UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-2071
Exact name of registrant as specified in charter:
Delaware Group Income Funds
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
Richelle S. Maestro, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: July 31
Date of reporting period: July 31, 2003
Item 1. Reports to Stockholders
Delaware
Investments(SM)
FIXED INCOME --------------------------------------
A member of Lincoln Financial Group(R)
Annual Report 2003
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DELAWARE CORPORATE BOND FUND
DELAWARE EXTENDED DURATION BOND FUND
[Graphic Omitted: Logo] POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 3
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FINANCIAL STATEMENTS:
Statements of Net Assets 5
Statements of Assets and Liabilities 14
Statements of Operations 15
Statements of Changes in Net Assets 16
Financial Highlights 17
Notes to Financial Statements 25
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REPORT OF INDEPENDENT AUDITORS 29
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BOARD OF TRUSTEES/OFFICERS 30
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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.
(C)2003 Delaware Distributors, L.P.
Portfolio Delaware Corporate Bond Fund
MANAGEMENT REVIEW Delaware Extended Duration Bond Fund
August 12, 2003
Fund Manager
Ryan K. Brist
Vice President/Portfolio Manager
Q: What was the climate for corporate bond investing for the 12-month period
ended July 31, 2003?
A: Slow yet uninterrupted economic growth was a central theme during the Funds'
fiscal year. As a result, equity investing proved difficult through much of the
period. With downward pressure on equities, investment capital continued to move
toward bonds, which were in demand for both their interest income and greater
principal stability relative to stocks.
On the whole, the fixed income environment was quite positive. With a modest
inflation outlook, the Fed was able to shepherd interest rates downward, with
the fed funds rate hitting a four-decade low of 1.0%. Bonds responded by rising
in value. When coupled with their income component, fixed-income investments
produced generally strong total returns for the period.
The environment for corporate securities in particular was a dynamic one for the
12-month period. Senior corporate managers generally effected strategies aimed
at enhancing financial structures, with evidence of their efforts found in
improved balance sheets. We believe this force, along with signs of continued
economic improvement and historically low interest rates, helped convince
investors that corporate bonds would be attractive moving forward --
particularly during 2003. In turn, we saw corporate bonds, which included both
high-grade and high-yield issues, provide general market leadership.
Q: How would you describe your approach to managing the Funds for the period?
A: Given our expectations for modest economic improvement during the period, we
believed we could seek competitive total returns by focusing on the
higher-yielding securities in the investment-grade bond spectrum. Thus, our
weighting in BBB-rated securities, which was higher than that of our benchmarks,
made a significant positive contribution to the Funds' performances.
We likewise gained total return by allocating the maximum percentage (20%) to
high-yield corporate bonds, which performed admirably during the 12-month span.
On the whole, both portfolios handsomely exceeded the returns of their benchmark
indexes, as well as their mutual fund peer groups.
For the fiscal year ended July 31, 2003, Delaware Corporate Bond Fund returned
+14.61% (Class A shares at net asset value with distributions reinvested),
surpassing its benchmark, the Lehman Brothers U.S. Credit Index, which gained
+10.71% for the same period.
Delaware Extended Duration Bond Fund returned +17.55% (Class A shares at net
asset value with distributions reinvested) for the same 12-month period. The
Fund's benchmark, as measured by the Lehman Brothers Long U.S. Credit Index,
rose +13.61%. The 184 funds that compose the Lipper Corporate Debt Funds
BBB-rated Average returned +9.24% during the fiscal year.
Q: What sectors or security types added to the Funds' strong showings during the
fiscal year?
A: Telecommunications and cable-related companies struggled during 2002 for a
number of reasons, including overcapacity and pricing concerns. During the dark
days for the industry, our stringent fundamental research discovered very
attractive bond valuations of issuers we believed could weather the short-term
environment and grow their businesses over the long term. By acquiring
securities we believed were undervalued, both Funds gained sound performance
when the market finally found attractive such bond offerings as Sprint and AT&T
Wireless.
Electric utility bonds also struggled during 2002, again due to concerns
involving pricing and capacity, but also due to regulatory considerations. The
lingering effects of Enron were undeniable, as investors struggled to separate
core business units from more speculative ventures. Despite these challenges, we
saw great potential in several of these issuers and bought their bonds while
they were still at depressed prices. We then enjoyed capital appreciation when
the market bid them higher. An example was CenterPoint Energy Houston Electric,
which caught investors' attention during the year. With a balance sheet that
benefited from asset sales and renegotiated bank credit, we believe this
security is poised to enjoy ample liquidity over the next two years.
We also found bonds of U.S. automakers attractive, even as these companies were
weighed down by competition and pension funding shortfalls, among other
considerations. As the economic outlook continued to improve, investors
attention was brought back to this sector.
1
Q: Where did the Funds lose ground relative to their performance benchmarks?
A: During the 12-month span, most sectors within the Funds performed either in
line with or in excess of their peer groups and benchmark indexes. However, we
experienced a measure of underperformance with our exposure to airline equipment
trust certificates.
While constituting relatively small positions in either portfolio, airlines
continued to struggle with cost cutting pressures and continued competition as a
result of operational concerns in the wake of September 11. However, this sector
rebounded in the final months of the Funds' fiscal year, with an example being
our holdings of Continental Airlines.
Moving forward, we remain optimistic for Continental Airlines as we believe
investors may need additional time before seeing the potential value we
identified in this security.
2
Delaware
CORPORATE BOND FUND
Fund Basics
As of July 31, 2003
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Fund Objective:
The Fund seeks to provide investors with total return.
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Total Fund Net Assets:
$144.32 million
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Number of Holdings:
210
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Fund Start Date:
September 15, 1998
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Your Fund Manager:
Ryan K. Brist joined Delaware Investments in 2000. Previously, he served as a
Senior Trader and Corporate Specialist for Conseco Capital Management's
fixed-income group, and as an Analyst in oil/gas investment banking for Dean
Witter Reynolds in New York. Mr. Brist is a graduate of Indiana University and a
CFA charterholder.
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Nasdaq Symbols:
Class A DGCAX
Class B DGCBX
Class C DGCCX
Fund Performance
Average Annual Total Returns
Through July 31, 2003 Lifetime One Year
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Class A (Est. 9/15/98)
Excluding Sales Charge +6.98% +14.61%
Including Sales Charge +5.97% +9.37%
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Class B (Est. 9/15/98)
Excluding Sales Charge +6.22% +13.78%
Including Sales Charge +5.97% +9.78%
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Class C (Est. 9/15/98)
Excluding Sales Charge +6.21% +13.77%
Including Sales Charge +6.21% +12.77%
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Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. Returns and share values will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. Performance
for Class B and C shares, excluding sales charges, assumes either contingent
deferred sales charges did not apply or the investment was not redeemed. Past
performance is not a guarantee of future results.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge 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. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1%, if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The cumulative total return for the lifetime period ended July 31, 2003 for
Delaware Corporate Bond Fund's Class R shares was -4.58%. 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 0.60%.
The average annual total returns for the lifetime and one-year periods ended
July 31, 2003 for Delaware Corporate Bond Fund's Institutional Class were
+7.25% and +14.92%, respectively. Institutional Class shares were first made
available on September 15, 1998 and are available without sales or asset-based
distribution charges only to certain eligible institutional accounts.
An expense limitation was in effect for all classes of Delaware Corporate Bond
Fund during the periods shown. Performance would have been lower had the expense
limitation not been in effect.
The performance table and graph do not reflect the deduction of taxes the
shareholder would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DGCIX
Nasdaq Class R symbol: DGCRX
Performance of a $10,000 Investment
September 15, 1998 (Fund's inception) through July 31, 2003
Delaware Corporate
Bond Fund - Class A Lehman Brothers U.S.
shares Credit Index
Sept.98 $9,775 $10,000
Jan-99 $9,936 $10,155
Jul-99 $9,498 $9,774
Jan-00 $9,602 $9,826
Jul-00 $9,767 $10,247
Jan-01 $10,533 $11,082
Jul-01 $11,105 $11,665
Jan-02 $11,472 $12,010
Jul-02 $11,552 $12,215
Jan-03 $12,734 $13,204
Jul-03 $13,239 $13,524
Chart assumes $10,000 invested on September 15, 1998 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 differing charges and
expenses. The chart also assumes $10,000 invested in the Lehman Brothers U.S.
Credit Index at that month's end, September 30, 1998. After September 30, 1998,
returns plotted on the chart were as of the last day of each month shown. The
Lehman Brothers U.S. Credit Index is an unmanaged composite of investment grade
corporate and non-corporate 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. Past performance is not a guarantee of future results. You
cannot invest directly in an index.
3
Delaware
EXTENDED DURATION BOND FUND
Fund Basics
As of July 31, 2003
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Fund Objective:
The Fund seeks to provide investors with total return.
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Total Fund Net Assets:
$69.56 million
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Number of Holdings:
154
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Fund Start Date:
September 15, 1998
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Your Fund Manager:
Ryan K. Brist
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Nasdaq Symbols:
Class A DEEAX
Class B DEEBX
Class C DEECX
Fund Performance
Average Annual Total Returns
Through July 31, 2003 Lifetime One Year
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Class A (Est. 9/15/98)
Excluding Sales Charge +7.05% +17.55%
Including Sales Charge +6.04% +12.22%
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Class B (Est. 9/15/98)
Excluding Sales Charge +6.27% +16.70%
Including Sales Charge +6.02% +12.70%
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Class C (Est. 9/15/98)
Excluding Sales Charge +6.29% +16.67%
Including Sales Charge +6.29% +15.67%
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Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. Returns and share values will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. Performance
for Class B and C shares, excluding sales charges, assumes either contingent
deferred sales charges did not apply or the investment was not redeemed. Past
performance is not a guarantee of future results.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge 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. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1%, if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
Class R shares are available only for certain retirement plan products. They are
sold without a sales charge and have an annual distribution and service fee of
0.60%. No Class R shares were made available during the periods shown.
The average annual total returns for the lifetime and one-year periods ended
July 31, 2003 for Delaware Extended Duration Bond Fund's Institutional Class
were +7.32% and +17.87%, respectively. Institutional Class shares were first
made available on September 15, 1998 and are available without sales or
asset-based distribution charges only to certain eligible institutional
accounts.
An expense limitation was in effect for all classes of Delaware Extended
Duration Bond Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table and graph do not reflect the deduction of taxes the
shareholder would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DEEIX
Performance of a $10,000 Investment
September 15, 1998 (Fund's inception) through July 31, 2003
Delaware Extended
Duration Bond Fund - Lehman Brothers
Class A shares Long U.S. Credit Index
Sept.98 $9,827 $10,000
Jan-99 $9,957 $10,223
Jul-99 $9,273 $9,526
Jan-00 $9,312 $9,517
Jul-00 $9,465 $9,974
Jan-01 $10,368 $10,864
Jul-01 $10,955 $11,447
Jan-02 $11,396 $11,857
Jul-02 $11,301 $11,691
Jan-03 $12,851 $13,135
Jul-03 $13,285 $13,282
Chart assumes $10,000 invested on September 15, 1998 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 differing charges and
expenses. The chart also assumes $10,000 invested in the Lehman Brothers Long
U.S. Credit Index at that month's end, September 30, 1998. After September 30,
1998, returns plotted on the chart were as of the last day of each month shown.
The Lehman Brothers Long U.S. Credit Index is an unmanaged composite of
corporate and non-corporate fixed-income securities that are rated investment
grade and have at least 10 years to final maturity. An index is unmanaged and
does not reflect the costs of operating a mutual fund, such as the costs of
buying, selling, and holding securities. Past performance is not a guarantee of
future results. You cannot invest directly in an index.
4
Statements Delaware Corporate Bond Fund
OF NET ASSETS July 31, 2003
Principal Market
Amount** Value (U.S.$)
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Asset-Backed Securities - 1.57%
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Goldman Sachs Mortgage Securities Trust
2003-FM1N 7.50% 3/20/33 USD 619,645 $ 613,908
*2002-WFN 144A 8.25% 10/20/32 112,470 112,193
MBNA Credit Card Master Note Trust
2001-C3 C3 6.55% 12/15/08 260,000 277,324
Mid-State Trust 11 A1 4.864% 7/15/38 179,731 168,021
*Novastar Capital Trust 2002-C1 A
144A 7.15% 10/25/31 74,364 74,364
*Sharp 2002-HE2N N 144A
9.50% 10/25/32 113,730 113,730
Sierra Receivables Funding
2003-1A A 3.09% 1/15/14 422,350 424,462
Travelers Funding 1A A1 6.30% 2/18/14 476,374 476,374
-------------
Total-Asset Backed Securities
(cost $2,280,717) 2,260,376
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Collateralized Mortgage Obligations - 1.41%
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Commercial Mortgage Pass-Through
Certificate Series 2000-C1 A1
7.206% 8/15/33 55,752 60,638
First Union National Bank Commercial
Mortgage Series 1999-C4 A1
7.184% 9/15/08 742,394 802,761
Freddie Mac 2075 Park 6.25% 8/15/27 500,000 517,212
*Government National Mortgage
Association 2003-5 B 144A
4.486% 10/16/25 250,000 245,124
Merrill Lynch Mortgage Trust
2002-MW1 J 5.695% 7/12/34 130,000 103,012
*|X|Prudential Securities Secured Financing
144A 7.335% 5/15/13 150,000 120,334
*|X|Salomon Brothers Mortgage Securities
1999-C1 J 144A 7.00% 5/18/32 250,000 186,500
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Total Collateralized Mortgage Obligations
(cost $2,025,424) 2,035,581
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Corporate Bonds - 72.01%
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Automobiles & Automotive Parts - 2.82%
Delphi 6.50% 8/15/13 750,000 733,498
Ford Motor 7.45% 7/16/31 2,430,000 2,080,685
General Motors
7.125% 7/15/13 775,000 757,153
8.375% 7/15/33 550,000 515,238
-------------
4,086,574
-------------
Banking - 3.97%
Bank One 2.625% 6/30/08 775,000 726,906
Branch Banking & Trust Wilson North
Carolina 4.875% 1/15/13 1,190,000 1,163,756
Comerica 4.80% 5/1/15 340,000 319,588
Compass Bank 6.45% 5/1/09 645,000 713,488
Frost National Bank 6.875% 8/1/11 15,000 16,123
Popular North America 4.25% 4/1/08 680,000 682,668
|X|RBS Capital Trust I 4.709% 12/29/49 525,000 488,717
Regions Financial 6.375% 5/15/12 685,000 743,176
US Bancorp 3.125% 3/15/08 470,000 457,971
Westpac Banking 4.625% 6/1/18 455,000 410,038
-------------
5,722,431
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Principal Market
Amount** Value (U.S.$)
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Corporate Bonds (continued)
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Building & Materials - 0.58%
*Lone Star Industries
144A 8.85% 6/15/05 USD 640,000 $ 668,000
York International 6.625% 8/15/06 165,000 175,330
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843,330
-------------
Cable, Media & Publishing - 6.16%
AOL Time Warner
6.75% 4/15/11 20,000 21,539
7.70% 5/1/32 510,000 536,841
CBS 8.625% 8/1/12 500,000 616,251
Comcast 6.50% 1/15/15 680,000 710,811
Continental Cablevision 9.50% 8/1/13 500,000 580,140
InterActiveCorp
6.75% 11/15/05 785,000 844,089
7.00% 1/15/13 1,335,000 1,444,630
Liberty Media 8.25% 2/1/30 675,000 694,952
Lodgenet Entertainment 9.50% 6/15/13 490,000 515,725
PanAmSat 8.50% 2/1/12 150,000 156,750
Time Warner 8.18% 8/15/07 245,000 279,702
Time Warner Entertainment
8.375% 3/15/23 1,625,000 1,876,484
Vertis
*144A 9.75% 4/1/09 270,000 280,125
10.875% 6/15/09 335,000 328,300
-------------
8,886,339
-------------
Chemicals - 1.68%
Dow Chemical 6.00% 10/1/12 310,000 315,539
IMC Global 7.375% 8/1/18 300,000 225,000
Lyondell Chemical 9.875% 5/1/07 730,000 711,750
Sherwin-Williams 6.85% 2/1/07 681,000 757,078
Valspar 6.00% 5/1/07 390,000 413,805
-------------
2,423,172
-------------
Computers & Technology - 0.98%
Computer Sciences 3.50% 4/15/08 615,000 605,417
Dell 7.10% 4/15/28 360,000 399,419
*Electronic Data Systems 144A
6.00% 8/1/13 440,000 412,412
-------------
1,417,248
-------------
Consumer Products - 0.48%
*Johnson (SC) & Son 144A 5.75% 2/15/33 750,000 687,979
-------------
687,979
-------------
Electronics & Electrical Equipment - 1.70%
*Amkor Technology 144A 7.75% 5/15/13 795,000 769,163
Jabil Circuit 5.875% 7/15/10 1,295,000 1,272,798
Johnson Controls 5.00% 11/15/06 385,000 408,539
-------------
2,450,500
-------------
Energy - 7.13%
*Alliance Pipeline US 144A 4.591% 12/31/25 813,145 752,683
Amerada Hess 7.30% 8/15/31 695,000 708,795
Enterprise Products Partners
6.375% 2/1/13 500,000 531,435
*144A 6.875% 3/1/33 805,000 807,975
*Kern River Funding 144A 4.893% 4/30/18 490,000 473,885
Kinder Morgan Energy Partners
7.75% 3/15/32 700,000 795,431
Northern Border Pipeline 6.25% 5/1/07 545,000 581,960
*Pemex Project Funding Master Trust
144A 7.375% 12/15/14 740,000 765,900
5
Statements Delaware Corporate Bond Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount** Value (U.S.$)
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Corporate Bonds (continued)
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Energy (continued)
Tennessee Gas Pipeline
8.375% 6/15/32 USD 1,040,000 $ 1,024,400
*Tesoro Petroleum 144A 8.00% 4/15/08 1,395,000 1,429,876
USX
9.125% 1/15/13 600,000 742,736
9.375% 2/15/12 430,000 537,431
Valero Energy 6.125% 4/15/07 355,000 380,919
Valero Logistics Operations 6.05% 3/15/13 760,000 750,029
-------------
10,283,455
-------------
Finance - 15.40%
American Express Credit 3.00% 5/16/08 285,000 276,494
Bear Stearns
4.00% 1/31/08 1,150,000 1,161,246
4.65% 7/2/18 1,140,000 1,002,013
Capital One Bank
4.875% 5/15/08 710,000 713,441
6.50% 6/13/13 240,000 224,460
Citigroup
5.625% 8/27/12 520,000 531,543
5.875% 2/22/33 455,000 426,027
6.625% 6/15/32 655,000 676,419
Citigroup Capital III 7.625% 12/1/36 500,000 555,485
Credit Suisse First Boston USA
4.625% 1/15/08 1,020,000 1,052,216
*ERAC USA Finance 144A 7.35% 6/15/08 1,160,000 1,308,068
*Fidelity Investments 144A 7.57% 6/15/29 650,000 752,418
Ford Motor Credit
6.875% 2/1/06 780,000 819,555
7.875% 6/15/10 340,000 350,798
General Electric Capital 5.45% 1/15/13 1,990,000 2,001,538
General Motors Acceptance
7.25% 3/2/11 715,000 717,104
8.00% 11/1/31 1,305,000 1,207,283
Goldman Sachs Group
4.75% 7/15/13 2,125,000 2,014,968
6.125% 2/15/33 755,000 721,773
International Lease Finance 5.875% 5/1/13 450,000 455,605
Janus Capital 7.00% 11/1/06 205,000 224,356
JP Morgan Chase 5.25% 5/1/15 535,000 513,987
MBNA 5.00% 6/15/15 700,000 643,584
Merrill Lynch 3.70% 4/21/08 525,000 521,322
Morgan Stanley 5.30% 3/1/13 1,675,000 1,650,232
National Rural Utilities 3.875% 2/15/08 1,190,000 1,195,662
*Wilmington Trust 144A 4.875% 4/15/13 525,000 501,007
-------------
22,218,604
-------------
Food, Beverage & Tobacco - 3.51%
Altria Group 7.65% 7/1/08 540,000 566,302
Di Giorgio 10.00% 6/15/07 415,000 411,369
Kraft Foods
5.25% 6/1/07 250,000 262,154
6.25% 6/1/12 550,000 576,714
Monsanto 4.00% 5/15/08 320,000 317,168
Safeway 3.80% 8/15/05 125,000 127,126
UST
6.625% 7/15/12 825,000 892,571
8.80% 3/15/05 595,000 646,938
Wendy's International
6.25% 11/15/11 785,000 839,525
6.35% 12/15/05 405,000 432,571
-------------
5,072,438
-------------
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
- --------------------------------------------------------------------------------
Healthcare & Pharmaceuticals - 1.16%
Merck 4.375% 2/15/13 USD 1,305,000 $1,257,908
UnitedHealth Group 4.875% 4/1/13 420,000 409,553
-------------
1,667,461
-------------
Insurance - 5.10%
AON 7.375% 12/14/12 675,000 762,928
*ASIF Global Financing 144A 4.90% 1/17/13 430,000 419,458
*Farmers Insurance Exchange
144A 8.625% 5/1/24 795,000 763,354
Harleysville Group 5.75% 7/15/13 300,000 282,116
Marsh & McLennan 5.875% 8/1/33 650,000 615,883
*Massachusetts Mutual Life Insurance
144A 5.625% 5/15/33 1,025,000 926,675
*Nationwide Life Global Funding
144A 5.35% 2/15/07 550,000 581,910
*Nationwide Mutual Insurance
144A 7.875% 4/1/33 390,000 416,245
*New York Life Insurance
144A 5.875% 5/15/33 540,000 505,504
Progressive 6.25% 12/1/32 975,000 970,348
*Zurich Capital Trust I
144A 8.376% 6/1/37 1,095,000 1,109,171
-------------
7,353,592
-------------
Metals & Mining - 0.38%
Newmont Gold 8.91% 1/5/09 174,070 197,125
United States Steel 9.75% 5/15/10 360,000 347,400
-------------
544,525
-------------
Miscellaneous - 0.40%
Cendant 7.375% 1/15/13 230,000 256,083
PHH 7.125% 3/1/13 305,000 326,985
-------------
583,068
-------------
Packaging & Containers - 1.22%
Portola Packaging 10.75% 10/1/05 435,000 437,175
*Sealed Air 144A
5.375% 4/15/08 400,000 407,096
5.625% 7/15/13 370,000 354,478
6.875% 7/15/33 590,000 556,514
-------------
1,755,263
-------------
Paper & Forest Products - 1.10%
*Bowater 144A 6.50% 6/15/13 1,275,000 1,143,297
*International Paper 144A 5.30% 4/1/15 465,000 442,618
-------------
1,585,915
-------------
Retail - 0.70%
Kohls
6.30% 3/1/11 480,000 524,940
7.25% 6/1/29 425,000 478,771
-------------
1,003,711
-------------
Shopping Center REIT's - 0.24%
*Developers Diversified Realty
144A 4.625% 8/1/10 360,000 344,380
-------------
344,380
-------------
Telecommunications - 4.85%
|X|AT&T 7.00% 11/15/06 665,000 735,639
AT&T Corporate
8.00% 11/15/31 565,000 599,536
8.125% 1/15/22 845,000 837,675
AT&T Wireless Service 7.875% 3/1/11 225,000 253,741
6
Statements Delaware Corporate Bond Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
- --------------------------------------------------------------------------------
Telecommunications (continued)
Citizens Communications
6.375% 8/15/04 USD 680,000 $ 704,987
Sprint Capital
6.375% 5/1/09 320,000 326,928
8.75% 3/15/32 1,160,000 1,259,830
Verizon Maryland 5.125% 6/15/33 500,000 412,109
Verizon Virginia 4.625% 3/15/13 1,425,000 1,346,229
Verizon Wireless Capital 5.375% 12/15/06 490,000 524,348
-------------
7,001,022
-------------
Textiles, Apparel & Furniture - 0.34%
++*J Crew Intermediate 144A 16.00% 5/15/08 690,906 493,998
-------------
493,998
-------------
Transportation & Shipping - 1.74%
American Airlines 6.817% 5/23/11 1,165,000 969,039
Continental Airlines
6.503% 6/15/11 505,000 478,967
7.033% 6/15/11 658,687 499,674
Delta Air Lines 7.299% 9/18/06 675,000 564,223
-------------
2,511,903
-------------
Utilities - 10.37%
Atmos Energy 5.125% 1/15/13 265,000 262,783
Avista
7.75% 1/1/07 295,000 326,856
9.75% 6/1/08 1,310,000 1,498,312
*CenterPoint Energy Houston Electric
144A 5.70% 3/15/13 1,125,000 1,147,019
Consumers Energy 6.00% 3/15/05 280,000 295,323
*Illinois Power 144A 11.50% 12/15/10 565,000 629,975
*ITC Holdings 144A 5.25% 7/15/13 500,000 464,939
Keyspan 4.65% 4/1/13 405,000 391,275
Keyspan Gas East 6.90% 1/15/08 725,000 806,861
Nevada Power 10.875% 10/15/09 95,000 107,825
Nisource Finance 7.50% 11/15/03 235,000 238,388
*Oncor Electric Delivery 144A 7.25% 1/15/33 825,000 879,065
Peco Energy 3.50% 5/1/08 1,080,000 1,072,496
Pepco Holdings 6.45% 8/15/12 600,000 626,435
*Power Contract Financing
144A 5.20% 2/1/06 580,000 579,740
Progress Energy 6.75% 3/1/06 850,000 928,336
PSEG Energy Holdings
7.75% 4/16/07 1,340,000 1,374,811
8.625% 2/15/08 465,000 482,976
Sempra Energy 6.00% 2/1/13 650,000 673,530
Southern Capital Funding 5.30% 2/1/07 240,000 254,118
TECO Energy 7.20% 5/1/11 755,000 721,025
*TXU Energy 144A 7.00% 3/15/13 715,000 750,189
TXU US Holdings 7.875% 3/1/23 440,000 458,571
-------------
14,970,848
-------------
Total Corporate Bonds (cost $103,881,553) 103,907,756
-------------
- --------------------------------------------------------------------------------
Foreign Bonds - 13.59%
- --------------------------------------------------------------------------------
Aruba - 0.38%
UFJ Finance Aruba 6.75% 7/15/13 570,000 552,724
-------------
552,724
-------------
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Foreign Bonds (continued)
- --------------------------------------------------------------------------------
Bahamas - 0.90%
*Bahamas Government International
Bond 144A 6.625% 5/15/33 USD 1,335,000 $ 1,291,933
-------------
1,291,933
-------------
Brazil - 1.32%
Federal Republic of Brazil
8.875% 4/15/24 1,340,000 954,750
10.25% 6/17/13 310,000 279,775
11.00% 8/17/40 790,000 671,500
-------------
1,906,025
-------------
Canada - 0.56%
Great Lakes Power 9.00% 8/1/04 150,000 157,616
Placer Dome 6.375% 3/1/33 680,000 649,148
-------------
806,764
-------------
Chile - 0.51%
Empresa Nacional de Petroleo
6.75% 11/15/12 685,000 740,823
-------------
740,823
-------------
Colombia - 1.02%
Republic of Colombia 10.375% 1/28/33 1,435,000 1,478,050
-------------
1,478,050
-------------
Dominican Republic - 0.80%
Dominican Republic
+++2.0625% 8/30/24(Brady) 575,000 442,750
9.04% 1/23/13 770,000 712,741
-------------
1,155,491
-------------
Ecuador - 0.92%
Republic of Ecuador
++6.00% 8/15/30 1,160,000 689,114
12.00% 11/15/12 800,000 639,193
-------------
1,328,307
-------------
France - 0.92%
|X|France Telecom 10.00% 3/1/31 710,000 886,975
*Rhodia 144A 8.875% 6/1/11 455,000 436,800
-------------
1,323,775
-------------
Mexico - 1.99%
Mexican United States
7.50% 4/8/33 1,765,000 1,689,987
8.30% 8/15/31 780,000 815,100
11.50% 5/15/26 260,000 351,650
-------------
2,856,737
-------------
Netherlands - 0.58%
*ING Bank 144A 5.125% 5/1/15 865,000 835,305
-------------
835,305
-------------
Peru - 0.37%
|X|Republic of Peru 4.25% 3/7/17 660,000 532,937
-------------
532,937
-------------
Russia - 1.43%
Gazprom OAO 9.625% 3/1/13 1,970,000 2,065,106
-------------
2,065,106
-------------
Singapore - 0.16%
*Singapor Telecommunications
144A 7.375% 12/1/31 200,000 229,378
-------------
229,378
-------------
7
Statements Delaware Corporate Bond Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Foreign Bonds (continued)
- --------------------------------------------------------------------------------
South Africa - 0.74%
Republic of South Africa
5.25% 5/16/13 EUR 1,000,000 $ 1,073,851
-------------
1,073,851
-------------
Supranational - 0.28%
*Central American Bank for Economic
Integration 144A 6.75% 4/15/13 USD 410,000 409,232
-------------
409,232
-------------
Uruguay - 0.71%
Republic of Uruguay
7.50% 3/15/15 390,000 287,625
7.875% 1/15/33 1,175,000 743,188
-------------
1,030,813
-------------
Total Foreign Bonds (cost $20,026,287) 19,617,251
-------------
- --------------------------------------------------------------------------------
Municipal Bonds - 1.96%
- --------------------------------------------------------------------------------
California State 5.00% 2/1/33 1,145,000 1,034,943
Illinois State 5.10% 6/1/33 2,050,000 1,798,608
-------------
Total Municipal Bonds (cost $3,195,838) 2,833,551
-------------
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 3.36%
- --------------------------------------------------------------------------------
U.S. Treasury Bond 5.375% 2/15/31 10,000 9,953
U.S. Treasury Notes
1.125% 6/30/05 3,730,000 3,686,874
3.625% 5/15/13 1,240,000 1,157,270
-------------
Total U.S. Treasury Obligations
(cost $4,878,182) 4,854,097
-------------
- --------------------------------------------------------------------------------
|_|Senior Secured Loans - 3.77%
- --------------------------------------------------------------------------------
Centerpoint Energy Bank Loan
12.75% 11/12/05 1,000,000 1,160,000
+++*Evergreen Funding 144A 1.66% 11/15/10 401,187 280,307
Qwest Communications Bank Loan
Tranche A 6.50% 6/30/07 1,250,000 1,256,250
Tranche B 6.95% 6/30/10 1,250,000 1,231,250
Vivendi University Bank Loan
3.86% 6/24/08 1,500,000 1,506,562
-------------
Total Senior Secured Loans
(cost $5,285,121) 5,434,369
-------------
Number of
Shares
- --------------------------------------------------------------------------------
Preferred Stock - 0.95%
- --------------------------------------------------------------------------------
*Centaur Funding 144A 9.08% 1,225 1,376,594
-------------
Total Preferred Stock (cost $1,173,398) 1,376,594
-------------
- --------------------------------------------------------------------------------
Warrants - 0.00%
- --------------------------------------------------------------------------------
+*Solutia Warrants 144A 615 6
-------------
Total Warrants (cost $52,353) 6
-------------
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Repurchase Agreements - 2.12%
- --------------------------------------------------------------------------------
With BNP Paribas 1.05% 8/1/03
(dated 7/31/03, collateralized
by $1,161,000 U.S. Treasury
Bills due 8/7/03,
market value $1,160,623) USD 1,137,800 $ 1,137,800
With J. P. Morgan Securities 0.97%
8/1/03 (dated 7/31/03,
collateralized by $728,164
U.S. Treasury Notes
6.750% due 5/15/05,
market value $803,642) 787,400 787,400
With UBS Warburg 1.05% 8/1/03
(dated 7/31/03, collateralized by
$1,162,400 U.S. Treasury Bills due
10/2/03, market value $1,160,617) 1,137,800 1,137,800
------------
Total Repurchase Agreements
(cost $3,063,000) 3,063,000
------------
Total Market Value of Securities - 100.74%
(cost $145,861,873) 145,382,581
Liabilities Net of Receivables
and Other Assets - (0.74%) (1,067,331)
------------
Net Assets Applicable to 25,676,207
Shares Outstanding - 100.00% $144,315,250
============
Net Asset Value - Delaware Corporate Bond
Fund Class A ($34,706,627 / 6,174,720 Shares) $5.62
-----
Net Asset Value - Delaware Corporate Bond
Fund Class B ($18,551,104 / 3,300,530 Shares) $5.62
-----
Net Asset Value - Delaware Corporate Bond
Fund Class C ($18,313,412 / 3,258,689 Shares) $5.62
-----
Net Asset Value - Delaware Corporate Bond
Fund Class R ($5.62 / 1 Shares) $5.62
-----
Net Asset Value - Delaware Corporate Bond
Fund Institutional Class
($72,744,101 / 12,942,267 Shares) $5.62
-----
Components of Net Assets at July 31, 2003:
Shares of beneficial interest
(unlimited authorization - no par) $143,205,169
Distributions in excess of net investment income (9,867)
Accumulated net realized gain on investments 1,599,577
Net unrealized depreciation of investments (479,629)
------------
Total net assets $144,315,250
============
8
Statements Delaware Corporate Bond Fund
OF NET ASSETS (CONTINUED)
* Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note 9 in "Notes to Financial Statements".
