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: 2-13017
Exact name of registrant as specified in charter: Delaware Group Equity Funds II
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: November 30
Date of reporting period: November 30, 2003
Item 1. Reports to Stockholders
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
VALUE-EQUITY
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE DECATUR EQUITY INCOME FUND
[LOGO] POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
- ------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- ------------------------------------------------
PERFORMANCE SUMMARY 2
- ------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 3
Statement of Operations 5
Statements of Changes in Net Assets 6
Financial Highlights 7
Notes to Financial Statements 12
- ------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 15
- ------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 16
- ------------------------------------------------
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) 2004 Delaware Distributors, L.P.
Portfolio Delaware Decatur Equity Income Fund
MANAGEMENT REVIEW December 10, 2003
Fund Manager
John B. Fields
Senior Portfolio Manager
Q: How did the Fund perform during the 12-month period ended November 30, 2003
and what drove stock market performance during the year?
A: For the 12 months ended November 30, 2003, Delaware Decatur Equity Income
Fund gained +14.34% (Class A shares at net asset value with distributions
reinvested). In comparison, the Fund's peer group, as measured by the Lipper
Equity Income Funds Average, returned +14.85%. The Fund's benchmark, the
Standard & Poor's (S&P) 500 Index rose +15.08%.
Early in the fiscal year, investors grew concerned about possible conflict in
Iraq and the Middle East. In time, these concerns shifted to the economy,
including the potential for deflation, or falling prices. In the face of so much
uncertainty, many investors bought defensive stocks, such as utilities and real
estate investment trusts (REITs), which are not expected to perform fully in
line with equity markets.
The market rallied in spring and was spurred on during summer when the economic
recovery showed consistent signs of strengthening. As the market rally picked up
steam during the fiscal year, investors became more aggressive and began bidding
up the prices of lesser-quality stocks. Research by Standard & Poor's shows that
the market advance was frequently led by stocks with questionable earnings and
financial health.
Q: What strategies were employed by the Fund and how did they impact
performance?
A: The biggest positive influence on portfolio performance during the fiscal
year was our conviction that investors were overplaying the economic and
political concerns of last winter. During this period, we resisted the
prevailing move toward defensive stocks. Rather, we searched for companies that
in our opinion had the potential to produce surprisingly good earnings, given
our belief that domestic economic growth was sustainable. Growing fear about
Iraq and concerns about the economy created a host of buying opportunities in
undervalued stocks. Thus, the Fund was overweighted in financials - and in
particular banks, where concern for credit problems arose due in part to the
possible arrival of deflation. The Fund was also significantly underweighted in
the energy sector.
The biggest overall drag on performance during the fiscal year was the
outperformance of small-cap stocks over large caps. In addition, the previously
mentioned outperformance of lower-quality stocks with weak financials proved a
challenge to dividend-oriented investors like ourselves who focus on companies
exhibiting consistent, high-quality earnings.
Fund performance was also held back by a significant underweighting in
technology versus the Fund's benchmark index. During the fiscal year, technology
was one of the better-performing sectors. Despite the handicap, we approached
the S&P 500 Index's return due to sound stock selection in other areas of the
market.
Q: Please identify some stocks that contributed positively to performance.
A: Among capital goods stocks, Caterpillar and Eaton were strong performers.
Both companies managed earnings well through the recent down cycle and their
stocks rebounded early as business conditions improved.
Among financial stocks, MBNA and Morgan Stanley were among the Fund's top picks.
We have since elected to liquidate our position in MBNA. J.P. Morgan Chase and
FleetBoston Financial (Fleet) also experienced sound returns during the 12-month
period. In Fleet's case, the stock further benefited in late October when Bank
of America announced it would buy the company at a premium price.
In telecommunications, BCE (Bell Canada Enterprises) performed well. In
utilities, the Fund had success with Public Service Enterprise Group of New
Jersey, which has since been sold, and Virginia-based power company Dominion
Resources.
Q: What holdings detracted from performance?
A: The Fund's negative performers this fiscal year were fairly concentrated.
Pharmaceutical producers, with few new drugs coming to market, experienced
pressure as product patents expired and uncertainty grew over Medicare drug
pricing.
In consumer-staple stocks, Anheuser-Busch and General Mills underperformed
primarily because the investment environment favored lower-quality and more
volatile stocks. Fund performance was also impeded in the technology area as
Microsoft and Oracle, two staple holdings, both underperformed for the fiscal
year.
1
Delaware
DECATUR EQUITY INCOME FUND
Fund Basics
As of November 30, 2003
- -----------------------------------------------
Fund Objective:
The Fund seeks total return.
- -----------------------------------------------
Total Fund Net Assets:
$1.03 billion
- -----------------------------------------------
Number of Holdings:
77
- -----------------------------------------------
Fund Start Date:
March 18, 1957
- -----------------------------------------------
Your Fund Manager:
John B. Fields has 31 years' experience in
investment management. He holds a bachelor's
degree and an MBA from Ohio State University.
Before joining Delaware Investments in 1992, he
was Director of Domestic Equity Risk Management
at DuPont. Mr. Fields is a CFA charterholder.
- -----------------------------------------------
Nasdaq Symbols:
Class A DELDX
Class B DEIBX
Class C DECCX
Fund Performance
Average Annual Total Returns
Through November 30, 2003 Lifetime 10 Years Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 3/18/57)
Excluding Sales Charge +11.18% +8.53% 0.00% +14.34%
Including Sales Charge +11.04% +7.89% -1.18% +7.80%
- --------------------------------------------------------------------------------
Class B (Est. 9/6/94)
Excluding Sales Charge +7.85% -- -0.75% +13.47%
Including Sales Charge +7.85% -- -1.11% +9.47%
- --------------------------------------------------------------------------------
Class C (Est. 11/29/95)
Excluding Sales Charge +6.33% -- -0.75% +13.53%
Including Sales Charge +6.33% -- -0.75% +12.53%
- --------------------------------------------------------------------------------
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 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 5.75% 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 November 30, 2003 for
Delaware Decatur Equity Income Fund's Class R shares was +7.51%. 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 (since 3/18/57), 10-year,
five-year, and one-year periods ended November 30, 2003 for Delaware Decatur
Equity Income Fund's Institutional Class were +11.23%, +8.74%, +0.25%, and
+14.64%, respectively. Institutional Class shares were first made available on
January 13, 1994 and are available without sales or asset-based distribution
charges only to certain eligible institutional accounts. Institutional Class
performance prior to January 13, 1994 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.
SEC 30-day yields for A, B, C, R, and Institutional Class shares were 1.01%,
0.39%, 0.38%, 0.78%, and 1.37%, respectively, as of November 30, 2003.
Nasdaq Institutional Class symbol: DEDIX
Nasdaq Class R symbol: DECRX
Performance of a $10,000 Investment
November 30, 1993 through November 30, 2003
Delaware Decatur
Equity Income
Fund -- Class A
Shares S&P 500 Index
30-Nov-93 $ 9,425 $10,000
30-Nov-94 $ 9,371 $10,105
30-Nov-95 $12,278 $13,841
30-Nov-96 $15,282 $17,698
30-Nov-97 $19,069 $22,744
30-Nov-98 $21,363 $28,125
30-Nov-99 $20,830 $34,005
30-Nov-00 $21,397 $32,570
30-Nov-01 $21,558 $28,589
30-Nov-02 $18,725 $23,868
30-Nov-03 $21,366 $27,471
Chart assumes $10,000 invested on November 30, 1993 and includes the effect of a
5.75% 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 S&P 500 Index is an unmanaged composite of mostly
large-capitalization U.S. companies. 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.
2
Statement Delaware Decatur Equity Income Fund
OF NET ASSETS November 30, 2003
Number of Market
Shares Value
Common Stock - 98.60%
Aerospace & Defense - 2.16%
*Boeing 189,800 $ 7,286,422
Honeywell International 501,500 14,889,535
------------
22,175,957
------------
Automobiles & Automotive Parts - 1.14%
*General Motors 273,500 11,700,330
------------
11,700,330
------------
Banking & Finance - 21.13%
American Express 364,500 16,661,295
Bank of America 224,982 16,970,392
Charter One Financial 325,000 10,796,500
Citigroup 270,500 12,724,320
Comerica 216,100 11,269,615
FleetBoston Financial 193,100 7,839,860
*Goldman Sachs Group 234,800 22,559,584
J.P. Morgan Chase 721,790 25,522,495
KeyCorp 546,600 15,190,014
Mellon Financial 401,900 11,574,720
Morgan Stanley 431,200 23,836,736
*U.S. Bancorp 764,000 21,170,440
Wells Fargo 370,700 21,252,231
------------
217,368,202
------------
Cable, Media & Publishing - 1.61%
Knight-Ridder 107,000 7,958,660
*+Westwood One 284,100 8,625,276
------------
16,583,936
------------
Chemicals - 3.63%
Air Products & Chemicals 215,300 10,321,482
*Dow Chemical 364,500 13,686,975
duPont (E.I.) deNemours 322,600 13,374,996
------------
37,383,453
------------
Computers & Technology - 7.52%
+Cisco Systems 597,600 13,541,616
*First Data 358,200 13,557,870
+Intuit 308,000 15,486,240
Microsoft 532,700 13,690,390
+Oracle 1,182,300 14,199,423
Pitney Bowes 174,600 6,940,350
------------
77,415,889
------------
Consumer Products - 6.25%
*Black & Decker 272,800 12,655,192
Clorox 377,900 17,731,068
Kimberly-Clark 151,100 8,192,642
Newell Rubbermaid 449,700 10,284,639
Procter & Gamble 160,500 15,446,520
------------
64,310,061
------------
Electronics & Electrical Equipment - 5.42%
*Eaton 101,300 10,432,887
Emerson Electric 188,900 11,530,456
General Electric 608,300 17,439,961
Intel 489,500 16,363,985
------------
55,767,289
------------
Number of Market
Shares Value
Common Stock (continued)
Energy - 7.50%
ChevronTexaco 171,800 $ 12,902,180
Exxon Mobil 584,226 21,131,454
Kerr-McGee 336,300 14,121,237
+Noble 291,900 10,093,902
Occidental Petroleum 514,200 18,860,856
------------
77,109,629
------------
Food, Beverage & Tobacco - 7.34%
Anheuser-Busch 344,100 17,831,262
Coca Cola 285,200 13,261,800
*General Mills 313,900 14,128,639
Kraft Foods -- Class A 219,500 6,951,565
PepsiCo 484,100 23,294,892
------------
75,468,158
------------
Healthcare & Pharmaceuticals - 9.93%
Abbott Laboratories 410,200 18,130,840
Baxter International 525,900 14,630,538
Bristol-Myers Squibb 414,700 10,927,345
*HCA 333,000 13,956,030
*+Laboratory Corporation of America Holdings 247,300 8,932,476
Pfizer 477,000 16,003,350
Wyeth 496,400 19,558,160
------------
102,138,73
------------
Industrial Machinery - 0.74%
Caterpillar 100,600 7,650,630
------------
7,650,630
------------
Insurance - 8.88%
Allstate 29,300 1,183,134
*Chubb 230,100 15,060,045
Cigna 273,100 14,651,815
Marsh & McLennan 414,800 18,433,712
MGIC Investment 138,200 7,317,690
Prudential Financial 361,200 14,126,532
XL Capital Ltd. -- Class A 273,600 20,574,720
------------
91,347,648
------------
Leisure, Lodging & Entertainment - 0.97%
Starwood Hotels & Resorts Worldwide 289,600 9,982,512
------------
9,982,512
------------
Metals & Mining - 1.58%
Alcoa 267,900 8,789,799
*Rio Tinto ADR 76,500 7,516,125
------------
16,305,924
------------
Paper & Forest Products - 1.33%
International Paper 367,118 13,660,461
------------
13,660,461
------------
Retail - 3.36%
Home Depot 388,800 14,292,288
Limited Brands 563,200 10,092,544
*TJX 452,500 10,221,975
------------
34,606,807
------------
Telecommunications - 4.01%
Alltel 211,800 9,617,838
BCE 367,400 8,218,738
SBC Communications 469,064 10,919,819
Verizon Communications 382,236 12,525,874
------------
41,282,269
------------
3
Statement Delaware Decatur Equity Income Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
Common Stock (continued)
Textiles, Apparel & Furniture - 0.83%
Nike 127,200 $ 8,554,200
--------------
8,554,200
--------------
Utilities - 3.27%
Dominion Resources 127,300 7,672,371
Exelon 123,300 7,622,406
FirstEnergy 308,800 10,699,920
FPL Group 119,600 7,600,580
--------------
33,595,277
--------------
Total Common Stock (cost $890,320,500) 1,014,407,371
--------------
Principal
Amount
Repurchase Agreements - 1.04%
With BNP Paribas 1.01%
12/1/03 (dated 11/28/03, collateralized
by $4,158,000 U.S. Treasury Notes
6.750% due 5/15/05,
market value $4,477,378) $ 4,388,000 4,388,000
With J. P. Morgan Securities 0.98%
12/1/03 (dated 11/28/03, collateralized
by $1,908,000 U.S. Treasury Notes
2.250% due 7/31/04,
market value $1,937,127) 1,899,000 1,899,000
With UBS Warburg 1.01%
12/1/03 (dated 11/28/03, collateralized
by $1,371,000 U.S. Treasury Notes
2.000% due 11/30/04, market value
$1,392,988, $48,000 U.S. Treasury
Notes 5.500% due 2/15/08, market
value $53,533, and $2,743,000
U.S. Treasury Notes 5.625%
due 5/15/08, market value $3,030,903) 4,388,000 4,388,000
--------------
Total Repurchase Agreements
(cost $10,675,000) 10,675,000
--------------
Total Market Value of Securities Before Securities
Lending Collateral - 99.64% (cost $900,995,500) 1,025,082,371
--------------
Securities Lending Collateral** - 4.45 %
Short-Term Investments
ABN AMRO Bank Chicago 1.06% 6/07/04 1,737,757 1,737,666
ABN AMRO Bank Tokyo 1.10% 1/13/04 496,515 496,515
Allied Irish Dublin 1.12% 1/20/04 1,986,019 1,986,058
Credit Suisse First Boston 1.60% 12/13/04 1,986,058 1,986,058
Deutsche Bank Financial 1.071% 1/16/04 1,986,387 1,986,760
FHLMC 1.12% 1/15/04 1,121,454 1,124,352
FNMA 1.035% 1/29/04 12,413,341 12,412,708
General Electric Capital 1.13% 10/04/04 745,421 746,691
Goldman Sachs Group LP
1.193% 12/15/03 1,737,785 1,737,801
HBOS Treasury Services PLC
1.09% 12/12/03 1,986,041 1,986,058
Keybank NA 1.146% 1/26/04 993,192 993,525
Marsh & McLennan 1.291% 6/15/04 1,277,154 1,313,509
Merrill Lynch Mortgage Capital
1.163% 12/08/03 1,986,058 1,986,058
Morgan Stanley Dean Witter
1.10% 12/01/03 8,308,247 8,308,247
1.22% 12/28/04 495,708 496,515
1.30% 3/19/04 1,240,487 1,241,286
Principal Market
Amount Value
Securities Lending Collateral** (continued)
Swiss Re Financial 1.103% 1/15/04 $ 1,239,525 $ 1,237,835
Wachovia Bank NA 1.127% 11/15/04 1,986,097 1,987,826
Wilmington Trust Company 1.11% 1/22/04 1,986,018 1,986,058
--------------
Total Securities Lending Collateral
(cost $45,751,526) 45,751,526
--------------
Total Market Value of Securities - 104.09%
(cost $946,747,026) 1,070,833,897
Obligation to Return Securities Lending
Collateral - (4.45%)** (45,751,526)
Receivables and Other Assets
Net of Liabilities - 0.36% 3,653,467
--------------
Net Assets Applicable to 63,379,872
Shares Outstanding - 100.00% $1,028,735,838
--------------
Net Asset Value - Delaware Decatur Equity Income Fund
Class A ($895,108,376 / 55,125,269 Shares) $16.24
------
Net Asset Value - Delaware Decatur Equity Income Fund
Class B ($74,018,847 / 4,583,711 Shares) $16.15
------
Net Asset Value - Delaware Decatur Equity Income Fund
Class C ($13,763,559 / 847,109 Shares) $16.25
------
Net Asset Value - Delaware Decatur Equity Income Fund
Class R ($654,275 / 40,310 Shares) $16.23
------
Net Asset Value - Delaware Decatur Equity Income Fund
Institutional Class ($45,190,781 / 2,783,473 Shares) $16.24
------
Components of Net Assets at November 30, 2003:
Shares of beneficial interest
(unlimited authorization-- no par) $1,046,884,123
Undistributed net investment income*** 6,128,049
Accumulated net realized loss on investments (148,363,205)
Net unrealized appreciation of investments 124,086,871
--------------
Total net assets $1,028,735,838
==============
*Fully or partially on loan.
