Trustee | Since | President — | 82 | Director — |
| 2005 Market Street | | January 2001 | Franklin & Marshall College | | Community Health |
| Philadelphia, PA | | | (June 2002–Present) | | Systems |
| 19103 | | | | | |
| | | | Executive Vice President — | | Director — |
| May 28, 1960 | | | University of Pennsylvania | | Allied Barton |
| | | | (April 1995–June 2002) | | Security Holdings |
| Anthony D. Knerr | Trustee | Since | Founder and Managing Director — | 82 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| |
| December 7, 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Chief Investment Officer — | 82 | None |
| 2005 Market Street | | March 2005 | Assurant, Inc. | | |
| Philadelphia, PA | | | (Insurance) | | |
| 19103 | | | (2002–2004) | | |
| |
| June 24, 1947 | | | | | |
| Ann R. Leven | Trustee | Since | Consultant — | 82 | Director and |
| 2005 Market Street | | October 1989 | ARL Associates | | Audit Committee |
| Philadelphia, PA | | | (Financial Planning) | | Chairperson — Andy |
| 19103 | | | (1983–Present) | | Warhol Foundation |
| |
| November 1, 1940 | | | | | Director and Audit |
| | | | | | Committee Chair — |
| | | | | | Systemax, Inc. |
30
| | | | | Number of | |
| | | | | Portfolios in Fund | Other |
| Name, | | | | Complex Overseen | Directorships |
| Address, | Position(s) | Length of | Principal Occupation(s) | by Trustee | Held by |
| and Birth Date | Held with Fund(s) | Time Served | During Past 5 Years | or Officer | Trustee or Officer |
| Independent Trustees (continued) | | | | |
| Thomas F. Madison | Trustee | Since | President and Chief | 82 | Director — |
| 2005 Market Street | | May 19973 | Executive Officer — | | CenterPoint Energy |
| Philadelphia, PA | | | MLM Partners, Inc. | | |
| 19103 | | | (Small Business Investing | | Director and Audit |
| | | | and Consulting) | | Committee Chair — |
| February 25, 1936 | | | (January 1993–Present) | | Digital River, Inc. |
| |
| | | | | | Director and Audit |
| | | | | | Committee Member — |
| | | | | | Rimage |
| | | | | | Corporation |
| |
| | | | | | Director — Valmont |
| | | | | | Industries, Inc. |
| Janet L. Yeomans | Trustee | Since | Treasurer | 82 | None |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | |
| Philadelphia, PA | | | Vice President — Mergers & Acquisitions | | |
| 19103 | | | (January 2003–January 2006), and | | |
| | | | Vice President | | |
| | | (July 1995–January 2003) | | |
| | | 3M Corporation | | |
| July 31, 1948 | | | | | |
| | | | Ms. Yeomans has held | | |
| | | | various management positions | | |
| | | | at 3M Corporation since 1983. | | |
| J. Richard Zecher | Trustee | Since | Founder — | 82 | Director and Audit |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | | Director and Audit |
| July 3, 1940 | | | Founder — | | Committee Member — |
| | | | Sutton Asset Management | | Oxigene, Inc. |
| | | | (Hedge Fund) | | |
| | | | (September 1996–Present) | | |
| Officers | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 82 | None4 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | | October 2005 | since 2000. | | |
| December 2, 1963 | | | | | |
| David P. O’Connor | Senior Vice | Senior Vice President, | David P. O’Connor has served in | 82 | None4 |
| 2005 Market Street | President, | General Counsel, and | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Chief Legal Officer | capacities at different times | | |
| 19103 | and Chief | since | at Delaware Investments. | | |
| | Legal Officer | October 2005 | | | |
| February 21, 1966 | | | | | |
| John J. O’Connor | Senior Vice President | Treasurer | John J. O’Connor has served in | 82 | None4 |
| 2005 Market Street | and Treasurer | since | various executive capacities | | |
| Philadelphia, PA | | February 2005 | at different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| June 16, 1957 | | | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 82 | None4 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| | Officer | | | | |
| October 4, 1963 | | | | | |
| 1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
| 2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
| 3 In 1997, several funds managed by Voyageur Fund Managers, Inc. (the “Voyageur Funds”) were incorporated into the Delaware Investments Family of Funds. Mr. Madison served as a director of the Voyageur Funds from 1993 until 1997. |
| 4 David F. Connor, David P. O’Connor, John J. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. John J. O’Connor also serves in a similar capacity for Lincoln Variable Insurance Products Trust, an investment company that has several portfolios sub-advised by the registrant’s investment advisor and whose investment advisor is an affiliated person of the registrant’s investment advisor. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
31
About the organization
This annual report is for the information of Delaware High-Yield Opportunities Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware High-Yield Opportunities Fund and the Delaware Investments® Performance Update for the most recently completed calendar quarter. The prospectus sets forth details about charges, expenses, investment objectives, and operating policies of the investment company. You should read the prospectus carefully before you invest. The figures in this report represent past results that are not a guarantee of future results. The return and principal value of an investment in the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
| Board of trustees Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA Thomas L. Bennett
Private Investor
Rosemont, PA John A. Fry
President
Franklin & Marshall College
Lancaster, PA Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA Ann R. Leven
Consultant
ARL Associates
New York, NY Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ | Affiliated officers David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA David P. O’Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA John J. O’Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA | Contact information Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA National distributor
Delaware Distributors, L.P.