** Principal amount is stated in the currency in which each bond is
denominated.
|X| Variable Rate Notes - the interest rate shown is the rate as
of July 31, 2003.
+ Non-income producing security for the year ended July 31, 2003.
++ Step coupon bond.
+++ Floating Rate Note - the interest rate shown is the rate as of
July 31, 2003.
|_| Senior Secured Loans in which the Fund invests 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.
Summary of Abbreviations
REITs - Real Estate Investment Trusts
EUR - European Monetary Unit
USD - U.S. Dollar
Net Asset Value and Offering Price per Share -
Delaware Corporate Bond Fund
Net asset value Class A (A) $5.62
Sales charge (4.50% of offering price,
or 4.63% of amount invested per share) (B) 0.26
-----
Offering Price $5.88
=====
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
9
Statements Delaware Extended Duration Bond Fund
OF NET ASSETS July 31, 2003
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Asset-Backed Securities - 0.41%
- --------------------------------------------------------------------------------
*Goldman Sachs Mortgage Securities
Trust 2002-WFN 144A
8.25% 10/20/32 USD 74,980 $ 74,795
Mid-State Trust 11 A1 4.864% 7/15/38 94,858 88,679
*Novastar Capital Trust 2002-C1 A
144A 7.15% 10/25/31 49,576 49,576
*Sharp 2002-HE2N N 144A 9.50% 10/25/32 75,177 75,177
-------------
Total Asset-Backed Securities
(cost $ 293,548) 288,227
-------------
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations - 0.51%
- --------------------------------------------------------------------------------
Government National Mortgage
Association 2003-5 B 4.486% 10/16/25 160,000 156,879
Merrill Lynch Mortgage Trust 2002-MW1 J
5.695% 7/12/34 110,000 87,164
*|X|Salomon Brothers Mortgage Securities
1999-C1 J 144A 7.00% 5/18/32 155,000 115,630
-------------
Total Collateralized Mortgage Obligations
(cost $363,154) 359,673
-------------
- --------------------------------------------------------------------------------
Corporate Bonds - 75.42%
- --------------------------------------------------------------------------------
Automobiles & Automotive Parts - 5.22%
Delphi 6.50% 8/15/13 375,000 366,749
Ford Motor 7.45% 7/16/31 2,495,000 2,136,341
General Motors 8.375% 7/15/33 1,205,000 1,128,839
-------------
3,631,929
-------------
Banking - 2.58%
Branch Banking & Trust Wilson North
Carolina 4.875% 1/15/13 490,000 479,192
Comerica 4.80% 5/1/15 180,000 169,194
Compass Bank 6.45% 5/1/09 330,000 365,040
|X|RBS Capital Trust I 4.709% 12/29/49 285,000 265,304
Regions Financial 6.375% 5/15/12 310,000 336,328
Westpac Banking 4.625% 6/1/18 200,000 180,237
-------------
1,795,295
-------------
Building & Materials - 0.57%
*Lone Star Industries 144A 8.85% 6/15/05 380,000 396,625
-------------
396,625
-------------
Cable, Media & Publishing - 9.01%
AOL Time Warner 7.70% 5/1/32 440,000 463,157
CBS 8.625% 8/1/12 500,000 616,251
Comcast
6.50% 1/15/15 405,000 423,351
7.05% 3/15/33 55,000 55,130
InterActiveCorp 7.00% 1/15/13 705,000 762,895
Liberty Media 8.25% 2/1/30 1,215,000 1,250,913
Lodgenet Entertainment 9.50% 6/15/13 260,000 273,650
PanAmSat 8.50% 2/1/12 70,000 73,150
Time Warner Entertainment
8.375% 3/15/23 795,000 918,034
Vertis
*144A 9.75% 4/1/09 230,000 238,625
10.875% 6/15/09 170,000 166,600
Viacom 7.875% 7/30/30 875,000 1,027,769
-------------
6,269,525
-------------
Chemicals - 0.97%
Dow Chemical 6.00% 10/1/12 160,000 162,859
IMC Global 7.375% 8/1/18 200,000 150,000
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
- --------------------------------------------------------------------------------
Chemicals (continued)
Lyondell Chemical 9.875% 5/1/07 USD 370,000 $ 360,750
-------------
673,609
-------------
Computers & Technology - 1.25%
Dell 7.10% 4/15/28 595,000 660,150
*Electronic Data Systems 144A
6.00% 8/1/13 225,000 210,893
-------------
871,043
-------------
Consumer Products - 0.56%
*Johnson (SC) & Son 144A 5.75% 2/15/33 425,000 389,855
-------------
389,855
-------------
Electronics & Electrical Equipment - 1.50%
*Amkor Technology 144A 7.75% 5/15/13 410,000 396,675
Jabil Circuit 5.875% 7/15/10 660,000 648,685
-------------
1,045,360
-------------
Energy - 5.53%
*Alliance Pipeline US 144A
4.591% 12/31/25 443,380 410,412
Amerada Hess 7.30% 8/15/31 340,000 346,749
*Enterprise Products Partners
144A 6.875% 3/1/33 490,000 491,811
*Kern River Funding 144A
4.893% 4/30/18 250,000 241,778
Kinder Morgan Energy Partners
7.75% 3/15/32 400,000 454,532
*Pemex Project Funding Master Trust
144A 7.375% 12/15/14 395,000 408,825
Tennessee Gas Pipeline 8.375% 6/15/32 540,000 531,900
*Tesoro Petroleum 144A 8.00% 4/15/08 530,000 543,249
Valero Logistics Operations
6.05% 3/15/13 420,000 414,490
-------------
3,843,746
-------------
Finance - 14.81%
Bear Stearns 4.65% 7/2/18 600,000 527,375
Capital One Bank
4.875% 5/15/08 385,000 386,866
6.50% 6/13/13 95,000 88,849
Citigroup
5.625% 8/27/12 265,000 270,883
5.875% 2/22/33 470,000 440,071
6.875% 2/15/98 750,000 775,883
Citigroup Capital III 7.625% 12/1/36 1,081,000 1,200,959
*ERAC USA Finance 144A 7.35% 6/15/08 535,000 603,290
*Fidelity Investments 144A 7.57% 6/15/29 350,000 405,148
General Electric Capital 5.45% 1/15/13 840,000 844,870
General Motors Acceptance
8.00% 11/1/31 1,535,000 1,420,061
Goldman Sachs Group
4.75% 7/15/13 985,000 933,997
6.125% 2/15/33 455,000 434,976
International Lease Finance
5.875% 5/1/13 245,000 248,051
JP Morgan Chase 5.25% 5/1/15 295,000 283,414
MBNA 5.00% 6/15/15 375,000 344,777
Morgan Stanley
5.30% 3/1/13 70,000 68,965
7.25% 4/1/32 690,000 758,238
*Wilmington Trust 144A 4.875% 4/15/13 275,000 262,432
-------------
10,299,105
-------------
10
Statements Delaware Extended Duration Bond Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
- --------------------------------------------------------------------------------
Food, Beverage & Tobacco - 3.55%
Altria Group 7.65% 7/1/08 USD 295,000 $ 309,369
Di Giorgio 10.00% 6/15/07 215,000 213,119
Kraft Foods 6.25% 6/1/12 355,000 372,242
UST 6.625% 7/15/12 835,000 903,390
Wendy's International 6.25% 11/15/11 625,000 668,412
-------------
2,466,532
-------------
Healthcare & Pharmaceuticals - 0.33%
UnitedHealth Group 4.875% 4/1/13 235,000 229,155
-------------
229,155
-------------
Insurance - 5.85%
American RE 7.45% 12/15/26 155,000 156,179
AON 7.375% 12/14/12 415,000 469,060
*ASIF Global Financing 144A 4.90% 1/17/13 265,000 258,503
*Farmers Insurance Exchange
144A 8.625% 5/1/24 515,000 494,500
Harleysville Group 5.75% 7/15/13 150,000 141,058
Marsh & McLennan 5.875% 8/1/33 350,000 331,629
*Massachusetts Mutual Life Insurance
144A 5.625% 5/15/33 560,000 506,281
*Nationwide Mutual Insurance
144A 7.875% 4/1/33 220,000 234,805
*New York Life Insurance
144A 5.875% 5/15/33 295,000 276,155
Progressive 6.25% 12/1/32 525,000 522,495
*Zurich Capital Trust I 144A
8.376% 6/1/37 670,000 678,670
-------------
4,069,335
-------------
Metals & Mining - 1.08%
Phelps Dodge 9.50% 6/1/31 500,000 559,612
United States Steel 9.75% 5/15/10 195,000 188,175
-------------
747,787
-------------
Miscellaneous - 0.41%
Cendant 7.375% 1/15/13 95,000 105,773
PHH 7.125% 3/1/13 170,000 182,254
-------------
288,027
-------------
Packaging & Containers - 1.33%
Portola Packaging 10.75% 10/1/05 235,000 236,175
*Sealed Air 144A
5.375% 4/15/08 220,000 223,903
5.625% 7/15/13 190,000 182,029
6.875% 7/15/33 300,000 282,973
-------------
925,080
-------------
Paper & Forest Products - 1.26%
*Bowater 144A 6.50% 6/15/13 675,000 605,275
*International Paper 144A 5.30% 4/1/15 285,000 271,282
-------------
876,557
-------------
Retail - 0.97%
Kohls 7.25% 6/1/29 600,000 675,912
-------------
675,912
-------------
Shopping Center REIT's - 0.25%
*Developers Diversified Realty
144A 4.625% 8/1/10 185,000 176,973
-------------
176,973
-------------
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Corporate Bonds (continued)
- --------------------------------------------------------------------------------
Telecommunications - 6.12%
AT&T Corporate
8.00% 11/15/31 USD 490,000 $ 519,952
8.125% 1/15/22 470,000 465,926
AT&T Wireless Services 8.75% 3/1/31 300,000 346,923
Citizens Communications
9.00% 8/15/31 1,000,000 1,222,579
Sprint Capital
6.375% 5/1/09 205,000 209,438
8.75% 3/15/32 615,000 667,927
Verizon Maryland 5.125% 6/15/33 1,000,000 824,217
-------------
4,256,962
-------------
Textiles, Apparel & Furniture - 0.39%
++*J Crew Intermediate 144A
16.00% 5/15/08 377,588 269,975
-------------
269,975
-------------
Transportation & Shipping - 1.39%
American Airlines 6.817% 5/23/11 565,000 469,963
Continental Airlines
6.503% 6/15/11 240,000 227,628
7.033% 6/15/11 352,537 267,431
-------------
965,022
-------------
Utilities - 10.49%
Atmos Energy 5.125% 1/15/13 165,000 163,619
Avista 9.75% 6/1/08 875,000 1,000,781
*CenterPoint Energy Houston Electric
144A 5.70% 3/15/13 520,000 530,178
Detroit Edison 6.35% 10/15/32 1,100,000 1,102,053
*Illinois Power 144A 11.50% 12/15/10 360,000 401,400
*ITC Holdings 144A 5.25% 7/15/13 250,000 232,469
Nevada Power 10.875% 10/15/09 60,000 68,100
*Ohio Power 144A 6.60% 2/15/33 785,000 794,144
*Oncor Electric Delivery
144A 7.25% 1/15/33 525,000 559,405
Pepco Holdings 6.45% 8/15/12 300,000 313,218
PSEG Energy Holdings
7.75% 4/16/07 735,000 754,095
8.625% 2/15/08 130,000 135,025
Sempra Energy 6.00% 2/1/13 410,000 424,842
TECO Energy 7.20% 5/1/11 410,000 391,550
*TXU Energy 144A 7.00% 3/15/13 405,000 424,932
-------------
7,295,811
-------------
Total Corporate Bonds
(cost $52,757,184) 52,459,220
-------------
- ------------------------------------------------------------------------------
Foreign Bonds - 13.56%
- ------------------------------------------------------------------------------
Aruba - 0.40%
UFJ Finance Aruba 6.75% 7/15/13 290,000 281,211
-------------
281,211
-------------
Bahamas - 0.93%
*Bahamas Government International
Bond 144A 6.625% 5/15/33 665,000 643,547
-------------
643,547
-------------
11
Statements Delaware Extended Duration Bond Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Foreign Bonds (continued)
- --------------------------------------------------------------------------------
Brazil - 0.99%
Federal Republic of Brazil
8.875% 4/15/24 USD 100,000 $ 71,250
10.25% 6/17/13 315,000 284,288
11.00% 8/17/40 395,000 335,750
-------------
691,288
-------------
Canada - 0.50%
Placer Dome 6.375% 3/1/33 365,000 348,440
-------------
348,440
-------------
Chile - 0.58%
Empresa Nacional de Petroleo
6.75% 11/15/12 375,000 405,560
-------------
405,560
-------------
Colombia - 0.68%
Republic of Colombia 10.375% 1/28/33 460,000 473,800
-------------
473,800
-------------
Dominican Republic - 0.86%
Dominican Republic
+++2.0625% 8/30/24 (Brady) 305,000 234,850
9.04% 1/23/13 390,000 360,999
-------------
595,849
-------------
Ecuador - 0.98%
Republic of Ecuador
++6.00% 8/15/30 570,000 338,616
12.00% 11/15/12 425,000 339,572
-------------
678,188
-------------
France - 1.04%
|X|France Telecom 10.00% 3/1/31 385,000 480,965
*Rhodia 144A 8.875% 6/1/11 250,000 240,000
-------------
720,965
-------------
Mexico - 2.00%
Mexican United States
7.50% 4/8/33 925,000 885,687
8.30% 8/15/31 335,000 350,074
11.50% 5/15/26 115,000 155,538
-------------
1,391,299
-------------
Netherlands - 0.31%
*ING Bank 144A 5.125% 5/1/15 220,000 212,447
-------------
212,447
-------------
Peru - 0.38%
|X|Republic of Peru 4.25% 3/7/17 325,000 262,431
-------------
262,431
-------------
Russia - 1.50%
Gazprom OAO 9.625% 3/1/13 1,000,000 1,048,277
-------------
1,048,277
-------------
Singapore - 0.29%
*Singapor Telecommunications
144A 7.375% 12/1/31 175,000 200,706
-------------
200,706
-------------
South Africa - 1.08%
Republic of South Africa
5.25% 5/16/13 EUR 700,000 751,696
-------------
751,696
-------------
Principal Market
Amount** Value (U.S.$)
- --------------------------------------------------------------------------------
Foreign Bonds (continued)
- --------------------------------------------------------------------------------
Supranational - 0.32%
*Central American Bank for Economic
Integration 144A 6.75% 4/15/13 USD 225,000 $ 224,579
-------------
224,579
-------------
Uruguay - 0.72%
Republic of Uruguay
7.50% 3/15/15 190,000 140,125
7.875% 1/15/33 575,000 363,688
-------------
503,813
-------------
Total Foreign Bonds (cost $9,471,747) 9,434,096
-------------
- --------------------------------------------------------------------------------
Municipal Bonds - 2.08%
- --------------------------------------------------------------------------------
California State 5.00% 2/1/33 580,000 524,250
Illinois State 5.10% 6/12/33 1,050,000 921,239
-------------
Total Municipal Bonds (cost$ 1,632,128) 1,445,489
-------------
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 0.49%
- --------------------------------------------------------------------------------
#U.S. Treasury Bond 5.25% 11/15/28 350,000 337,736
-------------
Total U.S. Treasury Obligations
(cost $353,500) 337,736
-------------
- --------------------------------------------------------------------------------
|_|Senior Secured Loans - 5.50%
- --------------------------------------------------------------------------------
Centerpoint Energy Bank Loan
12.75% 11/12/05 1,000,000 1,160,000
+++*Evergreen Funding 144A 1.66% 11/15/10 401,187 280,307
Qwest Communications Bank
Loan Tranche B 6.95% 6/30/10 1,400,000 1,379,000
Vivendi University Bank Loan
3.86% 6/30/08 1,000,000 1,004,375
-------------
Total Senior Secured Loans
(cost $3,695,143) 3,823,682
-------------
Number of
Shares
- --------------------------------------------------------------------------------
Preferred Stock - 1.62%
- --------------------------------------------------------------------------------
*Centaur Funding 144A 9.08% 1,000 1,123,750
-------------
Total Preferred Stock (cost $1,046,615) 1,123,750
-------------
- --------------------------------------------------------------------------------
Warrants - 0.00%
- --------------------------------------------------------------------------------
+*Solutia Warrants 550 6
-------------
Total Warrants (cost $46,787) 6
-------------
Total Market Value of Securities - 99.59%
(cost $69,659,806) 69,271,879
Receivables and Other Assets
Net of Liabilities - 0.41% 284,395
-------------
Net Assets Applicable to 12,543,928
Shares Outstanding - 100.00% $69,556,274
=============
12
Statements Delaware Extended Duration Bond Fund
OF NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Asset Value - Delaware Extended
Duration Bond Fund Class A
($9,539,321 / 1,720,346 shares) $5.55
-----
Net Asset Value - Delaware Extended
Duration Bond Fund Class B
($5,374,761 / 969,268 shares) $5.55
-----
Net Asset Value - Delaware Extended
Duration Bond Fund Class C
($4,751,437 / 856,886 shares) $5.55
-----
Net Asset Value - Delaware Extended
Duration Bond Fund Institutional Class
($49,890,755 / 8,997,428 shares) $5.55
-----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Components of Net Assets at July 31, 2003
Shares of beneficial interest
(unlimited authorization - no par) $69,835,268
Distributions in excess of net investment income (1,683)
Accumulated net realized gain on investments 447,241
Net unrealized depreciation of investments (724,552)
-----------
Total net assets $69,556,274
-----------
* Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note 8 in "Notes to Financial Statements."
** Principal amount is stated in the currency in which each bond is
denominated.
|X| Variable Rate Notes - the interest rate shown is the rate as
of July 31, 2003.
+ Non-income producing security for the year ended July 31,2003.
++ Step coupon bond.
+++ Floating Rate Note - the interest rate shown is the rate as of
July 31, 2003.
# Fully or partially pledged as collateral for financial futures contracts.
|_| Senior Secured Loans in which the Fund invests 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.
Summary of Abbreviations
EUR - European Monetary Unit
USD - U.S. Dollar
REITs - Real Estate Investment Trusts
Net Asset Value and Offering Price per Share -
Delaware Extended Duration Bond Fund
Net asset value Class A (A) $5.55
Sales charge (4.50% of offering price,
or 4.68% of amount invested per share) (B) 0.26
-----
Offering Price $5.81
-----
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
13
Statements Delaware Corporate Bond Fund
OF ASSETS AND LIABILITIES July 31, 2003
Assets:
Investments at market (cost $145,861,873) $145,382,581
Receivables for securities sold 5,221,247
Interest receivable 2,116,127
Subscriptions receivable 1,324,066
Cash 380,177
------------
Total assets 154,424,198
------------
Liabilities:
Payables for securities purchased 9,324,361
Liquidations payable 463,040
Accrued expenses 129,069
Distributions payable 192,478
------------
Total liabilities 10,108,948
------------
Total Net Assets $144,315,250
============
See accompanying notes
Delaware Extended Duration Bond Fund
July 31, 2003
Assets:
Investments at market (cost $69,659,806) $69,271,879
Receivables for securities sold 2,591,810
Interest receivable 1,075,887
Subscriptions receivable 157,691
-----------
Total assets 73,097,267
-----------
Liabilities:
Cash overdraft 1,703,506
Payables for securities purchased 1,289,180
Futures variation margin payable 237,911
Accrued expenses 76,015
Liquidations payable 124,688
Distributions payable 109,693
-----------
Total liabilities 3,540,993
-----------
Total Net Assets $69,556,274
===========
See accompanying notes
14
Statements Year Ended July 31, 2003
OF OPERATIONS
Delaware Corporate Delaware Extended
Bond Fund Duration Bond Fund
Investment Income:
Interest $ 7,621,901 $ 4,960,649
Dividends 65,830 90,800
----------- -----------
7,687,731 5,051,449
----------- -----------
Expenses:
Management fees 567,308 372,940
Dividend disbursing and transfer agent fees and expenses 365,688 132,622
Distribution expense -- Class A 71,720 20,767
Distribution expense -- Class B 150,510 43,299
Distribution expense -- Class C 104,298 27,386
Registration fees 64,166 39,550
Accounting and administration expenses 50,642 30,350
Reports and statements to shareholders 45,415 23,394
Professional fees 19,810 10,790
Custodian fees 15,387 14,366
Trustees' fees 5,433 4,622
Other 33,951 18,141
----------- -----------
1,494,328 738,227
Less expenses absorbed or waived by investment manager (540,307) (271,540)
Less waiver of distribution expenses -- Class A (10,692) (3,141)
Less expenses paid indirectly (4,666) (2,305)
----------- -----------
Total expenses 938,663 461,241
----------- -----------
Net Investment Income 6,749,068 4,590,208
----------- -----------
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies:
Net realized gain (loss) on:
Investments 5,332,233 4,191,647
Futures contracts -- 437,417
Foreign currency transactions (4,912) (3,439)
----------- -----------
Net realized gain 5,327,321 4,625,625
Net change in unrealized appreciation/depreciation of investments and foreign currencies 1,046,720 992,913
----------- -----------
Net Realized and Unrealized Gain on Investments and Foreign Currencies 6,374,041 5,618,538
----------- -----------
Net Increase in Net Assets Resulting from Operations $13,123,109 $10,208,746
=========== ===========
See accompanying notes
15
Statements
OF CHANGES IN NET ASSETS
Delaware Corporate Delaware Extended
Bond Fund Duration Bond Fund
Year Ended Year Ended
7/31/03 7/31/02 7/31/03 7/31/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 6,749,068 $ 5,148,071 $ 4,590,208 $ 5,101,565
Net realized gain on investments and foreign currencies 5,327,321 1,090,086 4,625,625 960,545
Net change in unrealized appreciation/depreciation
of investments and foreign currencies 1,046,720 (3,395,125) 992,913 (3,848,781)
----------- ----------- ----------- ------------
Net increase in net assets resulting from operations 13,123,109 2,843,032 10,208,746 2,213,329
----------- ----------- ----------- ------------
Dividends and Distributions to Shareholders from:
Net Investment Income
Class A (1,515,366) (725,537) (465,892) (337,516)
Class B (825,298) (490,335) (256,436) (141,883)
Class C (564,484) (217,538) (157,965) (63,535)
Institutional Class (4,105,988) (3,701,695) (3,759,954) (4,453,216)
----------- ----------- ----------- ------------
(7,011,136) (5,135,105) (4,640,247) (4,996,150)
----------- ----------- ----------- ------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 28,428,524 15,314,140 8,355,235 3,141,532
Class B 10,606,945 9,565,643 2,552,661 2,574,159
Class C 14,081,885 4,786,329 4,380,382 1,185,434
Class R 6 -- -- --
Institutional Class 33,176,155 16,343,326 8,696,274 13,691,709
Net asset value of shares issued upon reinvestment of dividends and
distributions:
Class A 918,175 425,076 254,133 203,690
Class B 403,587 236,372 128,541 81,063
Class C 347,700 126,156 86,622 42,338
Institutional Class 3,551,075 3,182,038 3,295,783 3,907,387
----------- ----------- ----------- ------------
91,514,052 49,979,080 27,749,631 24,827,312
----------- ----------- ----------- ------------
Cost of shares repurchased:
Class A (13,657,834) (2,962,214) (3,970,562) (1,880,937)
Class B (5,003,085) (2,547,415) (987,678) (291,763)
Class C (2,485,947) (503,317) (1,199,321) (147,953)
Institutional Class (20,549,038) (19,737,436) (23,741,044) (20,509,096)
----------- ----------- ----------- ------------
(41,695,904) (25,750,382) (29,898,605) (22,829,749)
----------- ----------- ----------- ------------
Increase (decrease) in net assets derived from capital share transactions 49,818,148 24,228,698 (2,148,974) 1,997,563
----------- ----------- ----------- ------------
Net Increase (Decrease) in Net Assets 55,930,121 21,936,625 3,419,525 (785,258)
Net Assets:
Beginning of year 88,385,129 66,448,504 66,136,749 66,922,007
----------- ----------- ----------- ------------
End of year $144,315,25 $88,385,129 $69,556,274 $66,136,749
=========== =========== =========== ============
See accompanying notes
16
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Corporate Bond Fund Class A
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.220 $5.370 $5.070 $5.280 $5.500
Income (loss) from investment operations:
Net investment income 0.339 0.364 0.370 0.353 0.201
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.410 (0.152) 0.299 (0.210) (0.216)
------ ------ ------ ------ ------
Total from investment operations 0.749 0.212 0.669 0.143 (0.015)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.349) (0.362) (0.369) (0.353) (0.201)
Net realized gain on investments -- -- -- -- (0.004)
------ ------ ------ ------ ------
Total dividends and distributions (0.349) (0.362) (0.369) (0.353) (0.205)
------ ------ ------ ------ ------
Net asset value, end of period $5.620 $5.220 $5.370 $5.070 $5.280
====== ====== ====== ====== ======
Total return(2) 14.61% 4.02% 13.72% 2.85% (0.34%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $34,707 $17,932 $5,596 $2,790 $1,377
Ratio of expenses to average net assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.32% 1.22% 1.20% 1.27% 1.26%
Ratio of net investment income to average net assets 5.98% 6.79% 7.16% 6.84% 5.75%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.46% 6.37% 6.76% 6.37% 5.29%
Portfolio turnover 861% 1044% 709% 118% 175%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of fees by the manager and
distributor, as applicable. Performance would have been lower had the
expense limitation not been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.002, a decrease in net realized and unrealized gain (loss)
per share of $0.002, and an increase in the ratio of net investment income
to average net assets of 0.03%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
17
Financial
highlights (continued)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Corporate Bond Fund Class B
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.220 $5.370 $5.070 $5.280 $5.500
Income (loss) from investment operations:
Net investment income 0.298 0.325 0.331 0.315 0.171
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.410 (0.152) 0.300 (0.210) (0.216)
------ ------ ------ ------ ------
Total from investment operations 0.708 0.173 0.631 0.105 (0.045)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.308) (0.323) (0.331) (0.315) (0.171)
Net realized gain on investments -- -- -- -- (0.004)
------ ------ ------ ------ ------
Total dividends and distributions (0.308) (0.323) (0.331) (0.315) (0.175)
------ ------ ------ ------ ------
Net asset value, end of period $5.620 $5.220 $5.370 $5.070 $5.280
====== ====== ====== ====== ======
Total return(2) 13.78% 3.25% 12.89% 2.09% (0.88%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $18,551 $11,709 $4,736 $2,057 $1,236
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 2.03% 1.97% 1.95% 2.02% 2.01%
Ratio of net investment income to average net assets 5.23% 6.04% 6.41% 6.09% 5.00%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.75% 5.62% 6.01% 5.62% 4.54%
Portfolio turnover 861% 1044% 709% 118% 175%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.002, a decrease in net realized and unrealized gain (loss)
per share of $0.002, and an increase in the ratio of net investment income
to average net assets of 0.03%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
18
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Corporate Delaware Corporate
Bond Fund Class C Bond Fund Class R
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1) 6/2/03(1)
Year Ended to to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99 7/31/03
Net asset value, beginning of period $5.220 $5.370 $5.070 $5.280 $5.500 $5.930
Income (loss) from investment operations:
Net investment income 0.297 0.324 0.331 0.316 0.171 0.030
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.410 (0.152) 0.299 (0.210) (0.216) (0.300)
------ ------ ------ ------ ------ ------
Total from investment operations 0.707 0.172 0.630 0.106 (0.045) (0.270)
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.307) (0.322) (0.330) (0.316) (0.171) (0.040)
Net realized gain on investments -- -- -- -- (0.004) --
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.307) (0.322) (0.330) (0.316) (0.175) (0.040)
------ ------ ------ ------ ------ ------
Net asset value, end of period $5.620 $5.220 $5.370 $5.070 $5.280 $5.620
====== ====== ====== ====== ====== ======
Total return(2) 13.77% 3.24% 12.88% 2.10% (0.88%) (4.58%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $18,313 $6,063 $1,804 $296 $303 $0
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.55% 1.55% 1.15%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 2.03% 1.97% 1.95% 2.02% 2.01% 1.57%
Ratio of net investment income to average net assets 5.23% 6.04% 6.41% 6.09% 5.00% 4.93%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.75% 5.62% 6.01% 5.62% 4.54% 4.51%
Portfolio turnover 861% 1044% 709% 118% 175% 861%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.002, a decrease in net realized and unrealized gain (loss)
per share of $0.002, and an increase in the ratio of net investment income
to average net assets of 0.03%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
19
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Corporate Bond Fund Institutional Class
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.220 $5.370 $5.070 $5.280 $5.500
Income (loss) from investment operations:
Net investment income 0.354 0.378 0.383 0.367 0.212
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.410 (0.152) 0.300 (0.210) (0.216)
------ ------ ------ ------ ------
Total from investment operations 0.764 0.226 0.683 0.157 (0.004)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.364) (0.376) (0.383) (0.367) (0.212)
Net realized gain on investments -- -- -- -- (0.004)
------ ------ ------ ------ ------
Total dividends and distributions (0.364) (0.376) (0.383) (0.367) (0.216)
------ ------ ------ ------ ------
Net asset value, end of period $5.620 $5.220 $5.370 $5.070 $5.280
====== ====== ====== ====== ======
Total return(2) 14.92% 4.29% 14.02% 3.12% (0.14%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $72,744 $52,681 $54,312 $55,088 $55,201
Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.03% 0.97% 0.95% 1.02% 1.01%
Ratio of net investment income to average net assets 6.23% 7.04% 7.41% 7.09% 6.00%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.75% 6.62% 7.01% 6.62% 5.54%
Portfolio turnover 861% 1044% 709% 118% 175%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of
fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.002, a decrease in net realized and unrealized gain (loss)
per share of $0.002, and an increase in the ratio of net investment income
to average net assets of 0.03%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
20
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Extended Duration Bond Fund Class A
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.050 $5.260 $4.890 $5.150 $5.500
Income (loss) from investment operations:
Net investment income 0.373 0.384 0.369 0.360 0.206
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.500 (0.218) 0.370 (0.260) (0.347)
------ ------ ------ ------ ------
Total from investment operations 0.873 0.166 0.739 0.100 (0.141)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.373) (0.376) (0.369) (0.360) (0.206)
Net realized gain on investments -- -- -- -- (0.003)
------ ------ ------ ------ ------
Total dividends and distributions (0.373) (0.376) (0.369) (0.360) (0.209)
------ ------ ------ ------ ------
Net asset value, end of period $5.550 $5.050 $5.260 $4.890 $5.150
====== ====== ====== ====== ======
Total return(2) 17.55% 3.16% 15.76% 2.08% (2.68%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $9,539 $4,629 $3,346 $1,948 $1,042
Ratio of expenses to average net assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.24% 1.23% 1.26% 1.23% 1.27%
Ratio of net investment income to average net assets 6.65% 7.34% 7.38% 7.24% 5.88%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.21% 6.91% 6.92% 6.81% 5.41%
Portfolio turnover 789% 923% 642% 115% 201%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of fees by the manager and
distributor, as applicable. Performance would have been lower had the
expense limitation not been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.008, a decrease in net realized and unrealized gain (loss)
per share of $0.008, and an increase in the ratio of net investment income
to average net assets of 0.15%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
21
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Extended Duration Bond Fund Class B
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.050 $5.260 $4.890 $5.150 $5.500
Income (loss) from investment operations:
Net investment income 0.332 0.343 0.331 0.323 0.172
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.500 (0.218) 0.370 (0.260) (0.347)
------ ------ ------ ------ ------
Total from investment operations 0.832 0.125 0.701 0.063 (0.175)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.332) (0.335) (0.331) (0.323) (0.172)
Net realized gain on investments -- -- -- -- (0.003)
------ ------ ------ ------ ------
Total dividends and distributions (0.332) (0.335) (0.331) (0.323) (0.175)
------ ------ ------ ------ ------
Net asset value, end of period $5.550 $5.050 $5.260 $4.890 $5.150
====== ====== ====== ====== ======
Total return(2) 16.70% 2.37% 14.90% 1.32% (3.28%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $5,375 $3,413 $1,175 $476 $114
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.95% 1.98% 2.01% 1.98% 2.02%
Ratio of net investment income to average net assets 5.90% 6.59% 6.63% 6.49% 5.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.50% 6.16% 6.17% 6.06% 4.66%
Portfolio turnover 789% 923% 642% 115% 201%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.008, a decrease in net realized and unrealized gain (loss)
per share of $0.008, and an increase in the ratio of net investment income
to average net assets of 0.15%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
22
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Extended Duration Bond Fund Class C
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.050 $5.260 $4.890 $5.150 $5.500
Income (loss) from investment operations:
Net investment income 0.331 0.343 0.331 0.323 0.180
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.500 (0.218) 0.370 (0.260) (0.347)
------ ------ ------ ------ ------
Total from investment operations 0.831 0.125 0.701 0.063 (0.167)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.331) (0.335) (0.331) (0.323) (0.180)
Net realized gain on investments -- -- -- -- (0.003)
------ ------ ------ ------ ------
Total dividends and distributions (0.331) (0.335) (0.331) (0.323) (0.183)
------ ------ ------ ------ ------
Net asset value, end of period $5.550 $5.050 $5.260 $4.890 $5.150
====== ====== ====== ====== ======
Total return(2) 16.67% 2.37% 14.88% 1.32% (3.15%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $4,751 $1,431 $408 $87 $58
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.95% 1.98% 2.01% 1.98% 2.02%
Ratio of net investment income to average net assets 5.90% 6.59% 6.63% 6.49% 5.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.50% 6.16% 6.17% 6.06% 4.66%
Portfolio turnover 789% 923% 642% 115% 201%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.008, a decrease in net realized and unrealized gain (loss)
per share of $0.008, and an increase in the ratio of net investment income
to average net assets of 0.15%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
23
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout
each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Extended Duration Bond Fund Institutional Class
- ------------------------------------------------------------------------------------------------------------------------------------
9/15/98(1)
Year Ended to
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $5.050 $5.260 $4.890 $5.150 $5.500
Income (loss) from investment operations:
Net investment income 0.387 0.397 0.382 0.372 0.215
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.500 (0.218) 0.370 (0.260) (0.347)
------ ------ ------ ------ ------
Total from investment operations 0.887 0.179 0.752 0.112 (0.132)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income (0.387) (0.389) (0.382) (0.372) (0.215)
Net realized gain on investments -- -- -- -- (0.003)
------ ------ ------ ------ ------
Total dividends and distributions (0.387) (0.389) (0.382) (0.372) (0.218)
------ ------ ------ ------ ------
Net asset value, end of period $5.550 $5.050 $5.260 $4.890 $5.150
====== ====== ====== ====== ======
Total return(2) 17.87% 3.43% 16.05% 2.34% (2.52%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $49,891 $56,664 $61,993 $61,955 $55,631
Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.95% 0.98% 1.01% 0.98% 1.02%
Ratio of net investment income to average net assets 6.90% 7.59% 7.63% 7.49% 6.13%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 6.50% 7.16% 7.17% 7.06% 5.66%
Portfolio turnover 789% 923% 642% 115% 201%
(1) Date of commencement of operations; ratios and portfolio turnover have been
annualized and total return has not been annualized.