**See Note 7 in "Notes to Financial Statements."
***Undistributed net investment income includes net realized gains on foreign
currencies. Net realized gains on foreign currencies are treated as net
investment income in accordance with provisions of the Internal Revenue Code.
+Non-income producing security for the year ended November 30, 2003.
++Includes $44,796,002 of securities loaned.
Summary of Abbreviations:
ADR - American Depositary Receipts
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
Net Asset Value and Offering Price per Share -
Delaware Decatur Equity Income Fund
Net asset value Class A (A) $16.24
Sales charge (5.75% of offering price,
or 6.10% of amount invested per share) (B) 0.99
------
Offering price $17.23
------
(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 $50,000 or more.
See accompanying notes
4
Statement Delaware Decatur Equity Income Fund
OF OPERATIONS Year Ended November 30, 2003
Investment Income:
Dividends $ 24,710,251
Interest 184,035
Securities lending income 43,633 $ 24,937,919
------------- -------------
Expenses:
Management fees 6,008,284
Distribution expenses -- Class A 2,140,345
Distribution expenses -- Class B 713,151
Distribution expenses -- Class C 117,956
Distribution expenses -- Class R 508
Dividend disbursing and transfer agent fees
and expenses 1,862,113
Accounting and administration expenses 412,722
Reports and statements to shareholders 310,753
Professional fees 92,880
Registration fees 64,701
Trustees' fees 39,985
Custodian fees 32,731
Other 237,528 12,033,657
-------------
Less expenses paid indirectly (24,431)
-------------
Total expenses 12,009,226
-------------
Net Investment Income 12,928,693
-------------
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies:
Net realized gain (loss) on:
Investments (8,143,163)
Foreign currencies 1,114
-------------
Net realized loss (8,142,049)
Net change in unrealized appreciation/depreciation of investments 123,764,997
-------------
Net Realized and Unrealized Gain on Investments and Foreign Currencies 115,622,948
-------------
Net Increase in Net Assets Resulting from Operations $ 128,551,641
=============
See accompanying notes
5
Statements Delaware Decatur Equity Income Fund
OF CHANGES IN NET ASSETS
Year Ended
11/30/03 11/30/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 12,928,693 $ 11,884,029
Net realized loss on investments and foreign currencies (8,142,049) (35,928,720)
Net change in unrealized appreciation/depreciation of investments 123,764,997 (141,882,600)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 128,551,641 (165,927,291)
--------------- ---------------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (6,955,180) (13,092,548)
Class B (36,646) (483,057)
Class C (5,500) (63,835)
Class R (62) --
Institutional Class (353,397) (669,240)
--------------- ---------------
(7,350,785) (14,308,680)
--------------- ---------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 32,982,623 29,791,366
Class B 8,422,733 13,761,204
Class C 3,775,235 3,255,581
Class R 647,752 --
Institutional Class 13,838,801 6,359,391
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 5,931,383 11,078,372
Class B 32,222 421,246
Class C 5,093 58,791
Class R 60 --
Institutional Class 353,397 669,240
--------------- ---------------
65,989,299 65,395,191
--------------- ---------------
Cost of shares repurchased:
Class A (120,101,777) (146,002,348)
Class B (18,873,009) (24,458,300)
Class C (2,684,627) (3,644,568)
Class R (12,990) --
Institutional Class (6,647,382) (15,388,563)
--------------- ---------------
(148,319,785) (189,493,779)
--------------- ---------------
Decrease in net assets derived from capital share transactions (82,330,486) (124,098,588)
--------------- ---------------
Net Increase (Decrease) in Net Assets 38,870,370 (304,334,559)
Net Assets:
Beginning of year 989,865,468 1,294,200,027
--------------- ---------------
End of year $ 1,028,735,838 $ 989,865,468
=============== ===============
See accompanying notes
6
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Decatur Equity Income Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $14.320 $16.730 $16.770 $17.200 $21.400
Income (loss) from investment operations:
Net investment income(1) 0.205 0.170 0.182 0.370 0.476
Net realized and unrealized gain (loss) on investments 1.835 (2.381) (0.062) 0.050 (0.916)
------- ------- ------- ------- -------
Total from investment operations 2.040 (2.211) 0.120 0.420 (0.440)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.120) (0.199) (0.160) (0.378) (0.540)
Net realized gain on investments -- -- -- (0.472) (3.220)
------- ------- ------- ------- -------
Total dividends and distributions (0.120) (0.199) (0.160) (0.850) (3.760)
------- ------- ------- ------- -------
Net asset value, end of period $16.240 $14.320 $16.730 $16.770 $17.200
======= ======= ======= ======= =======
Total return(2) 14.34% (13.34%) 0.75% 2.72% (2.50%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $895,108 $870,132 $1,132,147 $1,258,738 $1,658,696
Ratio of expenses to average net assets 1.20% 1.11% 1.07% 1.12% 1.03%
Ratio of net investment income to average net assets 1.40% 1.10% 1.06% 2.30% 2.59%
Portfolio turnover 77% 99% 111% 77% 92%
(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.
See accompanying notes
7
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Decatur Equity Income Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $14.240 $16.630 $16.690 $17.120 $21.320
Income (loss) from investment operations:
Net investment income(1) 0.096 0.054 0.054 0.248 0.333
Net realized and unrealized gain (loss) on investments 1.821 (2.364) (0.063) 0.059 (0.918)
------- ------- ------- ------- -------
Total from investment operations 1.917 (2.310) (0.009) 0.307 (0.585)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.007) (0.080) (0.051) (0.265) (0.395)
Net realized gain on investments -- -- -- (0.472) (3.220)
------- ------- ------- ------- -------
Total dividends and distributions (0.007) (0.080) (0.051) (0.737) (3.615)
------- ------- ------- ------- -------
Net asset value, end of period $16.150 $14.240 $16.630 $16.690 $17.120
======= ======= ======= ======= =======
Total return(2) 13.47% (13.96%) (0.05%) 2.01% (3.27%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $74,019 $75,707 $100,419 $99,266 $151,332
Ratio of expenses to average net assets 1.94% 1.86% 1.82% 1.88% 1.81%
Ratio of net investment income to average net assets 0.66% 0.35% 0.31% 1.54% 1.81%
Portfolio turnover 77% 99% 111% 77% 92%
(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.
See accompanying notes
8
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Decatur Equity Income Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $14.320 $16.730 $16.780 $17.220 $21.420
Income (loss) from investment operations:
Net investment income(1) 0.095 0.054 0.053 0.247 0.332
Net realized and unrealized gain (loss) on investments 1.842 (2.384) (0.052) 0.050 (0.917)
------- ------- ------- ------- -------
Total from investment operations 1.937 (2.330) 0.001 0.297 (0.585)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.007) (0.080) (0.051) (0.265) (0.395)
Net realized gain on investments -- -- -- (0.472) (3.220)
------- ------- ------- ------- -------
Total dividends and distributions (0.007) (0.080) (0.051) (0.737) (3.615)
------- ------- ------- ------- -------
Net asset value, end of period $16.250 $14.320 $16.730 $16.780 $17.220
======= ======= ======= ======= =======
Total return(2) 13.53% (14.00%) 0.02% 1.94% (3.25%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $13,764 $11,098 $13,442 $11,372 $19,511
Ratio of expenses to average net assets 1.94% 1.86% 1.82% 1.88% 1.81%
Ratio of net investment income to average net assets 0.66% 0.35% 0.31% 1.54% 1.81%
Portfolio turnover 77% 99% 111% 77% 92%
(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.
See accompanying notes
9
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Decatur Equity Income Fund Class R
- ------------------------------------------------------------------------------------------
6/02/03(1)
to
11/30/03
Net asset value, beginning of period $15.150
Income from investment operations:
Net investment income(2) 0.072
Net realized and unrealized gain on investments 1.063
-------
Total from investment operations 1.135
-------
Less dividends and distributions from:
Net investment income (0.055)
-------
Total dividends and distributions (0.055)
-------
Net asset value, end of period $16.230
=======
Total return(3) 7.51%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $654
Ratio of expenses to average net assets 1.54%
Ratio of net investment income to average net assets 0.91%
Portfolio turnover 77%
(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.
See accompanying notes
10
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Decatur Equity Income Fund Institutional Class
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $14.320 $16.730 $16.770 $17.200 $21.400
Income (loss) from investment operations:
Net investment income(1) 0.242 0.209 0.224 0.408 0.516
Net realized and unrealized gain (loss) on investments 1.835 (2.380) (0.065) 0.054 (0.913)
------- ------- ------- ------- -------
Total from investment operations 2.077 (2.171) 0.159 0.462 (0.397)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.157) (0.239) (0.199) (0.420) (0.583)
Net realized gain on investments -- -- -- (0.472) (3.220)
------- ------- ------- ------- -------
Total dividends and distributions (0.157) (0.239) (0.199) (0.892) (3.803)
------- ------- ------- ------- -------
Net asset value, end of period $16.240 $14.320 $16.730 $16.770 $17.200
======= ======= ======= ======= =======
Total return(2) 14.64% (13.11%) 1.00% 2.99% (2.27%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $45,191 $32,928 $48,192 $52,020 $89,128
Ratio of expenses to average net assets 0.94% 0.86% 0.82% 0.88% 0.81%
Ratio of net investment income to average net assets 1.66% 1.35% 1.31% 2.54% 2.81%
Portfolio turnover 77% 99% 111% 77% 92%
(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.
See accompanying notes
11
Notes Delaware Decatur Equity Income Fund
TO FINANCIAL STATEMENTS November 30, 2003
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware business
trust and offers four series: Delaware Decatur Equity Income Fund, Delaware
Diversified Value Fund, Delaware Growth and Income Fund, and Delaware Social
Awareness Fund. These financial statements and related notes pertain to Delaware
Decatur Equity 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 5.75%. 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 were 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.
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.
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.
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. The Fund declares and pays dividends from net
investment income quarterly and distributions from net realized gain on
investments, if any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. The amount of these expenses was approximately $23,041 for the year
ended November 30, 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 November 30, 2003
were approximately $1,390. 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 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.
Institutional Class shares pay no distribution and service expenses.
At November 30, 2003, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $89,488
Dividend disbursing, transfer agent fees, accounting 69,097
and other expenses payable to DSC
Other expenses payable to DMC and affiliates 73,954
For the year ended November 30, 2003, DDLP earned $46,696 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.
12
Notes Delaware Decatur Equity Income Fund
TO FINANCIAL STATEMENTS (CONTINUED)
3. Investments
For the year ended November 30, 2003, the Fund made purchases of $721,056,114
and sales of $794,518,600 of investment securities other than short-term
investments.
At November 30, 2003, the cost of investments for federal income tax purposes
was $923,065,741. At November 30, 2003, net unrealized appreciation was
$102,016,630, of which $128,184,180 related to unrealized appreciation of
investments and $26,167,550 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 November 30, 2003 and 2002 was as
follows:
Year Ended
11/30/03 11/30/02
---------- -----------
Ordinary income $7,350,785 $14,308,680
As of November 30, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $1,046,884,123
Undistributed ordinary income 6,128,049
Capital loss carryforwards (126,292,964)
Unrealized appreciation of investments 102,016,630
--------------
Net assets $1,028,735,838
==============
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
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: $95,490,481 expires in 2008, $15,384,000
expires in 2010 and $15,418,483 expires in 2011.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
11/30/03 11/30/02
Shares sold:
Class A 2,284,578 1,914,834
Class B 583,138 878,134
Class C 255,741 205,962
Class R 41,125 --
Institutional Class 917,732 400,717
Shares issued upon reinvestment
of dividends and distributions:
Class A 407,803 691,156
Class B 2,350 25,255
Class C 369 3,504
Class R 4 --
Institutional Class 24,293 41,793
----------- -----------
4,517,133 4,161,355
----------- -----------
Shares repurchased:
Class A (8,338,255) (9,506,340)
Class B (1,319,726) (1,623,214)
Class C (183,907) (237,962)
Class R (819) --
Institutional Class (458,715) (1,023,411)
----------- -----------
(10,301,422) (12,390,927)
----------- -----------
Net decrease (5,784,289) (8,229,572)
=========== ===========
For the years ended November 30, 2003 and 2002, 211,325 Class B shares were
converted to 209,990 Class A shares valued at $3,118,790 and 7,535 Class B
shares were converted to 7,483 Class A shares valued at $104,424, 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 $177,300,000 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 November 30, 2003, or at any time during
the year.
13
Notes Delaware Decatur Equity Income 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 the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Fund, or at the discretion
of the lending agent, replace the loaned securities. The Fund continues to
record dividends on the securities loaned and is subject to change in fair value
of the securities loaned that may occur during the term of the loan. The Fund
has the right under the Lending Agreement to recover the securities from the
borrower on demand. The security lending agent and the borrower retain a portion
of the earnings from the collateral investments. The Fund records security
lending income net of such allocation.
At November 30, 2003, the market value of the securities on loan was
$44,796,002, for which cash collateral was received and invested in accordance
with the Lending Agreement. Such investments are presented on the Statement of
Net Assets under the caption "Securities Lending Collateral."
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 November 30, 2003, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total (C)
Distributions Distributions Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
------------- ------------- ------------- ------------
-- 100% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
(C) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
For the fiscal year ended November 30, 2003 certain dividends paid by the Fund
may be subject to a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate up
to a maximum amount of $5,409,933 to be taxed at a maximum rate of 15%. Complete
information will be computed and reported in conjunction with your 2003 Form
1099-DIV.