Philadelphia, PA Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094 For shareholders
800 523-1918 For securities dealers and financial
institutions representatives only
800 362-7500 Web site
www.delawareinvestments.com |
Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; and (ii) on the Commission’s Web site at http://www.sec.gov. In addition, a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities and the Fund’s Schedule of Investments are available without charge on the Fund’s Web site at http://www.delawareinvestments.com. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C.; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Fund’s Web site at http://www.delawareinvestments.com; and (ii) on the Commission’s Web site at http://www.sec.gov.
32
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- Hassle-free investing — Make online purchases and redemptions at any time.
- Simplified tax processing — Automatically retrieve your Delaware Investments accounts’ 1099 information and import it directly into your 1040 tax return. Available only with Turbo Tax® OnlineSM and Desktop software — www.turbotax.com.
- Less mail clutter — Get instant access to your fund materials online with Delaware eDelivery.
Register for Account Access today! Please visit us at www.delawareinvestments.com, select Individual Investors, and click Account Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through Friday from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any questions.
| (2180) | Printed in the USA |
| AR-137 [7/07] CGI 9/07 | MF-07-08-039 PO12157 |
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. A copy of the registrant’s Code of Business Ethics has been posted on Delaware Investments’ internet website at www.delawareinvestments.com. Any amendments to the Code of Business Ethics, and information on any waiver from its provisions granted by the registrant, will also be posted on this website within five business days of such amendment or waiver and will remain on the website for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant’s Board of Trustees/Directors has determined that each member of the registrant’s Audit Committee is an audit committee financial expert, as defined below. For purposes of this item, an “audit committee financial expert” is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and financial statements;
b. The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial reporting; and e. An understanding of audit committee functions.
An “audit committee financial expert” shall have acquired such attributes through:
a. Education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor or experience in one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor, or person performing similar functions;
c. Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or
d. Other relevant experience.
The registrant’s Board of Trustees/Directors has also determined that each member of the registrant’s Audit Committee is independent. In order to be “independent” for purposes of this item, the Audit Committee member may not: (i) other than in his or her capacity as a member of the Board of Trustees/Directors or any committee thereof, accept directly or indirectly any consulting, advisory or other compensatory fee from the issuer; or (ii) be an “interested person” of the registrant as defined in Section 2(a)(19) of the Investment Company Act of 1940.
The names of the audit committee financial experts on the registrant’s Audit Committee are set forth below:
Thomas L. Bennett 1
Thomas F. Madison
Janet L. Yeomans 1
J. Richard Zecher
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
The aggregate fees billed for services provided to the registrant by its independent auditors for the audit of the registrant’s annual financial statements and for services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements were $79,200 for the fiscal year ended July 31, 2007.
_______________________
1 The instructions to Form N-CSR require disclosure on the relevant experience of persons who qualify as audit committee financial experts based on “other relevant experience.” The Board of Trustees/Directors has determined that Mr. Bennett qualifies as an audit committee financial expert by virtue of his education, Chartered Financial Analyst designation, and his experience as a credit analyst, portfolio manager and the manager of other credit analysts and portfolio managers. The Board of Trustees/Directors has determined that Ms. Yeomans qualifies as an audit committee financial expert by virtue of her education and experience as the Treasurer of a large global corporation.
The aggregate fees billed for services provided to the registrant by its independent auditors for the audit of the registrant’s annual financial statements and for services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements were $76,800 for the fiscal year ended July 31, 2006.
(b) Audit-related fees.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the registrant’s financial statements and not reported under paragraph (a) of this Item were $0 for the fiscal year ended July 31, 2007.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the financial statements of the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $19,074 for the registrant’s fiscal year ended July 31, 2007. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These audit-related services were as follows: issuance of report concerning transfer agent's system of internal accounting control pursuant to Rule 17Ad-13 of the Securities Exchange Act.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the registrant’s financial statements and not reported under paragraph (a) of this Item were $0 for the fiscal year ended July 31, 2006.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the financial statements of the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $33,700 for the registrant’s fiscal year ended July 31, 2006. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These audit-related services were as follows: issuance of report concerning transfer agent's system of internal accounting control pursuant to Rule 17Ad-13 of the Securities Exchange Act; and issuance of agreed upon procedures reports to the registrant's Board in connection with the pass-through of internal legal cost relating to the operations of the registrant.