(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 payments of
fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.008, a decrease in net realized and unrealized gain (loss)
per share of $0.008, and an increase in the ratio of net investment income
to average net assets of 0.15%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
24
Notes Delaware Corporate Bond Fund
TO FINANCIAL STATEMENTS Delaware Extended Duration Bond Fund
July 31, 2003
Delaware Group Income Funds (the "Trust") is organized as a Delaware business
trust and offers five series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund, Delaware High-Yield Opportunities
Fund and Delaware Strategic Income Fund. These financial statements and the
related notes pertain to the Delaware Corporate Bond Fund and Delaware Extended
Duration Bond Fund (each referred to as a "Fund" or collectively as the
"Funds"). The Trust is an open-end investment company. The Funds are considered
diversified under the Investment Company Act of 1940, as amended. The Funds
offer 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 B shares are
sold with a contingent deferred sales charge 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 contingent deferred sales
charge 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 a limited group of investors. As of July 31, 2003, Delaware
Extended Duration Bond Fund Class R had not commenced operations.
The investment objective of the Funds is to seek to provide investors with total
return.
1. Significant Accounting Policies
The following accounting policies are in accordance with accounting principles
generally accepted in the United States and are consistently followed by the
Funds.
Security Valuation - All equity securities 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 Stock Market, Inc.
("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.
U.S. government and agency securities are valued at the mean between the bid and
asked prices. 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. 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 Funds' Board of
Trustees.
Federal Income Taxes - Each 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.
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 Funds. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Funds 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 - Each Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. 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 each
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 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.
Foreign Currency Transactions - Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Funds isolate
that portion of realized gains and losses on investments in debt securities,
which are due to changes in foreign exchange rates from that which are due to
changes in market prices of debt securities. The Funds report certain foreign
currency related transactions as components of realized gains (losses) for
financial reporting purposes, where such components are treated as ordinary
income (loss) for federal income tax purposes.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). 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. Each Fund declares dividends daily from net investment income and pays
such dividends monthly and declares and pays distributions from net realized
gains on investments, if any, annually.
Certain expenses of the Funds are paid through commission arrangements with
brokers. These transactions are done subject to best execution. In addition, the
Funds may receive earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expenses
paid under the above arrangements are included in their respective expense
captions on the Statements of Operations with the corresponding expense offset
shown as "expenses paid indirectly". The amount of these expenses for the year
ended July 31, 2003 were as follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
--------- -----------------
Commission reimbursements $2,723 $1,627
Earnings credits 1,943 678
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its respective investment management agreement,
each Fund pays Delaware Management Company (DMC), a series of Delaware
Management Business Trust and the investment manager, an annual fee based on
each Fund's average daily net assets as follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
--------- -----------------
On the first $500 million 0.500% 0.550%
On the next $500 million 0.475% 0.500%
On the next $1.5 billion 0.450% 0.450%
In excess of $2.5 billion 0.425% 0.425%
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse each Fund to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, and extraordinary expenses, do not exceed 0.55% of average
daily net assets for each Fund through September 30, 2004.
25
Notes Delaware Corporate Bond Fund
TO FINANCIAL STATEMENTS (CONTINUED) Delaware Extended Duration Bond Fund
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates (continued)
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. Each Fund pays
DSC a monthly fee based on average net assets subject to certain minimums for
accounting and administration services. Each Fund pays DSC a monthly fee based
on the number of shareholder accounts for dividend disbursing and transfer agent
services. Prior to June 1, 2003, the monthly fee for dividend disbursing and
transfer agent services was based on the number of shareholder accounts and
shareholder transactions.
Pursuant to a distribution agreement and distribution plan, each Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual fee not to exceed 0.30% of the average daily net assets of 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 waive
distribution fees through September 30, 2004 in order to prevent distribution
fees of Class A shares from exceeding 0.25% of average daily net assets.
At July 31, 2003, each Fund had liabilities payable to affiliates as follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
----------- -----------------
Investment Management fee
payable to DMC $6,191 $9,355
Dividend disbursing, transfer agent
fees, accounting and other
expenses payable to DSC 30,975 13,011
Other expenses payable to
DMC and affiliates 2,082 1,037
For the year ended July 31, 2003, DDLP earned commissions on the sales of the
Class A shares for each Fund as follows:
Delaware Corporate Bond Fund $29,363
Delaware Extended Duration Bond Fund $8,392
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 Funds.
3. Investments
For the year ended July 31, 2003, the Funds made purchases and sales of
investment securities other than U.S. government securities and short-term
investments as follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
------------ -----------------
Purchases $532,158,136 $254,041,870
Sales 484,406,468 253,037,397
At July 31, 2003, the cost of investments and unrealized appreciation
(depreciation) for federal income tax purposes for each Fund were as follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
------------ -----------------
Cost of investments $146,368,471 $69,784,136
============ ===========
Aggregate unrealized appreciation $ 3,588,339 $ 2,313,368
Aggregate unrealized depreciation (4,574,229) (2,825,625)
------------ -----------
Net unrealized depreciation $ (985,890) $ (512,257)
============ ===========
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 accounting principles
generally accepted in the United States. The tax character of dividends and
distributions paid during the years ending July 31, 2003 and 2002 were as
follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
---------------- ---------------
2003 2002 2003 2002
Ordinary income $7,011,136 $5,135,105 $4,640,247 $4,996,150
As of July 31, 2003, the components of net assets on a tax basis were as
follows:
Delaware Delaware
Corporate Extended Duration
Bond Fund Bond Fund
------------ -----------------
Shares of beneficial interest $143,205,169 $69,835,268
Undistributed ordinary income 1,405,603 1,756
Undistributed long-term
capital gain 695,617 235,182
Post-October currency losses (4,912) (3,439)
Unrealized depreciation
on investments and
foreign currencies (986,227) (512,493)
------------ ------------
Net Assets $144,315,250 $ 69,556,274
============ ============
Post-October losses represent losses realized on investment and currency
transactions from November 1, 2002 through July 31, 2003 that, in accordance
with federal income tax regulations, the Fund has elected to defer and treat as
having arisen in the following fiscal year.
26
Notes Delaware Corporate Bond Fund
TO FINANCIAL STATEMENTS (CONTINUED) Delaware Extended Duration Bond Fund
5. Capital Shares
Transactions in capital shares were as follows:
Delaware Corporate Delaware Extended
Bond Fund Duration Bond Fund
------------------ ------------------
Year Ended Year Ended
7/31/03 7/31/02 7/31/03 7/31/02
Shares sold:
Class A 5,013,367 2,865,441 1,456,924 601,760
Class B 1,890,068 1,792,051 449,772 492,768
Class C 2,471,148 895,352 773,883 226,214
Class R 1 -- -- --
Institutional Class 5,967,397 3,060,909 1,572,296 2,613,281
Shares issued upon reinvestment
of dividends and distributions:
Class A 164,198 79,564 45,798 39,021
Class B 72,256 44,216 23,194 15,527
Class C 61,964 23,605 15,453 8,099
Institutional Class 637,752 595,929 600,939 748,742
----------- ----------- ----------- -----------
16,278,151 9,357,067 4,938,259 4,745,412
----------- ----------- ----------- -----------
Shares repurchased:
Class A (2,435,058) (555,864) (698,863) (360,575)
Class B (902,814) (478,053) (179,404) (56,053)
Class C (434,901) (94,638) (215,847) (28,487)
Institutional Class (3,745,700) (3,697,340) (4,395,521) (3,931,380)
----------- ----------- ----------- -----------
(7,518,473) (4,825,895) (5,489,635) (4,376,495)
----------- ----------- ----------- -----------
Net increase (decrease) 8,759,678 4,531,172 (551,376) 368,917
=========== =========== =========== ===========
Class B shares converted to Class A shares*
7/31/03 7/31/02
Shares Value Shares Value
------ ------- ------ -------
Corporate Bond 14,784 $83,540 5,337 $29,126
Extended Duration 309 1,889 -- --
*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.
6. Futures Contracts
Each Fund may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, each
Fund deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. (In some cases, due to the form of the futures agreement, initial
margin is held in a segregated account with the Fund's custodian, rather than
directly with the broker). Subsequent payments are received from the broker or
paid to the broker, (or added to the segregated account) each day, based on the
daily fluctuation in the market value of the contract. These receipts or
payments are known as "variation margin" and are recorded daily by each Fund as
unrealized gains or losses until the contracts are closed. When the contracts
are closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk of entering into futures contracts include potential
imperfect correlation between the futures contracts and the underlying
securities and the possibility of an illiquid secondary market for these
instruments.
Financial futures contracts open at July 31, 2003 were as follows:
Delaware Extended Duration Bond Fund
Contracts to Buy Notional Cost Expiration Date Unrealized Loss
---------------- ------------- --------------- ---------------
111 U.S. 20 Year Treasury $12,060,763 September 2003 $(336,388)
Bond Contracts
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional amount
presented above represents the Fund's total exposure in such contracts, whereas
only the net unrealized appreciation (depreciation) is reflected in the Fund's
net assets.
27
Notes Delaware Corporate Bond Fund
TO FINANCIAL STATEMENTS (CONTINUED) Delaware Extended Duration Bond Fund
7. Line of Credit
The Funds, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participate in a $202,300,000 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 fund'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
Funds had no amounts outstanding as of July 31, 2003, or at any time during the
year.
8. Foreign Exchange Contracts
The Funds may enter into forward foreign currency exchange contracts (and
forward foreign cross currency exchange contracts) as a way of managing foreign
exchange rate risk. The Fund may enter into these contracts to fix the U.S.
dollar value of a security that it has agreed to buy or sell for the period
between the date the trade was entered into and the date the security is
delivered and paid for. The Fund may also use these contracts to hedge the U.S.
dollar value of securities it already owns that are denominated in foreign
currencies. Forward foreign currency exchange contracts (and forward foreign
cross currency exchange contracts) are valued at the mean between the bid and
asked prices of the contracts and are marked-to-market daily. Interpolated
values are derived when the settlement date of the contract is an interim date
for which quotations are not available. The change in market value is recorded
as an unrealized gain or loss. When the contract is closed, a realized gain or
loss is recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed. The use of
forward foreign currency exchange contracts (and forward foreign cross currency
exchange contracts) does not eliminate fluctuations in the underlying prices of
the securities, but does establish a rate of exchange that can be achieved in
the future. Although forward foreign currency exchange contracts limit the risk
of loss due to a decline in the value of the hedged currency, they also limit
any potential gain that might result should the value of the currency increase.
In addition, the Funds could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts. No forward foreign
currency exchange contracts were outstanding at July 31, 2003.
9. Credit and Market Risk
Each Fund may invest in high-yield fixed-income securities, which carry ratings
of BB or lower by S&P and/or Ba or lower by Moody's. 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.
Each Fund invests in fixed-income securities whose value is derived from an
underlying pool of mortgages or consumer loans. Investors receive principal and
interest payments as the underlying mortgages and consumer loans are paid back.
Prepayment of mortgages may shorten the stated maturity of the obligations and
can result in a loss of premium, if any has been paid.
Each 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 each Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
10. Tax Information (Unaudited)
The information set forth below is for the Funds' 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 the funds. 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, 2003, the Funds designate distributions paid
during the period as follows:
Delaware Corporate Delaware Extended
Bond Fund Duration Bond Fund
------------------ ------------------
(A) Long-Term Capital Gains Distributions -- --
(Tax Basis)
(B) Ordinary Income Distributions (Tax Basis) 100% 100%
(C) Total Distributions (Tax Basis) 100% 100%
(D) Qualifying Dividends(1) -- --
(A) and (B) are based on a percentage of the Fund's total distributions.
(D) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
28
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees Delaware Group Income Funds
We have audited the accompanying statements of net assets and statements of
assets and liabilities of Delaware Corporate Bond Fund and Delaware Extended
Duration Bond Fund (the "Funds") (each a series of Delaware Group Income Funds)
as of July 31, 2003, and the related statements 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 Funds' 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 auditing standards generally accepted
in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 2003, by correspondence with the
custodian and brokers or by other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. 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 each
of the above listed Funds at July 31, 2003, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended, and their financial highlights for each of the periods
indicated therein, in conformity with accounting principles generally accepted
in the United States.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 12, 2003
29
Delaware Investments Family of Funds
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of 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 that perform services for the fund. The
independent fund trustees, in particular, are advocates for shareholder
interests. The following is a list of the Trustees/Officers and certain
background and related information.
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee Trustee
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jude to Driscoll(2) Chairman and 3 Years - Since August 2000, 83 None
2005 Market Street Trustee(4) Executive Officer Mr. Driscoll has served in
Philadelphia, PA various executive capacities
19103 Trustee as of at different times at
May 15, 2003 Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
Managing Director -
NationsBanc Capital Markets
(February 1996 - June 1998)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Walter P. Babich Trustee 15 Years Board Chairman - 101 None
2005 Market Street Citadel Construction, Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
John H. Durham Trustee 24 Years(3) Private Investor 101 Trustee -
2005 Market Street Abington Memorial
Philadelphia, PA Hospital
19103
August 7, 1937 President/Director -
22 WR Corporation
John A. Fry Trustee(4) 2 Years President - 83 None
2005 Market Street Franklin & Marshall College
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
30
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee/Officer Trustee/Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Anthony D. Knerr Trustee 10 Years Founder/Managing Director - 101 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director -
2005 Market Street National Gallery of Art Systemax, Inc.
Philadelphia, PA (1994 - 1999)
19103 Director - Andy
Warhol Foundation
November 1, 1940
Thomas F. Madison Trustee 9 Years President/Chief 101 Director -
2005 Market Street Executive Officer - CenterPoint Energy
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director - Digital
and Consulting) River Inc.
(January 1993 - Present)
February 25, 1936 Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
Janet L. Yeomans Trustee 4 Years Vice President/Mergers & 101 None
2005 Market Street Acquisitions - 3M Corporation
Philadelphia, PA (January 2003 - Present)
19103
Ms. Yeomans has held
July 31, 1948 various management
positions at 3M Corporation
since 1983.
- -----------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Richelle S. Maestro Senior Vice President, 4 Years Ms. Maestro has served in 101 None
2005 Market Street General Counsel various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
Michael P. Bishof Senior Vice President 7 Years Mr. Bishof has served in 101 None
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the Registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the portfolios of Voyageur
Insured Funds, Voyageur Intermediate Tax Free Funds, Voyageur Investment
Trust, Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual
Funds III and Voyageur Tax Free Funds.
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
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Corporate Bond Fund and
Delaware Extended Duration Bond Fund shareholders, but it may be used with
prospective investors when preceded or accompanied by a current prospectus for
Delaware Corporate Bond Fund and Delaware Extended Duration Bond 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 each Fund. You should read the prospectus
carefully before you invest. The figures in this report represent past results
which are not a guarantee of future results. The return and principal value of
an investment in a Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
Board of Trustees Affiliated Officers Contact Information
Jude T. Driscoll Michael P. Bishof Investment Manager
Chairman Senior Vice President and Treasurer Delaware Management Company
Delaware Investments Family of Funds Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA Philadelphia, PA
International Affiliate
Walter P. Babich Richelle S. Maestro Delaware International Advisers Ltd.
Board Chairman Executive Vice President, London, England
Citadel Construction Corporation General Counsel and Secretary
King of Prussia, PA Delaware Investments Family of Funds National Distributor
Philadelphia, PA Delaware Distributors, L.P.
John H. Durham Philadelphia, PA
Private Investor
Gwynedd Valley, PA Shareholder Servicing, Dividend
Disbursing and Transfer Agent
John A. Fry Delaware Service Company, Inc.
President 2005 Market Street
Franklin & Marshall College Philadelphia, PA 19103-7094
Lancaster, PA
For Shareholders
Anthony D. Knerr 800 523-1918
Managing Director
Anthony Knerr & Associates For Securities Dealers and Financial
New York, NY Institutions Representatives Only
800 362-7500
Ann R. Leven
Former Treasurer/Chief Fiscal Officer Web site
National Gallery of Art www.delawareinvestments.com
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
--------------------------------------------------------------------------------
Janet L. Yeomans A description of the policies and procedures that the Fund uses to determine how
Vice President/Mergers & Acquisitions to vote proxies (if any) relating to portfolio securities is available without
3M Corporation St. charge (i) upon request, by calling 800 523-1918; (ii) on the Fund's website at
Paul, MN http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. Beginning no later than August 31, 2004, information (if
any) regarding how the Fund voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available without charge
(i) through the Fund's website at http://www.delawareinvestments.com; and (ii)
on the Commission's website at http://www.sec.gov.
--------------------------------------------------------------------------------
(8152) Printed in the USA
AR-460 [7/03] IVES 9/03 J9373
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
FIXED INCOME
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE DELCHESTER FUND
[LOGO] POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY 3
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS:
- --------------------------------------------------------------------------------
Statement of Net Assets 4
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities 8
- --------------------------------------------------------------------------------
Statement of Operations 9
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets 10
- --------------------------------------------------------------------------------
Financial Highlights 11
- --------------------------------------------------------------------------------
Notes to Financial Statements 15
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 18
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 19
- --------------------------------------------------------------------------------
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.
(C) 2003 Delaware Distributors, L.P.
Portfolio Delaware Delchester Fund
MANAGEMENT REVIEW August 12, 2003
Fund Manager
Timothy L. Rabe
Senior Vice President/Senior Portfolio Manager
Q: Please discuss the Fund's performance and the high yield market in general
during the 12-month period.
A: Delaware Delchester Fund gained +28.67% (Class A shares at net asset value
with distributions reinvested) for the fiscal year ended July 31, 2003. The
Fund's peer group, as measured by the Lipper High Current Yield Funds Average,
returned +20.38%. The Fund's benchmark, the Citigroup High-Yield Cash Pay Index,
formerly the Salomon Smith Barney High-Yield Cash Pay Index, gained +28.62%. We
attribute the Fund's strong performance to our disciplined, long-term investment
approach.
A focus on prudent business operations and ethical accounting practices helped
companies post stronger earnings, sparking a rebound in the high yield market in
the second quarter of 2003. Refinancing debt at longer maturities has been a
positive strategy for many high-yield issuers, providing them with more time to
focus on improving their balance sheets.
Investors discouraged by low yielding fixed-income vehicles such as money market
funds are increasingly accepting the risks associated with non investment-grade
bonds in an effort to capture more attractive yields. In the second quarter of
2003, new high-yield issuance climbed to its highest level in five years.
Coupled with a declining default rate and strong cash flows, a healthier
high-yield bond market generated its best return in years.
Q: Please discuss the Fund's strategy over the past year.
A: In an effort to avoid sector bets and minimize portfolio risk, we maintained
neutral sector weightings relative to the Fund's benchmark index, with several
exceptions. In healthcare, the fallout from criminal investigations at
HealthSouth and Tenet Healthcare created negative implications for the entire
sector, prompting us to maintain a less heavily-weighted position. We also
believed it was unlikely that the financial prospects for airline carriers would
improve, and remain skeptical today. Due to continued industry uncertainty, we
avoided this sector during the fiscal year.
In the utility sector, the Fund held a neutral weighting despite concerns about
debt burdens and fraudulent accounting practices that have plagued the industry
in recent years. Our research group helped us search through the plagued
industry to find candidates for the portfolio. We believe that extensive
research is critical to helping us in an environment where corporate malfeasance
at one firm can weaken an entire sector. Our position in Calpine, an electric
utility generator, posted strong returns following its successful debt
refinancing amid a highly volatile industry.
Q: How do you manage investment risk?
A: We believe that a bottom-up approach to portfolio construction is the most
effective way to select good companies. Our investment discipline is founded on
in-depth company research and credit analysis supported by a team of 19
sector-specific analysts. This highly-focused approach provides us with the
ability to thoroughly scrutinize each investment opportunity. It helps us select
the market's most attractive yields and create a well-diversified portfolio. Of
course, ongoing credit analysis and portfolio monitoring are critical to helping
us identify factors or situations that might have a potential negative impact on
the Fund.
Q: Which holdings had the greatest positive impact on performance?
A: A focus on corporate debt restructuring was a key driver of performance among
many of our core holdings. Calpine delivered strong returns following a
successful debt refinancing. Clothing retailer J Crew also benefited from a
positive debt restructuring. With a strong brand name and capable management, we
believe the long-term prospects for J Crew remain promising. In the cable arena,
Charter Communications Holdings rebounded in the second quarter of 2003
following last year's investigation into suspected fraudulent accounting
practices and a high-profile management turnover. We believe the strong price
performance for Charter Communications' bonds is warranted and that the company
may fare well under the leadership of Paul Allen, a former Microsoft executive.
R.H. Donnelley was also a noteworthy contributor to performance due to its
recent acquisition of Sprint Directory Publishing.
1
Q: Please discuss any securities that detracted from performance.
A: While the Fund generated strong performance relative to its peers, several
holdings fell below our performance expectations. The Fund had a market-weighted
position in leading chemical producer Solutia, which suffered from a
highly-publicized water contamination case in Alabama. A weak U.S. dollar and
high natural gas prices also contributed to the firm's poor financial results,
as did legal expenditures associated with the ongoing litigation. However, we
remain optimistic that Solutia's legal issues will be fairly resolved and that
its competitive market position may reward investors over the long term.
We were also disappointed by our investment in Newmont Yandal Operations, the
Australian subsidiary of Newmont Mining Corporation, which declared bankruptcy
proceedings during the period and is consequently no longer a holding within the
portfolio.
2
Delaware
DELCHESTER FUND
Fund Basics
As of July 31, 2003
- -----------------------------------------------
Fund Objective:
The Fund seeks as high a level of current
income as is consistent with providing
reasonable safety.
- -----------------------------------------------
Total Fund Assets:
$370.57 million
- -----------------------------------------------
Number of Holdings:
179
- -----------------------------------------------
Fund Start Date:
August 20, 1970
- -----------------------------------------------
Your Fund Manager:
Timothy L. Rabe is Senior Vice President/Senior
Portfolio Manager of Delaware's high-yield
funds. Mr. Rabe received a bachelor's degree in
finance from the University of Illinois. Prior to
joining Delaware Investments in 2000, Mr. Rabe
was a high-yield portfolio manager for Conseco
Capital Management. Before that, he worked as
a tax analyst for The Northern Trust Company.
He is a CFA charterholder.
- -----------------------------------------------
Nasdaq Symbols:
Class A DETWX
Class B DHYBX
Class C DELCX
Fund Performance
Average Annual Total Returns
Through July 31, 2003 Lifetime 10 Years Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 8/20/70)
Excluding Sales Charge +7.48% +1.77% -5.13% +28.67%
Including Sales Charge +7.33% +1.31% -5.99% +22.95%
- --------------------------------------------------------------------------------
Class B (Est. 5/2/94)
Excluding Sales Charge +0.86% -5.77% +27.68%
Including Sales Charge +0.86% -5.94% +23.68%
- --------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge +0.03% -5.77% +27.68%
Including Sales Charge +0.03% -5.77% +26.68%
- --------------------------------------------------------------------------------
Delaware Delchester Fund invests primarily in high-yield bonds (commonly known
as "junk bonds"), which involve greater risk than higher quality bonds.
Returns reflect the reinvestment of distributions and any applicable sales
charges as noted below. Returns and share values will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. Performance
for Class B and C shares, excluding sales charges, assumes either that
contingent deferred sales charges did not apply or the investment was not
redeemed. Past performance is not a guarantee of future results.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge 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. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1%, if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
Class R shares are available only for certain retirement plan products. They are
sold without a sales charge and have an annual distribution and service fee of
0.60%. No Class R shares were made available during the periods shown.
An expense limitation was in effect for all share classes for the periods
through 7/31/01. Performance would have been lower had the expense limitation
not been in effect.
The average annual total returns for the lifetime (since 8/20/70), 10-year,
five-year, and one-year periods ended July 31, 2003 for Delaware Delchester
Fund's Institutional Class were +7.62%, +2.06%, -4.81%, and +29.46%,
respectively. The Institutional Class shares were first made available on June
1, 1992 and are available without sales or asset-based distribution charges only
to certain eligible institutional accounts. Institutional Class performance
prior to June 1, 1992 for Delaware Delchester Fund is based on Class A
performance and was adjusted to eliminate the sales charges, but not the
asset-based distribution charge of Class A shares.
The performance table and graph do not reflect the deduction of taxes the
shareholder would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DETIX
Performance of a $10,000 Investment
July 31, 1993 through July 31, 2003
Delaware Citigroup High-Yield
Delchester Fund Cash Pay Index
--------------- --------------
Jul-93 $9,550 $10,000
Jul-94 $9,703 $10,320
Jul-95 $10,524 $11,805
Jul-96 $11,376 $12,857
Jul-97 $13,371 $14,888
Jul-98 $14,772 $16,475
Jul-99 $13,642 $16,440
Jul-00 $12,043 $16,302
Jul-01 $9,609 $16,663
Jul-02 $8,827 $15,086
Jul-03 $11,357 $19,404
Chart assumes $10,000 invested on July 31, 1993 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The Citigroup High-Yield Cash Pay Index (formerly the Salomon Smith
Barney High-Yield Cash Pay Index) is an unmanaged index that generally tracks
the performance of high-yield bonds. An index is unmanaged and does not reflect
the costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities. You cannot invest directly in an index. Past performance is
not a guarantee of future results.