14
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II --
Delaware Decatur Equity Income Fund
We have audited the accompanying statement of net assets of Delaware Decatur
Equity Income Fund (the "Fund") as of November 30, 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 November 30, 2003, by correspondence with
the custodian and brokers. 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 Decatur Equity Income Fund at November 30, 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
January 2, 2004
15
Delaware Investments Family of Funds
BOARD OF TRUSTEES/DIRECTORS 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.
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
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 since 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 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 -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
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
16
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director - Andy
2005 Market Street National Gallery of Art Warhol Foundation
Philadelphia, PA (1994 - 1999)
19103 Director -
Systemax Inc.
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
Joseph H. Hastings Executive Executive Mr. Hastings has served in 101 None
2005 Market Street Vice President Vice President various executive capacities
Philadelphia, PA and and at different times at
19103 Chief Financial Chief Financial Delaware Investments.
Officer Officer since
August 21, 2003
Decenber 19, 1999
Richelle S. Maestro Senior Vice President, Chief Legal Ms. Maestro has served in 101 None
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 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.
17
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Decatur Equity Income Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Decatur Equity 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 Joseph H. Hastings Investment Manager
Chairman Executive Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA International Affiliate
Walter P. Babich Delaware International Advisers Ltd.
Board Chairman Richelle S. Maestro London, England
Citadel Construction Corporation Senior Vice President,
King of Prussia, PA Chief Legal Officer and Secretary National Distributor
Delaware Investments Family of Funds Delaware Distributors, L.P.
John H. Durham Philadelphia, PA Philadelphia, PA
Private Investor
Gwynedd Valley, PA Michael P. Bishof Shareholder Servicing, Dividend
Senior Vice President and Treasurer Disbursing and Transfer Agent
John A. Fry Delaware Investments Family of Funds Delaware Service Company, Inc.
President Philadelphia, PA 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.; and 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.
- --------------------------------------------------------------------------------
(8456) Printed in the USA
AR-001 [11/03] IVES 1/04 J9516 EXP: 01/05
Delaware
Investments(SM)
--------------------------------------
STRUCTURED PRODUCTS A member of Lincoln Financial Group(R)
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE DIVERSIFIED VALUE FUND
[Graphic Omitted:Logo] POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
- -----------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- -----------------------------------------------------------------
PERFORMANCE SUMMARY 3
- -----------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 4
Statement of Operations 7
Statements of Changes in Net Assets 8
Financial Highlights 9
Notes to Financial Statements 13
- -----------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 15
- -----------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 16
- -----------------------------------------------------------------
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) 2004 Delaware Distributors, L.P.
Portfolio Delaware Diversified Value Fund
MANAGEMENT REVIEW December 10, 2003
Fund Manager
J. Paul Dokas
Director of Research -- Quantitative
Q: How did the Fund and equity markets perform during the 12-month period?
A: After three challenging years, equity investors were eager for rising stock
prices. The groundwork for a market rebound was laid with the Federal Reserve's
policy of multiple interest rate cuts over the past three years, combined with a
fiscal stimulus package in the form of tax cuts that was passed by congress in
May 2003. Signs of economic strengthening emerged throughout the period and
contributed to renewed confidence and optimism on the part of businesses, which
began reinvesting in infrastructure and technology. Combined with ongoing
consumer spending, corporate earnings improved, leading to a strong rebound in
the stock markets.
For the fiscal year ended November 30, 2003, Delaware Diversified Value Fund
gained +15.37% (Class A shares at net asset value with distributions
reinvested), besting the +14.86% increase of the Lipper Large-Cap Value Funds
Average (an average return of 429 equity value funds). The Russell 1000 Value
Index, the fund's benchmark, returned +17.16% during the same period. The index
holds a greater exposure to somewhat smaller companies, which performed quite
well over the past 12 months and contributed to the index's measure of
outperformance.
Q: Did you alter your investment philosophy or stock selection processes during
the fiscal year?
A: No. Your Fund continues to maintain a very strong value orientation. Our
analytical models measure the securities within a broad large-cap universe by
analyzing projected future cashflows, dividends, and traditional financial
statement measures such as price-to-sales and price-to-earnings ratios. We
compare the current prices of these stocks with what we believe are their
intrinsic values, to determine which may be considered undervalued. We also
examine stocks that appear to be undergoing some dynamic change (in operations,
management, competitive environment, etc.) that may result in improved
fundamentals and the creation of added value for investors.
We remain fully committed to our process and are pleased with the strong
absolute performance delivered to our shareholders, as well as the relative
return compared with many of your Fund's large-cap value peers. We realize that
the significant movements in the markets have resulted in an environment that
will be more difficult to achieve similar absolute returns among value-oriented
stocks. However, we believe that our disciplined process allows us to capitalize
on overreactions in the markets in any environment and to create opportunities
for competitive relative returns moving forward.
Q: Can you discuss some of the stocks that contributed to the Fund's
performance?
A: Finance-related stocks, as well as those of consumer discretionary and
healthcare companies, were among the strongest performers in your Fund over the
past 12 months.
Stocks within the finance-related sector comprised almost one third of the
portfolio and returned roughly 25 percent during the 12-month period. Many
benefited from the low interest rate environment that contributed to the
domestic economy's continued strengthening. Residential mortgage lender
Countrywide Financial rose significantly during the period as a result of
increased borrowing and refinancing activity. MBNA, an independent credit card
lender, rebounded sharply after a very weak performance during the first quarter
of 2003, and we took a measure of profits after its initial rally.
Consumer discretionary stocks benefited from the economy's strengthening and
increased consumer spending. Though they represent a relatively small weighting
within your Fund, these stocks were the best performing group, gaining an
average 44 percent for the fiscal year. A strong residential housing market
helped lift the stock price of home improvement retailer Home Depot. We took
profits by liquidating Home Depot before the fiscal year-end.
Stocks in the healthcare sector represented only about five percent of the
overall portfolio, but many contributed substantial returns during the fiscal
year. Genentech, one of the country's largest biotech companies, performed well
after receiving FDA approval on a drug developed for colon cancer patients.
After its price surged, we sold the stock as it no longer met our "value"
criteria.
1
Q: Can you address some holdings that did not perform as well during the
12-month period?
A: Within the technology sector, your Fund generated a return of close to 20
percent, but trailed the related peer component of the benchmark index. The
negative relative performance was more a story of omission than of individual
stock selection. Several traditionally growth-oriented companies like Corning,
Lucent, and Novell had been beaten down over the past few years, with some
investors even questioning the longevity of their operations. Though their stock
prices were considerably cheaper than in previous years, our models did not
perceive them to be good fundamental values based on financial statement
measures and general business outlooks. We remained on the sidelines while these
stocks rose considerably during the period.
In addition to the strong performers that the Fund did not own, some of the
Fund's holdings underperformed during the 12-month period. Eastman Kodak
declined, owing to an announced restructuring strategy designed to help the
company compete in the digital photography market. While investors have taken a
less-than-favorable view about its ability to execute, our models view Kodak as
attractive based on cashflow, and we thus continue to hold a small position in
the stock.
Sonoco Products, which served the Fund well during the recent market slump as a
more defensive stock, failed to keep pace with the bounce back of its peers
during the market run-up in the second half of the Fund's fiscal year. As the
packaging and containers sector represents a small weighting of net assets, the
relative underperformance of such a stock as Sonoco did not dramatically hinder
overall Fund performance.
2
Delaware
DIVERSIFIED VALUE FUND
Fund Basics
As of November 30, 2003
- -------------------------------------------------
Fund Objectives:
The Fund seeks capital appreciation with
current income as a secondary objective.
- -------------------------------------------------
Total Fund Net Assets:
$42.28 million
- -------------------------------------------------
Number of Holdings:
178
- -------------------------------------------------
Your Fund Manager:
J. Paul Dokas leads Delaware's Structured Equity
Products Team. He earned a bachelor's degree
at Loyola College in Baltimore and an MBA degree
at the University of Maryland. Mr. Dokas is also
a CFA charterholder and a member of AIMR. Prior
to joining Delaware Investments in 1987, he was
Director of Trust Investment Management at Bell
Atlantic Corp.
- -------------------------------------------------
Nasdaq Symbols:
Class A DDVAX
Class B DDVBX
Class C DDVCX
Fund Performance
Average Annual Total Returns
Through November 30, 2003 Lifetime Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 9/15/98)
Excluding Sales Charge +5.04% +2.86% +15.37%
Including Sales Charge +3.85% +1.65% +8.69%
- --------------------------------------------------------------------------------
Class B (Est. 5/1/02)
Excluding Sales Charge -1.21% +14.50%
Including Sales Charge -3.22% +10.50%
- --------------------------------------------------------------------------------
Class C (Est. 5/1/02)
Excluding Sales Charge -1.38% +14.60%
Including Sales Charge -1.38% +13.60%
- --------------------------------------------------------------------------------
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 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 5.75% 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, five-year, and one-year
periods ended November 30, 2003 for Delaware Diversified Value Fund's
Institutional Class shares were +5.12%, +2.94%, and +15.70%, 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 Diversified
Value 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: DDVIX
Performance of a $10,000 Investment
September 15, 1998 (Fund's inception) through November 30, 2003
Delaware
Diversified
Value Fund Russell 1000
Class A Shares Value Index
9/30/1998 $9,302 $10,000
11/30/1998 $10,577 $11,277
11/30/1999 $11,957 $12,458
11/30/2000 $12,234 $12,760
11/30/2001 $11,976 $12,358
11/30/2002 $10,553 $11,171
11/30/2003 $12,176 $13,089
Chart assumes $10,000 invested on September 15, 1998 and includes the effect of
a 5.75% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to differing charges and
expenses. Chart also assumes $10,000 invested in the Russell 1000 Value 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 Russell 1000 Value
Index measures the performance of those Russell 1000 companies with lower
price-to-book ratios and lower forecasted growth values. 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. No 12b-1 fees were imposed on Class A
shares for the periods between inception to April 30, 2002, and had such charges
been imposed, returns would have been lower. You cannot invest directly in an
index. Past performance is not a guarantee of future results.
3
Statement Delaware Diversified Value Fund
OF NET ASSETS November 30, 2003
Number of Market
Shares Value
- --------------------------------------------------------------------------------
Common Stock - 99.53%
- --------------------------------------------------------------------------------
Aerospace & Defense - 2.55%
Honeywell International 10,400 $ 308,776
Northrop Grumman 2,900 268,627
Raytheon 5,700 157,947
United Technologies 4,000 342,800
------------
1,078,150
------------
Automobiles & Automotive Parts - 1.91%
General Motors 7,200 308,016
Johnson Controls 2,400 262,656
+Lear 1,400 82,796
Paccar 1,900 152,399
------------
805,867
------------
Banking - 13.93%
Associated Banc-Corp 3,900 164,190
Bank of America 16,000 1,206,880
Bank One 6,800 294,848
Charter One Financial 5,900 195,998
First Tennessee National 3,900 173,940
FleetBoston Financial 7,500 304,500
Golden West Financial 2,100 211,890
GreenPoint Financial 4,450 151,211
Mellon Financial 4,300 123,840
National City 9,100 305,305
PNC Financial Services Group 3,200 173,952
Union Planters 5,500 189,805
US Bancorp 14,300 396,253
Wachovia 16,000 732,000
Washington Mutual 11,000 503,910
Wells Fargo 13,200 756,756
------------
5,885,278
------------
Basic Industry - 0.23%
Cunnins 2,100 97,545
------------
97,545
------------
Basic Industry/Capital Goods - 1.00%
Caterpillar 2,700 205,335
Pentair 5,000 218,000
------------
423,335
------------
Buildings & Materials - 1.12%
D.R. Horton 2,500 109,250
KB Home 3,000 206,640
Masco 5,800 157,760
------------
473,650
------------
Business Services - 0.56%
+Convergys 6,900 105,846
Eastman Kodak 5,400 131,544
------------
237,390
------------
Cable, Media & Publishing - 7.10%
+Cablevision Systems 7,100 147,112
Clear Channel Communications 7,100 296,851
+Comcast - Class A 16,500 517,770
+General Motors-Hughes Electronics 9,200 152,720
+Liberty Media - Class A 11,000 121,550
Media General - Class A 1,500 100,335
+Time Warner 49,700 809,116
Viacom 12,000 471,840
Walt Disney 16,700 385,603
------------
3,002,897
------------
Number of Market
Shares Value
- --------------------------------------------------------------------------------
Common Stock (continued)
- --------------------------------------------------------------------------------
Chemicals - 2.59%
Dow Chemical 10,100 $ 379,255
duPont (E.I.) deNemours 4,700 194,862
Engelhard 5,500 164,010
Lubrizol 4,300 129,559
PPG Industries 1,900 111,093
Sigma-Aldrich 2,200 117,854
------------
1,096,633
------------
Computers & Technology - 3.75%
Factset Research Systems 2,200 91,190
Hewlett-Packard 31,000 672,390
International Business Machines 3,700 334,998
Linear Technology 3,100 133,734
Rockwell Automation 5,400 179,550
+Storage Technology 3,100 78,120
+Western Digital 7,800 97,032
------------
1,587,014
------------
Consumer Products - 2.29%
Clorox 1,800 84,456
Fortune Brands 3,000 204,960
Gillette 3,300 111,309
Kimberly-Clark 4,100 222,302
Procter & Gamble 3,600 346,464
------------
969,491
------------
Consumer Services - 0.54%
Deluxe 2,200 90,640
H&R Block 2,500 135,725
------------
226,365
------------
Consumer Services/Other - 0.89%
+Cendant 17,000 376,720
------------
376,720
------------
Electronics & Electrical Equipment - 0.68%
+Energizer Holdings 3,700 140,193
Koninklijke Philips Electronics 5,200 147,784
------------
287,977
------------
Energy - 10.16%
Amerada Hess 3,600 170,532
Anadarko Petroleum 5,100 229,143
Apache 1,900 136,420
Burlington Resources 1,900 95,380
ChevronTexaco 8,900 668,390
ConocoPhillips 6,700 380,158
Devon Energy 4,600 227,056
Exxon Mobil 49,500 1,790,415
Marathon Oil 5,400 159,894