(c) Tax fees.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $26,700 for the fiscal year ended July 31, 2007. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were as follows: review of income tax returns and review of annual excise distribution calculations.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended July 31, 2007.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $12,900 for the fiscal year ended July 31, 2006. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were as follows: review of income tax returns and review of annual excise distribution calculations.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended July 31, 2006.
(d) All other fees.
The aggregate fees billed for all services provided by the independent auditors to the registrant other than those set forth in paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended July 31, 2007.
The aggregate fees billed for all services other than those set forth in paragraphs (b) and (c) of this Item provided by the registrant’s independent auditors to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended July 31, 2007.
The aggregate fees billed for all services provided by the independent auditors to the registrant other than those set forth in paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended July 31, 2006.
The aggregate fees billed for all services other than those set forth in paragraphs (b) and (c) of this Item provided by the registrant’s independent auditors to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended July 31, 2006.
(e) The registrant’s Audit Committee has established pre-approval policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X (the “Pre-Approval Policy”) with respect to services provided by the registrant’s independent auditors. Pursuant to the Pre-Approval Policy, the Audit Committee has pre-approved the services set forth in the table below with respect to the registrant up to the specified fee limits. Certain fee limits are based on aggregate fees to the registrant and other registrants within the Delaware Investments Family of Funds.
| Service | Range of Fees |
| Audit Services | |
| Statutory audits or financial audits for new Funds | up to $25,000 per Fund |
| Services associated with SEC registration statements (e.g., Form N-1A, Form N-14, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings (e.g., comfort letters for closed-end Fund offerings, consents), and assistance in responding to SEC comment letters | up to $10,000 per Fund |
| Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit-related services” rather than “audit services”) | up to $25,000 in the aggregate |
| Audit-Related Services | |
| Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and /or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit services” rather than “audit-related services”) | up to $25,000 in the aggregate |
| Tax Services | |
| U.S. federal, state and local and international tax planning and advice (e.g., consulting on statutory, regulatory or administrative developments, evaluation of Funds’ tax compliance function, etc.) | up to $25,000 in the aggregate |
| U.S. federal, state and local tax compliance (e.g., excise distribution reviews, etc.) | up to $5,000 per Fund |
| Review of federal, state, local and international income, franchise and other tax returns | up to $5,000 per Fund |
Under the Pre-Approval Policy, the Audit Committee has also pre-approved the services set forth in the table below with respect to the registrant’s investment adviser and other entities controlling, controlled by or under common control with the investment adviser that provide ongoing services to the registrant (the “Control Affiliates”) up to the specified fee limit. This fee limit is based on aggregate fees to the investment adviser and its Control Affiliates.
| Service | Range of Fees |
| Non-Audit Services | |
| Services associated with periodic reports and other documents filed with the SEC and assistance in responding to SEC comment letters | up to $10,000 in the aggregate |
The Pre-Approval Policy requires the registrant’s independent auditors to report to the Audit Committee at each of its regular meetings regarding all services initiated since the last such report was rendered, including those services authorized by the Pre-Approval Policy.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant’s independent auditors for services rendered to the registrant and to its investment adviser and other service providers under common control with the adviser were $281,062 and $201,280 for the registrant’s fiscal years ended July 31, 2007 and July 31, 2006, respectively.
(h) In connection with its selection of the independent auditors, the registrant’s Audit Committee has considered the independent auditors’ provision of non-audit services to the registrant’s investment adviser and other service providers under common control with the adviser that were not required to be pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit Committee has determined that the independent auditors’ provision of these services is compatible with maintaining the auditors’ independence.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of the filing of this report and have concluded that they are effective in providing reasonable assurance that the information required to be disclosed by the registrant in its reports or statements filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no significant changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report to stockholders included herein (i.e., the registrant’s fourth fiscal quarter) that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
| (a) | | (1) Code of Ethics |
| | |
| | Not applicable. |
| | |
| | (2) Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are attached hereto as Exhibit 99.CERT. |
| | |
| | (3) Written solicitations to purchase securities pursuant to Rule 23c-1 under the Securities Exchange Act of 1934. |
| | |
| | Not applicable. |
| | |
| (b) | | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are furnished herewith as Exhibit 99.906CERT. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant: DELAWARE GROUP INCOME FUNDS
| PATRICK P. COYNE |
| By: Patrick P. Coyne |
| Title: Chief Executive Officer |
| Date: October 5, 2007 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| PATRICK P. COYNE |
| By: Patrick P. Coyne |
| Title: Chief Executive Officer |
| Date: October 5, 2007 |
| RICHARD SALUS |
| By: Richard Salus |
| Title: Chief Financial Officer |
| Date: October 5, 2007 |