3
Statement Delaware Delchester Fund
OF NET ASSETS July 31, 2003
Market
Principal Value
Amount (U.S.$)
Asset-Backed Securities - 0.63%
*Master Asset Securitization Trust
NIM 2003-OPT2 144A 9.79% 5/26/33 $ 1,531,791 $ 1,532,271
*South Street 1999-1A A1 144A
7.16% 7/1/11 900,000 805,553
-----------
Total Asset-Backed Securities
(cost $2,337,218) 2,337,824
-----------
Collateralized Mortgage Obligations - 0.93%
*Goldman Sachs Mortgage Securities
2002-HE2N 144A 8.25% 10/20/32 726,951 726,951
*|X|Prudential Securities Secured Financing
1998 C1-J 144A 7.335% 5/15/13 850,000 681,893
*|X|Salomon Brothers Mortgage Securities
1999 C1-J 144A 7.00% 5/18/32 2,730,000 2,036,579
-----------
Total Collateralized Mortgage Obligations
(cost $3,496,986) 3,445,423
-----------
Corporate Bonds - 76.15%
Aerospace & Defense - 0.51%
*Aviall 144A 7.625% 7/1/11 1,425,000 1,425,000
*TD Funding 144A 8.375% 7/15/11 450,000 460,125
-----------
1,885,125
-----------
Automobiles & Automotive Parts - 1.76%
*Advanced Accessory Systems 144A
10.75% 6/15/11 1,285,000 1,355,675
+CSK Auto 12.00% 6/15/06 1,875,000 2,088,281
General Motors 8.375% 7/15/33 2,030,000 1,901,696
*UIS 144A 9.375% 6/15/13 1,100,000 1,152,250
oVenture Holdings Trust 12.00% 6/1/09 3,465,000 38,981
-----------
6,536,883
-----------
Banking, Finance & Insurance - 2.93%
*Crum & Forster 144A 10.375% 6/15/13 1,720,000 1,784,500
*Farmers Exchange Capital 144A
7.20% 7/15/48 945,000 737,782
*Farmers Insurance Exchange 144A
8.625% 5/1/24 735,000 705,743
Finova Group 7.50% 11/15/09 5,235,000 2,381,925
Qwest Capital Funding 5.875% 8/3/04 3,075,000 2,905,875
TIG Holdings 8.125% 4/15/05 2,010,000 1,939,650
*Zurich Capital Trust I 144A 8.376% 6/1/37 400,000 405,176
-----------
10,860,651
-----------
Buildings & Materials - 1.85%
+Foster Wheeler 6.75% 11/15/05 3,415,000 1,997,775
*Lone Star Industries 144A 8.85% 6/15/05 1,940,000 2,024,875
United States Steel 10.75% 8/1/08 1,770,000 1,770,000
oWCI Steel 10.00% 12/1/04 3,215,000 1,060,950
-----------
6,853,600
-----------
Business Services - 0.51%
*Brickman Group 144A 11.75% 12/15/09 1,070,000 1,185,025
*Worldspan Finance 144A 9.625% 6/15/11 675,000 705,375
-----------
1,890,400
-----------
Market
Principal Value
Amount (U.S.$)
Corporate Bonds (continued)
Cable, Media & Publishing - 10.83%
American Media Operation
10.25% 5/1/09 $ 1,845,000 $ 1,969,538
+Charter Communications Holdings
10.00% 4/1/09 7,155,000 5,580,899
10.75% 10/1/09 5,435,000 4,388,763
+CSC Holdings 10.50% 5/15/16 445,000 476,150
+Insight Midwest 10.50% 11/1/10 3,310,000 3,558,250
+Lodgenet Entertainment 9.50% 6/15/13 4,840,000 5,094,100
Mediacom 9.50% 1/15/13 3,350,000 3,333,250
PanAmSat 8.50% 2/1/12 2,675,000 2,795,375
*PEI Holdings 144A 11.00% 3/15/10 1,195,000 1,320,475
+*RH Donnelley Finance 144A
10.875% 12/15/12 3,300,000 3,729,000
Vertis
10.875% 6/15/09 2,740,000 2,685,200
13.50% 12/7/09 1,525,000 1,418,250
XM Satellite Radio
+*144A 12.00% 6/15/10 855,000 850,725
#14.00% 12/31/09 4,000,000 2,920,000
-----------
40,119,975
-----------
Chemicals - 3.12%
*++HMP Equity 144A 15.433% 5/15/08 1,080,000 534,600
+Huntsman International
*144A 9.875% 3/1/09 1,550,000 1,596,500
10.125% 7/1/09 2,095,000 2,021,675
IMC Global 7.625% 11/1/05 2,600,000 2,756,000
+Solutia
6.72% 10/15/37 2,650,000 1,603,250
11.25% 7/15/09 2,030,000 1,410,850
*Westlake Chemical 144A 8.75% 7/15/11 1,645,000 1,645,000
-----------
11,567,875
-----------
Computers & Technology - 2.70%
+*Amkor Technology 144A 7.75% 5/15/13 1,950,000 1,886,625
*Cooperative Computing
144A 10.50% 6/15/11 2,150,000 2,214,500
*DigitalNet 144A 9.00% 7/15/10 800,000 788,000
+Northern Telecom Capital
7.40% 6/15/06 2,060,000 2,008,500
7.875% 6/15/26 950,000 878,750
+Sanmina 10.375% 1/15/10 1,975,000 2,231,750
-----------
10,008,125
-----------
Consumer Products - 2.61%
+American Greetings 11.75% 7/15/08 2,405,000 2,753,725
*Jacuzzi Brands 144A 9.625% 7/1/10 1,500,000 1,552,500
+Playtex Products 9.375% 6/1/11 1,075,000 1,037,375
+Salton
10.75% 12/15/05 1,255,000 1,248,725
12.25% 4/15/08 1,025,000 1,045,500
+Samsonite 10.75% 6/15/08 1,980,000 2,049,300
-----------
9,687,125
-----------
Consumer Services - 1.29%
+Alderwoods Group 12.25% 1/2/09 2,350,000 2,520,375
Corrections Corporation of America
7.50% 5/1/11 1,175,000 1,192,625
*144A 7.50% 5/1/11 1,025,000 1,068,563
-----------
4,781,563
-----------
4
Statement Delaware Delchester Fund
OF NET ASSETS (CONTINUED)
Market
Principal Value
Amount (U.S.$)
Corporate Bonds (continued)
Energy - 9.75%
*Citgo Petroleum 144A 11.375% 2/1/11 $ 3,405,000 $ 3,771,037
+Dynegy Holdings 6.75% 12/15/05 2,200,000 2,189,000
+El Paso 7.00% 5/15/11 2,765,000 2,198,175
*El Paso Natural Gas 144A 7.625% 8/1/10 2,000,000 1,870,000
*El Paso Production Holding 144A
7.75% 6/1/13 1,850,000 1,706,625
Energy Partners 8.75% 8/1/10 1,200,000 1,203,000
+*Gemstone Investor 144A 7.71% 10/31/04 1,605,000 1,560,863
+Hanover Equipment Trust 8.50% 9/1/08 1,440,000 1,512,000
*Houston Exploration 144A 7.00% 6/15/13 1,835,000 1,835,000
+Petroleum Geo-Services 6.25% 11/19/03 2,440,000 1,622,600
*SEMCO Energy 144A 7.75% 5/15/13 1,675,000 1,706,406
*Southern Natural Gas 144A
8.875% 3/15/10 1,630,000 1,687,050
+Tennessee Gas Pipeline 8.375% 6/15/32 2,535,000 2,496,975
Transcontinental Gas Pipeline
6.125% 1/15/05 650,000 648,375
8.875% 7/15/12 1,985,000 2,153,725
+Williams Companies
6.625% 11/15/04 1,065,000 1,049,025
8.125% 3/15/12 3,855,000 3,720,075
*Williams Gas Pipelines Central 144A
7.375% 11/15/06 3,010,000 3,198,125
-----------
36,128,056
-----------
Environmental Services - 1.38%
+*Casella Waste Systems 144A
9.75% 2/1/13 2,345,000 2,485,700
IESI 10.25% 6/15/12 2,500,000 2,637,500
-----------
5,123,200
-----------
Food, Beverage & Tobacco - 4.50%
Avado Brands 9.75% 6/1/06 1,540,000 708,400
B&G Foods 9.625% 8/1/07 1,160,000 1,191,900
* Commonwealth Brands 144A
10.625% 9/1/08 3,525,000 3,560,250
Denny's 12.75% 9/30/07 3,400,000 3,408,500
Di Giorgio 10.00% 6/15/07 3,045,000 3,018,356
*Le-Natures 144A 9.00% 6/15/13 2,800,000 2,912,000
*National Beef Packing 144A
10.50% 8/1/11 1,865,000 1,865,000
-----------
16,664,406
-----------
Healthcare & Pharmaceuticals - 1.86%
+Alliance Imaging 10.375% 4/15/11 3,195,000 3,195,000
Team Health 12.00% 3/15/09 3,595,000 3,684,875
-----------
6,879,875
-----------
Home Builders - 1.76%
Schuler Homes 10.50% 7/15/11 1,960,000 2,224,600
+Standard Pacific 9.25% 4/15/12 1,930,000 2,103,700
+Technical Olympic USA 10.375% 7/1/12 2,040,000 2,193,000
-----------
6,521,300
-----------
Leisure, Lodging & Entertainment - 2.39%
Extended Stay America 9.875% 6/15/11 2,805,000 3,001,350
*Hard Rock Hotel 144A 8.875% 6/1/13 1,600,000 1,652,000
Herbst Gaming 10.75% 9/1/08 1,545,000 1,703,363
+MeriStar Hospitality Operating Partnership
REIT 10.50% 6/15/09 1,675,000 1,708,500
Regal Cinemas 9.375% 2/1/12 725,000 804,750
-----------
8,869,963
-----------
Principal Market
Amount Value
(U.S.$)
Corporate Bonds (continued)
Packaging & Containers - 3.53%
+AEP Industries 9.875% 11/15/07 $ 3,995,00 $ 3,735,325
*Anchor Glass Container 144A
11.00% 2/15/13 950,000 1,028,375
+Consolidated Container 10.125% 7/15/09 3,505,000 2,120,525
Portola Packaging 10.75% 10/1/05 2,475,000 2,487,375
+*Radnor Holdings 144A 11.00% 3/15/10 3,705,000 3,705,000
-----------
13,076,600
-----------
Paper & Forest Products - 1.20%
Georgia-Pacific 9.875% 11/1/21 4,590,000 4,429,350
-----------
4,429,350
-----------
Real Estate - 0.65%
+Tanger Properties REIT 9.125% 2/15/08 2,230,000 2,419,550
-----------
2,419,550
-----------
Retail - 4.52%
*J Crew Intermediate 144A 16.00% 5/15/08 5,117,943 3,659,329
+J Crew Operating 10.375% 10/15/07 2,698,000 2,657,530
*Jafra Cosmetics 144A 10.75% 5/15/11 2,585,000 2,727,175
+Office Depot 10.00% 7/15/08 2,750,000 3,176,250
Petco Animal Supplies 10.75% 11/1/11 1,305,000 1,461,600
*Remington Arms 144A 10.50% 2/1/11 1,925,000 1,996,995
+Saks 7.25% 12/1/04 1,010,000 1,042,825
-----------
16,721,704
-----------
Telecommunications - 6.76%
+Alamosa Delaware 12.50% 2/1/11 2,965,000 2,564,725
oAllegiance Telecom 11.75% 2/15/08 3,135,000 705,375
++American Tower Escrow 10.886% 8/1/08 1,135,000 754,775
*Centennial Cellular Operating 144A
10.125% 6/15/13 2,800,000 2,751,000
*Cincinnati Bell 144A 7.25% 7/15/13 645,000 614,363
+Crown Castle International 10.75% 8/1/11 3,250,000 3,574,999
Nextel Partners
*144A 8.125% 7/1/11 1,400,000 1,309,000
12.50% 11/15/09 1,220,000 1,354,200
*Qwest Services 144A 13.50% 12/15/10 2,430,000 2,624,400
+Time Warner Telecommunications
9.75% 7/15/08 3,300,000 3,184,500
+#UbiquiTel Operating 14.00% 4/15/10 5,420,000 2,574,500
*Western Wireless 144A 9.25% 7/15/13 2,000,000 1,910,000
+oWorldCom 7.50% 5/15/11 4,275,000 1,138,219
-----------
25,060,056
-----------
Textiles, Apparel & Furniture - 0.45%
Levi Strauss 12.25% 12/15/12 1,970,000 1,674,500
-----------
1,674,500
-----------
Transportation & Shipping - 1.66%
+Hornbeck Offshore Services
10.625% 8/1/08 1,595,000 1,706,650
+*Overseas Shipholding Group 144A
8.25% 3/15/13 2,210,000 2,303,925
*Seabulk International 144A
9.50% 8/15/13 2,150,000 2,150,000
-----------
6,160,575
-----------
Utilities - 7.63%
+*Allegheny Energy Supply Statutory Trust
2001 144A
Series A 10.25% 11/15/07 2,784,065 2,867,587
Series B 10.25% 11/15/07 615,935 609,776
5
Statement Delaware Delchester Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
(U.S.$)
Corporate Bonds (continued)
Utilities (continued)
Avista 9.75% 6/1/08 $ 2,775,000 $ 3,173,906
+Calpine
*144A 8.50% 7/15/10 1,500,000 1,357,500
10.50% 5/15/06 3,895,000 3,563,926
Homer City Fund 8.137% 10/1/19 1,165,000 1,141,700
*Illinois Power 144A 11.50% 12/15/10 695,000 774,925
Midland Funding II 11.75% 7/23/05 1,050,000 1,139,250
Midwest Generation 8.30% 7/2/09 2,435,000 2,419,463
+*oMirant 144A 7.40% 7/15/04 1,415,000 608,450
oMirant Americas Generation
7.625% 5/1/06 2,910,000 2,138,850
Nevada Power 10.875% 10/15/09 1,015,000 1,152,025
Orion Power Holdings 12.00% 5/1/10 2,440,000 2,793,800
*PG&E 144A 6.875% 7/15/08 1,900,000 1,938,000
+PSEG Energy Holdings 7.75% 4/16/07 1,705,000 1,749,294
*USGen New England 144A
7.459% 1/2/15 1,700,000 834,241
------------
28,262,693
------------
Total Corporate Bonds
(cost $279,466,028) 282,183,150
------------
Foreign Bonds - 16.81%
Brazil - 0.84%
Federal Republic of Brazil 10.00% 8/7/11 3,475,000 3,097,094
------------
3,097,094
------------
British Virgin Islands - 0.70%
+ChipPac International 12.75% 8/1/09 2,385,000 2,605,613
------------
2,605,613
------------
Canada - 3.16%
Ainsworth Lumber
12.50% 7/15/07 2,375,000 2,677,813
13.875% 7/15/07 870,000 983,100
CP Ships 10.375% 7/15/12 1,930,000 2,113,350
*Hollinger 144A 11.875% 3/1/11 2,290,000 2,507,550
Western Oil Sands 8.375% 5/1/12 3,130,000 3,458,649
------------
11,740,462
------------
Cayman Islands - 0.56%
*Bluewater Finance 144A
10.25% 2/15/12 2,070,000 2,059,650
------------
2,059,650
------------
Colombia - 0.70%
Republic of Colombia
10.00% 1/23/12 1,400,000 1,494,500
10.375% 1/28/33 1,075,000 1,107,250
------------
2,601,750
------------
Dominican Republic - 1.28%
Dominican Republic
**2.0625% 8/30/24 (Brady) 1,470,000 1,131,900
9.04% 1/23/13 1,300,000 1,203,329
*144A 9.04% 1/23/13 2,660,000 2,400,650
------------
4,735,879
------------
Principal Market
Amount Value
(U.S.$)
Foreign Bonds (continued)
Ecuador - 0.55%
#Republic of Ecuador 6.00% 8/15/30 $ 3,425,000 $ 2,034,669
-----------
2,034,669
-----------
France - 0.86%
+*Rhodia SA 144A 8.875% 6/1/11 3,320,000 3,187,200
-----------
3,187,200
-----------
Ireland - 1.98%
*Eircom Funding 144A 8.25% 8/15/13 2,750,000 2,818,750
Smurfit Capital 7.50% 11/20/25 4,725,000 4,559,625
-----------
7,378,375
-----------
Liberia - 0.60%
Royal Caribbean Cruises 7.50% 2,500,000 2,212,500
10/15/27
-----------
2,212,500
-----------
Norway - 0.65%
Ocean Rig Norway 10.25% 6/1/08 2,830,000 2,419,650
-----------
2,419,650
-----------
Panama - 1.00%
Republic of Panama 8.875% 9/30/27 3,705,000 3,714,263
-----------
3,714,263
-----------
Russia - 1.22%
Gazprom OAO
9.625% 3/1/13 1,300,000 1,362,760
*144A 9.625% 3/1/13 3,000,000 3,150,000
-----------
4,512,760
-----------
Sweden - 0.97%
Stena AB 9.625% 12/1/12
3,255,000 3,592,706
-----------
3,592,706
-----------
United Kingdom - 0.73%
Avecia Group 11.00% 7/1/09 3,160,000 2,701,800
-----------
2,701,800
-----------
Uruguay - 0.04%
+Republic of Uruguay 7.50% 3/15/15 190,000 140,125
-----------
140,125
-----------
Venezuela - 0.97%
Republic of Venezuela
Series A 6.75% 3/31/20 1,945,000 1,664,819
Series B 6.75% 3/31/20 2,250,000 1,925,883
-----------
3,590,702
-----------
Total Foreign Bonds (cost $62,557,699) 62,325,198
-----------
6
Statement Delaware Delchester Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
(U.S.$)
Common Stock - 0.47%
+++Kmart Holdings 50,769 $ 1,188,005
+++NII Holdings 11,251 556,137
------------
Total Common Stock (cost $1,887,106) 1,744,142
------------
Preferred Stock - 1.07%
CSC Holdings PIK 11.75% 37,750 3,954,314
------------
Total Preferred (cost $3,470,086) 3,954,314
------------
Warrants - 0.30%
+++*American Tower 144A 1,175 135,713
+++*Horizon PCS 144A 7,300 365
+++*Solutia 144A 4,410 44
+++XM Satellite Radio 1,045 961,400
------------
Total Warrants (cost $1,163,467) 1,097,522
------------
Total Market Value of Securities -96.36%
(cost $354,378,590) 357,087,573
Short-Term Investments Held as Collateral
for Loaned Securities - 21.51%
(cost $79,721,066)*** 79,721,066
Obligations to Return Securities Lending
Collateral - (21.51%)*** (79,721,066)
Receivables and Other Assets
Net of Liabilities - 3.64% 13,484,206
------------
Net Assets Applicable to 123,323,217 Shares
Outstanding - 100.00% $370,571,779
============
Net Asset Value - Delaware Delchester Fund Class A
($253,965,697 / 84,567,381 Shares) $3.00
-----
Net Asset Value - Delaware Delchester Fund Class B
($82,345,309 / 27,362,722 Shares) $3.01
-----
Net Asset Value - Delaware Delchester Fund Class C
($16,964,710 / 5,636,366 Shares) $3.01
-----
Net Asset Value - Delaware Delchester Fund
Institutional Class
($17,296,063 / 5,756,748 Shares) $3.00
-----
Components of Net Assets at July 31, 2003:
Shares of beneficial interest
(unlimited authorization-- no par) $1,047,275,035
Undistributed net investment income 11,354
Accumulated net realized loss on investments (679,423,593)
Net unrealized appreciation of investments 2,708,983
--------------
Total net assets $ 370,571,779
--------------
*Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note 8 in "Notes to Financial Statements".
**Floating Rate Note - the interest rate shown is the rate as of July 31, 2003
and the maturity date shown is the longer of the next interest readjustment
or the date the principal amount shown can be recovered through demand.
***See Note 7 in "Notes to Financial Statements".
+Fully or partially on loan.
++Zero coupon bond. The interest rate shown is the yield at the time of
purchase.
+++Non-income producing security for the year ended July 31,2003.
#Step coupon bond.
oNon-income producing security. Security is currently in default.
|X|Variable rate notes. The interest rate shown is the rate as of July 31,2003.
Summary of Abbreviations
NIM - Net Interest Margin PIK - Pay-in-kind
REIT - Real Estate Investment Trust
Net Asset Value and Offering Price Per Share -
Delaware Delchester Fund
Net asset value Class A (A) $ 3.00
Sales charge (4.50% of offering price or 4.67% of the
amount invested per share) (B) 0.14
------
Offering price $ 3.14
======
(A) Net asset value per share, as illustrated, is the estimated amount, which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
7
Statement Delaware Detchester Fund
OF ASSETS AND LIABILITIES July 31,2003
Assets:
Investments at market (cost $354,378,590) $ 357,087,573
Receivables for securities sold 80,932,678
Short-term investments held as collateral loaned securities 79,721,066
Interest receivable 7,189,705
Subscriptions receivable 296,761
Other assets 9,507
-------------
Total assets 525,237,290
-------------
Liabilities:
Obligations to return securities lending collateral 79,721,066
Payables for securities purchased 67,970,836
Liquidations payable 3,841,670
Cash overdraft 2,020,774
Distributions payable 907,652
Accrued expenses 203,513
-------------
Total liabilities 154,665,511
-------------
Total Net Assets $ 370,571,779
=============
See accompanying notes
8
Statement Delaware Delchester Fund
OF OPERATIONS Year Ended July 31, 2003
Investment Income:
Interest $39,784,452
Dividends 289,888
Securities lending income 135,914 $40,210,254
----------- -----------
Expenses:
Management fees 2,107,471
Distribution expense - Class A 610,947
Distribution expense - Class B 782,673
Distribution expense - Class C 131,885
Dividend disbursing and transfer agent
fees and expenses 1,171,389
Reports and statements to shareholders 170,000
Accounting and administration expenses 144,893
Registration fees 68,000
Custodian fees 48,279
Professional fees 42,700
Trustees' fees 17,000
Other 109,353 5,404,590
-----------
Less expenses paid indirectly (12,758)
-----------
Total expenses 5,391,832
-----------
Net Investment Income 34,818,422
-----------
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments 17,615,827
Net change in unrealized appreciation/depreciation
of investments 29,262,361
-----------
Net Realized and Unrealized Gain on Investments 46,878,188
-----------
Net Increase in Net Assets Resulting from Operations $81,696,610
===========
See accompanying notes
9
Statements Delaware Delchester Fund
OF CHANGES IN NET ASSETS
Year Ended
7/31/03 7/31/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 34,818,422 $ 39,463,259
Net realized gain (loss) on investments 17,615,827 (60,189,654)
Net change in unrealized appreciation/depreciation
of investments 29,262,361 (6,434,705)
------------ ------------
Net increase (decrease) in net assets
resulting from operations 81,696,610 (27,161,100)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (22,181,414 (24,865,632)
Class B (7,415,497) (9,838,723)
Class C (1,239,632) (1,367,538)
Institutional Class (1,474,718) (1,407,087)
------------ ------------
(32,311,261) (37,478,980)
------------ ------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 92,592,117 29,594,726
Class B 19,861,389 11,387,592
Class C 6,787,876 1,978,001
Institutional Class 14,111,433 5,925,087
Net asset value of shares issued upon reinvestment
of dividends and distributions:
Class A 11,223,968 12,009,813
Class B 2,948,502 3,754,222
Class C 717,706 682,422
Institutional Class 1,377,306 1,378,453
------------ ------------
149,620,297 66,710,316
------------ ------------
Cost of shares repurchased:
Class A (72,145,113) (89,672,334)
Class B (31,661,917) (36,183,890)
Class C (3,726,368) (5,834,983)
Institutional Class (10,861,376) (14,581,401)
------------ ------------
(118,394,774) (146,272,608)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions 31,225,523 (79,562,292)
------------ ------------
Net Increase (Decrease) in Net Assets 80,610,872 (144,202,372)
Net Assets:
Beginning of year 289,960,907 434,163,279
------------ ------------
End of year $370,571,779 $289,960,907
============ ============
See accompanying notes
10
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Delchester Fund Class A
Year Ended
7/31/03 07/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $2.580 $3.110 $4.390 $5.540 $6.650
Income (loss) from investment operations:
Net investment income(1) 0.303 0.317 0.432 0.524 0.597
Net realized and unrealized gain (loss) on investments 0.399 (0.543) (1.276) (1.155) (1.102)
------- ------- ------- ------- -------
Total from investment operations 0.702 (0.226) (0.844) (0.631) (0.505)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.282) (0.304) (0.436) (0.519) (0.605)
------- ------- ------- ------- -------
Total dividends and distributions 0.282) (0.304) (0.436) (0.519) (0.605)
------- ------- ------- ------- -------
Net asset value, end of period $3.000 $2.580 $3.110 $4.390 $5.540
======= ======= ======= ======= =======
Total return(2) 28.67% (7.94%) (20.22%) (11.93%) (7.65%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $253,966 $188,736 $278,975 $485,581 $813,787
Ratio of expenses to average net assets 1.47% 1.32% 1.25% 1.27% 1.10%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly 1.47% 1.32% 1.33% 1.30% 1.10%
Ratio of net investment income to average net assets 10.93% 10.76% 11.63% 10.55% 10.12%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly 10.93% 10.76% 11.55% 10.52% 10.12%
Portfolio turnover 788% 441% 294% 82% 85%
(1) The average shares outstanding method has been applied for per share
information for the periods ended July 31, 2003, 2002, 2001 and 2000.
(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 payments of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.019, a decrease in net realized and unrealized gain (loss)
per share of $0.019, and an increase in the ratio of net investment income
to average net assets of 0.65%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
11
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Delchester Fund Class B
Year Ended
7/31/03 07/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $2.590 $3.120 $4.390 $5.540 $6.650
Income (loss) from investment operations:
Net investment income(1) 0.283 0.295 0.405 0.487 0.557
Net realized and unrealized gain (loss) on investments 0.399 (0.543) (1.270) (1.154) (1.103)
------- ------- ------- ------- -------
Total from investment operations 0.682 (0.248) (0.865) (0.667) (0.546)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.262) (0.282) (0.405) (0.483) (0.564)
------- ------- ------- ------- -------
Total dividends and distributions (0.262) (0.282) (0.405) (0.483) (0.564)
------- ------- ------- ------- -------
Net asset value, end of period $3.010 $2.590 $3.120 $4.390 $5.540
======= ======= ======= ======= =======
Total return(2) 27.68% (8.28%) (20.85%) (12.57%) (8.34%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $82,345 $79,507 $118,235 $208,784 $349,960
Ratio of expenses to average net assets 2.19% 2.04% 1.98% 2.00% 1.85%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly 2.19% 2.04% 2.06% 2.03% 1.85%
Ratio of net investment income to average net assets 10.21% 10.04% 10.90% 9.82% 9.37%
Ratio of net investment income to average net assets
prior to expense limitation and expenses
paid indirectly 10.21% 10.04% 10.82% 9.79% 9.37%
Portfolio turnover 788% 441% 294% 82% 85%
(1) The average shares outstanding method has been applied for per share
information for the periods ended July 31, 2003, 2002, 2001 and 2000.
(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 payments of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.019, a decrease in net realized and unrealized gain (loss)
per share of $0.019, and an ncrease in the ratio of net investment income to
average net assets of 0.65%. Per share data and ratios for periods prior to
August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
12
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Delchester Fund Class C
Year Ended
7/31/03 07/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $2.590 $3.120 $4.390 $5.540 $6.650
Income (loss) from investment operations:
Net investment income(1) 0.283 0.295 0.405 0.487 0.566
Net realized and unrealized gain (loss) on investments 0.399 (0.543) (1.270) (1.154) (1.111)
------- ------- ------- ------- -------
Total from investment operations 0.682 (0.248) (0.865) (0.667) (0.545)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.262) (0.282) (0.405) (0.483) (0.565)
------- ------- ------- ------- -------
Total dividends and distributions (0.262) (0.282) (0.405) (0.483) (0.565)
------- ------- ------- ------- -------
Net asset value, end of period $3.010 $2.590 $3.120 $4.390 $5.540
======= ======= ======= ======= =======
Total return(2) 27.68% (8.28%) (20.85%) (12.57%) (8.34%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $16,965 $11,176 $16,841 $33,871 $62,613
Ratio of expenses to average net assets 2.19% 2.04% 1.98% 2.00% 1.85%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly 2.19% 2.04% 2.06% 2.03% 1.85%
Ratio of net investment income to average net assets 10.21% 10.04% 10.90% 9.82% 9.37%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly 10.21% 10.04% 10.82% 9.79% 9.37%
Portfolio turnover 788% 441% 294% 82% 85%
(1) The average shares outstanding method has been applied for per share
information for the periods ended July 31, 2003, 2002, 2001 and 2000.
(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 payments of fees by the manager, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was an increase in net investment income
per share of $0.019, a decrease in net realized and unrealized gain (loss)
per share of $0.019, and an increase in the ratio of net investment income
to average net assets of 0.65%. Per share data and ratios for periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
13
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Delchester Fund Institutional Class
Year Ended
7/31/03 07/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $2.590 $3.110 $4.390 $5.540 $6.650
Income (loss) from investment operations:
Net investment income(1) 0.311 0.325 0.442 0.538 0.613
Net realized and unrealized gain (loss) on investments 0.389 (0.533) (1.277) (1.156) (1.104)
Total from investment operations 0.700 (0.208) (0.835) (0.618) (0.491)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.290) (0.312) (0.445) (0.532) (0.619)
------- ------- ------- ------- -------
Total dividends and distributions (0.290) (0.312) (0.445) (0.532) (0.619)
------- ------- ------- ------- -------
Net asset value, end of period $3.000 $2.590 $3.110 $4.39 $5.540
======= ======= ======= ======= =======
Total return(2) 29.46% (7.69%) (19.98%) (11.70%) (7.42%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $17,296 $10,542 $20,112 $19,751 $38,687
Ratio of expenses to average net assets 1.19% 1.04% 0.98% 1.00% 0.85%
Ratio of expenses to average net assets prior to
expense limitation and expenses paid indirectly 1.19% 1.04% 1.06% 1.03% 0.85%
Ratio of net investment income to average net assets 11.21% 11.04% 11.90% 10.82% 10.37%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid
indirectly 11.21% 11.04% 11.82% 10.79% 10.37%
Portfolio turnover 788% 441% 294% 82% 85%
(1) The average shares outstanding method has been applied for per share
information for the periods ended July 31, 2003, 2002, 2001 and 2000.
(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 payments of
fees by the manager, as applicable. Performance would have been lower had
the expense limitation not been in effect
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium discounts on debt securities and the recording
of paydown gains and losses on mortgage- and asset-backed securities as an
adjustment to interest income. The effect of these changes for the year
ended July 31, 2002 was an increase in net investment income per share of
$0.019, a decrease in net realized and unrealized gain (loss) per share of
$0.019, and an increase in the ratio of net investment income to average net
assets of 0.65%. Per share data and ratios for periods prior to August 1,
2001 have not been restated to reflect these changes in accounting.
See accompanying notes
14
Notes Delaware Delchester Fund
TO FINACIAL STATEMENTS July 31, 2003
Delaware Group Income Funds (the "Trust") is organized as a Delaware business
trust and offers five series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund, Delaware High-Yield Opportunities
Fund and Delaware Strategic Income 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 B shares are sold with a contingent
deferred sales charge 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 contingent deferred sales charge 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 a limited
group of investors. As of July 31, 2003, Class R has not commenced operations.
The investment objective of the Fund is to seek as high a level of current
income as is consistent with providing reasonable safety.
1. Significant Accounting Policies
The following accounting policies are in accordance with accounting principles
generally accepted in the United States and are consistently followed by the
Fund.
Security Valuation -- All equity securities 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 Stock Market, Inc.
("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. 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.
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.
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
other members of the Delaware Investments Family of Funds. 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 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.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). 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
gains on investments, if any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. These transactions are done subject to best execution. The amount of
these expenses was approximately $7,781 for the year ended July 31, 2003. In
addition, the Fund receives earnings credits from its custodian when positive
cash balances are maintained, which are used to offset custody fees. The
earnings credits for the year ended July 31, 2003 were approximately $4,977. The
expenses paid under the above arrangements are included in their respective
expense captions on the Statement of Operations with the corresponding expense
offset shown as "expenses 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.
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 based on average net assets subject to certain minimums 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. Prior to June 1, 2003, the monthly fee for dividend disbursing and
transfer agent services was based on the number of shareholder accounts and
shareholder transactions.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual 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.
At July 31, 2003, the Fund had liabilities payable to affiliates as follows:
Investment management fees payable to DMC $ 41,357
Dividend disbursing, transfer agent fees,
accounting and other expenses payable to DSC 15,869
Other expenses payable to DMC and affiliates 8,589
For the year ended July 31, 2003, DDLP earned $16,476 for commissions on sales
of the Fund's Class A shares.
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.
15
Notes Delaware Delchester Fund
TO FINANCIAL STATEMENTS (CONTINUED)
3. Investments
For the year ended July 31, 2003, the Fund made purchases of $3,074,663,267 and
sales of $2,456,856,274 of investment securities other than short-term
investments.
At July 31, 2003, the cost of investments for federal income tax purposes was
$354,292,966. At July 31, 2003, net unrealized appreciation was $2,794,607,
which $17,200,566 related to unrealized appreciation of investments and of
$14,405,959 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 accounting principles generally accepted in the United
States. The tax character of dividends and distributions paid during the years
ending July 31, 2003 and 2002 were as follows:
2003 2002
Ordinary Income $ 32,311,261 $ 37,478,980
As of July 31, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $1,047,275,035
Undistributed ordinary income 11,354
Capital loss carryforwards (674,253,699)
Post-October losses (5,255,518)
Unrealized appreciation of investments 2,794,607
--------------
Net assets $ 370,571,779
==============
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss
carryforwards expire as follows: $10,982,838 expires in 2007, $147,703,776
expires in 2008, $284,053,994 expires in 2009, $211,481,773 expires in 2010 and
$20,031,318 expires in 2011. During the year ended July 31, 2003, $87,593,579 of
unused capital loss carryforwards expired.
Post-October losses represent losses realized on investment transactions from
November 1, 2002 through July 31, 2003 that, in accordance with federal income
tax regulations, the Fund has elected to defer and treat as having arisen in the
following fiscal year.
5.Capital Shares
Transactions in capital shares were as follows:
Year Ended
7/31/03 7/31/02
Shares sold:
Class A 33,365,111 9,958,716
Class B 7,213,107 3,831,704
Class C 2,412,224 670,486
Institutional Class 5,137,453 1,992,363
Shares issued upon reinvestment of
dividends and distributions:
Class A 4,038,769 4,119,452
Class B 1,064,668 1,285,644
Class C 256,850 233,953
Institutional Class 495,471 472,384
----------- -----------
53,983,653 22,564,702
----------- -----------
Shares repurchased:
Class A (25,854,116) (30,649,968)
Class B (11,613,868) (12,370,137)
Class C (1,347,248) (1,994,829)
Institutional Class (3,953,892) (4,848,366)
----------- -----------
(42,769,124) (49,863,300)
----------- -----------
Net increase (decrease) 11,214,529 (27,298,598)
=========== ===========
For the years ended July 31, 2003 and 2002, 2,791,938 Class B shares were
converted to 2,795,743 Class A shares valued at $7,737,698 and 314,471 Class B
shares were converted to 314,471 Class A shares valued at $872,631,
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.
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participates in a $202,300,000 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 fund'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, 2003 or at any time during the
year.
16
Notes Delaware Delchester Fund
TO FINANCIAL STATEMENTS (CONTINUED)
7. 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 J.P. Morgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. Treasury 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 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 that 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. At July 31,
2003, the market value of securities on loan was $77,657,576.
The securities on loan were collateralized by the following:
Description Market Value
FNMA 1.0549% 1/29/04 $ 21,886,018
UBS Warburg LLC 1.14% 8/01/03 20,074,015
Landesbank Hessen Thur New York 1.10% 8/6/03 3,875,998
Deutsche Bank Financial 1.0909% 1/16/04 3,504,327
Allied Irish Dublin 1.06% 10/10/03 3,501,852
Citibank Canada, Toronto 1.06% 11/12/03 3,501,852
Fortis Bank, Brussels 1.05% 9/30/03 3,501,852
Barclays, London 1.05% 8/15/03 3,239,217
ABN Amro Bank Chicago 1.119% 6/07/04 3,067,262
Rabobank, London 1.035% 8/12/03 3,064,309
Goldman Sachs Group LP 1.255% 12/15/03 3,064,120
Merrill Lynch Mortgage Capital 1.225% 8/07/03 2,626,389
Credit Suisse First Boston, NY 1.05% 8/11/03 2,188,657
Barton Capital Corporation 1.0409% 8/08/03 1,312,056
Morgan Stanley Dean Witter, Discover 1.2069% 8/31/04 875,463
Canadian Imperial Bank, NY 1.1593% 10/09/03 437,679
------------
$ 79,721,066
------------
8. Credit and Market Risk
The Fund invests in high-yield fixed-income securities, which carry ratings of
BB or lower by S&P and/or Ba or lower by Moody's. 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.