+Noble 2,800 96,824
Occidental Petroleum 6,100 223,748
Unocal 3,700 117,586
------------
4,295,546
------------
Environmental Services - 0.54%
Waste Management 7,800 229,398
------------
229,398
------------
Farming & Agriculture - 0.26%
Monsanto 4,100 111,192
------------
111,192
------------
4
Statement Delaware Diversified Value Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
- --------------------------------------------------------------------------------
Common Stock (continued)
- --------------------------------------------------------------------------------
Finance - 12.26%
Bear Stearns 3,700 $ 268,102
Capital One Financial 1,000 59,720
Citigroup 47,600 2,239,104
Countrywide Financial 2,500 264,000
Doral Financial 1,600 80,912
Freddie Mac 2,500 136,050
Goldman Sachs Group 3,900 374,712
J.P. Morgan Chase 19,000 671,840
Lehman Brothers Holdings 2,900 209,409
MBNA 7,600 186,352
Merrill Lynch 3,900 221,325
Morgan Stanley 8,500 469,880
------------
5,181,406
------------
Food, Beverage & Tobacco - 3.87%
Adolph Coors - Class B 1,900 104,709
Albertson's 7,000 148,960
Altria Group 8,600 447,200
Archer-Daniels-Midland 11,500 164,335
Coca-Cola 1,300 60,450
Kellogg 3,900 139,503
Kraft Foods - Class A 6,300 199,521
RJ Reynolds 1,900 104,880
Sara Lee 9,300 191,115
Tyson Food - Class A 5,600 76,440
------------
1,637,113
------------
Healthcare & Pharmaceuticals - 5.18%
Aetna 3,700 238,206
+Anthem 2,800 201,936
Baxter International 5,000 139,100
Becton Dickinson 3,900 156,117
Bristol-Myers Squibb 12,100 318,835
HCA 700 29,337
Hillenbrand Industries 2,100 120,540
+Lincare Holdings 3,500 104,405
Merck & Company 12,600 511,560
Mylan Laboratories 4,400 111,408
+Tenet Healthcare 7,900 115,419
Wyeth 3,600 141,840
------------
2,188,703
------------
Industrial - 0.76%
Ingersoll-Rand 1,700 105,978
Textron 2,700 134,568
Tyco International 3,600 82,620
------------
323,166
------------
Insurance - 6.15%
Allstate 9,700 391,686
American International Group 6,800 394,060
Berkley (W.R.) 3,300 112,695
Marsh & McLennan 2,200 97,768
MBIA 2,700 156,924
MetLife 8,900 290,941
MGIC Investment 2,000 105,900
Nationwide Financial Services 3,900 127,296
Old Republic International 2,800 103,768
Principal Financial Group 8,000 264,880
Prudential Financial 7,900 308,969
Torchmark 1,000 44,100
XL Capital Limited - Class A 2,700 203,040
------------
2,602,027
------------
Number of Market
Shares Value
- --------------------------------------------------------------------------------
Common Stock (continued)
- --------------------------------------------------------------------------------
Internet Services - 0.39%
+InterActiveCorp 5,000 $ 164,250
------------
164,250
------------
Leisure, Lodging & Entertainment - 1.02%
GTECH Holdings 2,000 99,520
Harley-Davidson 3,900 183,963
Marriott International - Class A 3,200 146,656
------------
430,139
------------
Metals & Mining - 0.30%
Alcoa 3,900 127,959
------------
127,959
------------
Packaging & Containers - 0.71%
Bemis 2,000 91,000
+Sealed Air 2,200 116,094
Sonoco Products 4,400 94,160
------------
301,254
------------
Paper & Forest Products - 0.92%
Boise Cascade 4,000 118,040
International Paper 7,300 271,633
------------
389,673
------------
REITs - 1.22%
Apartment Investment & Management 2,900 98,745
Duke Realty 3,600 110,880
Equity Office Properties Trust 8,500 235,705
ProLogis 2,300 70,150
------------
515,480
------------
Retail - 3.63%
+AutoNation 6,500 114,270
Best Buy 2,200 136,400
CBRL Group 1,300 53,625
CVS 6,700 250,982
Federated Department Stores 3,100 152,179
Gap 7,700 165,550
Limited Brands 6,000 107,520
McDonald's 9,300 238,359
Nordstrom 3,900 134,550
+Yum! Brands 5,200 179,348
------------
1,532,783
------------
Technology/Software - 2.03%
Adobe Systems 4,600 190,072
+Electronics Arts 2,300 101,729
First Data 3,300 124,905
+Intuit 2,800 140,784
Microsoft 3,600 92,520
+Oracle 17,300 207,773
------------
857,783
------------
Telecommunications - 5.78%
+AT&T Wireless Services 24,400 183,000
BellSouth 16,300 424,289
Nokia ADR 7,500 134,850
SBC Communications 32,000 744,960
+Utstarcom 4,400 166,672
Verizon Communications 24,100 789,757
------------
2,443,528
------------
5
Statement Delaware Diversified Value Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
- --------------------------------------------------------------------------------
Common Stock (continued)
- --------------------------------------------------------------------------------
Textiles & Apparel - 0.39%
VF 4,000 $ 165,080
------------
165,080
------------
Transportation & Shipping - 0.79%
Delta Air Lines 5,700 71,478
Union Pacific 4,100 261,088
------------
332,566
------------
Utilities - 4.03%
American Electric Power 6,900 191,061
Dominion Resources 2,000 120,540
+Edison International 8,700 177,654
Exelon 4,100 253,462
FirstEnergy 5,500 190,575
FPL Group 2,300 146,165
Oneok 5,900 116,879
PPL 5,000 204,400
Public Service Enterprise Group 3,700 151,774
TXU 6,900 152,766
------------
1,705,276
------------
Total Common Stock (cost $37,505,250) 42,082,634
------------
Principal
Amount
- --------------------------------------------------------------------------------
Repurchase Agreements - 0.23%
- --------------------------------------------------------------------------------
With BNP Paribas 1.01% 12/1/03
(dated 11/28/03, collateralized by
$37,780 U.S. Treasury Notes 6.75%
due 5/15/05, market value $40,684) $39,875 39,875
With J. P. Morgan Securities 0.98% 12/1/03
(dated 11/28/03, collateralized by
$17,340 U.S. Treasury Notes 2.25%
due 7/31/04, market value $17,602) 17,250 17,250
With UBS Warburg 1.01% 12/1/03
(dated 11/28/03, collateralized by
$12,460 U.S. Treasury Notes 2.00%
due 11/30/04, market value $12,658,
$440 U.S. Treasury Notes 5.50%
due 2/15/08, market value $486 and
$24,920 U.S.Treasury Notes 5.625%
due 5/15/08, market value $27,541) 39,875 39,875
-----------
Total Repurchase Agreements (cost $97,000) 97,000
-----------
Total Market Value of Securities - 99.76%
(cost $37,602,250) 42,179,634
Receivables and Other Assets
Net of Liabilities-- 0.24% 100,767
-----------
Net Assets Applicable to 4,451,746
Shares Outstanding-- 100.00% $42,280,401
===========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Asset Value-- Delaware Diversified Value Fund
Class A ($717,347 / 75,662 Shares) $9.48
-----
Net Asset Value-- Delaware Diversified Value Fund
Class B ($383,145 / 40,678 Shares) $9.42
-----
Net Asset Value-- Delaware Diversified Value Fund
Class C ($132,698 / 14,086 Shares) $9.42
-----
Net Asset Value-- Delaware Diversified Value Fund
Institutional Class ($41,047,211 / 4,321,320 Shares) $9.50
-----
Components of Net Assets at November 30, 2003:
Shares of beneficial interest
(unlimited authorization - no par) $39,622,719
Undistributed net investment income 467,553
Accumulated net realized loss on investments (2,387,255)
Net unrealized appreciation of investments 4,577,384
-----------
Total net assets $42,280,401
===========
+Non-income producing security for the year ended November 30, 2003.
Summary of Abbreviations:
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
Net Asset Value and Offering Price per Share--
Delaware Diversified Value Fund
Net asset value Class A (A) $9.48
Sales charge (5.75% of offering or 6.12%
of the amount invested per share) (B) 0.58
------
Offering price $10.06
======
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon the redemption or repurchase of shares.
(B) See the current prospectus for purchases of $50,000 or more.
See accompanying notes
6
Statement Delaware Diversified Value Fund
OF OPERATIONS Year Ended November 30, 2003
Investment Income:
Dividends $ 748,236
Interest 3,615 $ 751,851
--------- ----------
Expenses:
Management fees 213,512
Distribution expense - Class A 762
Distribution expense - Class B 1,907
Distribution expense - Class C 711
Registration fees 32,084
Reports and statements to shareholders 28,073
Accounting and administration expenses 14,018
Dividend disbursing and transfer agent fees and expenses 11,009
Custodian fees 4,535
Professional fees 2,847
Trustees' fees 2,412
Other 5,692 317,562
---------
Less expenses absorbed or waived (67,608)
Less waiver of distribution expenses - Class A (127)
Less expenses paid indirectly (787)
----------
Total expenses 249,040
----------
Net Investment Income 502,811
----------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized loss on investments (267,031)
Net change in unrealized appreciation/depreciation of investments 5,422,498
----------
Net Realized and Unrealized Gain on Investments 5,155,467
----------
Net Increase in Net Assets Resulting from Operations $5,658,278
==========
See accompanying notes
7
Statements Delaware Diversified Value Fund
OF CHANGES IN NET ASSETS
Year Ended
11/30/03 11/30/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $502,811 $264,412
Net realized loss on investments (267,031) (1,754,945)
Net change in unrealized appreciation/depreciation of investments 5,422,498 (697,909)
----------- -----------
Net increase (decrease) in net assets resulting from operations 5,658,278 (2,188,442)
----------- -----------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (664) (169)
Class B (496) --
Class C (60) --
Institutional Class (280,307) (106,073)
----------- -----------
(281,527) (106,242)
----------- -----------
Capital Share Transactions:
Proceeds from shares sold:
Class A 642,162 22,304
Class B 366,291 12,071
Class C 122,624 27,103
Institutional Class 19,558,554 11,505,844
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 590 169
Class B 400 --
Institutional Class 280,307 106,073
----------- -----------
20,970,928 11,673,564
----------- -----------
Cost of shares repurchased:
Class A (20,527) (15)
Class B (34,406) --
Class C (30,321) --
Institutional Class (7,339,770) (23,912)
----------- -----------
(7,425,024) (23,927)
----------- -----------
Increase in net assets derived from capital share transactions 13,545,904 11,649,637
----------- -----------
Net Increase in Net Assets 18,922,655 9,354,953
Net Assets:
Beginning of year 23,357,746 14,002,793
----------- -----------
End of year $42,280,401 $23,357,746
=========== ===========
8
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Diversified Value Fund Class A
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00(1)
Net asset value, beginning of period $8.300 $9.490 $10.150 $10.690
Income (loss) from investment operations:
Net investment income(2) 0.110 0.113 0.116 0.125
Net realized and unrealized gain (loss) on investments 1.151 (1.231) (0.309) 0.092
------ ------ ------- -------
Total from investment operations 1.261 (1.118) (0.193) 0.217
------ ------ ------- -------
Less dividends and distributions from:
Net investment income (0.081) (0.072) (0.103) (0.070)
Net realized gain on investments -- -- (0.147) (0.687)
In excess of net realized gain on investments -- -- (0.217) --
------ ------ ------- -------
Total dividends and distributions (0.081) (0.072) (0.467) (0.757)
------ ------ ------- -------
Net asset value, end of period $9.480 $8.300 $9.490 $10.150
====== ====== ====== =======
Total return(3) 15.37% (11.88%) (2.11%) 2.32%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $717 $42 $22 $23
Ratio of expenses to average net assets 1.00% 1.03% 0.75% 0.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.26% 1.60% 1.08% 1.10%
Ratio of net investment income to average net assets 1.29% 1.27% 1.18% 1.23%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.03% 0.70% 0.85% 0.88%
Portfolio turnover 101% 61% 101% 130%
(1) Shares of the Delaware Diversified Value Fund Class A were initially offered
on September 15, 1998. Prior to the fiscal year ended November 30, 2000,
there was a balance of 1 share representing the initial seed purchase.
Financial Highlights for the period ended November 30, 1999 is not presented
because the data is not believed to be meaningful.
(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. Performance would have been lower had the expense limitation
not been in effect.
See accompanying notes
9
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Diversified Value Fund Class B
- ------------------------------------------------------------------------------------------------------------------------------------
5/1/02(1)
Year Ended to
11/30/03 11/30/02
Net asset value, beginning of period $8.310 $9.700
Income (loss) from investment operations:
Net investment income(2) 0.044 0.030
Net realized and unrealized gain (loss) on investments 1.147 (1.420)
------ ------
Total from investment operations 1.191 (1.390)
------ ------
Less dividends and distributions from:
Net investment income (0.081) --
------ ------
Total dividends and distributions (0.081) --
------ ------
Net asset value, end of period $9.420 $8.310
====== ======
Total return(3) 14.50% (14.33%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $383 $13
Ratio of expenses to average net assets 1.75% 1.93%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.96% 2.62%
Ratio of net investment income to average net assets 0.54% 0.59%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly 0.33% (0.10%)
Portfolio turnover 101% 61%
(1) Date of commencement of operations; ratios have been annualized and total
return has not been annualized. The date of commencement of operations was
changed from April 30, 2002 to May 1, 2002. Prior to May 1, 2002, there was
a balance of 1 share representing the initial seed purchase. Accordingly,
the initial net asset value per share was changed from $9.48 to $9.70 and
the total return was changed from (12.66%) to (14.33%).
(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
10
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Diversified Value Fund Class C
- ------------------------------------------------------------------------------------------------------------------------------------
5/1/02(1)
Year Ended to
11/30/03 11/30/02
Net asset value, beginning of period $8.280 $9.700
Income (loss) from investment operations:
Net investment income(2) 0.044 0.032
Net realized and unrealized gain (loss) on investments 1.155 (1.452)
------ ------
Total from investment operations 1.199 (1.420)
------ ------
Less dividends and distributions from:
Net investment income (0.059) --
------ ------
Total dividends and distributions (0.059) --
------ ------
Net asset value, end of period $9.420 $8.280
====== ======
Total return(3) 14.60% (14.64%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $133 $27
Ratio of expenses to average net assets 1.75% 1.93%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.96% 2.62%
Ratio of net investment income to average net assets 0.54% 0.59%
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly 0.33% (0.10%)
Portfolio turnover 101% 61%
(1) Date of commencement of operations; ratios have been annualized and total
return has not been annualized. The date of commencement of operations was
changed from April 30, 2002 to May 1, 2002. Prior to May 1, 2002, there was
a balance of 1 share representing the initial seed purchase. Accordingly,
the initial net asset value per share was changed from $9.48 to $9.70 and
the total return was changed from (12.66%) to (14.64%).
(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
11
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Diversified Value Fund Institutional Class
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $8.310 $9.490 $10.150 $10.690 $9.540
Income (loss) from investment operations:
Net investment income(1) 0.132 0.126 0.116 0.125 0.129
Net realized and unrealized gain (loss) on investments 1.155 (1.234) (0.309) 0.092 1.108
------ ------ ------ ------- -------
Total from investment operations 1.287 (1.108) (0.193) 0.217 1.237
------ ------ ------ ------- -------
Less dividends and distributions from:
Net investment income (0.097) (0.072) (0.103) (0.070) (0.037)
Net realized gain on investments -- -- (0.147) (0.687) (0.050)
In excess of net realized gain on investments -- -- (0.217) -- --
------ ------ ------ ------- -------
Total dividends and distributions (0.097) (0.072) (0.467) (0.757) (0.087)
------ ------ ------ ------- -------
Net asset value, end of period $9.500 $8.310 $9.490 $10.150 $10.690
====== ====== ====== ======= =======
Total return(2) 15.70% (11.77%) (2.11%) 2.32% 13.05%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $41,047 $23,276 $13,980 $15,327 $5,143
Ratio of expenses to average net assets 0.75% 0.87% 0.75% 0.75% 0.75%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 0.96% 1.30% 0.78% 0.80% 1.24%
Ratio of net investment income to average net assets 1.54% 1.43% 1.18% 1.23% 1.25%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.33% 1.00% 1.15% 1.18% 0.76%
Portfolio turnover 101% 61% 101% 130% 111%
(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.