9. 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, 2003, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary (C)
Capital Gains Income Total (D)
Distributions Distributions Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
- ------------- -------------- ------------- ------------
-- 100% 100% --
(A) and (B) are based on a percentage of the Fund's total distributions.
(D) is based on a percentage of ordinary income of the Fund.
(1)Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
17
Report
OF INDEPENDENT AUTITORS
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 (the "Fund") as of July 31, 2003,
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 auditing standards generally accepted
in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 2003, by correspondence with the
custodian and brokers or by other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. 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
Delaware Delchester Fund at July 31, 2003, 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 accounting principles generally
accepted in the United States.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 12, 2003
18
Delaware Investments Family of Funds
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of 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 that perform services for the fund. The
independent fund trustees, in particular, are advocates for shareholder
interests. The following is a list of the Trustees/Officers and certain
background and related information.
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee Trustee
- ----------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jude T. Driscoll(2) Chairman and 3 Years - Since August 2000, 83 None
2005 Market Street Trustee(4) Executive Officer Mr. Driscoll has served in
Philadelphia,PA various executive capacities
19103 Trustee as of at different times at
May 15, 2003 Delaware Investments1
March 10,1963 Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
Managing Director -
NationsBanc Capital Markets
(February 1996 - June 1998)
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Walter P. Babich Trustee 15 Years Board Chairman - 101 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
- ----------------------------------------------------------------------------------------------------------------------------
John H.Durham Trustee 24 Years(3) Private Investor 101 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103 President/Director -
22 WR Corporation
August 7, 1937
- ----------------------------------------------------------------------------------------------------------------------------
John A. Fry Trustee(4) 2 Years President - 83 None
2005 Market Street Franklin & Marshall College
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President -
May 28, 1960 University of Pennsylvania
(April 1995 - June 2002)
19
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee/Officer Trustee/Officer
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Anthony D. Knerr Trustee 10 Years Founder/Managing Director - 101 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
- ----------------------------------------------------------------------------------------------------------------------------
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director - Systemax Inc.
2005 Market Street National Gallery of Art
Philadelphia,PA (1994 - 1999)
19103 Director - Andy
Warhol Foundation
November 1, 1940
- ----------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison Trustee 9 Years President/Chief 101 Director -
2005 Market Street Executive Officer - CenterPoint Energy
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director - Digital River Inc.
and Consulting)
February 25,1936 (January 1993 - Present) Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Janet L.Yeomans Trustee 4 Years Vice President/Mergers & 101 None
2005 Market Street Acquisitions - 3M Corporation
Philadelphia,PA (January 2003 - Present)
19103
Ms. Yeomans has held
July 31, 1948 various management positions
at 3M Corporation since 1983.
- ----------------------------------------------------------------------------------------------------------------------------
OFFICERS
Richell S.Maestro Executive 4 Years Ms. Maestro has served in 101 None
2005 Market Street Vice President, various executive capacities
Philadelphia,PA General Counsel at different times at
19103 and Secretary Delaware Investments.
November 26,1957
- ----------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof Senior Vice 7 Years Mr. Bishof has served in 101 None
2005 Market Street President and various executive capacities
Philadelphia, PA Treasurer at different times at
19103 Delaware Investments.
August 18, 1962
- ----------------------------------------------------------------------------------------------------------------------------
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the Registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the portfolios of Voyageur
Insured Funds, Voyageur Intermediate Tax Free Funds, Voyageur Investment
Trust, Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual
Funds III and Voyageur Tax Free Funds.
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.
20
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
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 Fund. You should read the prospectus
carefully before you invest. The figures in this report represent past results
which 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 AFFILIATED OFFICERS CONTACT INFORMATION
Jude T. Driscoll Michael P. Bishof Investment Manager
Chairman Senior Vice President and Treasurer Delaware Management Company
Delaware Investments Family of Funds Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA Philadelphia, PA
International Affiliate
Walter P. Babich Richelle S. Maestro Delaware International Advisers Ltd.
Board Chairman Executive Vice President, London, England
Citadel Construction Corporation General Counsel and Secretary
King of Prussia, PA Delaware Investments Family of Funds National Distributor
Philadelphia, PA Delaware Distributors, L.P.
John H. Durham Philadelphia, PA
Private Investor
Gwynedd Valley, PA Shareholder Servicing, Dividend
Disbursing and Transfer Agent
John A. Fry Delaware Service Company, Inc.
President 2005 Market Street
Franklin & Marshall College Philadelphia, PA 19103-7094
Lancaster, PA
For Shareholders
Anthony D. Knerr 800 523-1918
Managing Director
Anthony Knerr & Associates For Securities Dealers and Financial
New York, NY Institutions Representatives Only
800 362-7500
Ann R. Leven
Former Treasurer/Chief Fiscal Officer Web site
National Gallery of Art www.delawareinvestments.com
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President/Mergers & Acquisitions
3M Corporation St.
Paul, MN
- --------------------------------------------------------------------------------
A description of the policies and procedures that the Fund uses to determine how
to vote proxies (if any) relating to portfolio securities is available without
charge (i) upon request, by calling 800 523-1918; (ii) on the Fund's website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. Beginning no later than August 31, 2004, information (if
any) regarding how the Fund voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available without charge
(i) through the Fund's website at http://www.delawareinvestments.com; and (ii)
on the Commission's website at http://www.sec.gov.
- --------------------------------------------------------------------------------
(8144) Printed in the USA
AR-024 [7/03] IVES 9/03 J9364
Delaware
Investments(SM)
---------------------------------------
FIXED INCOME A member of Lincoln Financial Group (R)
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE HIGH-YIELD OPPORTUNITIES FUND
[Logo]POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
- --------------------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- --------------------------------------------------------------------------
PERFORMANCE SUMMARY 3
- --------------------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 4
Statement of Assets and Liabilities 8
Statement of Operations 9
Statements of Changes in Net Assets 10
Financial Highlights 11
Notes to Financial Statements 16
- --------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 19
- --------------------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 20
- --------------------------------------------------------------------------
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.
(C)2003 Delaware Distributors, L.P.
Portfolio Delaware High-Yield Opportunities Fund
MANAGEMENT REVIEW August 12, 2003
Fund Manager
Timothy L. Rabe
Senior Portfolio Manager
Q: Please discuss the Fund's performance and the high-yield market in general
during the 12-month period.
A: Delaware High-Yield Opportunities Fund returned +28.02% (Class A shares at
net asset value with distributions reinvested) for the fiscal year ended July
31, 2003. The average high-yield bond fund, however, had much lower results,
returning +20.38% (based on the performance of 415 funds that compose the Lipper
High Current Yield Funds Average). The Fund's benchmark, the Citigroup
High-Yield Cash Pay Index (formerly the Salomon Smith Barney High-Yield Cash Pay
Index), slightly outperformed the Fund, gaining +28.62% for the same period.
Throughout much of 2002, the high-yield corporate bond market suffered from
uncertainty, fueled by a wave of corporate scandals and an escalating default
rate. Renewed strength among high-yield issuers prompted a market rally in the
first half of 2003, helping the sector deliver its best returns in years.
Companies benefited from refinancing their debt at longer maturities, providing
them with more time to focus on improving their balance sheets. Along with a
significant rise in new issuance, the high-yield market also witnessed a
noticeable decline in default rates. Consequently, as a healthier high-yield
market emerged, inflows into high-yield securities grew stronger. Investors
discouraged by low-yielding fixed-income vehicles such as money market funds
increasingly accepted the risks associated with non-investment-grade bonds in an
effort to capture more attractive yields.
Q: Please discuss the Fund's strategy over the past year.
A: We continued to concentrate on selecting good companies, utilizing a
bottom-up approach to portfolio construction. A dedicated team of 19 analysts
supports our extensive research effort and provides us with the ability to
thoroughly scrutinize every potential investment opportunity. We are confident
that our research-driven approach helps us minimize portfolio risk during market
downturns and leverage attractive long-term opportunities in up markets.
Over the past year, we maintained neutral sector weightings relative to the
benchmark index, while lowering our stakes in select industries. In healthcare,
the fallout from criminal investigations at HealthSouth and Tenet Healthcare
created negative implications for the entire sector, prompting us to maintain an
underweighted position. We also remain skeptical that the financial problems
among airline carriers will improve in the near future, and steered away from
this sector as a result.
In the utility sector, the Fund held a neutral weighting despite concerns about
debt burdens and fraudulent accounting practices that have plagued the industry
in recent years. Our research group helped us search through the plagued
industry to find candidates for the portfolio. We believe that extensive
research is critical to helping us in an environment where corporate malfeasance
at one firm can weaken an entire sector. Research strength helps us to identify
high-quality companies with strong long-term business prospects. Our position in
Calpine, an electric utility generator, is one example of a holding that
performed extremely well compared with its competitors.
Q: Which holdings had the greatest positive impact on performance?
A: A focus on corporate debt restructuring was a key driver of performance among
many of our core holdings. Calpine delivered strong returns following a
successful debt refinancing. Clothing retailer J Crew also benefited from a
positive debt restructuring. With a strong brand name and capable management, we
believe the long-term prospects for J Crew remain promising. In the cable arena,
Charter Communications rebounded in the second quarter of 2003 following last
year's investigation into suspected fraudulent accounting practices and a
high-profile management turnover. We believe the strong price performance for
Charter Communications' bonds is warranted and that the company will fare well
under the leadership of Paul Allen, a former Microsoft executive.
A noteworthy contributor to performance was the beneficiary of a recent business
acquisition. RH Donnelley, which acquired Sprint Directory Publishing, is now
the nation's largest yellow page directory publisher. Consistent sales,
attractive revenue, steady cash flow, and low capital expenditures remain
compelling qualities of this company.
1
Q: Please discuss any securities that detracted from performance.
A: While the Fund generated strong performance relative to its peers, several
holdings fell below our performance expectations. The Fund had a market-weighted
position in leading chemical producer Solutia, which suffered from a highly
publicized water contamination case in Alabama. Work force reductions, a weak
U.S. dollar, and high natural gas prices also contributed to the firm's poor
financial results, as did legal expenditures associated with the ongoing
litigation. However, we remain optimistic that Solutia's legal issues will be
fairly resolved and that its competitive market position will reward investors
over the long term. We were also disappointed by our investment in Newmont
Yandal Operations, the Australian subsidiary of Newmont Mining Corporation,
which declared bankruptcy proceedings during the period and is consequently no
longer a holding within the portfolio.
2
Delaware
HIGH-YIELD OPPORTUNITIES FUND
Fund Basics
As of July 31, 2003
- ------------------------------------------------------------
Fund Objectives:
The Fund seeks total return, and as a secondary
objective, high current income.
- ------------------------------------------------------------
Total Fund Net Assets:
$54.08 million
- ------------------------------------------------------------
Number of Holdings:
179
- ------------------------------------------------------------
Fund Start Date:
December 30, 1996
- ------------------------------------------------------------
Your Fund Manager:
Timothy L. Rabe is Senior Vice President/Senior Portfolio
Manager of Delaware's high-yield funds.
Mr. Rabe received a bachelor's degree in finance
from the University of Illinois. Prior to joining
Delaware Investments in 2000, Mr. Rabe was a
high-yield portfolio manager for Conseco Capital
Management. Before that, he worked as a tax
analyst for The Northern Trust Company. He is
a CFA charterholder.
- ------------------------------------------------------------
Nasdaq Symbols:
Class A DHOAX
Class B DHOBX
Class C DHOCX
Fund Performance
Average Annual Total Returns
Through July 31, 2003 Lifetime Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 12/30/96)
Excluding Sales Charge +5.28% +1.84% +28.02%
Including Sales Charge +4.55% +0.91% +22.30%
- --------------------------------------------------------------------------------
Class B (Est. 2/17/98)
Excluding Sales Charge +1.68% +1.13% +27.14%
Including Sales Charge +1.57% +0.94% +23.14%
- --------------------------------------------------------------------------------
Class C (Est. 2/17/98)
Excluding Sales Charge +1.68% +1.13% +27.13%
Including Sales Charge +1.68% +1.13% +26.13%
- --------------------------------------------------------------------------------
The Fund invests primarily in high-yield bonds (commonly known as "junk bonds"),
which involve greater risk than investing in higher-quality bonds.
Returns reflect the reinvestment of distributions and any applicable sales
charges as noted below. Returns and share values will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. Performance
for Class B and C shares, excluding sales charges, assumes either that
contingent deferred sales charges did not apply or the investment was not
redeemed. Past performance is not a guarantee of future results.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge 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. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1%, if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
The cumulative total return for the lifetime period ended July 31, 2003 for
Delaware High-Yield Opportunities Fund's Class R shares was +1.49%. 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 0.60%.
The average annual total returns for the lifetime, five-year, and one-year
periods ended July 31, 2003 for Delaware High-Yield Opportunities Fund's
Institutional Class were +5.56%, +2.16%, and +28.40%, respectively. The
Institutional Class shares were first made available on December 30, 1996 and
are available without sales or asset-based distribution charges only to certain
eligible institutional accounts.
An expense limitation was in effect for all classes of Delaware High-Yield
Opportunities Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance table and graph do not reflect the deduction of taxes the
shareholder would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DHOIX
Nasdaq Class R symbol: DHIRX
Performance of a $10,000 Investment
December 30, 1996 (Fund's inception) through July 31, 2003
Delaware High Yield Opportunities Fund Performance of $10,000 investment chart
- --------------------------------------------------------------------------------
Delaware High-Yield
Opportunities Fund - Citigroup High-Yield Cash
Class A shares Pay Index
Dec-96 $ 9,549 $10,000
Jul-97 $10,580 $10,835
Jul-98 $12,211 $11,993
Jul-99 $11,693 $11,968
Jul-00 $12,102 $11,886
Jul-01 $10,799 $12,149
Jul-02 $10,448 $11,000
Jul-03 $13,409 $14,148
Chart assumes $10,000 invested on December 30, 1996 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The Citigroup High-Yield Cash Pay Index (formerly the Salomon Smith
Barney High-Yield Cash Pay Index) is an unmanaged index that generally tracks
the performance of high-yield bonds. An index is unmanaged and does not reflect
the costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities. You cannot invest directly in an index. Past performance is
not a guarantee of future results.
3
Statement Delaware High-Yield Opportunities Fund
OF NET ASSETS July 31, 2003
Principal Market
Amount Value (U.S.$)
Asset-Backed Securities - 0.74%
*Master Asset Securitization NIM
Trust 2003-OPT2 144A
9.79% 5/26/33 $218,827 $218,896
*South Street 1999-1A A1 144A
7.16% 7/1/11 200,000 179,012
---------
Total Asset-Backed Securities
(cost $397,817) 397,908
---------
Collateralized Mortgage Obligations - 0.71%
*Goldman Sachs Mortgage Securities
2002-HE2N 144A 8.25% 10/20/32 77,888 77,888
|X|*Prudential Securities Secured Financing
1998 C1-J 144A 7.335% 5/15/13 100,000 80,223
|X|*Salomon Brothers Mortgage Securities
1999 C1-J 144A 7.00% 5/18/32 300,000 223,799
---------
Total Collateralized Mortgage Obligations
(cost $387,738) 381,910
---------
Corporate Bonds - 76.94%
Aerospace & Defense - 0.65%
*Aviall 144A 7.625% 7/1/11 275,000 275,000
*TD Funding 144A 8.375% 7/15/11 75,000 76,688
---------
351,688
---------
Automobiles & Automotive Parts - 2.19%
*Advanced Accessory Systems 144A
10.75% 6/15/11 200,000 211,000
CSK Auto 12.00% 6/15/06 325,000 361,969
General Motors 8.375% 7/15/33 450,000 421,557
*UIS 144A 9.375% 6/15/13 175,000 183,313
+Venture Holdings Trust 12.00% 6/1/09 475,000 5,344
---------
1,183,183
=========
Banking, Finance & Insurance - 3.08%
*Crum & Forster 144A 10.375% 6/15/13 275,000 285,313
*Farmers Exchange Capital 144A
7.20% 7/15/48 125,000 97,590
*Farmers Insurance Exchange 144A
8.625% 5/1/24 75,000 72,015
Finova Group 7.50% 11/15/09 725,000 329,875
Qwest Capital Funding 5.875% 8/3/04 600,000 566,999
TIG Holdings 8.125% 4/15/05 250,000 241,250
*Zurich Capital Trust I 144A 8.376% 6/1/37 75,000 75,971
---------
1,669,013
---------
Buildings & Materials - 1.63%
Foster Wheeler 6.75% 11/15/05 400,000 234,000
*Lone Star Industries 144A 8.85% 6/15/05 250,000 260,938
United States Steel 10.75% 8/1/08 250,000 250,000
+WCI Steel 10.00% 12/1/04 425,000 140,250
---------
885,188
---------
Business Services - 0.59%
*Brickman Group 144A 11.75% 12/15/09 125,000 138,438
*Worldspan Finance 144A 9.625% 6/15/11 175,000 182,875
---------
321,313
---------
Principal Market
Amount Value (U.S.$)
Corporate Bonds (continued)
Cable, Media & Publishing - 11.07%
American Media Operation
10.25% 5/1/09 $ 250,000 $ 266,875
Charter Communications Holdings
10.00% 4/1/09 1,025,000 799,499
10.75% 10/1/09 775,000 625,813
CSC Holdings 10.50% 5/15/16 75,000 80,250
Insight Midwest 10.50% 11/1/10 500,000 537,500
Lodgenet Entertainment 9.50% 6/15/13 600,000 631,500
Mediacom 9.50% 1/15/13 500,000 497,500
PanAmSat 8.50% 2/1/12 425,000 444,125
*PEI Holdings 144A 11.00% 3/15/10 175,000 193,375
*RH Donnelley Finance 144A
10.875% 12/15/12 475,000 536,750
Vertis
10.875% 6/15/09 375,000 367,500
13.50% 12/7/09 200,000 186,000
XM Satellite Radio
*144A 12.00% 6/15/10 275,000 273,625
**14.00% 12/31/09 750,000 547,500
---------
5,987,812
---------
Chemicals - 3.06%
*++HMP Equity 144A 15.433% 5/15/08 125,000 61,875
Huntsman International
*144A 9.875% 3/1/09 300,000 309,000
10.125% 7/1/09 275,000 265,375
IMC Global 7.625% 11/1/05 350,000 371,000
Solutia
6.72% 10/15/37 325,000 196,625
11.25% 7/15/09 250,000 173,750
*Westlake Chemical 144A 8.75% 7/15/11 275,000 275,000
---------
1,652,625
---------
Computers & Technology - 2.84%
*Amkor Technology 144A 7.75% 5/15/13 275,000 266,063
*Cooperative Computing 144A 10.50% 6/15/11 300,000 309,000
*DigitalNet 144A 9.00% 7/15/10 125,000 123,125
Northern Telecom Capital
7.40% 6/15/06 275,000 268,125
7.875% 6/15/26 125,000 115,625
Sanmina 10.375% 1/15/10 400,000 452,000
---------
1,533,938
---------
Consumer Products - 3.60%
American Greetings 11.75% 7/15/08 275,000 314,875
*Jacuzzi Brands 144A 9.625% 7/1/10 200,000 207,000
Playtex Products 9.375% 6/1/11 150,000 144,750
*Remington Arms 144A 10.50% 2/1/11 275,000 285,285
Salton
10.75% 12/15/05 250,000 248,750
12.25% 4/15/08 225,000 229,500
Samsonite 10.75% 6/15/08 325,000 336,375
*Warnaco 144A 8.875% 6/15/13 175,000 182,875
---------
1,949,410
---------
Consumer Services - 1.36%
Alderwoods Group 12.25% 1/2/09 425,000 455,813
Corrections Corporation of America
7.50% 5/1/11 225,000 228,375
*144A 7.50% 5/1/11 50,000 52,125
---------
736,313
---------
4
Statement Delaware High-Yield Opportunities Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value (U.S.$)
Corporate Bonds (continued)
Energy - 9.19%
*Citgo Petroleum 144A 11.375% 2/1/11 $ 425,000 $ 470,687
Dynegy Holdings 6.75% 12/15/05 275,000 273,625
El Paso 7.00% 5/15/11 325,000 258,375
*El Paso Natural Gas 144A 7.625% 8/1/10 400,000 374,000
*El Paso Production Holding 144A
7.75% 6/1/13 275,000 253,688
Energy Partners 8.75% 8/1/10 200,000 200,500
*Gemstone Investor 144A 7.71% 10/31/04 200,000 194,500
Hanover Equipment Trust 8.50% 9/1/08 200,000 210,000
*Houston Exploration 144A 7.00% 6/15/13 500,000 499,999
Petroleum Geo-Services 6.25% 11/19/03 75,000 49,875
*SEMCO Energy 144A 7.75% 5/15/13 250,000 254,688
*Southern Natural Gas 144A 8.875% 3/15/10 150,000 155,250
Tennessee Gas Pipeline 8.375% 6/15/32 300,000 295,500
Transcontinental Gas Pipeline
6.125% 1/15/05 100,000 99,750
6.25% 1/15/08 175,000 172,375
8.875% 7/15/12 215,000 233,275
Williams Companies
6.625% 11/15/04 125,000 123,125
8.125% 3/15/12 525,000 506,624
*Williams Gas Pipelines Central 144A
7.375% 11/15/06 325,000 345,313
---------
4,971,149
---------
Environmental Services - 1.37%
*Casella Waste Systems 144A 9.75% 2/1/13 325,000 344,500
IESI 10.25% 6/15/12 375,000 395,625
---------
740,125
---------
Food, Beverage & Tobacco - 4.33%
Avado Brands 9.75% 6/1/06 150,000 69,000
B&G Foods 9.625% 8/1/07 200,000 205,500
*Commonwealth Brands 144A 10.625% 9/1/08 500,000 505,000
Denny's 12.75% 9/30/07 450,000 451,125
Di Giorgio 10.00% 6/15/07 425,000 421,281
*Le-Natures 144A 9.00% 6/15/13 400,000 416,000
*National Beef Packing 144A 10.50% 8/1/11 275,000 275,000
---------
2,342,906
---------
Healthcare & Pharmaceuticals - 2.02%
Alliance Imaging 10.375% 4/15/11 475,000 475,000
Team Health 12.00% 3/15/09 600,000 615,000
---------
1,090,000
---------
Home Builders - 1.68%
Schuler Homes 10.50% 7/15/11 275,000 312,125
Standard Pacific 9.25% 4/15/12 225,000 245,250
Technical Olympic USA 10.375% 7/1/12 325,000 349,375
---------
906,750
---------
Leisure, Lodging & Entertainment - 2.84%
Alliance Gaming 10.00% 8/1/07 75,000 77,906
Extended Stay America 9.875% 6/15/11 425,000 454,750
*Hard Rock Hotel 144A 8.875% 6/1/13 350,000 361,375
Herbst Gaming 10.75% 9/1/08 250,000 275,625
MeriStar Hospitality Operating
Partnership
REIT 10.50% 6/15/09 250,000 255,000
Regal Cinemas 9.375% 2/1/12 100,000 111,000
---------
1,535,656
---------
Principal Market
Amount Value
(U.S.$)
Corporate Bonds (continued)
Packaging & Containers - 3.56%
AEP Industries 9.875% 11/15/07 $700,000 $ 654,500
*Anchor Glass Container 144A
11.00% 2/15/13 125,000 135,313
Consolidated Container 10.125% 7/15/09 550,000 332,750
Portola Packaging 10.75% 10/1/05 225,000 226,125
*Radnor Holdings 144A 11.00% 3/15/10 575,000 575,000
---------
1,923,688
---------
Paper & Forest Products - 1.65%
Georgia-Pacific 9.875% 11/1/21 925,000 892,625
---------
892,625
---------
Real Estate - 0.60%
Tanger Properties REIT 9.125% 2/15/08 300,000 325,500
---------
325,500
---------
Retail - 3.73%
*J Crew Intermediate 144A 16.00% 5/15/08 610,568 436,556
J Crew Operating 10.375% 10/15/07 325,000 320,125
*Jafra Cosmetics 144A 10.75% 5/15/11 425,000 448,375
Office Depot 10.00% 7/15/08 350,000 404,250
Petco Animal Supplies 10.75% 11/1/11 250,000 280,000
Saks 7.25% 12/1/04 120,000 123,900
---------
2,013,206
---------
Telecommunications - 6.35%
Alamosa Delaware 12.50% 2/1/11 475,000 410,875
+Allegiance Telecom 11.75% 2/15/08 350,000 78,750
++American Tower Escrow 10.886% 8/1/08 140,000 93,100
*Centennial Cellular Operating 144A
10.125% 6/15/13 450,000 442,125
*Cincinnati Bell 144A 7.25% 7/15/13 100,000 95,250
Crown Castle International 10.75% 400,000 440,000
8/1/11
Nextel Partners
*144A 8.125% 7/1/11 300,000 280,500
12.50% 11/15/09 125,000 138,750
*Qwest Services 144A
13.50% 12/15/10 350,000 378,000
Time Warner Telecommunications
9.75% 7/15/08 400,000 386,000
**UbiquiTel Operating 14.00% 4/15/10 550,000 261,250
*Western Wireless 144A 9.25% 7/15/13 275,000 262,625
+WorldCom 7.50% 5/15/11 625,000 166,406
---------
3,433,631
---------
Textiles, Apparel & Furniture - 0.39%
Levi Strauss 12.25% 12/15/12 250,000 212,500
---------
212,500
---------
Transportation & Shipping - 1.92%
Hornbeck Offshore Services
10.625% 8/1/08 200,000 214,000
Kansas City Southern Railway
9.50% 10/1/08 75,000 83,250
*Overseas Shipholding Group 144A
8.25% 3/15/13 400,000 417,000
*Seabulk International 144A
9.50% 8/15/13 325,000 325,000
---------
1,039,250
---------
5
Statement Delaware High-Yield Opportunities Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
(U.S.$)
Corporate Bonds (continued)
Utilities - 7.24%
*Allegheny Energy Supply Statutory Trust
2001 144A 10.25% 11/15/07 $555,000 $ 568,249
Avista 9.75% 6/1/08 325,000 371,719
Calpine
*144A 8.50% 7/15/10 300,000 271,500
10.50% 5/15/06 625,000 571,874
Homer City Fund 8.137% 10/1/19 150,000 147,000
*Illinois Power 144A 11.50% 12/15/10 100,000 111,500
Midland Funding II 11.75% 7/23/05 125,000 135,625
Midwest Generation 8.30% 7/2/09 300,000 298,086
*+Mirant 144A 7.40% 7/15/04 200,000 86,000
+Mirant Americas Generation 7.625% 5/1/06 425,000 312,375
Nevada Power 10.875% 10/15/09 100,000 113,500
Orion Power Holdings 12.00% 5/1/10 300,000 343,500
*PG&E 144A 6.875% 7/15/08 250,000 255,000
PSEG Energy Holdings 7.75% 4/16/07 200,000 205,196
*USGen New England 144A 7.459% 1/2/15 250,000 122,683
---------
3,913,807
---------
Total Corporate Bonds (cost $ 41,211,777) 41,611,276
----------
Foreign Bonds - 13.16%
British Virgin Islands - 0.60%
ChipPAC International 12.75% 8/1/09 300,000 327,750
---------
327,750
---------
Canada - 2.77%
Ainsworth Lumber
12.50% 7/15/07 375,000 422,812
13.875% 7/15/07 100,000 113,000
CP Ships 10.375% 7/15/12 250,000 273,750
*Hollinger 144A 11.875% 3/1/11 325,000 355,875
Western Oil Sands 8.375% 5/1/12 300,000 331,500
---------
1,496,937
---------
Cayman Islands - 0.69%
*Bluewater Finance 144A 10.25% 2/15/12 375,000 373,125
---------
373,125
---------
Colombia - 0.78%
Republic of Colombia
10.00% 1/23/12 250,000 266,875
10.375% 1/28/33 150,000 154,500
---------
421,375
---------
Dominican Republic - 1.20%
Dominican Republic
|X|2.063% 8/30/24 (Brady) 250,000 192,500
9.04% 1/23/13 175,000 161,987
*144A 9.04% 4/1/13 325,000 293,312
---------
647,799
---------
Ecuador - 0.22%
**Republic of Ecuador 6.00% 8/15/30 200,000 118,813
---------
118,813
---------
France - 0.84%
*Rhodia SA 144A 8.875% 6/1/11 475,000 456,000
---------
456,000
---------
Principal Market
Amount Value
(U.S.$)
Foreign Bonds (continued)
Ireland - 1.92%
Smurfit Capital 7.50% 11/20/25 $1,075,000 $1,037,375
---------
1,037,375
---------
Liberia - 0.61%
Royal Caribbean Cruises 7.50% 10/15/27 375,000 331,875
---------
331,875
---------
Norway - 0.59%
Ocean Rig Norway 10.25% 6/1/08 375,000 320,625
---------
320,625
---------
Panama - 0.78%
Republic of Panama 8.875% 9/30/27 420,000 421,050
---------
421,050
---------
Russia - 0.35%
Gazprom OAO 9.625% 3/1/13 180,000 188,690
---------
188,690
---------
Sweden - 1.02%
Stena AB 9.625% 12/1/12 500,000 551,875
---------
551,875
---------
Venezuela - 0.79%
Republic of Venezuela Series A
6.75% 3/31/20 250,000 213,987
Republic of Venezuela Series B
6.75% 3/31/20 250,000 213,987
---------
427,974
---------
Total Foreign Bonds (cost $7,141,995) 7,121,263
---------
Number of
Shares
Common Stock - 0.33%
Kmart Holdings 5,549 129,847
NII Holdings 989 48,886
---------
Total Common Stock (cost $204,590) 178,733
---------
Preferred Stock - 1.02%
CSC Holdings 5,250 549,986
11.75%
Intermedia Communications PIK 13.50% 1 11
Rural Cellular PIK 1 396
11.375%
---------
Total Preferred Stock (cos$491,963) 550,393
---------
Warrants - 0.24%
*American Tower 144A 140 16,170
*Horizon PCS 144A 600 30
*Solutia 144A 450 5
XM Satellite Radio 125 115,000
---------
Total Warrants (cost $ 116,345) 131,205
---------
6
Statement Delaware High-Yield Opportunities Fund
OF NET ASSETS (CONTINUED)
Total Market Value of Securities - 93.14%
(cost $ 49,952,2$5) 50,372,688
Receivables and Other Assets
Net of Liabilities - 6.86% 3,708,901
-----------
Net Assets Applicable to 13,633,286 Shares
Outstanding - 100.00% $54,081,589
-----------
Net Asset Value - Delaware High-Yield
Opportunities Fund
Class A ($29,385,147 / 7,407,368 Shares) $ 3.97
------
Net Asset Value - Delaware High-Yield
Opportunities Fund
Class B ($15,464,355 / 3,898,516 Shares) $ 3.97
------
Net Asset Value - Delaware High-Yield
Opportunities Fund
Class C ($5,916,219 / 1,491,456 Shares) $ 3.97
------
Net Asset Value - Delaware High-Yield
Opportunities Fund
Class R ($4.02 / 1.012 Shares) $ 3.97
------
Net Asset Value -- Delaware High-Yield
Opportunities Fund
Institutional Class ($3,315,864/ 835,945 Shares) $ 3.97
------
Components of Net Assets at July 31, 2003:
Shares of beneficial interest
(unlimited authorization -- no par) $64,136,725
Undistributed net investment income 1,035
Accumulated net realized loss on investments (10,476,634)
Net unrealized appreciation of investments 420,463
-----------
Total net assets $54,081,589
-----------
*Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note 7 in "Notes to Financial Statements."
**Step coupon bond.
+Non-income producing security. Security is currently in default.
++Zero coupon bond. The interest rate shown is the yield at the time of
purchase.
+++Non-income producing security for the year ended July 31, 2003.
|X|Variable rate notes. The interest rate shown is the rate as of
July 31, 2003.
Summary of Abbreviations
NIM -- Net Interest Margin
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) $3.97
Sales charge (4.50% of offering price, or 4.79% of
amount invested per share) (B) 0.19
-----
Offering price $4.16
-----
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
7
Statement Delaware High-Yield Opportunities Fund
OF ASSETS AND LIABILITIES July 31, 2003
Assets:
Investments at market (cost $49,952,225) $ 50,372,688
Cash 880,430
Subscriptions receivable 425,381
Receivables for securities sold 9,554,969
Interest receivable 1,014,744
Due from DMC 8,068
------------
Total assets 62,256,280
------------
Liabilities:
Payables for securities purchased 7,375,230
Liquidations payable 628,745
Distributions payable 111,942
Accrued expenses 58,774
------------
Total liabilities 8,174,691
------------
Total Net Assets $ 54,081,589
------------
See accompanying notes
8
Statement Delaware High-Yield Opportunities Fund
OF OPERATIONS Year Ended July 31, 2003
Investment Income:
Interest $ 4,393,436
Dividends 36,232 $4,429,668
----------- ----------
Expenses:
Management fees 250,579
Distribution expense - Class A 58,588
Distribution expense - Class B 120,101
Distribution expense - Class C 39,778
Dividend disbursing and transfer agent
fees and expenses 122,568
Registration fees 49,148
Reports and statements to shareholders 18,952
Accounting and administration expenses 17,174
Custodian fees 12,051
Professional fees 5,679
Trustees' fees 2,601
Other 8,820 706,039
----------- ----------
Less expenses absorbed or waived (167,041)
Less expenses paid indirectly (1,284)
---------
Total expenses 537,714
---------
Net Investment Income 3,891,954
---------
Net Realized and Unrealized Gain on
Investments:
Net realized gain on investments 2,685,528
Net change in unrealized appreciation/
depreciation of investments 2,805,137
---------
Net Realized and Unrealized Gain on Investments 5,490,665
---------
Net Increase in Net Assets Resulting from
Operations $9,382,619
==========
See accompanying notes
9
Statements Delaware High-Yield Opportunities Fund
OF CHANGES IN NET ASSETS
Year Ended
7/31/03 7/31/02
Increase (Decrease) in Net Assets from
Operations:
Net investment income $3,891,954 $3,106,184
Net realized gain (loss) on investments 2,685,528 (3,047,410)
Net change in unrealized appreciation/
depreciation of investments 2,805,137 (1,913,658)
---------- ----------
Net increase (decrease) in net assets
resulting from operations 9,382,619 (1,854,884)
---------- ----------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (1,903,645) (1,922,328)
Class B (1,086,914) (1,002,194)
Class C (360,627) (273,572)
Institutional Class (294,034) (307,668)
---------- ----------
(3,645,220) (3,505,762)
---------- ----------
Capital Share Transactions:
Proceeds from shares sold:
Class A 15,615,594 8,881,337
Class B 8,097,884 4,512,149
Class C 4,428,710 1,219,846
Class R 4 --
Institutional Class 16,601 4,099,027
Net asset value of shares issued upon
reinvestment of dividends and distributions:
Class A 1,445,505 1,481,164
Class B 447,781 427,436
Class C 235,707 166,851
Institutional Class 292,625 301,157
---------- ----------
30,580,411 21,088,967
---------- ----------
Cost of shares repurchased:
Class A (5,324,461) (11,317,246)
Class B (4,349,310) (5,094,602)
Class C (2,238,032) (1,091,567)
Institutional Class (15) (1,284,648)
---------- ----------
(11,911,818) (18,788,063)
---------- ----------
Increase in net assets derived from capital
share transactions 18,668,593 2,300,904
---------- ----------
Net Increase (Decrease) in Net Assets 24,405,992 (3,059,742)
Net Assets:
Beginning of year 29,675,597 32,735,339
---------- ----------
End of year $54,081,589 $29,675,597
=========== ===========
See accompanying notes
10
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Year Ended
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $3.420 $3.950 $4.850 $5.120 $5.920
Income (loss) from investment operations:
Net investment income(1) 0.377 0.344 0.444 0.455 0.434
Net realized and unrealized gain (loss)
on investments and foreign currencies
0.532 (0.488) (0.893) (0.296) (0.691)
----- ------ ------ ------ ------
Total from investment operations 0.909 (0.144) (0.449) 0.159 (0.257)
----- ------ ------ ----- ------
Less dividends and distributions from:
Net investment income (0.359) (0.386) (0.451) (0.429) (0.438)
Net realized gain on investments -- -- -- -- (0.105)
----- ------ ------ ----- ------
Total dividends and distributions (0.359) (0.386) (0.451) (0.429) (0.543)
------ ------ ------ ------ ------
Net asset value, end of period $3.970 $3.420 $3.950 $4.850 $5.120
====== ====== ====== ====== ======
Total return(2) 28.02% (3.87%) (9.96%) 3.28% (4.26%)
----- ----- ----- ---- -----
Ratios and supplemental data:
Net assets, end of period (000 omitted) $29,385 $14,767 $18,478 $15,650 $12,558
Ratio of expenses to average net assets 1.13% 1.13% 1.30% 1.30% 1.27%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid
indirectly 1.56% 1.44% 1.40% 1.57% 1.89%
Ratio of net investment income to average net
assets 10.36% 9.05% 10.06% 9.21% 8.02%
Ratio of net investment income to average net
assets prior to expense limitation and expenses
paid indirectly 9.93% 8.74% 9.96% 8.94% 7.39%
Portfolio turnover 832% 609% 1,201% 396% 382%
(1) The average shares outstanding method has been applied for per share
information.
(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 a waiver and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.030, an increase in net realized and unrealized gain (loss) per
share of $0.030, and a decrease in the ratio of net investment income to
average net assets of 0.79%. Per share data and ratios for periods prior to
August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
11
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Year Ended
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $3.420 $ 3.960 $4.850 $5.120 $ 5.920
Income (loss) from investment operations:
Net investment income(1) 0.352 0.317 0.413 0.421 0.401
Net realized and unrealized gain (loss)
on investments and foreign currencies 0.532 (0.498) (0.886) (0.294) (0.694)
-------- ------- ------ ------ --------
Total from investment operations 0.884 (0.181) (0.473) 0.127 (0.293)
-------- ------- ------ ------ --------
Less dividends and distributions from:
Net investment income (0.334) (0.359) (0.417) (0.397) (0.402)
Net realized gain on investments -- -- -- -- (0.105)
-------- ------- ------ ------ --------
Total dividends and distributions (0.334) (0.359) (0.417) (0.397) (0.507)
-------- ------- ------ ------ --------
Net asset value, end of period $3.970 $3.420 $3.960 $4.850 $5.120
====== ====== ====== ====== ======
Total return(2) 27.14% (4.80%) (10.44%) 2.62% (4.91%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $15,464 $9,435 $11,210 $9,589 $6,296
Ratio of expenses to average net assets 1.83% 1.83% 2.00% 2.00% 1.97%
Ratio of expenses to average net assets
prior to expense limitation and expenses
paid indirectly 2.26% 2.14% 2.10% 2.27% 2.59%
Ratio of net investment income to average net
assets 9.66% 8.35% 9.36% 8.51% 7.32%
Ratio of net investment income to average net
assets prior to expense limitation and
expenses paid indirectly 9.23% 8.04% 9.26% 8.24% 6.69%
Portfolio turnover 832% 609% 1,201% 396% 382%
(1) The average shares outstanding method has been applied for per share
information.
(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 a waiver and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.030, an increase in net realized and unrealized gain (loss) per
share of $0.030, and a decrease in the ratio of net investment income to
average net assets of 0.79%. Per share data and ratios for periods prior to
August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
12
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Year Ended
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $3.420 $3.960 $4.850 $5.120 $5.920
Income (loss) from investment operations:
Net investment income(1) 0.352 0.317 0.414 0.422 0.403
Net realized and unrealized gain (loss) on
investments and foreign currencies 0.532 (0.498) (0.887) 0.295) (0.696)
----- ------ ------ ------ ------
Total from investment operations 0.884 (0.181) (0.473) 0.127 (0.293)
----- ------ ------ ----- ------
Less dividends and distributions from:
Net investment income (0.334) (0.359) (0.417) (0.397) (0.402)
Net realized gain on investments -- -- -- -- (0.105)
----- ------ ------ ----- ------
Total dividends and distributions (0.334) (0.359) (0.417) (0.397) (0.507)
------ ------ ------ ------ ------
Net asset value, end of period $3.970 $3.420 $3.960 $4.850 $5.120
====== ====== ====== ====== ======
Total return(2) 27.13% (4.80%) (10.44%) 2.61% (4.91%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $5,916 $2,905 $3,044 $2,264 $1,913
Ratio of expenses to average net assets 1.83% 1.83% 2.00% 2.00% 1.97%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid
indirectly 2.26% 2.14% 2.10% 2.27% 2.59%
Ratio of net investment income to average net
assets 9.66% 8.35% 9.36% 8.51% 7.32%
Ratio of net investment income to average net
assets prior to expense limitation and expenses
paid indirectly 9.23% 8.04% 9.26% 8.24% 6.69%
Portfolio turnover 832% 609% 1,201% 396% 382%
(1) The average shares outstanding method has been applied for per share
information.
(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 a waiver and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
(3) As required, effective August 1, 2001, the Fund adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
that require amortization of all premium and discounts on debt securities
and the recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.030, an increase in net realized and unrealized gain (loss) per
share of $0.030, and a decrease in the ratio of net investment income to
average net assets of 0.79%. Per share data and ratios for periods prior to
August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
13
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
6/2/03(1)
to
7/31/03
Net asset value, beginning of period $3.960
Income from investment operations:
Net investment income(2) 0.050
Net realized and unrealized gain on investments 0.010
------
Total from investment operations 0.060
------
Less dividends and distributions from:
Net investment income (0.050)
------
Total dividends and distributions (0.050)
------
Net asset value, end of period $3.970
======
Total return(3) 1.49%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ --
Ratio of expenses to average net assets 1.43%
Ratio of expenses to average net assets prior
to expense limitation and expenses paid
indirectly 2.25%
Ratio of net investment income to average net
assets 9.57%
Ratio of net investment income to average net
assets prior to expense limitation and expenses
paid indirectly 8.75%
Portfolio turnover 832%
(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.
(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 a waiver and payment of
fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
See accompanying notes
14
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Year Ended
7/31/03 7/31/02(3) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $3.420 3.950 4.850 5.120 5.920
Income (loss) from investment operations:
Net investment income(1) 0.388 0.355 0.458 0.473 0.444
Net realized and unrealized gain (loss) on
investments and foreign currencies
0.532 (0.487) (0.893) (0.298) (0.684)
----- ------ ------ ------ ------
Total from investment operations 0.920 (0.132) (0.435) 0.175 (0.240)
----- ------ ------ ----- ------
Less dividends and distributions from:
Net investment income (0.370) (0.398) (0.465) (0.445) (0.455)
Net realized gain on investments -- -- -- -- (0.105)
----- ------ ------ ----- ------
Total dividends and distributions (0.370) (0.398) (0.465) (0.445) (0.560)
----- ------ ------ ----- ------
Net asset value, end of period $3.970 $3.420 $3.950 $4.850 $5.120
====== ====== ====== ====== ======
Total return(2) 28.40% (3.57%) (9.67%) 3.61% (3.96%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $3,316 $2,569 $ 3 $ 4 $3,691
Ratio of expenses to average net assets 0.83% 0.83% 1.00% 1.00% 0.97%
Ratio of expenses to average net assets prior
to expense limitation
and expenses paid indirectly 1.26% 1.14% 1.10% 1.27% 1.59%
Ratio of net investment income to average net
assets 10.66% 9.35% 10.36% 9.51% 8.32%
Ratio of net investment income to average net
assets prior to expense limitation
and expenses paid indirectly 10.23% 9.04% 10.26% 9.24% 7.69%
Portfolio turnover 832% 609% 1,201% 386% 382%
(1) The average shares outstanding method has been applied for per share
information.
(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 a waiver and payment of
fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
(3) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that require
amortization of all premium and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.030, an increase in net realized and unrealized gain (loss) per
share of $0.030, and a decrease in the ratio of net investment income to
average net assets of 0.79%. Per share data and ratios for periods prior to
August 1, 2001 have not been restated to reflect these changes in
accounting.
See accompanying notes
15
Notes Delaware High-Yield Opportunities Fund
TO FINANCIAL STATEMENTS July 31, 2003
Delaware Group Income Funds (the "Trust") is organized as a Delaware business
trust and offers five series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund, Delaware High-Yield Opportunities
Fund and Delaware Strategic Income 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 B shares are sold with a
contingent deferred sales charge 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 contingent deferred sales charge 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 a
limited group of investors.
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 accounting principles generally accepted in the United States
and are consistently followed by the Fund.
Security Valuation -- All equity securities are valued at the last quoted sales
price as of the time of regular close of the New York Stock Exchange ("NYSE") on
the valuation date. Securities traded on the Nasdaq Stock Market, Inc.
("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. 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.
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.
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
other members of the Delaware Investments Family of Funds. 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 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.
Foreign Currency Transactions -- Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Fund isolates
that portion of realized gains and losses on investments in debt securities,
which are due to changes in foreign exchange rates from that which are due to
changes in market prices of debt securities. The Fund reports certain foreign
currency related transactions as components of realized gains (losses) for
financial reporting purposes, where such components are treated as ordinary
income (loss) for federal income tax purposes.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). 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 the Fund declares and pays distributions from net realized
gain on investments, if any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. These transactions are done subject to best execution. The amount of
these expenses was approximately $925 for the year ended July 31, 2003. In
addition, the Fund receives earnings credits from its custodian when positive
cash balances are maintained, which are used to offset custody fees. The
earnings credits for the year ended July 31, 2003 were approximately $359. The
expenses paid under the above arrangements are included in their respective
expense captions on the Statement of Operations with the corresponding expense
offset shown as "expenses 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 the 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 commissions,
distribution fees, and extraordinary expenses, do not exceed 0.83% of average
daily net assets of the Fund through September 30, 2004.
16
Notes Delaware High-Yield Opportunities Fund
TO FINANCIAL STATEMENTS (CONTINUED)
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates (continued) 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 based on average net assets subject to
certain minimums 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. Prior to June 1, 2003, the monthly fee for dividend
disbursing and transfer agent services was based on the number of shareholder
accounts and shareholder transactions.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (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. No
distribution and service expenses are paid by Institutional Class shares.
At July 31, 2003, the Fund had receivables from or liabilities payable to
affiliates as follows:
Dividend disbursing, transfer agent fees,
accounting and other expenses payable to DSC ($12,824)
Other expenses payable to DMC and affiliates (8,387)
Receivable from DMC under expense limitation agreement 8,068
For the year ended July 31, 2003, DDLP earned $11,350 for commissions on sales
of the Fund's Class A shares.
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, 2003, the Fund made purchases of $314,103,957 and
sales of $297,996,505 of investment securities other than short-term
investments.
At July 31, 2003, the cost of investments for federal income tax purposes was
$49,966,036. At July 31, 2003, net unrealized appreciation was $406,652, of
which $2,094,550 related to unrealized appreciation of investments and
$1,687,898 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 accounting principles
generally accepted in the United States. The tax character of dividends and
distributions paid during the years ended July 31, 2003 and 2002 was as follows:
2003 2002
Ordinary income $3,645,220 $3,505,762
As of July 31, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $64,136,725
Undistributed ordinary income 1,035
Capital loss carryforwards (10,138,820)
Post-October losses (324,003)
Unrealized appreciation on investments 406,652
-----------
Net assets $54,081,589
===========
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss
carryforwards expire as follows: $845,969 expires in 2008, $2,847,377 expires in
2009 and $6,445,474 expires in 2010.
Post-October losses represent losses realized on investment transactions from
November 1, 2002 through July 31, 2003 that, in accordance with federal income
tax regulations, the Fund has elected to defer and treat as having arisen in the
following fiscal year.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
7/31/03 7/31/02
Shares sold:
Class A 4,112,658 2,334,583
Class B 2,180,603 1,192,799
Class C 1,177,944 327,189
Class R 1 --
Institutional Class 4,553 1,019,717
Shares issued upon reinvestment of
dividends and distributions:
Class A 392,923 392,117
Class B 122,073 113,185
Class C 64,271 44,267
Institutional Class 80,170 79,676
---------- ----------
8,135,196 5,503,533
---------- ----------
Shares repurchased:
Class A (1,415,636) (3,082,757)
Class B (1,163,767) (1,376,965)
Class C (600,233) (290,936)
Institutional Class (4) (348,921)
---------- ----------
(3,179,640) (5,099,579)
---------- ----------
Net increase 4,955,556 403,954
========== ==========
For the year ended July 31, 2003, 27,154 Class B shares were converted to 27,145
Class A shares valued at $98,827. The respective amounts are included in Class B
redemptions and Class A subscriptions in the table above and the Statement of
Changes in Net Assets.
17
Notes Delaware High-Yield Opportunities Fund
TO FINANCIAL STATEMENTS (CONTINUED)
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participates in a $202,300,000 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 fund'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, 2003, or at any time during the
period.
7. Credit and Market Risk
The Fund invests in high-yield fixed-income securities, which carry ratings of
BB or lower by S&P and/or Ba or lower by Moody's. 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.
8. 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, 2003, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary (C)
Capital Gains Income Total (D)
Distributions Distributions Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
- ------------- -------------- ------------- -------------
-- 100% 100% --
(A) and (B) are based on a percentage of the Fund's total distributions.
(D) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
18
Report
OF INDEPENDENT AUDITORS
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 (the "Fund") as of
July 31, 2003, 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 auditing standards generally accepted
in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 2003, by correspondence with the
custodian and brokers or by other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. 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
Delaware High-Yield Opportunities Fund at July 31, 2003, 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 accounting principles
generally accepted in the United States.
Ernst + Young LLP
Philadelphia, Pennsylvania
September 12, 2003
19
Delaware Investments Family of Funds
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of 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 that perform services for the fund. The
independent fund trustees, in particular, are advocates for shareholder
interests. The following is a list of the Trustees/Officers and certain
background and related information.
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee Trustee
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jude T. Driscoll(2) Chairman and 3 Years - Since August 2000, 83 None
2005 Market Street Trustee(4) Executive Officer Mr. Driscoll has served in
Philadelphia, PA various executive capacities
19103 Trustee as of at different times at
May 15, 2003 Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
Managing Director -
NationsBanc Capital Markets
(February 1996 - June 1998)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Walter P. Babich Trustee 15 Years Board Chairman - 101 None
2005 Market Street Citadel Constructors, Inc.
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
- -----------------------------------------------------------------------------------------------------------------------------------
John H. Durham Trustee 24 Years(3) Private Investor 101 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103
August 7, 1937 President/Director -
22 WR Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
John A. Fry Trustee(4) 2 Years President - 83 None
2005 Market Street Franklin & Marshall College
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
- -----------------------------------------------------------------------------------------------------------------------------------
20
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee/Officer Trustee/Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Anthony D. Knerr Trustee 10 Years Founder/Managing Director - 101 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7,1938
- -----------------------------------------------------------------------------------------------------------------------------------
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director -
2005 Market Street National Gallery of Art Systemax, Inc.
Philadelphia, PA (1994 - 1999)
19103 Director - Andy
Warhol Foundation
November 1, 1940
-----------------------------------------------------------------------------------------------------------------------------------
Thomas F. Madison Trustee 9 Years President/Chief 101 Director -
2005 Market Street Executive Officer - CenterPoint Energy
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director - Digital
and Consulting) River Inc.
(January 1993 - Present)
February 25, 1936 Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans Trustee 4 Years Vice President/Mergers & 101 None
2005 Market Street Acquisitions - 3M Corporation
Philadelphia, PA (January 2003 - Present)
19103
Ms. Yeomans has held
July 31, 1948 various management
positions at 3M Corporation
since 1983.
- -----------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Richelle S. Maestro Executive Vice President, 4 Years Ms. Maestro has served in 101 None
2005 Market Street General Counsel various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
- -----------------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof Senior Vice President 7 Years Mr. Bishof has served in 101 None
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Registrant's investment
advisor, principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the portfolios of Voyageur
Insured Funds, Voyageur Intermediate Tax Free Funds, Voyageur Investment
Trust, Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual
Funds III and Voyageur Tax Free Funds.
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.
21
Delaware
Investments(SM)
- -------------------------------------
A member of Lincoln Financal Group(R)
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 Fund. You should
read the prospectus carefully before you invest. The figures in this report
represent past results which 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 Affiliated Officers Contact Information
Jude T. Driscoll Michael P. Bishof Investment Manager
Chairman Senior Vice President and Treasurer Delaware Management Company
Delaware Investments Family of Funds Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA Philadelphia, PA
International Affiliate
Walter P. Babich Richelle S. Maestro Delaware International Advisers Ltd.
Board Chairman Executive Vice President, London, England
Citadel Construction Corporation General Counsel and Secretary
King of Prussia, PA Delaware Investments Family of Funds National Distributor
Philadelphia, PA Delaware Distributors, L.P.
John H. Durham Philadelphia, PA
Private Investor
Gwynedd Valley, PA Shareholder Servicing, Dividend
Disbursing and Transfer Agent
John A. Fry Delaware Service Company, Inc.
President 2005 Market Street
Franklin & Marshall College Philadelphia, PA 19103-7094
Lancaster, PA
For Shareholders
Anthony D. Knerr 800 523-1918
Managing Director
Anthony Knerr & Associates For Securities Dealers and Financial
New York, NY Institutions Representatives Only
800 362-7500
Ann R. Leven
Former Treasurer/Chief Fiscal Officer Web site
National Gallery of Art www.delawareinvestments.com
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President/Mergers & Acquisitions
3M Corporation St.
Paul, MN
- --------------------------------------------------------------------------------
A description of the policies and procedures that the Fund uses to determine how
to vote proxies (if any) relating to portfolio securities is available without
charge (i) upon request, by calling 800 523-1918; (ii) on the Fund's website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov. Beginning no later than August 31, 2004, information (if
any) regarding how the Fund voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available without charge
(i) through the Fund's website at http://www.delawareinvestments.com; and (ii)
on the Commission's website at http://www.sec.gov.
- --------------------------------------------------------------------------------
(8135) Printed in the USA
AR-137 [7/03] IVES 9/03 J9363
FIXED INCOME
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE STRATEGIC INCOME FUND
[LOGO] POWERED BY RESEARCH.(SM)
TABLE
OF CONTENTS
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY 3
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 5
Statement of Assets and Liabilities 12
Statement of Operations 13
Statements of Changes in Net Assets 14
Financial Highlights 15
Notes to Financial Statements 19
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 23
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 24
- --------------------------------------------------------------------------------
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.
(C) 2003 Delaware Distributors, L.P.
Portfolio Delaware Strategic Income Fund
MANAGEMENT REVIEW August 12, 2003
Fund Managers
Paul Grillo
Senior Portfolio Manager
U.S. Investment-Grade Bonds
Timothy L. Rabe
Senior Portfolio Manager
U.S. High-Yield Bonds
Joanna Bates
Senior Portfolio Manager
Non-U.S. Fixed Income and Emerging Markets
Christopher A. Moth
Senior Portfolio Manager
Non-U.S. Fixed Income and Currency
Q: How did the Fund perform versus its peer funds and benchmarks during the past
year?
A: As has been the case for the past few years, the fixed-income markets
in general fared quite well during the past 12 months. The year was highlighted
by ongoing uncertainty due to a variety of factors: continued threats of
domestic terror at home and abroad, the impact of the new regulations regarding
corporate accountability, the outbreak of the SARS virus, and the military
conflict in Iraq. In each case, uncertainty prompted many investors to continue
to seek the safe haven of fixed-income securities.
All three of the sectors in which Delaware Strategic Income Fund invests (U.S.
investment-grade, high-yield, and international fixed income) turned in a good
year overall, with U.S. Treasury securities relinquishing leadership with regard
to total return as the fiscal year progressed.
While the Lipper Multi-Sector Bond Funds Average gained +15.30% during the
fiscal year ended July 31, 2003, Delaware Strategic Income Fund fared better
yet. Experiencing strong gains in its three sectors, the Fund posted a total
return of +20.99% (Class A shares at net asset value with distributions
reinvested) for the fiscal year ended July 31, 2003.
The Lehman Brothers Aggregate Bond Index, a very broad index which tracks the
highly liquid U.S. investment-grade sector, gained +5.42% for the fiscal year.
The high-yield and international markets turned in double-digit returns,
respectively, based on market index returns in those particular sectors.
Q: How did the strong performance in the high-yield bond market influence
overall performance?
A: The high-yield bond market turned in very strong performance during our
fiscal year - a turnaround that seemed to be several years in the making. Our
allocation to high yield - which accounted for 35.41% of total net assets as of
July 31, 2003 - helped the Fund's performance versus other funds in the
multi-sector fixed-income fund peer group.
During our fiscal year, the Citigroup High-Yield Cash Pay Index gained +28.62%.
The high-yield rally, which gained strength as 2003 progressed, was sparked by
several factors in our opinion. A focus on prudent business operations and
ethical accounting practices helped companies post stronger earnings.
Refinancing debt at longer maturities has been a positive strategy for many
high-yield issuers, providing them with more time to focus on improving their
balance sheets.
Investors discouraged by low-yielding fixed-income vehicles such as money market
funds are increasingly accepting the risks associated with noninvestment-grade
bonds in an effort to capture more attractive yields. In the second quarter of
2003, new high-yield bond issuance climbed to its highest level in five years.
Coupled with a declining default rate and strong cash flows, a healthier
high-yield bond market generated its best return in years.
Q: What is your approach to high-yield securities in the portfolio?
A: We believe that a bottom-up process is the most effective means to select
good companies, and a prudent way to approach the noninvestment-grade sector.
Our investment discipline is founded on in-depth company research and credit
analysis supported by a team of 19 sector-specific analysts.
This highly focused approach provides us with the ability to thoroughly
scrutinize each investment opportunity in order to select what we believe are
the market's most attractive yields and help ensure a more diversified
portfolio. Of course, ongoing credit analysis and portfolio monitoring are
critical to helping us identify factors or situations that might have a
potential negative impact on the Fund.
1
Q: What was your approach to the U.S. investment-grade portion of the markets?
A: Over the past few years, there has been a flight to quality as asset flows
have generally shown investors moving out of equity securities and into the
perceived safe haven of Treasuries. During the fiscal year, yields on U.S.
Treasury bills, notes, and bonds had fallen to significantly low levels.
Subsequently, we focused on security selection within non-Treasury markets. We
have been able to enhance the performance of the Fund (without adding
substantial risk, in our opinion) by investing in higher-yielding government
agency markets, high-quality corporates, and structured mortgage-backed and
asset-backed bonds with good cash flow predictability.
We continue to invest primarily in intermediate-term securities with five- to
10-year maturities and remain cautious about predicting the growth of the
economy and the future direction of interest rates. Our neutral stance with
regard to interest rates led to a decision to own more defensive,
intermediate-maturity (and intermediate-duration) securities in your Fund.
Q: How did international bonds affect performance for the fiscal year?
A: The Fund's international bond component benefited from the general decline in
interest rates around the world. The Citigroup Non-U.S. World Government Index,
a benchmark for this segment of the portfolio, gained +14.19% during the fiscal
year.
When our international portfolio beat the Citigroup index in the second quarter
of 2003, it marked our sixth quarter of international outperformance in the past
seven. The portfolio return in the second half of the year was largely
influenced by overweighted positions in Australia, Canada, New Zealand and
Sweden, all of which beat the index, and underweighted exposure to the U.S. and
Japan, which lagged the benchmark.
2
Delaware
STRATEGIC INCOME FUND
Fund Basics Average Annual Total Returns
As of July 31, 2003 Through July 31, 2003
- ---------------------------------------------- Lifetime Five Years One Year
Fund Objectives: --------------------------------------------------------------------------------
To seek high current income and total return. Class A (Est. 10/1/96)
- ---------------------------------------------- Excluding Sales Charge +4.76% +3.27% +20.99%
Total Fund Net Assets: Including Sales Charge +4.06% +2.32% +15.47%
$32.69 million --------------------------------------------------------------------------------
- ---------------------------------------------- Class B (Est. 10/1/96)
Number of Holdings: Excluding Sales Charge +4.01% +2.55% +20.12%
375 Including Sales Charge +4.01% +2.33% +16.12%
- ---------------------------------------------- --------------------------------------------------------------------------------
Fund Start Date: Class C (Est. 10/1/96)
October 1, 1996 Excluding Sales Charge +4.01% +2.54% +20.12%
- ---------------------------------------------- Including Sales Charge +4.01% +2.54% +19.12%
Your Fund Managers: --------------------------------------------------------------------------------
Paul Grillo joined Delaware Investments in Delaware Strategic Income Fund invests in high-yield bonds (commonly known as
1993, after serving as a mortgage strategist "junk bonds"), which involve a greater risk than high-quality bonds. The Fund
and trader at Dreyfus Corporation. He holds a also invests in foreign bonds which are subject to risks not ordinarily
bachelor's degree from North Carolina State associated with domestic bonds (e.g., currency, economic, and political risks).
University and a MBA from Pace University. Mr.
Grillo is also a CFA charterholder. Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. Returns and share values will fluctuate so that shares,
Timothy L. Rabe received a bachelor's degree when redeemed, may be worth more or less than their original cost. Performance
in finance from the University of Illinois. for Class B and C shares, excluding sales charges, assumes either that
Prior to joining Delaware Investments in 2000, contingent deferred sales charges did not apply or the investment was not
Mr. Rabe was a high-yield portfolio manager redeemed. Past performance is not a guarantee of future results.
for Conseco Capital Management. Before that,
he worked as a tax analyst for The Northern The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
Trust Company. He is a CFA charterholder. are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Joanna Bates is a graduate of London
University, and is an associate of the Class B shares are sold with a contingent deferred sales charge that declines
Institute of Investment Management and from 4% to zero depending upon the period of time the shares are held. Class B
Research. She joined Delaware's Fixed Income shares will automatically convert to Class A shares on a quarterly basis
team in 1997, before which she was Associate approximately eight years after purchase. They are also subject to an annual
Director, Fixed Income at Hill Samuel distribution and service fee of 1%.
Investment Management. She has also worked for
Fidelity International and Save & Prosper as a Class C shares are sold with a contingent deferred sales charge of 1%, if
fund manager and analyst for global bond redeemed during the first 12 months. They are also subject to an annual
markets. distribution and service fee of 1%.
Christopher A. Moth is an actuarial graduate Class R shares are available only for certain retirement plan products. They are
from The City University in London, and was sold without a sales charge and have an annual distribution and service fee of
later awarded the Certificate in Finance & 0.60%. No Class R shares were made available during the periods shown.
Investment from the London Institute of
Actuaries. Mr. Moth joined Delaware in 1992, The average annual total returns for the lifetime, five-year, and one-year
after working for the GRE insurance company periods ended July 31, 2003 for Delaware Strategic Income Fund's Institutional
where he was responsible for quantitative Class were +5.06%, +3.60%, and +21.28%, respectively. The Institutional Class
models and projections. shares were first made available on October 1, 1996 and are available without
- ---------------------------------------------- sales or asset-based distribution charges only to certain eligible institutional
Nasdaq Symbols: accounts.
Class A DISAX
Class B DISBX An expense limitation was in effect for all classes of Delaware Strategic Income
Class C DISCX Fund during the periods shown. Performance would have been lower had the expense
limitation not been in effect.
The performance table and graph on the following page do not reflect the
deduction of taxes the shareholder would pay on Fund distributions or
redemptions of Fund shares.
Nasdaq Institutional Class symbol: DISIX
3
Delaware
STRATEGIC INCOME FUND
Performance of a $10,000 Investment
October 1, 1996 (Fund's inception) through July 31, 2003
Delaware Strategic Lehman Brothers
Income Fund - Aggregate
Class A shares Bond Index
------------------ ---------------
October 1996 $ 9,653 $10,000
July 1997 10,494 10,669
July 1998 11,147 11,508
July 1999 10,836 11,793
July 2000 10,570 12,496
July 2001 10,374 14,082
July 2002 10,845 15,144
July 2003 13,121 15,965
Chart assumes $10,000 invested on October 1, 1996 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. The chart also assumes $10,000 invested in the Lehman Brothers
Aggregate Bond Index at that month's end, October 31, 1996. After October 31,
1996, returns plotted on the chart were as of the last day of each month shown.
The Lehman Brothers Aggregate Bond Index is an unmanaged composite that tracks
the broad U.S. bond markets. An index is unmanaged and does not reflect the
costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities. You cannot invest directly in an index. Past performance is
not a guarantee of future results.