See accompanying notes
12
Notes Delaware Diversified Value Fund
TO FINANCIAL STATEMENTS November 30, 2003
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware
statutory trust and offers four series: Delaware Decatur Equity Income Fund,
Delaware Diversified Value Fund, Delaware Growth and Income Fund and Delaware
Social Awareness Fund. These financial statements and related notes pertain to
Delaware Diversified Value 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 5.75%. 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.
Class R shares have not commenced operations.
The investment objective of the Fund is to achieve capital appreciation with
current income as a secondary objective.
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. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will normally be used. 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, after market 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.
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. The Fund declares and pays dividends from net
investment income and distributions from net realized gain on investments, if
any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. The amount of these expenses was approximately $787 for the year ended
November 30, 2003. In addition, the Fund receives earnings credits from its
custodian when positive cash balances are maintained, which are used to offset
custody fees. There were no earnings credits for the year ended November 30,
2003. 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 Agreement and Other Transactions with
Affiliates
In accordance with the terms of the investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the Fund,
0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50% on
average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Fund to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.75% of average daily net assets of the Fund through January 31, 2005.
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. DDLP has contracted to
waive its fees through January 31, 2005 in order to prevent distribution fees of
Class A shares from exceeding 0.25% of average daily net assets. Institutional
Class shares pay no distribution and service expenses.
13
Notes Delaware Diversified Value Fund
TO FINANCIAL STATEMENTS (CONTINUED)
2. Investment Management, Administration Agreement and Other Transactions with
Affiliates (continued)
At November 30, 2003, the Fund had liabilities payable to
affiliates as follows:
Investment management fee payable to DMC $22,174
Dividend disbursing, transfer agent fees,
accounting and other expenses payable to DSC 1,709
Other expenses payable to DMC and affiliates* 7,034
*DMC, as part of its administrative services, pays Fund operating expenses on
behalf of the Fund and is reimbursed on a periodic basis. Such expenses include
items such as printing of shareholder reports, professional fees, custodian
fees and trustees fees.
For the year ended November 30, 2003, DDLP earned $997 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 November 30, 2003, the Fund made purchases of $46,561,022 and
sales of $32,876,331 of investment securities other than short-term investments.
At November 30, 2003, the cost of investments for federal income tax purposes
was $38,439,165. At November 30, 2003, the net unrealized appreciation was
$3,740,469 of which $4,808,292 related to unrealized appreciation of investments
and $1,067,823 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 November 30, 2003 and 2002 was as
follows:
2003 2002
-------- --------
Ordinary income $281,527 $106,242
As of November 30, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $39,622,719
Undistributed ordinary income 467,553
Capital loss carryforwards (1,550,340)
Unrealized appreciation of investments 3,740,469
-----------
Net assets $42,280,401
===========
The difference between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
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:$1,550,340 expires in 2010.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
11/30/03 11/30/02
Shares sold:
Class A 73,086 2,649
Class B 42,941 1,518
Class C 14,392 3,282
Institutional Class 2,338,783 1,318,970
Shares issued upon reinvestment of dividends and distributions:
Class A 73 18
Class B 50 --
Institutional Class 34,907 11,166
--------- ---------
2,504,232 1,337,603
--------- ---------
Shares repurchased:
Class A (2,515) (2)
Class B (3,831) --
Class C (3,588) --
Institutional Class (852,729) (3,013)
--------- ---------
(862,663) (3,015)
--------- ---------
Net increase 1,641,569 1,334,588
========= =========
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participates in a $177,300,000 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 at November 30, 2003, or at any time during the
year.
7. 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 November 30, 2003, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gain Income Total (C)
Distributions Distribution Distributions Qualifying(1)
(Tax Basis) (Tax Basis) (Tax Basis) Dividends
------------- ------------ ------------- -------------
-- 100% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
(C) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
14
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II - Delaware Diversified
Value Fund
We have audited the accompanying statement of net assets of Delaware Diversified
Value Fund (the "Fund") as of November 30, 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 November 30, 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 Diversified Value Fund at November 30, 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
January 2, 2004
15
Delaware Investments Family of Funds
BOARD OF TRUSTEES/DIRECTORS 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.
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
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 since 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 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 -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
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
16
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director - Andy
2005 Market Street National Gallery of Art Warhol Foundation
Philadelphia, PA (1994 - 1999)
19103 Director -
Systemax Inc.
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
Joseph H. Hastings Executive Executive Mr. Hastings has served in 101 None
2005 Market Street Vice President Vice President various executive capacities
Philadelphia, PA and and at different times at
19103 Chief Financial Chief Financial Delaware Investments.
Officer Officer since
December 19, 1949 August 21, 2003
Richelle S. Maestro Senior Vice President, Chief Legal Ms. Maestro has served in 101 None
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 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.
17
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Diversified Value Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Diversified Value 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 Joseph H. Hastings Investment Manager
Chairman Executive Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA International Affiliate
Walter P. Babich Delaware International Advisers Ltd.
Board Chairman Richelle S. Maestro London, England
Citadel Construction Corporation Senior Vice President,
King of Prussia, PA Chief Legal Officer and Secretary National Distributor
Delaware Investments Family of Funds Delaware Distributors, L.P.
John H. Durham Philadelphia, PA Philadelphia, PA
Private Investor
Gwynedd Valley, PA Michael P. Bishof Shareholder Servicing, Dividend
Senior Vice President and Treasurer Disbursing and Transfer Agent
John A. Fry Delaware Investments Family of Funds Delaware Service Company, Inc.
President Philadelphia, PA 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.; and 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.
-----------------------------------------------------------------------------------
(8465) Printed in the USA
AR-456 [11/03] IVES 1/04 J9504 EXP: 1/05
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
VALUE-EQUITY
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE GROWTH AND INCOME FUND
[LOGO]
POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 2
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FINANCIAL STATEMENTS:
Statement of Net Assets 3
Statement of Operations 5
Statements of Changes in Net Assets 6
Financial Highlights 7
Notes to Financial Statements 12
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REPORT OF INDEPENDENT AUDITORS 15
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BOARD OF TRUSTEES/OFFICERS 16
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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) 2004 Delaware Distributors, L.P.
Portfolio Delaware Growth and Income Fund
MANAGEMENT REVIEW December 10, 2003
Fund Managers
John B. Fields
Senior Portfolio Manager
Robert L. Arnold
Senior Portfolio Manager
Q: How did the Fund perform during its fiscal year ended November 30, 2003?
A: For the 12 months ended November 30, 2003, Delaware Growth and Income Fund
gained +13.24% (Class A shares at net asset value with distributions
reinvested). In comparison, the Fund's peer group, as measured by the Lipper
Large-Cap Value Funds Average, returned +14.86%. The Fund's benchmark, the S&P
500 Index, rose +15.08%.
Q: What influenced the stock market's performance during the fiscal year?
A: In early 2003, the broad domestic stock market generally moved lower until
March, amid uncertainty over the impending conflict with Iraq and lack of
investor confidence in the economic outlook. Once the end of major combat seemed
assured, investor optimism rose, and the stock market responded
enthusiastically. The Federal Reserve's maintenance of low interest rates and
Congress's approval in May 2003 of a huge stimulus package, including reductions
in dividend income tax rates, helped stimulate the economy and set the stage for
a strong market rebound that spanned to the fiscal year's conclusion.
Q: What were the main strategies used during the fiscal year and what impact did
they have on Fund performance?
A: A year ago, we positioned the Fund for forthcoming economic and stock market
recovery. However, we believed the market would experience volatility for a
time, the likes of which can create attractive buying opportunities. In the
financial services sector, we were able to acquire well-run companies at
appealing prices, in our opinion. We likewise found compelling valuations among
a number of healthcare companies. Our conservative style of stock investing
meant we would be less heavily weighted versus our benchmarks in technology
stocks. As they experienced a significant runup for much of 2003, this decision
unfortunately detracted from the Fund's return potential.
Q: Which stocks performed well during the fiscal year?
A: Most of our top selections were in financial services stocks. Our top
contributor to performance was MBNA, which we bought early in the fiscal year at
an attractive price, in our opinion. Morgan Stanley and J.P. Morgan Chase were
our second and third largest contributors to performance. Oddly, J.P. Morgan
Chase had been one of the Fund's worst performers during its prior fiscal year.
We believed the bank's stock had been oversold in the aftermath of Enron. We not
only held onto our original position, but added to it over the fiscal year.
Outside of financial stocks, we experienced sound performance with Caterpillar,
which responded to the improving economy. We acquired Boeing stock at what we
thought was a distressed price, and its turnaround provided the Fund with a
solid gain. We also benefited from strong stock selections in electric utilities
during the 12-month period. This sector particularly benefited from the
newly-enacted reduction in dividend tax rates, since utilities stocks typically
pay above-average dividends.
Q: What holdings detracted from performance for the 12-month period?
A: We were disappointed with the performance of Newell Rubbermaid. We believe
its senior management poorly effected the company's restructuring, in which they
failed to meet their own projections for increased revenues and the liquidation
of a number of business divisions. Fund performance was also inhibited with the
timing of two stock liquidations - McDonald's and Sears, Roebuck. In both cases,
we sold the stocks based on deteriorating company fundamentals, after which they
rebounded due to specific management initiatives. McDonald's benefited from a
new advertising campaign that appeared capable of lifting sales while Sears
announced the sale of its credit card unit.
1
Delaware
GROWTH AND INCOME FUND
Fund Basics Fund Performance
As of November 30, 2003 Average Annual Total Returns
- ---------------------------------------- Through November 30, 2003 Lifetime 10 Years Five Years One Year
Fund Objective: ---------------------------------------------------------------------------------------
The Fund seeks capital appreciation with Class A (Est. 8/27/86)
current income as a secondary objective. Excluding Sales Charge +9.20% +7.61% -2.60% +13.24%
- ---------------------------------------- Including Sales Charge +8.83% +6.97% -3.75% +6.69%
Total Fund Net Assets: ---------------------------------------------------------------------------------------
$ 475.94 million Class B (Est. 9/6/94)
- ---------------------------------------- Excluding Sales Charge +6.88% -3.30% +12.43%
Number of Holdings: Including Sales Charge +6.88% -3.66% +8.43%
77 ---------------------------------------------------------------------------------------
- ---------------------------------------- Class C (Est. 11/29/95)
Fund Start Date: Excluding Sales Charge +4.87% -3.29% +12.54%
August 27, 1986 Including Sales Charge +4.87% -3.29% +11.54%
- ---------------------------------------- ---------------------------------------------------------------------------------------
Your Fund Managers:
John B. Fields has 31 years' experience Returns reflect the reinvestment of all distributions and any applicable sales
in investment management. He holds a charges as noted below. Returns and share values will fluctuate so that shares, when
bachelor's degree and an MBA from Ohio redeemed, may be worth more or less than their original cost. Performance for Class B
State University. Before joining and C shares, excluding sales charges, assumes either that contingent deferred sales
Delaware Investments in 1992, he was charges did not apply or the investment was not redeemed. Past performance is not a
Director of Domestic Equity Risk guarantee of future results.
Management at DuPont. Mr. Fields is a
CFA charterholder. 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 5.75% and have an annual distribution and
Robert L. Arnold holds a bachelor's service fee of 0.30%.
degree in economics from Carnegie Mellon
University and an MBA from the Class B shares are sold with a contingent deferred sales charge that declines from 4%
University of Chicago. Before joining to zero depending upon the period of time the shares are held. Class B shares will
Delaware Investments in 1992, he was automatically convert to Class A shares on a quarterly basis approximately eight
involved in strategic analysis for the years after purchase. They are also subject to an annual distribution and service fee
Office of the Chairman of Chemical of 1%.
Banking Corporation.
- ---------------------------------------- Class C shares are sold with a contingent deferred sales charge of 1%, if redeemed
Nasdaq Symbols: during the first 12 months. They are also subject to an annual distribution and
Class A DEDTX service fee of 1%.
Class B DEOBX
Class C DTRCX The cumulative total return for the lifetime period ended November 30, 2003 for
Delaware Growth and Income Fund's Class R shares was +7.46%. Class R shares were
first made available on June 2, 2003 and are available for certain retirement plan
products. They are also sold without a sales charges and have an annual distribution
and service fee of 0.60%.
The average annual total returns for the lifetime (since 8/27/86), 10-year,
five-year, and one-year periods ended November 30, 2003 for Delaware Growth and
Income Fund's Institutional Class shares were +9.39%, +7.92%, -2.31 %, and 13.58%,
respectively. The Institutional Class shares were first made available on July 26,
1993 and are available without sales or asset-based distribution charges only to
certain eligible institutional accounts. Institutional Class performance prior to
July 26, 1993 is based on Class A performance 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.
The SEC 30-day yields for Class A, B, C, R, and Institutional Class shares were,
0.86%, 0.24%, 0.24%, 0.61%, and 1.20%, respectively, as of November 30, 2003.
Nasdaq Institutional Class symbol: DERIX
Nasdaq Class R symbol: DEGRX
Performance of a $10,000 Investment
November 30, 1993 through November 30, 2003
- -- S&P 500 Index
- -- Delaware Growth and Income Fund -- Class A Shares
Delaware Growth
and Income Fund --
Class A Share S&P 500 Index
Nov-93 $ 9,425 $10,000
Nov-94 $ 9,419 $10,105
Nov-95 $12,686 $13,841
Nov-96 $15,843 $17,698
Nov-97 $19,856 $22,744
Nov-98 $22,378 $28,125
Nov-99 $21,932 $34,005
Nov-00 $21,845 $32,570
Nov-01 $21,346 $28,589
Nov-02 $17,320 $23,868
Nov-03 $19,613 $27,471
Chart assumes $10,000 invested on November 30, 1993 and includes the effect of a
5.75% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to differing charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The S&P 500 Index is a composite of mostly large-capitalization U.S.
companies. 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.