4
Statement Delaware Strategic Income Fund
OF NET ASSETS July 31, 2003
Principal Market
Amount+ Value (U.S.$)
Agency Collateralized Mortgage Obligations - 0.58%
Fannie Mae Interest Only Strip
Series 02-16 Class IG 6.00%
3/25/15 USD 25,613 $ 423
Fannie Mae Series
03-W1 1A1 6.50% 12/25/42 36,376 38,422
Freddie Mac Series
02-70 QD 5.50% 6/25/26 25,000 25,817
2302 Class NJ 6.50% 11/15/29 29,150 29,349
2644 AU 3.50% 5/15/22 30,000 29,742
T-11 A6 6.50% 9/25/18 15,259 15,294
T-50 A3 2.182% 9/27/07 20,000 20,034
GNMA Series
02-62 B 4.763% 1/16/25 15,000 15,056
03-72 C 4.798% 8/15/33 15,000 14,850
----------
Total Agency Collateralized
Mortgage Obligations (cost $ 194,970) 188,987
----------
Agency Mortgage-Backed Securities - 5.31%
Fannie Mae
4.50% 8/1/18 240,000 233,700
5.00% 8/1/18 to 8/1/33 420,000 414,071
5.50% 8/1/33 265,000 261,688
6.00% 4/1/17 to 5/1/33 208,320 211,696
6.50% 8/1/32 to 1/1/33 167,109 171,905
7.50% 6/1/31 29,117 30,855
Freddie Mac
5.00% 8/1/18 50,000 49,953
5.50% 8/1/33 150,000 148,453
6.00% 12/1/32 15,000 15,168
6.50% 8/1/32 77,610 79,890
GNMA
6.50% 9/15/32 86,346 89,421
9.50% 9/15/17 13,231 14,761
10.00% 7/15/17 13,568 15,277
----------
Total Agency Mortgage-Backed
Securities (cost $ 1,782,578) 1,736,838
----------
Agency Obligations - 1.25%
Fannie Mae
2.875% 5/19/08 30,000 28,755
3.25% 1/15/08 95,000 93,788
4.375% 10/15/06 40,000 41,880
Fannie Mae Global
6.375% 8/15/07 AUD 324,000 218,496
Freddie Mac
4.50% 1/15/13 USD 5,000 4,783
6.25% 7/15/32 20,000 20,391
----------
Total Agency Obligations
(cost $365,815) 408,093
----------
Asset-Backed Securities - 1.02%
Capital One Multi-Asset Execution Trust
Series 03-C2 C2 4.32% 4/15/09 10,000 9,943
Citibank Credit Card Issuance Trust
Series 03-A6 A6 2.90% 5/17/10 20,000 19,194
MBNA Credit Card Master Note Trust Series
01-A1 5.75% 10/15/08 60,000 64,952
01-C3 C3 6.55% 12/15/08 15,000 15,999
Mid-State Trust Series 11 A1 4.864% 7/15/38 9,985 9,334
Principal Market
Amount+ Value (U.S.$)
Asset-Backed Securities (continued)
NationsCredit Grantor Trust
Series 97-1A 6.75% 8/15/13 USD 38,987 $ 41,619
Sallie Mae Student Loan Trust Series
96-3 Certificates 1.957% 10/25/11 35,000 35,219
97-1 A2 1.577% 1/25/10 28,027 28,186
97-4 A2 1.757% 10/25/10 89,970 90,810
98-2 A2 1.737% 1/25/14 13,150 13,264
*Sharp Interest Trust Series
02-HE2N N 144A 9.50% 10/25/32 5,783 5,783
----------
Total Asset-Backed Securities (cost $331,060) 334,303
----------
Collateralized Mortgage Obligations - 0.78%
Bank of America Mortgage Securities Series
03-D 1A1 3.428% 5/25/33 17,870 17,954
03-D 1A2 3.428% 5/25/33 4,467 4,452
Cendant Mortgage Series
02-4 A6 6.50% 7/25/32 26,807 27,203
Countrywide Alternative Loan Trust Series
02-7 6.75% 8/25/32 27,002 27,499
Credit Suisse First Boston Mortgage
Securities Series
02-10 2A1 7.50% 5/25/32 19,397 20,319
02-34 1A1 7.50% 12/25/32 32,980 34,650
03-8 5A1 6.50% 4/25/33 50,758 51,601
First Horizon Asset Securities Series
03-5 1A17 8.00% 7/25/33 9,818 10,522
Impac Secured Assets CMN Owner Trust Series
01-4 A3 6.38% 4/25/24 242 241
Washington Mutual Series
03-AR4 A7 3.95% 5/25/33 26,363 26,561
03-S1 A1 5.00% 4/25/33 32,654 33,517
----------
Total Collateralized Mortgage Obligations
(cost $ 256,400) 254,519
----------
Commercial Mortgage-Backed Securities - 0.27%
Commercial Mortgage Series
00-C1 A1 7.206% 8/15/33 79,646 86,626
----------
Total Commercial Mortgage-Backed
Securities (cost $79,644) 86,626
----------
Corporate Bonds - 33.20%
Aerospace & Defense - 0.20%
*Aviall 144A 7.625% 7/1/11 50,000 50,000
*TD Funding 144A 8.375% 7/15/11 15,000 15,338
----------
65,338
----------
Automobiles & Automotive Parts - 0.94%
*Advanced Accessory Systems
144A 10.75% 6/15/11 45,000 47,475
CSK Auto 12.00% 6/15/06 60,000 66,825
Delphi 6.50% 8/15/13 10,000 9,780
Ford Motor 7.45% 7/16/31 60,000 51,375
General Motors
7.125% 7/15/13 10,000 9,770
8.375% 7/15/33 85,000 79,627
*UIS 144A 9.375% 6/15/13 40,000 41,900
----------
306,752
----------
Banking, Finance & Insurance - 3.21%
Allstate Corporate 5.35% 6/1/33 15,000 13,056
America Express Credit 3.00% 5/16/08 5,000 4,851
AON Corporate 7.375% 12/14/12 15,000 16,954
5
Statement Delaware Strategic Income Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount+ Value (U.S.$)
Corporate Bonds (continued)
Banking, Finance & Insurance (continued)
*ASIF Global Financing 144A
4.90% 1/17/13 USD 10,000 $ 9,755
Bear Stearns
4.00% 1/31/08 15,000 15,147
4.65% 7/2/18 20,000 17,579
Capital One Bank 4.875% 5/15/08 25,000 25,121
Cendant 7.375% 1/15/13 5,000 5,567
Citigroup
5.625% 8/27/12 10,000 10,222
5.875% 2/22/33 30,000 28,090
Countrywide Home Loans 1.76% 6/2/06 30,000 30,143
Credit Suisse First Boston USA
4.625% 1/15/08 20,000 20,632
*Crum & Forster 144A 10.375% 6/15/13 55,000 57,063
*ERAC USA Finance 144A 7.35% 6/15/08 45,000 50,744
*Farmers Exchange Capital
144A 7.20% 7/15/48 30,000 23,422
*Farmers Insurance Exchange
144A 8.625% 5/1/24 40,000 38,408
Finova Group 7.50% 11/15/09 160,000 72,800
Ford Motor Credit 5.80% 1/12/09 15,000 14,368
Franklin Resources 3.70% 4/15/08 10,000 9,937
General Electric Capital
4.25% 1/28/05 50,000 51,906
5.45% 1/15/13 15,000 15,087
General Motors Acceptance
7.25% 3/2/11 35,000 35,103
8.00% 11/1/31 10,000 9,251
Goldman Sachs 4.75% 7/15/13 20,000 18,964
Harleysville Group 5.75% 7/15/13 5,000 4,702
International Lease Finance 5.875% 5/1/13 10,000 10,125
Janus Capital 7.00% 11/1/06 10,000 10,944
JP Morgan Chase 5.75% 1/2/13 20,000 20,418
*Massachusetts Mutual Life
144A 5.625% 5/15/33 10,000 9,041
Morgan Stanley 5.30% 3/1/13 30,000 29,556
National Rural Utilities 3.875% 2/15/08 15,000 15,071
PHH 7.125% 3/1/13 5,000 5,360
Popular North America 4.25% 4/1/08 15,000 15,059
Prudential Financial 5.75% 7/15/33 15,000 13,317
Qwest Capital Funding 5.875% 8/3/04 125,000 118,126
RBS Capital Trust I 4.709% 12/29/49 20,000 18,618
Regions Financial 6.375% 5/15/12 20,000 21,699
*TIAA Global Markets 144A
2.75% 1/13/06 25,000 25,144
TIG Holdings 8.125% 4/15/05 65,000 62,725
*Wilmington Trust 144A
4.875% 4/15/13 15,000 14,314
*Zurich Capital Trust I 144A
8.376% 6/1/37 60,000 60,776
----------
1,049,165
----------
Buildings & Materials - 0.54%
*Lone Star Industries 144A
8.85% 6/15/05 50,000 52,188
United States Steel 10.75% 8/1/08 55,000 55,000
USX 9.375% 2/15/12 5,000 6,249
Valspar 6.00% 5/1/07 20,000 21,221
++WCI Steel 10.00% 12/1/04 95,000 31,350
York International 6.625% 8/15/06 10,000 10,626
----------
176,634
----------
Principal Market
Amount+ Value (U.S.$)
Corporate Bonds (continued)
Business Services - 0.16%
*Brickman Group 144A
11.75% 12/15/09 USD 25,000 $ 27,688
*Worldspan Finance 144A
9.625% 6/15/11 25,000 26,125
----------
53,813
----------
Cable, Media & Publishing - 4.31%
American Media Operation 10.25% 5/1/09 60,000 64,050
AOL Time Warner 7.70% 5/1/32 10,000 10,526
Charter Communications Holdings
10.00% 4/1/09 205,000 159,899
10.75% 10/1/09 170,000 137,275
Comcast 7.05% 3/15/33 15,000 15,036
CSC Holdings 10.50% 5/15/16 15,000 16,050
Insight Midwest 10.50% 11/1/10 110,000 118,250
InterActiveCorp
6.75% 11/15/05 10,000 10,753
7.00% 1/15/13 20,000 21,642
Liberty Media 8.25% 2/1/30 20,000 20,591
Lodgenet Entertainment 9.50% 6/15/13 130,000 136,825
Mediacom 9.50% 1/15/13 110,000 109,450
PanAmSat 8.50% 2/1/12 90,000 94,050
*PEI Holdings 144A 11.00% 3/15/10 40,000 44,200
*RH Donnelley Finance 144A
10.875% 12/15/12 100,000 113,000
Time Warner 8.18% 8/15/07 15,000 17,125
Time Warner Entertainment
8.375% 3/15/23 15,000 17,321
Vertis
10.875% 6/15/09 80,000 78,400
13.50% 12/7/09 45,000 41,850
XM Satellite Radio
*144A 12.00% 6/15/10 70,000 69,650
**14.00% 12/31/09 160,000 116,800
----------
1,412,743
----------
Chemicals - 1.24%
Dow Chemical 6.00% 10/1/12 15,000 15,268
*+++HMP Equity 144A 15.433% 5/15/08
Huntsman International
*144A 9.875% 3/1/09 60,000 61,800
10.125% 7/1/09 80,000 77,200
IMC Global 7.625% 11/1/05 80,000 84,800
Solutia
6.72% 10/15/37 80,000 48,400
11.25% 7/15/09 60,000 41,700
*Westlake Chemical 144A 8.75% 7/15/11 60,000 60,000
----------
404,018
----------
Computers & Technology - 1.08%
*Amkor Technology 144A 7.75% 5/15/13 60,000 58,050
*Cooperative Computing 144A
10.50% 6/15/11 75,000 77,250
Dell Computer 7.10% 4/15/28 25,000 27,737
*DigitalNet 144A 9.00% 7/15/10 25,000 24,625
Northern Telecom Capital
7.40% 6/15/06 65,000 63,375
7.875% 6/15/26 30,000 27,750
Sanmina 10.375% 1/15/10 65,000 73,450
----------
352,237
----------
6
Statement Delaware Strategic Income Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount+ Value (U.S.$)
Corporate Bonds (continued)
Consumer Products - 1.57%
American Greetings 11.75% 7/15/08 USD 105,000 $ 120,225
*Fortune Brands 144A 7.125% 11/1/04 15,000 16,006
*Jacuzzi Brands 144A 9.625% 7/1/10 45,000 46,575
Playtex Products 9.375% 6/1/11 35,000 33,775
*Remington Arms 144A 10.50% 2/1/11 95,000 98,553
Salton
10.75% 12/15/05 45,000 44,775
12.25% 4/15/08 35,000 35,700
Samsonite 10.75% 6/15/08 55,000 56,925
*Warnaco 144A 8.875% 6/15/13 60,000 62,700
----------
515,234
----------
Consumer Services - 0.47%
Alderwoods Group 12.25% 1/2/09 70,000 75,075
Corrections Corporation of America
7.50% 5/1/11 45,000 45,675
*144A 7.50% 5/1/11 30,000 31,275
----------
152,025
----------
Electronics & Electrical Equipment - 0.05%
Johnson Controls 5.00% 11/15/06 5,000 5,306
Pepco Holdings 6.45% 8/15/12 10,000 10,440
----------
15,746
----------
Energy - 4.01%
*Alliance Pipeline US 144A 4.591% 12/31/25 15,000 13,885
Amerada Hess 7.30% 8/15/31 10,000 10,198
*Citgo Petroleum 144A 11.375% 2/1/11 95,000 105,213
Dynegy Holdings 6.75% 12/15/05 60,000 59,700
El Paso 7.00% 5/15/11 75,000 59,625
*El Paso Natural Gas 144A
7.625% 8/1/10 75,000 70,125
*El Paso Production Holding 144A
7.75% 6/1/13 60,000 55,350
Energy Partners 8.75% 8/1/10 45,000 45,113
*Enterprise Products Partners 144A
6.875% 3/1/33 15,000 15,055
*Gemstone Investor 144A 7.71% 10/31/04 50,000 48,625
Hanover Equipment Trust 8.50% 9/1/08 50,000 52,500
*Houston Exploration 144A 7.00% 6/15/13 110,000 110,000
Kinder Morgan Energy Partners
7.75% 3/15/32 5,000 5,682
8.00% 3/15/05 30,000 32,746
Northern Border Pipeline 6.25% 5/1/07 15,000 16,017
*Pemex Project Funding Master Trust 144A
7.375% 12/15/14 10,000 10,350
*SEMCO Energy 144A 7.75% 5/15/13 60,000 61,125
*Southern Natural Gas 144A 8.875% 3/15/10 30,000 31,050
Tennessee Gas Pipeline 8.375% 6/15/32 95,000 93,575
Transcontinental Gas Pipeline
6.125% 1/15/05 25,000 24,938
6.25% 1/15/08 120,000 118,200
Valero Energy 6.125% 4/15/07 15,000 16,095
Valero Logistics Operations 6.05% 3/15/13 25,000 24,672
Williams Companies
6.625% 11/15/04 35,000 34,475
8.125% 3/15/12 125,000 120,624
*Williams Gas Pipelines Central 144A
7.375% 11/15/06 70,000 74,375
----------
1,309,313
----------
Principal Market
Amount+ Value (U.S.$)
Corporate Bonds (continued)
Environmental Services - 0.49%
*Casella Waste Systems 144A
9.75% 2/1/13 USD 70,000 $ 74,200
IESI 10.25% 6/15/12 80,000 84,400
----------
158,600
----------
Food, Beverage & Tobacco - 1.84%
B&G Foods 9.625% 8/1/07 100,000 102,750
*Commonwealth Brands 144A
10.625% 9/1/08 110,000 111,100
Denny's 12.75% 9/30/07 105,000 105,263
Di Giorgio 10.00% 6/15/07 80,000 79,300
Kraft Foods 6.25% 6/1/12 10,000 10,486
*Le-Natures 144A 9.00% 6/15/13 90,000 93,600
*National Beef Packing 144A
10.50% 8/1/11 60,000 60,000
UST
6.625% 7/15/12 20,000 21,638
8.80% 3/15/05 15,000 16,309
----------
600,446
----------
Healthcare & Pharmaceuticals - 0.64%
Alliance Imaging 10.375% 4/15/11 90,000 90,000
Team Health 12.00% 3/15/09 115,000 117,875
----------
207,875
----------
Home Builders - 0.64%
Schuler Homes 10.50% 7/15/11 65,000 73,775
Standard Pacific 9.25% 4/15/12 55,000 59,950
Technical Olympic USA 10.375% 7/1/12 70,000 75,250
----------
208,975
----------
Leisure, Lodging & Entertainment - 1.18%
Alliance Gaming 10.00% 8/1/07 65,000 67,519
Extended Stay America 9.875% 6/15/11 85,000 90,950
*Hard Rock Hotel 144A 8.875% 6/1/13 80,000 82,600
Herbst Gaming 10.75% 9/1/08 60,000 66,150
MeriStar Hospitality Operating
Partnership REIT 10.50% 6/15/09 55,000 56,100
Regal Cinemas 9.375% 2/1/12 20,000 22,200
----------
385,519
----------
Packaging & Containers - 1.12%
AEP Industries 9.875% 11/15/07 115,000 107,525
*Anchor Glass Container 144A 11.00% 2/15/13 30,000 32,475
Consolidated Container 10.125% 7/15/09 95,000 57,475
Portola Packaging 10.75% 10/1/05 45,000 45,225
*Radnor Holdings 144A 11.00% 3/15/10 110,000 110,001
*Sealed Air Corporate 144A
5.625% 7/15/13 5,000 4,790
6.875% 7/15/33 10,000 9,432
----------
366,923
----------
Paper & Forest Products - 0.47%
Georgia-Pacific 9.875% 11/1/21 160,000 154,400
----------
154,400
----------
Real Estate - 0.28%
*Developers Diversified Realty REIT
144A 4.625% 8/1/10 15,000 14,349
Tanger Properties REIT 9.125% 2/15/08 70,000 75,950
----------
90,299
----------
7
Statement Delaware Strategic Income Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount+ Value (U.S.$)
Corporate Bonds (continued)
Retail - 1.79%
*J Crew Intermediate 144A
16.00% 5/15/08 USD 128,541 $ 91,907
J Crew Operating 10.375% 10/15/07 65,000 64,025
*Jafra Cosmetics 144A
10.75% 5/15/11 110,000 116,050
Kohl's 7.25% 6/1/29 10,000 11,265
Lowe's Companies 7.50% 12/15/05 25,000 27,960
Office Depot 10.00% 7/15/08 80,000 92,400
Petco Animal Supplies 10.75% 11/1/11 75,000 84,000
Saks 7.25% 12/1/04 60,000 61,950
Wendy's International
6.20% 6/15/14 5,000 5,323
6.25% 11/15/11 30,000 32,084
----------
586,964
----------
Telecommunications - 2.32%
Alamosa Delaware 12.50% 2/1/11 75,000 64,875
AT&T Corporate
7.00% 11/15/06 20,000 22,124
8.00% 11/15/31 20,000 21,223
*Centennial Cellular Operating 144A
10.125% 6/15/13 120,000 117,900
*Cincinnati Bell 144A 7.25% 7/15/13 25,000 23,813
Citizens Communications 6.375% 8/15/04 20,000 20,735
Crown Castle International 10.75% 8/1/11 80,000 88,000
Nextel Partners
*144A 8.125% 7/1/11 75,000 70,125
12.50% 11/15/09 30,000 33,300
*Qwest Services 144A 13.50% 12/15/10 75,000 81,000
Sprint Capital
6.375% 5/1/09 5,000 5,108
8.75% 3/15/32 15,000 16,291
Time Warner Telecommunications
9.75% 7/15/08 75,000 72,375
Verizon Maryland 5.125% 6/15/33 15,000 12,363
Verizon Wireless Capital 5.375% 12/15/06 15,000 16,051
*Western Wireless 144A 9.25% 7/15/13 60,000 57,300
++WorldCom 7.50% 5/15/11 135,000 35,944
----------
758,527
----------
Textiles, Apparel & Furniture - 0.14%
Levi Strauss 12.25% 12/15/12 55,000 46,750
----------
46,750
----------
Transportation & Shipping - 1.00%
American Airlines 6.817% 5/23/11 10,000 8,318
Delta Air Lines 7.299% 9/18/06 10,000 8,359
Hornbeck Offshore Services 10.625% 8/1/08 50,000 53,500
Kansas City Southern Railway 9.50% 10/1/08 70,000 77,700
*Overseas Shipholding Group 144A
8.25% 3/15/13 105,000 109,462
*Seabulk International 144A
9.50% 8/15/13 70,000 70,000
----------
327,339
----------
Utilities - 3.51%
*Allegheny Energy Supply Statutory Trust 2001 144A
Series A 10.25% 11/15/07 85,000 87,550
Series B 10.25% 11/15/07 19,000 18,810
Avista
7.75% 1/1/07 25,000 27,700
9.75% 6/1/08 85,000 97,219
Principal Market
Amount+ Value (U.S.$)
Corporate Bonds (continued)
Utilities (continued)
Calpine
*144A 8.50% 7/15/10 USD 45,000 $ 40,725
10.50% 5/15/06 125,000 114,374
Consumers Energy 6.00% 3/15/05 15,000 15,821
Detroit Edison 5.05% 10/1/05 15,000 15,888
FPL Group Capital 3.25% 4/11/06 25,000 25,287
Homer City Fund 8.137% 10/1/19 35,000 34,300
*Illinois Power 144A 11.50% 12/15/10 20,000 22,300
*ITC Holdings 144A 5.25% 7/15/13 15,000 13,948
Midland Funding II 11.75% 7/23/05 30,000 32,550
Midwest Generation 8.30% 7/2/09 70,000 69,553
*++Mirant 144A 7.40% 7/15/04 45,000 19,350
++Mirant Americas Generation 7.625% 5/1/06 90,000 66,150
Nevada Power 10.875% 10/15/09 85,000 96,475
Oncor Electric Delivery 7.00% 5/1/32 5,000 5,186
Orion Power Holdings 12.00% 5/1/10 60,000 68,700
Peco Energy 3.50% 5/1/08 20,000 19,861
*PG&E 144A 6.875% 7/15/08 60,000 61,200
*Power Contract 144A 5.20% 2/1/06 20,000 19,991
PSEG Energy Holdings 7.75% 4/16/07 65,000 66,689
PSEG Power 8.625% 4/15/31-00 15,000 17,794
Sempra Energy
6.00% 2/1/13 20,000 20,724
6.925% 7/1/04 10,000 10,442
Southern Capital Funding 5.30% 2/1/07 20,000 21,177
*TXU Energy 144A 7.00% 3/15/13 10,000 10,492
*USGen New England 144A 7.459% 1/2/15 55,000 26,990
----------
1,147,246
----------
Total Corporate Bonds (cost $10,449,856) 10,852,881
----------
Foreign Bonds - 44.13%
Aruba - 0.07%
UFJ Finance Aruba 6.75% 7/15/13 USD 25,000 24,242
----------
24,242
----------
Australia - 2.18%
Apache Finance Property
7.00% 3/15/09 20,000 22,597
Queensland Treasury
6.00% 6/14/11 AUD 1,000,000 672,219
Westpac Banking 4.625% 6/1/18 USD 20,000 18,024
----------
712,840
----------
Austria - 0.60%
Republic of Austria 7.25% 5/3/07 DEM 300,000 196,200
----------
196,200
----------
Bahamas - 0.06%
*Commonwealth of Bahamas
144A 6.625% 5/15/33 USD 20,000 19,355
----------
19,355
----------
Brazil - 0.34%
Federal Republic of Brazil
10.00% 8/7/11 125,000 111,406
----------
111,406
----------
British Virgin Islands - 0.23%
ChipPac International 12.75% 8/1/09 70,000 76,475
----------
76,475
----------
8
Statement Delaware Strategic Income Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount+ Value (U.S.$)
Foreign Bonds (continued)
Canada - 1.29%
Ainsworth Lumber 12.50% 7/15/07 USD 75,000 $ 84,563
Alcan 7.25% 3/15/31 25,000 27,963
CP Ships 10.375% 7/15/12 60,000 65,700
Great Lakes Power 9.00% 8/1/04 10,000 10,508
*Hollinger 144A 11.875% 3/1/11 75,000 82,125
Placer Dome 6.375% 3/1/33 20,000 19,093
Thomson 5.75% 2/1/08 20,000 21,674
Western Oil Sands 8.375% 5/1/12 100,000 110,499
-----------
422,125
-----------
Cayman Islands - 0.28%
*Bluewater Finance 144A
10.25% 2/15/12 70,000 69,650
Transocean 6.75% 4/15/05 20,000 21,408
-----------
91,058
-----------
Colombia - 0.29%
Republic of Colombia
10.00% 1/23/12 55,000 58,713
10.375% 1/28/33 35,000 36,050
-----------
94,763
-----------
Dominican Republic - 0.33%
Dominican Republic
9.04% 1/23/13 40,000 37,026
*144A 9.04% 1/23/13 80,000 72,200
-----------
109,226
-----------
Ecuador - 0.22%
**Republic of Ecuador 6.00% 8/15/30 120,000 71,288
-----------
71,288
-----------
France - 2.10%
France Government Bond O.A.T.
5.50% 4/25/10 EUR 460,000 571,340
**France Telecom 10.00% 3/1/31 USD 15,000 18,739
*Rhodia SA 144A 8.875% 6/1/11 100,000 96,000
-----------
686,079
-----------
Germany - 4.08%
Deutschland Republic
4.75% 7/4/28 EUR 340,000 376,334
5.00% 7/4/11 450,000 540,808
6.50% 10/14/05 340,000 415,235
-----------
1,332,377
-----------
Greece - 3.91%
Hellenic Republic
8.60% 3/26/08 205,429 281,720
8.70% 4/8/05 800,000 996,459
-----------
1,278,179
-----------
Ireland - 0.62%
*Eircom Funding 144A
8.25% 8/15/13 USD 75,000 76,875
Smurfit Capital 7.50% 11/20/25 130,000 125,450
-----------
202,325
-----------
Italy - 3.51%
Republic of Italy
3.75% 6/8/05 JPY 87,000,000 770,566
5.75% 7/25/16 EUR 300,000 375,332
-----------
1,145,898
-----------
Principal Market
Amount+ Value (U.S.$)
Foreign Bonds (continued)
Liberia - 0.22%
Royal Caribbean Cruises
7.50% 10/15/27 USD 80,000 $ 70,800
-----------
70,800
-----------
Mexico - 2.43%
United Mexican States
7.50% 4/8/33 50,000 47,875
8.30% 8/15/31 25,000 26,125
11.50% 5/15/26 10,000 13,525
United Mexican States Global
7.375% 3/13/08 EUR 250,000 312,248
8.25% 2/24/09 DEM 600,000 392,962
-----------
792,735
-----------
Netherlands - 0.16%
Aegon NV 4.75% 6/1/13 USD 15,000 14,146
Deutsche Telekom 5.25% 7/22/13 10,000 9,597
*ING Bank 144A 5.125% 5/1/15 30,000 28,970
-----------
52,713
-----------
New Zealand - 1.83%
New Zealand Government
6.00% 11/15/11 NZD 350,000 207,187
6.50% 4/15/13 640,000 392,012
-----------
599,199
-----------
Norway - 2.61%
Kingdom of Norway
6.00% 5/16/11 NOK 2,000,000 295,414
6.50% 5/15/13 1,600,000 246,009
6.75% 1/15/07 1,600,000 239,535
Ocean Rig Norway 10.25% 6/1/08 USD 85,000 72,675
-----------
853,633
-----------
Panama - 0.35%
Republic of Panama 8.875% 9/30/27 115,000 115,288
-----------
115,288
-----------
Poland - 3.76%
Poland Government
5.00% 10/24/13 PLZ 3,400,000 836,132
12.00% 10/12/03 1,500,000 392,208
-----------
1,228,340
-----------
Russia - 0.42%
Gazprom OAO
9.625% 3/1/13 USD 30,000 31,448
*144A 9.625% 3/1/13 100,000 105,000
-----------
136,448
-----------
Singapore - 0.14%
*Singapore Telecommunications
144A 7.375% 12/1/31 40,000 45,876
-----------
45,876
-----------
Spain - 1.79%
Kingdom of Spain
5.15% 7/30/09 EUR 480,000 583,430
-----------
583,430
-----------
9
Statement Delaware Strategic Income Fund
OF NET ASSETS (CONTINUED)
Principal Market
Amount+ Value (U.S.$)
Foreign Bonds (continued)
Supranational - 3.97%
International Bank Reconstruction
& Development 5.50% 11/3/08 NZD 1,200,000 $ 691,797
International Finance
6.75% 7/15/09 1,000,000 605,358
-----------
1,297,155
-----------
Sweden - 5.99%
*Nordea Bank Sweden 144A
5.25% 11/30/12 USD 20,000 20,177
Stena AB 9.625% 12/1/12 80,000 88,300
Swedish Government
6.75% 5/5/14 SEK 6,000,000 858,888
8.00% 8/15/07 7,000,000 988,211
-----------
1,955,576
-----------
United Kingdom - 0.35%
Avecia Group 11.00% 7/1/09 USD 100,000 85,499
Diageo Capital 3.375% 3/20/08 10,000 9,864
Vodafone Group 5.375% 1/30/15 20,000 19,709
-----------
115,072
-----------
Total Foreign Bonds (cost $13,551,339) 14,420,101
-----------
Municipal Bonds - 0.23%
California State 5.00% 2/1/33 20,000 18,078
Forsyth, Montana Pollution Control Revenue
5.20% 5/1/33 10,000 10,111
Illinois State 5.10% 6/1/33 35,000 30,707
Long Island, New York Power Authority
Series A 5.00% 6/1/08 15,000 16,142
-----------
Total Municipal Bonds (cost $81,320) 75,038
-----------
Number of
Shares
Common Stock - 3.34%
American Financial Realty 5,000 73,700
Chelsea Property Group 5,000 218,000
Developers Diversified Realty 2,500 74,250
Equity One 3,900 66,300
Keystone Property Trust 2,000 38,580
Lasalle Hotel Properties 11,200 184,240
Maguire Properties 3,000 61,200
Nationwide Health Properties 8,500 145,520
Ramco-Gershenson Properties 3,500 86,030
Simon Property Group 2,000 84,700
Starwood Hotels & Resorts Worldwide 1,800 58,680
-----------
Total Common Stock (cost $1,004,238) 1,091,200
-----------
Preferred Stocks - 0.92%
*Centaur Funding 144A 9.08% 35 39,331
CSC Holdings PIK 11.75% 1,150 120,463
#Intermedia Communications PIK 13.50% 1 12
LaSalle Hotel Properties 10.25% 5,300 141,775
-----------
Total Preferred Stocks (cost $289,495) 301,581
-----------
Number of Market
Shares Value (U.S.$)
Warrants - 0.08%
#*Solutia 144A 3,226 $ 1
#XM Satellite Radio 2,550 27,600
-----------
Total Warrants (cost $17,209) 27,601
-----------
Principal
Amount+
U.S. Treasury Obligations - 2.20%
U.S. Treasury Bonds
5.375% 2/15/31 USD 190,000 189,109
***8.125% 8/15/19 65,000 85,287
U.S. Treasury Inflation Index Notes
3.00% 7/15/12 61,235 64,363
3.375% 4/15/32 118,887 130,534
3.625% 1/15/08 28,396 31,014
U.S. Treasury Notes
2.00% 11/30/04 to 5/15/06 35,000 34,929
2.625% 5/15/08 75,000 72,826
3.625% 5/15/13 120,000 111,994
-----------
Total U.S. Treasury Obligations (cost $751,964) 720,056
-----------
Repurchase Agreements - 7.57%
With BNP Paribas 1.05% 8/1/03
(dated 7/31/03, collateralized
by $938,000 U.S. Treasury Bills
due 8/7/03, market value $937,440) 919,000 919,000
With J. P. Morgan Securities 0.97% 8/1/03
(dated 7/31/03, collateralized
by $588,000 U.S. Treasury Notes
6.750% due 5/15/05, market value $649,106) 636,000 636,000
With UBS Warburg 1.05% 8/1/03
(dated 7/31/03, collateralized
by $939,000 U.S. Treasury Bills
due 10/2/03, market value $937,436) 919,000 919,000
-----------
Total Repurchase Agreements (cost $2,474,000) 2,474,000
-----------
Total Market Value of Securities - 100.88%
(cost $31,629,888) 32,971,824
Liabilities Net of Receivables
and Other Assets - (0.88%) (286,716)
-----------
Net Assets Applicable to 7,599,510
Shares Outstanding - 100.00% $32,685,108
===========
Net Asset Value - Delaware Strategic Income Fund
Class A ($10,834,650 / 2,517,001 Shares) $4.30
-----
Net Asset Value - Delaware Strategic Income Fund
Class B ($13,567,998 / 3,155,694 Shares) $4.30
-----
Net Asset Value - Delaware Strategic Income Fund
Class C ($3,977,634 / 925,234 Shares) $4.30
-----
Net Asset Value - Delaware Strategic Income Fund
Institutional Class ($4,304,826 / 1,001,581 Shares) $4.30
-----
10
Statement Delaware Strategic Income Fund
OF NET ASSETS (CONTINUED)
Components of Net Assets at July 31, 2003:
Shares of beneficial interest
(unlimited authorization - no par) $ 42,529,756
Accumulated net realized loss on investments (11,233,416)
Net unrealized appreciation of investments
and foreign currencies 1,388,768
------------
Total net assets $ 32,685,108
============
+ Principal amount is stated in the currency in which each bond is
denominated.