2
Statement Delaware Growth and Income Fund
OF NET ASSETS November 30, 2003
Number of Market
Shares Value
Common Stock - 97.98%
Aerospace & Defense - 2.15%
Boeing 87,700 $ 3,366,803
Honeywell International 231,800 6,882,142
------------
10,248,945
------------
Automobiles & Automotive Parts - 0.98%
General Motors 108,700 4,650,186
------------
4,650,186
------------
Banking & Finance - 23.65%
American Express 168,700 7,711,277
Bank of America 103,448 7,803,083
Charter One Financial 226,400 7,521,008
Citigroup 129,400 6,086,976
*Comerica 123,800 6,456,170
FleetBoston Financial 89,700 3,641,820
Goldman Sachs Group 110,100 10,578,408
J.P. Morgan Chase 335,250 11,854,440
KeyCorp 253,900 7,055,881
MBNA 200,000 4,904,000
Mellon Financial 189,900 5,469,120
Morgan Stanley 232,600 12,858,127
U.S. Bancorp 386,400 10,707,144
Wells Fargo 172,200 9,872,226
------------
112,519,680
------------
Cable, Media & Publishing - 1.82%
Knight-Ridder 51,400 3,823,132
+Westwood One 158,700 4,818,132
------------
8,641,264
------------
Chemicals - 2.86%
Air Products & Chemicals 76,500 3,667,410
Dow Chemical 134,900 5,065,495
duPont (E.I.) deNemours 117,300 4,863,258
------------
13,596,163
------------
Computers & Technology - 6.92%
+Cisco Systems 289,200 6,553,272
First Data 144,300 5,461,755
Hewlett-Packard 117,300 2,544,237
+Intuit 143,500 7,215,180
Microsoft 161,100 4,140,270
+Oracle 584,200 7,016,242
------------
32,930,956
------------
Consumer Products - 7.37%
Black & Decker 142,200 6,596,658
Clorox 176,000 8,257,920
Gillette 127,100 4,287,083
Kimberly-Clark 72,900 3,952,638
Newell Rubbermaid 208,700 4,772,969
Procter & Gamble 75,100 7,227,624
------------
35,094,892
------------
Electronics & Electrical Equipment - 5.49%
Eaton 40,100 4,129,899
Emerson Electric 90,000 5,493,600
General Electric 282,000 8,084,940
Intel 252,300 8,434,389
------------
26,142,828
------------
Number of Market
Shares Value
Common Stock (continued)
Energy - 6.94%
ChevronTexaco 49,400 $ 3,709,940
Exxon Mobil 339,554 12,281,668
Kerr-McGee 164,700 6,915,753
+Noble 104,500 3,613,610
Occidental Petroleum 177,000 6,492,360
-----------
33,013,331
-----------
Food, Beverage & Tobacco - 4.71%
Anheuser-Busch 117,600 6,094,032
General Mills 95,600 4,302,956
Kraft Foods-- Class A 107,200 3,395,024
PepsiCo 179,700 8,647,164
-----------
22,439,176
-----------
Healthcare & Pharmaceuticals - 9.76%
Abbott Laboratories 189,600 8,380,320
Baxter International 258,900 7,202,598
Bristol-Myers Squibb 192,400 5,069,740
*HCA 154,700 6,483,477
+*Laboratory Corporation of America Holdings 114,700 4,142,964
Pfizer 212,020 7,113,271
Wyeth 202,800 7,990,320
-----------
46,382,690
-----------
Industrial Machinery - 0.74%
Caterpillar 46,600 3,543,930
-----------
3,543,930
-----------
Insurance - 9.10%
Allstate 13,600 549,168
Chubb 106,900 6,996,605
Cigna 126,900 6,808,185
Marsh & McLennan 192,900 8,572,476
MGIC Investment 64,200 3,399,390
Prudential Financial 171,700 6,715,187
XL Capital Ltd.-- Class A 136,500 10,264,800
-----------
43,305,811
-----------
Leisure, Lodging & Entertainment - 0.70%
Starwood Hotels & Resorts Worldwide 97,000 3,343,590
-----------
3,343,590
-----------
Metals & Mining - 2.08%
Alcoa 166,100 5,449,741
*Rio Tinto ADR 45,400 4,460,550
-----------
9,910,291
-----------
Paper & Forest Products - 1.21%
International Paper 154,590 5,752,294
-----------
5,752,294
-----------
Retail - 3.21%
Home Depot 181,100 6,657,236
Limited Brands 218,300 3,911,936
TJX 209,300 4,728,087
-----------
15,297,259
-----------
Telecommunications - 4.31%
Alltel 92,600 4,204,966
BCE 215,200 4,814,024
SBC Communications 257,911 6,004,169
Verizon Communications 167,972 5,504,442
-----------
20,527,601
-----------
3
Statement Delaware Growth and Income Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
Common Stock (continued)
Textiles, Apparel & Furniture - 0.92%
Nike 65,400 $ 4,398,150
------------
4,398,150
------------
Utilities - 3.06%
Dominion Resources 78,500 4,731,195
FirstEnergy 138,100 4,785,165
FPL Group 79,600 5,058,580
------------
14,574,940
------------
Total Common Stock (cost $421,044,345) 466,313,977
------------
Principal
Amount
Repurchase Agreements - 1.54%
With BNP Paribas 1.01% 12/1/03
(dated 11/28/03, collateralized by
$2,852,000 U.S. Treasury Notes 6.750%
due 5/15/05, market value $3,071,460) $ 3,010,000 3,010,000
With J. P. Morgan Securities 0.98% 12/1/03
(dated 11/28/03, collateralized by
$1,309,000 U.S. Treasury Notes 2.250%
due 7/31/04, market value $1,328,860) 1,303,000 1,303,000
With UBS Warburg 1.01% 12/1/03
(dated 11/28/03, collateralized by
$941,000 U.S. Treasury Notes 2.000%
due 11/30/04, market value $955,583,
$33,000 U.S. Treasury Notes 5.500%
due 2/15/08, market value $36,723 and
$1,881,000 U.S. Treasury Notes 5.625%
due 5/15/08, market value $2,079,185) 3,010,000 3,010,000
------------
Total Repurchase Agreements (cost $7,323,000) 7,323,000
------------
Total Market Value of Securities Before Securities
Lending Collateral - 99.52% (cost $428,367,345) 473,636,977
------------
Securities Lending Collateral** - 2.41%
Short-Term Investments
ABN AMRO Bank Chicago 1.06% 6/07/04 436,545 436,522
ABN AMRO Bank Tokyo 1.10% 1/13/04 124,730 124,730
Allied Irish Dublin 1.12% 1/20/04 498,912 498,921
Credit Suisse First Boston 1.60% 12/13/04 498,921 498,921
Deutsche Bank Financial 1.071% 1/16/04 499,004 499,098
FHLMC 1.12% 1/15/04 281,722 282,451
FNMA 1.035% 1/29/04 3,118,378 3,118,219
General Electric Capital 1.13% 10/04/04 187,259 187,578
Goldman Sachs Group LP 1.193% 12/15/03 436,552 436,556
HBOS Treasury Services PLC 1.09% 12/12/03 498,917 498,921
Keybank NA 1.15% 1/26/04 249,502 249,586
Marsh & McLennan 1.291% 6/15/04 320,836 329,969
Merrill Lynch Mortgage Capital
1.163% 12/08/03 498,921 498,921
Morgan Stanley Dean Witter
1.10% 12/01/03 2,087,130 2,087,130
1.22% 12/28/04 124,528 124,730
1.30% 3/19/04 311,625 311,826
Swiss Re Financial 1.103% 1/15/04 311,383 310,959
Wachovia Bank NA 1.127% 11/15/04 498,931 499,366
Wilmington Trust 1.11% 1/22/04 498,911 498,921
------------
Total Securities Lending Collateral
(cost $11,493,325) 11,493,325
------------
Total Market Value of Securities - 101.93%
(cost $439,860,670) $485,130,302++
Obligation to Return Securities Lending
Collateral - (2.41%)** (11,493,325)
Receivables and Other Assets
Net of Liabilities - 0.48% 2,302,311
------------
Net Assets Applicable to 35,196,385
Shares Outstanding - 100.00% $475,939,288
============
Net Asset Value - Delaware Growth and Income Fund
Class A ($331,903,645 / 24,483,236 Shares) $13.56
------
Net Asset Value - Delaware Growth and Income Fund
Class B ($83,522,640 / 6,236,175 Shares) $13.39
------
Net Asset Value - Delaware Growth and Income Fund
Class C ($19,654,609 / 1,470,557 Shares) $13.37
------
Net Asset Value - Delaware Growth and Income Fund
Class R ($3,046 / 225 Shares) $13.54
------
Net Asset Value - Delaware Growth and Income Fund
Institutional Class ($40,855,348 / 3,006,192 Shares) $13.59
------
Components of Net Assets at November 30, 2003:
Shares of beneficial interest
(unlimited authorization-- no par) $540,762,673
Undistributed net investment income 3,322,652
Accumulated net realized loss on investments (113,415,669)
Net unrealized appreciation of investments 45,269,632
------------
Total net assets $475,939,288
------------
*Fully or partially on loan.
**See Note 7 in "Notes to Financial Statements."
+Non-income producing security for the year ended November 30, 2003.
++Includes $11,268,258 of securities loaned.
Summary of Abbreviations:
ADR - American Depositary Receipts
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
Net Asset Value and Offering Price per Share --
Delaware Growth and Income Fund
Net asset value Class A (A) $13.56
Sales charge (5.75% of offering price,
or 6.12% of amount invested per share) (B) 0.83
------
Offering price $14.39
------
(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 $50,000 or more.
See accompanying notes
4
Statement Delaware Growth and Income Fund
OF OPERATIONS Year Ended November 30, 2003
Investment Income:
Dividends $11,190,671
Interest 81,071
Security lending income 27,072 $11,298,814
----------- -----------
Expenses:
Management fees 3,002,071
Distribution expenses-- Class A 957,962
Distribution expenses-- Class B 812,802
Distribution expenses-- Class C 183,736
Distribution expenses-- Class R 1
Dividend disbursing and transfer agent
fees and expenses 1,798,798
Reports and statements to shareholders 231,251
Accounting and administration expenses 198,712
Registration fees 48,200
Professional fees 40,532
Trustees' fees 20,559
Custodian fees 13,964
Other 128,678 7,437,266
-----------
Less expenses paid indirectly (11,726)
-----------
Total expenses 7,425,540
-----------
Net Investment Income 3,873,274
-----------
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currencies:
Net realized gain (loss) on:
Investments (8,851,519)
Foreign currencies 784
-----------
Net realized loss (8,850,735)
Net change in unrealized appreciation/depreciation
of investments 60,852,772
-----------
Net Realized and Unrealized Gain on Investments and
Foreign Currencies 52,002,037
-----------
Net Increase in Net Assets Resulting from Operations $55,875,311
===========
See accompanying notes
5
Statements Delaware Growth and Income Fund
OF CHANGES IN NET ASSETS
Year Ended
11/30/03 11/30/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 3,873,274 $ 2,220,698
Net realized loss on investments and foreign currencies (8,850,735) (29,306,106)
Net change in unrealized appreciation/depreciation of investments 60,852,772 (101,044,899)
------------ ------------
Net increase (decrease) in net assets resulting from operations 55,875,311 (128,130,307)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income:
Class A (2,292,140) (1,870,784)
Institutional Class (414,962) (345,204)
------------ ------------
(2,707,102) (2,215,988)
------------ ------------
Capital Share Transactions:
Proceeds from shares sold:
Class A 19,749,746 28,930,298
Class B 7,016,858 9,269,882
Class C 2,876,998 4,638,930
Class R 3,013 --
Institutional Class 7,856,375 9,136,337
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 2,126,306 1,731,179
Institutional Class 414,960 345,204
------------ ------------
40,044,256 54,051,830
------------ ------------
Cost of shares repurchased:
Class A (66,043,646) (94,095,839)
Class B (20,712,270) (31,859,254)
Class C (4,500,841) (7,766,315)
Institutional Class (14,400,115) (26,845,202)
------------ ------------
(105,656,872) (160,566,610)
------------ ------------
Decrease in net assets derived from capital share transactions (65,612,616) (106,514,780)
------------ ------------
Net Decrease in Net Assets (12,444,407) (236,861,075)
Net Assets:
Beginning of year 488,383,695 725,244,770
------------ ------------
End of year $475,939,288 $488,383,695
============ ============
See accompanying notes
6
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Growth and Income Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $12.060 $14.920 $15.290 $16.350 $19.120
Income (loss) from investment operations:
Net investment income(1) 0.118 0.068 0.062 0.151 0.221
Net realized and unrealized gain (loss) on investments 1.464 (2.871) (0.421) (0.230) (0.556)
------- ------- ------- ------- -------
Total from investment operations 1.582 (2.803) (0.359) (0.079) (0.335)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.082) (0.057) (0.011) (0.213) (0.235)
Net realized gain on investments -- -- -- (0.768) (2.200)
------- ------- ------- ------- -------
Total dividends and distributions (0.082) (0.057) (0.011) (0.981) (2.435)
------- ------- ------- ------- -------
Net asset value, end of period $13.560 $12.060 $14.920 $15.290 $16.350
======= ======= ======= ======= =======
Total return(2) 13.24% (18.86%) (2.29%) (0.39%) (2.00%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $331,904 $339,318 $493,459 $577,400 $871,409
Ratio of expenses to average net assets 1.48% 1.40% 1.30% 1.35% 1.20%
Ratio of net investment income to average net assets 0.97% 0.51% 0.40% 1.02% 1.28%
Portfolio turnover 62% 83% 98% 87% 94%
(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.
See accompanying notes
7
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Growth and Income Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $11.910 $14.790 $15.250 $16.300 $19.090
Income (loss) from investment operations:
Net investment income (loss)(1) 0.033 (0.025) (0.045) 0.047 0.100
Net realized and unrealized gain (loss) on investments 1.447 (2.855) (0.415) (0.224) (0.560)
------- ------- ------- ------- -------
Total from investment operations 1.480 (2.880) (0.460) (0.177) (0.460)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income -- -- -- (0.105) (0.130)
Net realized gain on investments -- -- -- (0.768) (2.200)
------- ------- ------- ------- -------
Total dividends and distributions -- -- -- (0.873) (2.330)
------- ------- ------- ------- -------
Net asset value, end of period $13.390 $11.910 $14.790 $15.250 $16.300
======= ======= ======= ======= =======
Total return(2) 12.43% (19.47%) (2.95%) (1.05%) (2.72%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $83,523 $88,109 $135,565 $141,911 $213,533
Ratio of expenses to average net assets 2.18% 2.10% 2.00% 2.05% 1.90%
Ratio of net investment income (loss) to average net assets 0.27% (0.19%) (0.30%) 0.32% 0.58%
Portfolio turnover 62% 83% 98% 87% 94%
(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.
See accompanying notes
8
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Growth and Income Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $11.880 $14.760 $15.210 $16.270 $19.050
Income (loss) from investment operations:
Net investment income (loss)(1) 0.033 (0.025) (0.045) 0.047 0.100
Net realized and unrealized gain (loss) on investments 1.457 (2.855) (0.405) (0.234) (0.550)
------- ------- ------- ------- -------
Total from investment operations 1.490 (2.880) (0.450) (0.187) (0.450)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income -- -- -- (0.105) (0.130)
Net realized gain on investments -- -- -- (0.768) (2.200)
------- ------- ------- ------- -------
Total dividends and distributions -- -- -- (0.873) (2.330)
------- ------- ------- ------- -------
Net asset value, end of period $13.370 $11.880 $14.760 $15.210 $16.270
======= ======= ======= ======= =======
Total return(2) 12.54% (19.51%) (2.96%) (1.05%) (2.71%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $19,655 $19,132 $27,576 $28,350 $45,026
Ratio of expenses to average net assets 2.18% 2.10% 2.00% 2.05% 1.90%
Ratio of net investment income (loss) to average net assets 0.27% (0.19%) (0.30%) 0.32% 0.58%
Portfolio turnover 62% 83% 98% 87% 94%
(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.
See accompanying notes
9
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Growth and Income Fund Class R
- ---------------------------------------------------------------------------------------
6/02/03(1)
to
11/30/03
Net asset value, beginning of period $12.600
Income from investment operations:
Net investment income(2) 0.036
Net realized and unrealized gain on investments 0.904
-------
Total from investment operations 0.940
-------
Net asset value, end of period $13.540
=======
Total return(3) 7.46%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $3
Ratio of expenses to average net assets 1.79%
Ratio of net investment income to average net assets 0.56%
Portfolio turnover 62%
(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.
See accompanying notes
10
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Growth and Income Fund Institutional Class
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $12.090 $14.960 $15.300 $16.370 $19.150
Income (loss) from investment operations:
Net investment income(1) 0.154 0.108 0.108 0.196 0.273
Net realized and unrealized gain (loss) on investments 1.466 (2.875) (0.423) (0.235) (0.553)
------- ------- ------- ------- -------
Total from investment operations 1.620 (2.767) (0.315) (0.039) (0.280)
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income (0.120) (0.103) (0.025) (0.263) (0.300)
Net realized gain on investments -- -- -- (0.768) (2.200)
------- ------- ------- ------- -------
Total dividends and distributions (0.120) (0.103) (0.025) (1.031) (2.500)
------- ------- ------- ------- -------
Net asset value, end of period $13.590 $12.090 $14.960 $15.300 $16.370
======= ======= ======= ======= =======
Total return(2) 13.58% (18.63%) (2.07%) (0.05%) (1.68%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $40,855 $41,824 $68,645 $69,906 $117,377
Ratio of expenses to average net assets 1.18% 1.10% 1.00% 1.05% 0.90%
Ratio of net investment income to average net assets 1.27% 0.81% 0.70% 1.32% 1.58%
Portfolio turnover 62% 83% 98% 87% 94%
(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.
See accompanying notes
11
Notes Delaware Growth and Income Fund
TO FINANCIAL STATEMENTS November 30, 2003
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware business
trust and offers four series: Delaware Decatur Equity Income Fund, Delaware
Diversified Value Fund, Delaware Growth and Income Fund, and Delaware Social
Awareness Fund. These financial statements and related notes pertain to Delaware
Growth and 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 5.75%. 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 capital appreciation with
current income as a secondary objective.
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.
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.
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. The Fund declares and pays dividends from net
investment income and distributions from net realized gain on investments, if
any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. The amount of these expenses was approximately $11,085 for the year
ended November 30, 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 November 30, 2003
were approximately $641. 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 the 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 Class A shares, 1.00% of the average daily net assets of 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 November 30, 2003, the Fund had liabilities payables to affiliates as
follows:
Investment management fee payable to DMC $43,588
Dividend disbursing, transfer agent fees,
accounting and other expenses payable to DSC 89,732
Other expenses payable to DMC and affiliates 35,858
For the year ended November 30, 2003, DDLP earned $23,524 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.
12
Notes Delaware Growth and Income Fund
TO FINANCIAL STATEMENTS (CONTINUED)
3. Investments
For the year ended November 30, 2003, the Fund made purchases of $280,295,684
and sales of $347,112,211 of investment securities other than short-term
investments.
At November 30, 2003, the cost of investments for federal income
tax purposes was $432,192,315. At November 30, 2003, net unrealized appreciation
was $41,444,662, of which $60,251,194 related to unrealized appreciation of
investments and $18,806,532 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 November 30, 2003 and 2002 was as
follows:
Year Ended
11/30/03 11/30/02
---------- ----------
Ordinary Income $2,707,102 $2,215,988
As of November 30, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $540,762,673
Undistributed ordinary income 3,322,652
Capital loss carryforwards (109,590,699)
Unrealized appreciation of investments 41,444,662
------------
Net assets $475,939,288
============
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: $69,792,803 expires in 2008, $23,995,607
expires in 2010 and $15,802,289 expires in 2011.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
11/30/03 11/30/02
Shares sold:
Class A 1,619,649 2,140,778
Class B 571,446 682,031
Class C 240,231 345,768
Class R 225 --
Institutional Class 653,820 679,327
Shares issued upon reinvestment of
dividends and distributions:
Class A 185,057 115,953
Institutional Class 36,115 23,122
---------- ----------
3,306,543 3,986,979
---------- ----------
Shares repurchased:
Class A (5,467,179) (7,183,563)
Class B (1,733,422) (2,451,814)
Class C (379,517) (604,713)
Institutional Class (1,143,071) (1,830,479)
---------- ----------
(8,723,189) (12,070,569)
---------- ----------
Net decrease (5,416,646) (8,083,590)
========== ==========
For the years ended November 30, 2003 and 2002, 221,529 Class B shares were
converted to 219,326 Class A shares valued at $2,738,679 and 14,752 Class B
shares were converted to 14,589 Class A shares valued at $170,563, respectively.
The respective amounts are included in Class B redemptions and Class A
subscriptions in the previous table 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 $177,300,000 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 November 30, 2003, or at any time during
the year.
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 the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Fund, or at the discretion
of the lending agent, replace the loaned securities. The Fund continues to
record dividends on the securities loaned and is subject to changes in fair
value of the securities loaned that may occur during the term of the loan. The
Fund has the right under the Lending Agreement to recover the securities from
the borrower on demand. The security lending agent and the borrower retain a
portion of the earnings from the collateral investments. The Fund records
security lending income net of such allocation.
At November 30, 2003, the market value of the securities on loan was
$11,268,258, for which cash collateral was received and invested in accordance
with the Lending Agreement. Such investments are presented on the Statement of
Net Assets under the caption "Securities Lending Collateral."
13
Notes Delaware Growth and Income Fund
TO FINANCIAL STATEMENTS (CONTINUED)
8. Fund Reorganization
On August 21, 2003, the Board of Trustees approved a proposal to merge the Fund
into the Delaware Decatur Equity Income Fund, a series of Delaware Group Equity
Funds II, subject to shareholder approval at a special meeting of shareholders
to be held on or about February 19, 2004. If approved, the merger would be
expected to take place on or about March 26, 2004.
Effective as of the close of business on October 31, 2003, the Fund was closed
to new investors.
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 November 30, 2003, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total (C)
Distributions Distributions Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
- ------------- ------------- ------------- ------------
-- 100% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
(C) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
14
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II - Delaware Growth and
Income Fund
We have audited the accompanying statement of net assets of Delaware Growth and
Income Fund (the "Fund") as of November 30, 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 November 30, 2003, by correspondence with
the custodian and brokers. 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 Growth and Income Fund at November 30, 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
January 2, 2004
15
Delaware Investments Family of Funds
BOARD OF TRUSTEES/DIRECTORS 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.
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
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 since 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 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 -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
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
16
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director - Andy
2005 Market Street National Gallery of Art Warhol Foundation
Philadelphia, PA (1994 - 1999)
19103 Director -
Systemax Inc.
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
Joseph H. Hastings Executive Executive Mr. Hastings has served in 101 None
2005 Market Street Vice President Vice President various executive capacities
Philadelphia, PA and and at different times at
19103 Chief Financial Chief Financial Delaware Investments.
Officer Officer since
August 21, 2003
Decenber 19, 1999
Richelle S. Maestro Senior Vice President, Chief Legal Ms. Maestro has served in 101 None
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 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.
17
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Growth and Income Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Growth and 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 Joseph H. Hastings Investment Manager
Chairman Executive Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA International Affiliate
Walter P. Babich Delaware International Advisers Ltd.
Board Chairman Richelle S. Maestro London, England
Citadel Construction Corporation Senior Vice President,
King of Prussia, PA Chief Legal Officer and Secretary National Distributor
Delaware Investments Family of Funds Delaware Distributors, L.P.
John H. Durham Philadelphia, PA Philadelphia, PA
Private Investor
Gwynedd Valley, PA Michael P. Bishof Shareholder Servicing, Dividend
Senior Vice President and Treasurer Disbursing and Transfer Agent
John A. Fry Delaware Investments Family of Funds Delaware Service Company, Inc.
President Philadelphia, PA 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.; and 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.
- --------------------------------------------------------------------------------
(8459) Printed in the USA
AR-018 [11/03] IVES 1/04 J9521 EXP: 01/05
Delaware
Investments(SM)
--------------------------------------
A member of Lincoln Financial Group(R)
BLEND
Annual Report 2003
- --------------------------------------------------------------------------------
DELAWARE SOCIAL AWARENESS 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 Operations 7
Statements of Changes in Net Assets 8
Financial Highlights 9
Notes to Financial Statements 13
- -----------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 15
- -----------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 16
- -----------------------------------------------------------------
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) 2004 Delaware Distributors, L.P.
Portfolio Delaware Social Awareness Fund
MANAGEMENT REVIEW December 10, 2003
Fund Managers
J. Paul Dokas
Senior Portfolio Manager
Timothy G. Connors
Senior Portfolio Manager
Q: How did the Fund and the markets in general perform during the 12-month
period?
A: Following three challenging years in the equity markets, investors were eager
to welcome any signs of a rebound. The results of the 12-month period exceeded
many investors' expectations. Monetary and fiscal stimuli (in the form of
interest rate cuts and tax cuts, respectively) combined to jump-start the
economy, as stronger economic releases became the norm throughout 2003.
Corporate earnings rebounded, as both Main Street and Wall Street looked to move
past the investigations and scandals that had taken their toll on consumers and
businesses. Though geopolitical concerns persisted in Iraq and elsewhere,
investors once again focused on relevant issues at home. A renewed, though
guarded, sense of confidence emerged over the course of the fiscal year.
For the fiscal year ended November 30, 2003, Delaware Social Awareness Fund
returned +19.18% (Class A shares at net asset value with distributions
reinvested), far outpacing the S&P 500 Index, which gained +15.08% during the
same period. Your Fund's performance also exceeded the +18.77% increase in the
Lipper Multi-Cap Core Funds Average (an average return of 614 multi-cap core
funds).
Notably, the S&P 500 Index and most of the funds that comprise the Lipper peer
group do not face the same social responsibility restrictions that apply to
Delaware Social Awareness Fund.
Q: Please describe the investment strategy for Delaware Social Awareness Fund.
A: A large and growing number of individuals and institutions choose to make
investment decisions that meet certain socially responsible criteria. Your Fund
has established a number of parameters that reflect the needs of the socially
responsible investor. As a result, a screening process helps the managers
determine which stocks are eligible for investment by the Fund.
Your Fund will not knowingly invest in companies that:
o engage in activities that could damage the environment.
o participate in nuclear power production.
o manufacture military weapons.
o produce alcohol and/or tobacco.
o participate in gambling.
o conduct animal testing for non-medical purposes.
In addition to this social responsibility screen, we apply
quantitative models to evaluate expected returns, risk characteristics, and
business outlooks for stocks within a broad universe. We confirm the validity of
the outputs of these models through fundamental analyses of a company's cashflow
and other balance sheet measures, its management team, and any timely news or
announcements that may impact its operations. Finally, we review the results to
ensure that the Fund is structured with similar characteristics to its
benchmark.
Within the Fund, we strive to maintain a balance between companies with growth
and value characteristics. Because the social screen limits our abilities to
invest in certain companies in traditionally value-oriented industries (some
utilities, basic materials, energy, and consumer discretionary companies that
deal with tobacco and alcohol), we may take larger positions in related value
stocks that are considered socially responsible.
Though your Fund may have historically been considered a mid-cap or multi-cap
portfolio, its make-up at fiscal year end more accurately reflected the
large-cap universe.
Q: How do restrictions placed on socially responsible funds impact their
performance?
A: With the growth in demand for such funds, an ongoing debate exists about
whether investing based on one's core values and principles compromises the
maximum return that can be achieved. Over short time periods, certain sectors or
individual stocks often lead the market into higher territory, rewarding
investors along the way. For example, defense contractors may surge during
periods of military threats and engagements. Prices of tobacco stocks may climb
when favorable legal rulings impact their outlook. Certainly, socially
responsible investors may miss these market movements because they are unable to
hold such issues.
Over time, however, negative or unexpected news also may impact certain sectors
and companies. Energy stock prices are often affected by unfavorable OPEC
decisions or uncontrollable weather issues. Gaming companies may struggle during
periods of economic downturns. In such cases, the socially responsible investor
may actually benefit through lack of exposure to certain markets.
1
Although the debate will continue, we believe that over a longer time horizon,
socially responsible investors do not suffer a negative bias, and returns
generally remain in-line with traditional equity funds. The fiscal year ended
November 30, 2003 lends credence to this point, as Delaware Social Awareness
Fund outperformed its benchmark and many of it peers -- many of which do not
have socially responsible mandates.
Q: Please discuss some of the stocks that contributed to performance over the
past 12 months.
A: Companies within three sectors performed well for your Fund on both an
absolute and relative basis: consumer discretionary, healthcare, and
financial-related.
Consumer discretionary companies benefited greatly from the economic rebound.
Your Fund owned several solid performers among consumer discretionary issues,
including Best Buy and Nordstrom. Both are specialty retail stores that rose
considerably during the period as consumers displayed a willingness to spend.
Likewise, Home Depot reaped the rewards of continued strength in the residential
housing market and the ongoing needs of homeowners.
Within healthcare, biotechnology holding Genentech surged during the fiscal
year. The company maintains a very strong pipeline of drugs in development. In
fact, Avastin, a promising colon cancer treatment drug, recently received its
much-anticipated FDA approval. Two other healthcare company stocks, PerkinElmer
and Guidant, virtually doubled over the past 12 months.
Like consumer discretionary companies, financial stocks have significant ties to
consumers and have benefited from the low interest rate environment. We owned
several related stocks that performed quite well, including Countrywide Credit
Industries, a leading financial services company primarily engaged in
residential mortgage lending. Low mortgage rates greatly contributed to
increased levels of new home purchases and refinancing activities. Similarly,
Washington Mutual is a banking concern that targets individuals and small- to
mid-sized businesses. As the economy strengthened, Washington Mutual's increased
lending activity contributed to its strong return. H&R Block moved beyond
previous litigation concerns that had resulted in a large "uncertainty" discount
in its stock price. We took advantage of its perceived undervaluation and
benefited as the issues were resolved.
Q: How does technology fit into the investment picture?
A: When markets begin to rebound, investors often anticipate that technology
will be the primary contributing sector. Interestingly, some of our better
absolute and relative returns came from stocks outside of this area.
Even so, the technology holdings within your Fund performed quite well and
contributed to the strong returns of the fiscal year. More specifically,
semiconductors drove the performance among these stocks. Your Fund maintains
significant positions in Intel and Texas Instruments, two semiconductor industry
leaders. Of note, Intel has done an excellent job of expanding its product line
into other areas -- particularly the wireless handheld markets.
Q: Can you address some holdings that did not fare quite as well during the
period?