++ Non-income producing security. Security is currently in default.
+++ Zero coupon bond. The interest rate shown is the yield at the time of
purchase.
# Non-income producing security for the year ended July 31, 2003.
* Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note 11 in "Notes to Financial Statements."
** Step coupon bond.
*** Fully or partially pledged as collateral for financial futures contracts.
Summary of Abbreviations:
GNMA - Government National Mortgage Association
PIK - Pay-in-kind
REIT - Real Estate Investment Trust
AUD - Australian Dollar
DEM - German Mark
EUR - European Monetary Unit
JPY - Japanese Yen
NZD - New Zealand Dollar
NOK - Norwegian Kroner
PLZ - Polish Zloty
SEK - Swedish Krona
USD - U.S. Dollar
Net Asset Value and Offering Price
per Share -- Delaware Strategic Income Fund
Net asset value Class A (A) $ 4.30
Sales charge (4.50% of offering price,
or 4.65% of the amount invested per share) (B) 0.20
--------
Offering price $ 4.50
========
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $100,000 or more.
See accompanying notes
11
Statement Delaware Strategic Income Fund
OF ASSETS AND LIABILITIES July 31, 2003
Assets:
Investments at market (cost $31,629,888) $ 32,971,824
Cash 167,883
Subscriptions receivable 33,888
Receivables for securities sold 2,892,759
Dividends receivable 784
Interest receivable 561,020
Futures variation margin receivable 10,531
------------
Total assets 36,638,689
------------
Liabilities:
Payables for securities purchased 3,594,406
Written options (including premiums recieved of $7,638) 10,219
Liquidations payable 290,541
Swap agreement mark to market payable 7,002
Accrued expenses 51,413
------------
Total liabilities 3,953,581
------------
Total Net Assets $ 32,685,108
============
See accompanying notes
12
Statement Delaware Strategic Income Fund
OF OPERATIONS Year Ended July 31, 2003
Investment Income:
Interest $ 1,986,570
Dividends 63,792 $ 2,050,362
------------ --------------
Expenses:
Management fees 190,085
Distribution expense-- Class A 28,876
Distribution expense-- Class B 127,599
Distribution expense-- Class C 33,628
Dividend disbursing and transfer agent fees and expenses 164,206
Registration fees 37,606
Reports and statements to shareholders 20,287
Accounting and administration expenses 13,084
Custodian fees 11,599
Professional fees 4,805
Trustees' fees 2,357
Other 7,988 642,120
------------
Less expenses absorbed or waived by investment manager (232,081)
Less waiver of distribution expenses - Class A (4,149)
Less expenses paid indirectly (733)
--------------
Total expenses 405,157
--------------
Net Investment Income 1,645,205
--------------
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies:
Net realized gain loss on:
Investments 732,753
Futures contracts (80,007)
Options written 9,915
Swap agreements 16,321
Foreign currencies 116,365
--------------
Net realized gain 795,347
Net change in unrealized appreciation/depreciation of investments and foreign currencies 2,904,957
--------------
Net Realized and Unrealized Gain on Investments and Foreign Currencies 3,700,304
--------------
Net Increase in Net Assets Resulting from Operations $ 5,345,509
==============
See accompanying notes
13
Statements Delaware Strategic Income Fund
OF CHANGES IN NET ASSETS
Year Ended
7/31/03 7/31/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 1,645,205 $ 1,668,104
Net realized gain (loss) on investments and foreign currencies 795,347 (1,165,130)
Net change in unrealized appreciation/depreciation of investments and foreign currencies 2,904,957 621,032
------------ ------------
Net increase in net assets resulting from operations 5,345,509 1,124,006
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A (550,772) (347,032)
Class B (626,114) (387,681)
Class C (164,355) (102,168)
Institutional Class (186,996) (66,444)
Return of capital:
Class A (28,292) (338,054)
Class B (32,162) (377,652)
Class C (8,443) (99,524)
Institutional Class (9,606) (64,726)
------------ ------------
(1,606,740) (1,783,281)
------------ ------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 3,262,861 1,143,839
Class B 3,045,943 1,519,320
Class C 1,547,411 695,365
Institutional Class 2,608,142 969,847
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 383,221 454,394
Class B 357,117 388,535
Class C 119,145 132,561
Institutional Class 196,603 131,170
------------ ------------
11,520,443 5,435,031
------------ ------------
Cost of shares repurchased:
Class A (3,021,964) (2,913,651)
Class B (3,319,519) (2,504,551)
Class C (1,183,619) (929,681)
Institutional Class (1,178,083) (262,378)
------------ ------------
(8,703,185) (6,610,261)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions 2,817,258 (1,175,230)
------------ ------------
Net Increase (Decrease) in Net Assets 6,556,027 (1,834,505)
Net Assets:
Beginning of year 26,129,081 27,963,586
------------ ------------
End of year $ 32,685,108 $ 26,129,081
============ ============
See accompanying notes
14
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Strategic Income Fund Class A
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/03 7/31/02(1) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $ 3.770 $ 3.870 $ 4.320 $ 4.860 $ 5.480
Income (loss) from investment operations:
Net investment income(2) 0.246 0.253 0.327 0.413 0.462
Net realized and unrealized gain (loss) on investments
and foreign currencies 0.524 (0.083) (0.407) (0.540) (0.607)
------- ------ ------- -------- -------
Total from investment operations 0.770 0.170 (0.080) (0.127) (0.145)
------- ------ ------- -------- -------
Less dividends and distributions:
From net investment income (0.228) (0.137) (0.201) (0.356) (0.440)
From net realized gain on investments -- -- -- -- (0.035)
In excess of net investment income -- -- (0.060) (0.057) --
Return of capital (0.012) (0.133) (0.109) -- --
------- ------ ------- -------- -------
Total dividends and distributions (0.240) (0.270) (0.370) (0.413) (0.475)
------- ------ ------- -------- -------
Net asset value, end of period $ 4.300 $3.770 $ 3.870 $ 4.320 $ 4.860
======= ====== ======= ======== =======
Total return(3) 20.99% 4.54% (1.85%) (2.67%) (2.77%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $10,835 $8,932 $10,488 $ 12,238 $18,757
Ratio of expenses to average net assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.85% 1.84% 1.99% 1.75% 1.55%
Ratio of net investment income to average net assets 6.02% 6.60% 8.06% 9.20% 8.97%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.17% 5.76% 7.07% 8.45% 8.42%
Portfolio turnover 422% 349% 200% 127% 156%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment
Companies that require amortization of all premium and discounts on debt securities and the recording of paydown gains and
losses on mortgage- and asset-backed securities as an adjustment to interest income. The effect of these changes for the year
ended July 31, 2002 was a decrease in net investment income per share of $ 0.031, an increase in net realized and unrealized
gain (loss) per share of $0.031, and a decrease in the ratio of net investment income to average net assets of 0.80%. Per share
data and ratios for periods prior to August 1, 2001 have not been restated to reflect these changes in accounting.
(2) The average shares outstanding method has been applied for per share information.
(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 and does not reflect the impact of a sales charge. Total investment return
reflects a waiver and payment of fees by the manager and distributor, as applicable. Performance would have been lower had the
expense limitation not been in effect.
See accompanying notes
15
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Strategic Income Fund Class B
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/03 7/31/02(1) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $ 3.770 $ 3.860 $ 4.320 $ 4.860 $ 5.480
Income (loss) from investment operations:
Net investment income(2) 0.215 0.224 0.297 0.378 0.424
Net realized and unrealized gain (loss) on investments
and foreign currencies 0.526 (0.073) (0.418) (0.540) (0.607)
-------- ------- ------- ------- -------
Total from investment operations 0.741 0.151 (0.121) (0.162) (0.183)
-------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.201) (0.122) (0.184) (0.325) (0.402)
From net realized gain on investments -- -- -- -- (0.035)
In excess of net investment income -- -- (0.055) (0.053) --
Return of capital (0.010) (0.119) (0.100) -- --
-------- ------- ------- ------- -------
Total dividends and distributions (0.211) (0.241) (0.339) (0.378) (0.437)
-------- ------- ------- ------- -------
Net asset value, end of period $ 4.300 $ 3.770 $ 3.860 $ 4.320 $ 4.860
======== ======= ======= ======= =======
Total return(3) 20.12% 4.03% (2.61%) (3.63%) (3.31%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 13,568 $11,827 $12,718 $14,184 $19,318
Ratio of expenses to average net assets 1.75% 1.75% 1.75% 1.75% 1.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 2.55% 2.59% 2.74% 2.50% 2.30%
Ratio of net investment income to average net assets 5.27% 5.85% 7.31% 8.45% 8.22%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 4.47% 5.01% 6.32% 7.70% 7.67%
Portfolio turnover 422% 349% 200% 127% 156%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment
Companies that require amortization of all premium and discounts on debt securities and the recording of paydown gains and
losses on mortgage- and asset-backed securities as an adjustment to interest income. The effect of these changes for the year
ended July 31, 2002 was a decrease in net investment income per share of $0.031, an increase in net realized and unrealized
gain (loss) per share of $0.0.31, and a decrease in the ratio of net investment income to average net assets of 0.80%. Per
share data and ratios for periods prior to August 1, 2001 have not been restated to reflect these changes in accounting.
(2) The average shares outstanding method has been applied for per share information.
(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 and does not reflect the impact of a sales charge. Total investment return
reflects a waiver and payment of fees by the manager. Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
16
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Strategic Income Fund Class C
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/03 7/31/02(1) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $ 3.770 $ 3.860 $ 4.320 $ 4.860 $ 5.480
Income (loss) from investment operations:
Net investment income(2) 0.215 0.224 0.297 0.378 0.424
Net realized and unrealized gain (loss) on investments
and foreign currencies 0.526 (0.073) (0.418) (0.540) (0.607)
-------- ------- ------- ------- -------
Total from investment operations 0.741 0.151 (0.121) (0.162) (0.183)
-------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.201) (0.122) (0.184) (0.325) (0.402)
From net realized gain on investments -- -- -- -- (0.035)
In excess of net investment income -- -- (0.055) (0.053) --
Return of capital (0.010) (0.119) (0.100) -- --
-------- ------- ------- ------- -------
Total dividends and distributions (0.211) (0.241) (0.339) (0.378) (0.437)
-------- ------- ------- ------- -------
Net asset value, end of period $ 4.300 $ 3.770 $ 3.860 $ 4.320 $ 4.860
======== ======= ======= ======= =======
Total return(3) 20.12% 4.03% (2.84%) (3.41%) (3.32%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 3,978 $ 3,086 $ 3,265 $ 4,402 $ 6,548
Ratio of expenses to average net assets 1.75% 1.75% 1.75% 1.75% 1.75%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.55% 2.59% 2.74% 2.50% 2.30%
Ratio of net investment income to average net assets 5.27% 5.85% 7.31% 8.45% 8.22%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 4.47% 5.01% 6.32% 7.70% 7.67%
Portfolio turnover 422% 349% 200% 127% 156%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment
Companies that require amortization of all premium and discounts on debt securities and the recording of paydown gains and
losses on mortgage- and asset-backed securities as an adjustment to interest income. The effect of these changes for the year
ended July 31, 2002 was a decrease in net investment income per share of $0.031, an increase in net realized and unrealized
gain (loss) per share of $0.031, and a decrease in the ratio of net investment income to average net assets of 0.80%. Per share
data and ratios for periods prior to August 1, 2001 have not been restated to reflect these changes in accounting.
(2) The average shares outstanding method has been applied for per share information.
(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 and does not reflect the impact of a sales charge. Total investment return
reflects a waiver and payment of fees by the manager. Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
17
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Strategic Income Fund Institutional Class
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
7/31/03 7/31/02(1) 7/31/01 7/31/00 7/31/99
Net asset value, beginning of period $ 3.770 $ 3.860 $ 4.310 $ 4.850 $ 5.470
Income (loss) from investment operations:
Net investment income(2) 0.256 0.263 0.338 0.424 0.475
Net realized and unrealized gain (loss) on investments
and foreign currencies 0.524 (0.073) (0.408) (0.540) (0.603)
-------- ------- ------- ------- -------
Total from investment operations 0.780 0.190 (0.070) (0.116) (0.128)
-------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.238) (0.142) (0.207) (0.365) (0.457)
From net realized gain on investments -- -- -- -- (0.035)
In excess of net investment income -- -- (0.062) (0.059) --
Return of capital (0.012) (0.138) (0.111) -- --
-------- ------- ------- ------- -------
Total dividends and distributions (0.250) (0.280) (0.380) (0.424) (0.492)
-------- ------- ------- ------- -------
Net asset value, end of period $ 4.300 $ 3.770 $ 3.860 $ 4.310 $ 4.850
======== ======= ======= ======= =======
Total return(3) 21.28% 5.08% (1.61%) (2.45%) (2.46%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 4,305 $ 2,284 $ 1,493 $ 1,044 $ 4,350
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.55% 1.59% 1.74% 1.50% 1.30%
Ratio of net investment income to average net assets 6.27% 6.85% 8.31% 9.45% 9.22%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 5.47% 6.01% 7.32% 8.70% 8.67%
Portfolio turnover 422% 349% 200% 127% 156%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment
Companies that require amortization of all premium and discounts on debt securities and the recording of paydown gains and
losses on mortgage- and asset-backed securities as an adjustment to interest income. The effect of these changes for the year
ended July 31, 2002 was a decrease in net investment income per share of $0.031, an increase in net realized and unrealized
gain (loss) per share of $0.031, and a decrease in the ratio of net investment income to average net assets of 0.80%. Per share
data and ratios for periods prior to August 1, 2001 have not been restated to reflect these changes in accounting.
(2) The average shares outstanding method has been applied for per share information.
(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 a waiver and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in effect.
See accompanying notes
18
Notes Delaware Strategic Income Fund
TO FINANCIAL STATEMENTS July 31, 2003
Delaware Group Income Funds (the "Trust") is organized as a Delaware business
trust and offers five series: Delaware Corporate Bond Fund, Delaware Delchester
Fund, Delaware Extended Duration Bond Fund, Delaware High-Yield Opportunities
Fund and Delaware Strategic Income Fund. These financial statements and related
notes pertain to the Delaware Strategic Income 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 B shares are sold with a contingent
deferred sales charge that declines from 4.00% 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 contingent deferred sales charge 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 a limited
group of investors. As of July 31, 2003, Class R shares have not commenced
operations.
The investment objective of the Fund is to seek high current income and total
return.
1. Significant Accounting Policies
The following accounting policies are in accordance with accounting principles
generally accepted in the United States and are consistently followed by the
Fund.
Security Valuation -- All equity securities 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 Stock Market, Inc.
("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 normally be
used. Securities listed on a foreign exchange are normally valued at the last
quoted sales price before the Fund is valued. U.S. government and agency
securities are valued at the mean between the bid and asked prices. Other
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. 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).
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.
Class Accounting -- Investment income, common expenses and 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
other members of the Delaware Investments Family of Funds. 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 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.
Foreign Currency Transactions -- Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar daily. Transaction gains or losses resulting from changes in exchange
rates during the reporting period or upon settlement of the foreign currency
transaction are reported in operations for the current period. The Fund isolates
that portion of realized gains and losses on investments in debt securities,
which are due to changes in the foreign exchange rates from that which are due
to changes in market prices of debt securities. For foreign equity securities,
these changes are included in realized gains (losses) on investments. The Fund
reports certain foreign currency related transactions as components of realized
gains (losses) for financial reporting purposes, where such components are
treated as ordinary income (loss) for federal income tax purposes.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). 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. Withholding taxes on foreign interest have been
recorded in accordance with the Fund's understanding of the applicable country's
tax rules and rates. Premiums and discounts on all debt securities 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 and pays dividends from net investment income monthly and
distributions from net realized gain on investments, if any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. These transactions are done subject to best execution. The amount of
these expenses was approximately $702 for the year ended July 31, 2003. In
addition, the Fund may receive earnings credits from its custodian when positive
cash balances are maintained, which are used to offset custody fees. The
earnings credits for the year ended July 31, 2003 were approximately $31. The
expenses paid under the above arrangements are included in their respective
expense captions on the Statement of Operations with the corresponding expense
offset shown as "expenses paid indirectly."
19
Notes
TO FINANCIAL STATEMENTS (CONTINUED) Delaware Strategic Income Fund
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 $2.5 billion. DMC has entered into a
sub-advisory agreement with Delaware International Advisors Ltd. (DIAL), an
affiliate of DMC, related to the foreign securities portion of the Fund. For the
services provided, DMC pays DIAL an annual fee which is equal to one third of
its investment management fees. The Fund does not pay any fees directly to DIAL.
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 commissions,
distribution fees, and extraordinary expenses, do not exceed 0.75% of average
daily net assets of the Fund through March 31, 2004.
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 based on average net assets subject to certain minimums 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. Prior to June 1, 2003, the monthly fee for dividend disbursing and
transfer agent services was based on the number of shareholder accounts and
shareholder transactions.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC and
DIAL, 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 the Class
R shares. DDLP has elected to waive its fees through March 31, 2004 in order to
prevent distribution fees of Class A shares from exceeding 0.25% of average
daily net assets. No distribution expenses are paid by Institutional Class
shares.
At July 31, 2003, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $ 3,837
Dividend disbursing, transfer agent fees,
accounting and other expenses payable to DSC 14,904
Other expenses payable to DMC and affiliates 2,464
For the year ended July 31, 2003, DDLP earned $5,350 for commissions on sales of
the Fund's Class A shares.
Certain officers of DMC, DSC, DDLP and DIAL 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, 2003, the Fund made purchases of $115,724,975 and
sales of $112,913,172 of investment securities other than U.S. government
securities and short-term investments.
At July 31, 2003, the cost of investments for federal income tax purposes was
$31,883,926. At July 31, 2003, the net unrealized appreciation was $1,087,898,
of which $1,700,622 related to unrealized appreciation of investments and
$612,724 related to unrealized depreciation of investments.
4. Dividends and Distribution Information
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from accounting principals
generally accepted in the United States. The tax character of dividends and
distributions paid during the years ended July 31, 2003 and 2002 was as follows:
Year Ended
7/31/03 7/31/02
Ordinary income $ 1,528,237 $903,325
Return of capital 78,503 879,956
----------- ----------
Total $ 1,606,740 $1,783,281
=========== ==========
As of July 31, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $ 42,529,756
Capital loss carryforwards (10,753,542)
Post-October losses (170,865)
Unrealized appreciation
of investments and foreign currencies 1,079,759
-------------
Net assets $ 32,685,108
=============
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss
carryforwards expire as follows: $3,871,584 expires in 2008, $4,750,913 in 2009
and $2,131,045 expires in 2010.
Post-October losses represent losses realized on investment and foreign currency
transactions from November 1, 2002 through July 31, 2003 that, in accordance
with federal income tax regulations, the Fund has elected to defer and treat as
having arisen in the following fiscal year.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
7/31/03 7/31/02
Shares sold:
Class A 797,598 298,073
Class B 739,696 397,322
Class C 366,084 182,237
Institutional Class 629,517 254,129
Shares issued upon reinvestment of
dividends and distributions:
Class A 94,238 119,085
Class B 87,877 101,856
Class C 29,246 34,755
Institutional Class 48,011 34,423
---------- ----------
2,792,267 1,421,880
---------- ----------
Shares repurchased:
Class A (743,170) (762,243)
Class B (809,986) (653,489)
Class C (289,031) (243,111)
Institutional Class (282,550) (68,591)
---------- ----------
(2,124,737) (1,727,434)
---------- ----------
Net increase (decrease) 667,530 (305,554)
========== ==========
For the year ended July 31, 2003, 4,084 Class B shares were converted to 4,076
Class A shares valued at $18,053. The respective amounts are included in Class B
redemptions and Class A subscriptions in the table above and the Statement of
Changes in Net Assets.
20
Notes
TO FINANCIAL STATEMENTS (CONTINUED) Delaware Strategic Income Fund
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participates in a $202,300,000 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 fund'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 amount outstanding as of July 31, 2003, or at any time during the
year.
7. Foreign Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts as a way of
managing foreign exchange rate risk. The Fund may enter into these contracts to
fix the U.S. dollar value of a security that it has agreed to buy or sell for
the period between the date the trade was entered into and the date the security
is delivered and paid for. The Fund may also use these contracts to hedge the
U.S. dollar value of securities it already owns that are denominated in foreign
currencies.
Forward foreign currency exchange contracts are valued at the mean between the
bid and asked prices of the contracts and are marked-to-market daily.
Interpolated values are derived when the settlement date of the contract is an
interim date for which quotations are not available. The change in market value
is recorded as an unrealized gain or loss. When the contract is closed, a
realized gain or loss is recorded equal to the difference between the value of
the contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency exchange contracts limit the risk of loss due to a decline in the value
of the hedged currency, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Fund could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts.
No forward foreign currency exchange contracts were outstanding at July 31,
2003.
8. Futures Contracts
The Fund may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Fund deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. (In some cases, due to the form of the futures agreement, initial
margin is held in a segregated account with the Fund's custodian, rather than
directly with the broker.) Subsequent payments are received from the broker or
paid to the broker (or added to the segregated account) each day, based on the
daily fluctuation in the market value of the contract. These receipts or
payments are known as "variation margin" and are recorded daily by the Fund as
unrealized gains or losses until the contracts are closed. When the contracts
are closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk of entering into futures contracts include potential
imperfect correlation between the futures contracts and the underlying
securities and the possibility of an illiquid secondary market for these
instruments.
8. Futures Contracts (continued)
Financial futures contracts open at July 31, 2003 were as follows:
Contracts Notional Unrealized
To Buy (Sell) Cost (Proceeds) Expiration Date Gain (Loss)
- --------------- --------------- --------------- -----------
(9) U.S. Treasury
10 year Note $(1,059,578) 09/03 $ 63,630
2 U.S Treasury
5 year Note 231,315 09/03 (8,659)
---------
$ 54,971
=========
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional amount
presented above represents the Fund's total exposure in such contracts, whereas
only the net unrealized appreciation (depreciation) is reflected in the Fund's
net assets.
9. Options Written
During the year ended July 31, 2003, the Fund entered into options contracts in
accordance with its investment objectives. When the Fund writes an option, a
premium is received and a liability is recorded and adjusted on a daily basis to
reflect the current market value of the options written. Premiums received from
writing options that expire unexercised are treated by the Fund on the
expiration date as realized gains. The difference between the premium received
and the amount paid on effecting a closing purchase transaction, including
brokerage commissions, is treated as realized gain or loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security in determining whether the Fund has a realized gain or loss. If a put
option is exercised, the premium reduces the cost basis of the securities
purchased by the Fund. The Fund, as writer of an option, bears market risk of an
unfavorable change in the price of the security underlying the written option.
Transactions in options written during the year ended July 31, 2003 for the
Fund, were as follows:
Number of
Contracts Premiums
Options outstanding at July 31, 2002 -- $ --
Options written 64 30,774
Options terminated in closing
purchase transaction (48) (23,136)
---- --------
Options outstanding at July 31, 2003 16 $ 7,638
====== ========
As July 31, 2003 the Fund had the following options written outstanding:
Number Notional Net Unrealized
of Amount Exercise Expiration Appreciation
Description Contracts of Future Price Date (Depreciation)
- ----------- --------- --------- -------- ---------- --------------
Call Options Written
U.S. Treasury 10 year
Notes future 5 $500,000 $113 12/31/03 $ 1,069
U.S. Treasury 10 year
Notes future 3 $300,000 $116 9/30/03 23
Put Options Written
U.S. Treasury 10 year
Notes future 5 $500,000 $107 12/31/03 (2,790)
U.S. Treasury 10 year
Notes future 3 $300,000 $108 9/30/03 (883)
-------
$(2,581)
=======
Writing options involves elements of market risk and risks in excess of the
amount recognized in the financial statements. The notional amount presented
above represents the Fund's total exposure in such contracts, whereas only the
net unrealized appreciation (depreciation) is reflected in the Fund's net
assets.
21
Notes
TO FINANCIAL STATEMENTS (CONTINUED) Delaware Strategic Income Fund
10. Swap Agreements
During the year ended July 31, 2003, the Fund entered into total return swap
agreements in accordance with its investment objectives. A swap is an agreement
to exchange the return generated by one instrument for the return generated by
another instrument. Total return 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. Total return swaps are marked-to-market daily based upon the fair
valuation methodology established by the Board of Trustees. The change in value
of swap agreements 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 agreement.
At July 31, 2003, the Fund had the following total return swap agreements
outstanding:
Notional Expiration
Amount Date Description Unrealized Loss
- -------- ---------- ----------- ---------------
$175,000 12/31/03 Agreement with Goldman $(7,002)
Sachs to receive the notional
amount multiplied by the
return on the Lehman Brothers
Commercial MBS Index
AAA and to pay the notional
amount multiplied by the
1 month BBA LIBOR adjusted
by a spread of minus 0.35%.
Because there is no organized market for these swap agreements, 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
agreements include the potential inability of the counterparty to meet the terms
of the agreements. This type of risk is generally limited to the amount of
favorable movements in the value of the underlying security, instrument or
baskets 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
related amounts shown above.
11. Credit and Market Risks
Some countries in which the Fund may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Fund may
be inhibited.
The Fund may invest up to 60% of net assets in high-yield fixed income
securities, which carry ratings of BB or lower by S&P and/or Ba or lower by
Moody's. 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 invests in fixed-income securities whose value is derived from an
underlying pool of mortgages or consumer loans. Investors receive principal and
interest payments as the underlying mortgages and consumer loans are paid back.
Some of these securities are collateralized mortgage obligations (CMOs). CMOs
are debt securities issued by U.S. government agencies or by financial
institutions and other mortgage lenders, which are collateralized by a pool of
mortgages held under an indenture. Prepayment of mortgages may shorten the
stated maturity of the obligations and can result in a loss of premium, if any
has been paid. Certain of these securities may be stripped (securities, which
provide only the principal or interest feature of the underlying security). The
yield to maturity on an interest-only CMO is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. A rapid rate
of principal payments may have a material adverse affect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
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.
12. 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, 2003, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary (C) (D)
Capital Gains Income Return Total (E)
Distributions Distributions of Capital Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
- ------------- ------------- ----------- ------------- ------------
-- 95% 5% 100% --
(A), (B) and (C) are based on a percentage of the Fund's total distributions.
(E) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
22
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Delaware Group Income Funds -- Delaware Strategic Income Fund
We have audited the accompanying statement of net assets and statement of assets
and liabilities of Delaware Strategic Income Fund (the "Fund") as of July 31,
2003, 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 auditing standards generally accepted
in the 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 2003, by correspondence with the
custodian and brokers or by other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. 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
Delaware Strategic Income Fund at July 31, 2003, 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 accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 12, 2003
23
Delaware Investments Family of Funds
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of 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 that perform services for the fund. The
independent fund trustees, in particular, are advocates for shareholder
interests. The following is a list of the Trustees/Officers and certain
background and related information.
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee Trustee
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jude T. Driscoll(2) Chairman and 3 Years - Since August 2000, 83 None
2005 Market Street Trustee(4) Executive Officer Mr. Driscoll has served in
Philadelphia, PA various executive capacities
19103 Trustee as of at different times at
May 15, 2003 Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
Managing Director -
NationsBanc Capital Markets
(February 1996 - June 1998)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Walter P. Babich Trustee 15 Years Board Chairman - 101 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
John H. Durham Trustee 24 Years(3) Private Investor 101 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103
August 7, 1937 President/Director -
22 WR Corporation
John A. Fry Trustee(4) 2 Years President - 83 None
2005 Market Street Franklin & Marshall College
Philadelphia, PA (June 2002 - Present)
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
24
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Fund(s) Served Past 5 Years by Trustee/Officer Trustee/Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Anthony D. Knerr Trustee 10 Years Founder/Managing Director - 101 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director -
2005 Market Street National Gallery of Art Systemax, Inc.
Philadelphia, PA (1994 - 1999)
19103 Director - Andy
Warhol Foundation
November 1, 1940
Thomas F. Madison Trustee 9 Years President/Chief 101 Director -
2005 Market Street Executive Officer - CenterPoint Energy
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director - Digital
and Consulting) River Inc.
(January 1993 - Present)
February 25, 1936 Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
Janet L. Yeomans Trustee 4 Years Vice President/Mergers & 101 None
2005 Market Street Acquisitions - 3M Corporation
Philadelphia, PA (January 2003 - Present)
19103
Ms. Yeomans has held
July 31, 1948 various management
positions at 3M Corporation
since 1983.
- -----------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Richelle S. Maestro Executive Vice President, 4 Years Ms. Maestro has served in 101 None
2005 Market Street General Counsel various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
Michael P. Bishof Senior Vice President 7 Years Mr. Bishof has served in 101 None
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
(1) Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Registrant's investment
sc advisor, principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the portfolios of Voyageur
Insured Funds, Voyageur Intermediate Tax Free Funds, Voyageur Investment
Trust, Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual
Funds III and Voyageur Tax Free Funds.
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.
25
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Strategic Income Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Strategic Income 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 Fund. You should read the prospectus
carefully before you invest. The figures in this report represent past results
which 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 Affiliated Officers Contact Information
Jude T. Driscoll Michael P. Bishof Investment Manager
Chairman Senior Vice President and Treasurer Delaware Management Company
Delaware Investments Family of Funds Delaware Investments Family of Funds Philadelphia, PA
Philadelphia, PA Philadelphia, PA
International Affiliate
Walter P. Babich Richelle S. Maestro Delaware International Advisers Ltd.
Board Chairman Executive Vice President, London, England
Citadel Construction Corporation General Counsel and Secretary
King of Prussia, PA Delaware Investments Family of Funds National Distributor
Philadelphia, PA Delaware Distributors, L.P.
John H. Durham Philadelphia, PA
Private Investor
Gwynedd Valley, PA Shareholder Servicing, Dividend
Disbursing and Transfer Agent
John A. Fry Delaware Service Company, Inc.
President 2005 Market Street
Franklin & Marshall College Philadelphia, PA 19103-7094
Lancaster, PA
For Shareholders
Anthony D. Knerr 800 523-1918
Managing Director
Anthony Knerr & Associates For Securities Dealers and Financial
New York, NY Institutions Representatives Only
800 362-7500
Ann R. Leven
Former Treasurer/Chief Fiscal Officer Web site
National Gallery of Art www.delawareinvestments.com
Washington, DC
--------------------------------------------------------------------------------
Thomas F. Madison A description of the policies and procedures that the Fund uses to determine how
President and Chief Executive Officer to vote proxies (if any) relating to portfolio securities is available without
MLM Partners, Inc. charge (i) upon request, by calling 800-523-1918; (ii) on the Fund's website at
Minneapolis, MN http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov.; and beginning no later than August 31, 2004, information
Janet L. Yeomans (if any) regarding how the Fund voted proxies relating to portfolio securities
Vice President/Mergers & Acquisitions during the most recent 12-month period ended June 30 is available without charge
3M Corporation (i) through the Fund's website at http://www.delawareinvestments.com; and (ii)
St. Paul, MN on the Commission's website at http://www.sec.gov.
--------------------------------------------------------------------------------
(8154) Printed in the USA
AR-125 [7/03] IVES 9/03 J9374
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:
Ann R. Leven
Thomas F. Madison
Janet L. Yeomans (1)
Item 4. Principal Accountant Fees and Services
Required only for fiscal years ending after December 15, 2003.
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
_______________________
(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 Ms.
Yeomans qualifies as an audit committee financial expert by virtue of her
education and experience as the Treasurer of a large global corporation.
Item 8. [Reserved]
Item 9. 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 registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an annual
report) that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 10. 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.
(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:
JUDE T. DRISCOLL
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By: Jude T. Driscoll
----------------------
Title: Chairman
Date: October 2, 2003
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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.
JUDE T. DRISCOLL
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By: Jude T. Driscoll
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Title: Chairman
Date: October 2, 2003
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JOSEPH H. HASTINGS
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By: Joseph H. Hastings
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Title: Chief Financial Officer
Date: October 2, 2003
----------------------