A: Your Fund trailed the benchmark index return within several sectors. Many of
the traditional "old economy" companies that make up the basic materials sector
are considered cyclical in nature and benefited from the economic rebound during
the period. Because of environmental concerns, your Fund is often restricted
from holding positions in stocks of paper companies or chemical companies, some
of which performed quite well throughout the past 12 months.
During the fiscal year, we sought alternatives within the basic materials
sector. Your Fund owned two packaging companies, Bemis and Sonoco Products,
which traditionally are not as cyclical as others in this sector. These stocks
had been far more stable during the market downturn of prior years, and
subsequently did not perform as well when the economy began to rebound. Further,
pricing and margin concerns pressured these stocks during the period.
The consumer staples sector was led by tobacco issues, which benefited from
favorable litigation rulings. Again here, your Fund cannot own any
tobacco-related companies. Among holdings within this sector, Newell Rubbermaid
suffered from management's decision to restructure its manufacturing operations.
Newell Rubbermaid is attempting to revamp its branding strategies, though the
results have not come as quickly as Wall Street would like. Similarly, Pepsi
Bottling Group reduced its volume expectations during the period, which
disappointed some investors and negatively impacted its stock price. Unlike
other more cyclical consumer staple companies, Newell Rubbermaid and Pepsi
Bottling Group are defensive in nature and were more stable during the previous
market downtown.
2
Delaware
SOCIAL AWARENESS FUND
Fund Basics Fund Performance
As of November 30, 2003 Average Annual Total Returns
- ---------------------------------------------- Through November 30, 2003 Lifetime Five Years One Year
Fund Objective: -----------------------------------------------------------------------------------
The Fund seeks long-term capital appreciation. Class A (Est. 2/24/97)
- ---------------------------------------------- Excluding Sales Charge +3.55% -0.99% +19.18%
Total Fund Net Assets: Including Sales Charge +2.65% -2.16% +12.32%
$48.84 million -----------------------------------------------------------------------------------
- ---------------------------------------------- Class B (Est. 2/24/97)
Number of Holdings: Excluding Sales Charge +2.77% -1.74% +18.12%
186 Including Sales Charge +2.77% -2.14%
- ---------------------------------------------- -----------------------------------------------------------------------------------
Fund Start Date: Class C (Est. 2/24/97)
February 24, 1997 Excluding Sales Charge +2.79% -1.72% +18.25%
- ---------------------------------------------- Including Sales Charge +2.79% -1.72% +17.25%
Your Fund Managers: -----------------------------------------------------------------------------------
J. Paul Dokas joined Delaware Investments in
1997. He was previously Director of Trust Returns reflect the reinvestment of all distributions and any applicable sales
Investment Management at Bell Atlantic charges as noted below. Returns and share values will fluctuate so that shares,
Corporation. Mr. Dokas earned a bachelor's when redeemed, may be worth more or less than their original cost. Performance
degree at Loyola College in Baltimore and an for Class B and C shares, excluding sales charges, assumes either that
MBA at the University of Maryland. He is a CFA contingent deferred sales charges did not apply or the investment was not
charterholder. redeemed. Past performance is not a guarantee of future results.
Timothy G. Connors earned a BA at the The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
University of Virginia and an MBA in finance are sold with a front-end sales charge of up to 5.75% and have an annual
at Tulane University. He joined Delaware distribution and service fee of up to 0.30%.
Investments in 1997 after serving as a
Principal at Miller, Anderson & Sherrerd, Class B shares are sold with a contingent deferred sales charge that declines
where he managed equity accounts, conducted from 4% to zero depending upon the period of time the shares are held. Class B
sector analysis, and directed research. He shares will automatically convert to Class A shares on a quarterly basis
previously held positions at CoreStates approximately eight years after purchase. They are also subject to an annual
Investment Advisers and Fauquier National distribution and service fee of 1%.
Bank. Mr. Connors is a CFA charterholder and a
member of the Association for Investment Class C shares are sold with a contingent deferred sales charge of 1%, if
Management and Research. redeemed during the first 12 months. They are also subject to an annual
- ---------------------------------------------- distribution and service fee of 1%.
Nasdaq Symbols:
Class A DEQAX Class R shares are available only for certain retirement plan products. They are
Class B DEQBX sold without a sales charge and have an annual distribution and service fee of
Class C DEQCX 0.60%. No Class R shares were made available during the periods shown.
The average annual total returns for the lifetime, five-year, and one-year
periods ended November 30, 2003 for Delaware Social Awareness Fund's
Institutional Class shares were +3.80%, -0.73%, and +19.36%, respectively.
Institutional Class shares were first made available on February 24, 1997, 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 Social Awareness
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: DEQNX
Performance of a $10,000 Investment
February 24, 1997 (Fund's inception) through November 30, 2003
- -- S&P 500 Index
- -- Delaware Social Awareness Fund -- Class A Shares
Delaware Social
Awareness Fund
Class A Shares S&P 500 Index
Feb-97 $ 9,424 $10,000
Nov-97 $11,452 $12,224
Nov-98 $12,543 $15,141
Nov-99 $14,480 $18,306
Nov-00 $13,299 $17,534
Nov-01 $11,996 $15,391
Nov-02 $10,013 $12,850
Nov-03 $11,934 $14,788
Chart assumes $10,000 invested on February 24, 1997, and includes the effect of
a 5.75% front-end sales charge and the reinvestment of all distributions.
Performance for other Fund classes will vary due to differing charges and
expenses. The chart also assumes $10,000 invested in the S&P 500 Index at that
month's end, February 28, 1997. After February 28, 1997, returns plotted on the
chart were as of the last day of each month shown. The S&P 500 Index is a
composite of mostly large-capitalization U.S. companies. 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 Social Awareness Fund
OF NET ASSETS November 30, 2003
Number of Market
Shares Value
Common Stock - 99.85%
Automobiles & Automotive Parts - 0.75%
*Advance Auto Parts 600 $ 48,972
ArvinMeritor 5,600 111,272
Delphi Automotive Systems 9,300 81,654
*Lear 2,100 124,194
----------
366,092
----------
Banking & Finance - 17.41%
American Express 5,900 269,689
AmSouth Bancorp 6,700 160,733
Bank of America 12,500 942,875
Bank One 3,000 130,080
Bear Stearns 3,100 224,626
Block (H&R) 4,300 233,447
Capital One Financial 2,400 143,328
Charter One Financial 3,900 129,558
Citigroup 28,400 1,335,935
Countrywide Credit Industries 1,500 158,400
Doral Financial 2,000 101,140
*Dun & Bradstreet 2,200 106,150
First Tennessee National 2,300 102,580
FleetBoston Financial 5,100 207,060
Freddie Mac 6,800 370,056
Goldman Sachs Group 2,700 259,416
GreenPoint Financial 3,200 108,736
J.P. Morgan Chase 12,000 424,320
KeyCorp 4,100 113,939
MBNA 5,900 144,668
Mellon Financial 10,000 288,000
Merrill Lynch 3,000 170,250
Morgan Stanley 8,300 458,824
National City 2,800 93,940
PNC Financial Services Group 2,400 130,464
SEI Investments 3,200 89,760
SLM 3,100 115,103
Union Planters 1,400 48,314
US Bancorp 13,895 385,030
Wachovia 6,200 283,650
Washington Mutual 8,100 371,061
Wells Fargo 7,000 401,310
----------
8,502,442
----------
Basic Industry/Capital Goods - 3.01%
*American Standard 3,600 358,920
Federal Signal 12,400 187,860
Herman Miller 4,200 109,410
Pentair 7,400 322,640
Teleflex 5,700 260,832
York International 5,800 231,710
----------
1,471,372
----------
Buildings & Materials - 0.99%
KB Home 4,800 330,624
Masco 5,600 152,320
----------
482,944
----------
Number of Market
Shares Value
Common Stock (continued)
Business Services - 2.12%
*Apollo Group-- Class A 1,500 $ 103,545
*Convergys 7,800 119,652
*Corinthian Colleges 900 57,537
Pitney Bowes 6,200 246,450
Republic Services 11,400 290,130
ServiceMaster 19,600 219,520
----------
1,036,834
----------
Cable, Media & Publishing - 6.42%
Clear Channel Communications 10,800 451,548
*Comcast Special-- Class A 26,700 805,005
*Liberty Media-- Class A 33,100 365,755
McGraw-Hill 3,200 219,200
*Time Warner 50,600 823,768
Walt Disney 20,400 471,036
----------
3,136,312
----------
Chemicals - 2.63%
Ecolab 14,000 367,080
Lubrizol 2,900 87,377
Praxair 5,000 358,900
RPM International 7,000 105,910
Sigma-Aldrich 6,800 364,276
----------
1,283,543
----------
Consumer Non-Durable/Other - 9.42%
Albertson's 4,700 100,016
Clorox 6,500 304,980
*Coach 6,000 239,040
Coca-Cola Enterprises 10,800 223,020
Deluxe 4,500 185,400
*Energizer Holdings 7,300 276,597
General Mills 3,500 157,535
Gillette 15,500 522,815
Heinz (H.J.) 8,100 292,410
Hershey Foods 600 46,620
Kellogg 9,400 336,238
McDonald's 14,300 366,509
Newell Rubbermaid 10,896 249,192
Nike 4,000 269,000
Pepsi Bottling Group 9,800 226,184
Sara Lee 6,000 123,300
Sysco 3,500 127,120
Wrigley, (W.M.) Jr 4,600 253,552
*Yum! Brands 8,800 303,512
----------
4,603,040
----------
Consumer Services/Other - 0.70%
*Cendant 15,500 343,480
----------
343,480
----------
Electronics & Electrical Equipment - 1.26%
Emerson Electric 7,800 476,112
Koninklijke Philips Electronics 4,900 139,258
----------
615,370
----------
4
Statement Delaware Social Awareness Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
Common Stock (continued)
Energy - 5.04%
Apache 4,572 $ 328,270
*BJ Services 10,200 325,278
Burlington Resources 8,200 411,640
EOG Resources 6,300 264,222
*Noble 10,500 363,090
Noble Energy 7,300 289,445
Questar 7,600 259,312
*Smith International 5,900 221,486
----------
2,462,743
----------
Healthcare & Pharmaceuticals - 16.03%
Abbott Laboratories 21,400 945,880
Allergan 3,800 283,974
*American Pharmaceutical Partners 2,300 83,030
*Amgen 10,300 592,353
*Anthem 1,500 108,180
Bard (C.R.) 2,000 151,200
Baxter International 9,900 275,418
Beckman Coulter 2,100 107,415
Becton Dickinson 8,100 324,243
*Boston Scientific 3,400 122,026
Cardinal Health 4,700 287,358
*Cytyc 7,100 91,519
Eli Lilly 15,100 1,035,256
*Forest Laboratories 4,100 224,024
*Genentech 2,500 210,750
*Genzyme 5,100 238,374
*Gilead Sciences 4,100 240,588
Guidant 5,200 295,204
HCA - The Healthcare Company 1,700 71,247
Hillenbrand Industries 5,900 338,660
*Lincare Holdings 4,100 122,303
*Medimmune 8,900 211,820
Medtronic 5,100 230,520
Mylan Laboratories 7,200 182,304
*Patterson Dental 800 54,480
PerkinElmer 14,500 245,195
*Tenet Healthcare 12,350 180,434
UnitedHealth Group 4,600 247,940
*Varian Associates 800 55,208
*Wellpoint Health Networks 2,900 271,121
----------
7,828,024
----------
Insurance - 4.59%
Allstate 9,300 375,534
American International Group 10,862 629,453
Berkley (W.R.) 2,800 95,620
Marsh & McLennan 3,000 133,320
MBIA 1,600 92,992
MGIC Investment 2,100 111,195
Nationwide Financial Services 4,100 133,824
Old Republic International 2,200 81,532
Principal Financial Group 6,400 211,904
Progressive 1,300 101,530
Prudential Financial 3,400 132,974
XL Capital Limited-- Class A 1,900 142,880
----------
2,242,758
----------
Number of Market
Shares Value
Common Stock (continued)
Internet Services - 0.76%
*eBay 1,800 $ 100,530
*InterActiveCorp 8,200 269,370
----------
369,900
----------
Packaging & Containers - 1.38%
Bemis 4,800 218,400
*Pactiv 7,300 163,812
Sonoco Products 13,700 293,180
----------
675,392
----------
REITs - 0.55%
Apartment Investment & Management 3,400 115,770
Equity Office Properties Trust 4,200 116,466
ProLogis 1,200 36,600
----------
268,836
----------
Retail - 6.42%
*Bed Bath & Beyond 4,800 202,752
Best Buy 4,000 248,000
*BJ's Wholesale Club 3,900 99,255
CBRL Group 1,400 57,750
CVS 9,900 370,854
Dollar General 2,200 46,464
Federated Department Stores 3,100 152,179
Gap 9,900 212,850
Home Depot 8,500 312,460
*Kohl's 4,800 231,936
Limited 7,300 130,816
Nordstrom 7,000 241,500
Radioshack 4,800 149,520
Ross Stores 3,000 164,340
*Saks 15,700 241,466
Target 3,000 116,160
VF 3,800 156,826
----------
3,135,128
----------
Technology/Communications - 2.90%
*Ciena 17,000 120,360
*Cisco Systems 43,600 987,976
Nokia ADR 17,100 307,458
----------
1,415,794
----------
Technology/Hardware - 3.59%
*Dell Computer 23,900 824,550
*EMC 21,400 294,036
Factset Research Systems 4,000 165,800
Hewlett-Packard 15,632 339,058
*Storage Technology 3,600 90,720
*Western Digital 3,200 39,808
----------
1,753,972
----------
Technology/Semiconductors - 3.90%
*Altera 7,700 195,041
Intel 37,200 1,243,596
Texas Instruments 15,600 464,256
----------
1,902,893
----------
5
Statement Delaware Social Awareness Fund
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
Common Stock (continued)
Technology/Software - 6.06%
Adobe Systems 7,300 $ 301,636
Automatic Data Processing 6,500 248,495
*Citrix Systems 3,800 91,276
*Electronics Arts 4,300 190,189
*Intuit 5,200 261,456
Microsoft 57,100 1,467,470
*Oracle 33,200 398,732
-----------
2,959,254
-----------
Telecommunications - 3.05%
*AT&T Wireless Services 23,300 174,750
BellSouth 9,400 244,682
*Level 3 Communications 13,400 73,432
*Nextel Communications 8,400 212,772
SBC Communications 27,100 630,888
*Utstarcom 4,000 151,520
-----------
1,488,044
-----------
Transportation & Shipping - 0.87%
Delta Air Lines 3,400 42,636
FedEx 3,700 268,990
Southwest Airlines 6,300 113,274
-----------
424,900
-----------
Total Common Stock (cost $40,568,571) 48,769,067
-----------
Total Market Value of Securities - 99.85%
(cost $40,568,571) 48,769,067
Receivables and Other Assets Net of Liabilities - 0.15% 74,042
-----------
Net Assets Applicable to 5,269,285 Shares
Outstanding - 100.00% $48,843,109
===========
Net Asset Value - Delaware Social Awareness Fund
Class A ($19,670,372/2,056,251 Shares) $9.57
-----
Net Asset Value - Delaware Social Awareness Fund
Class B ($22,144,952/2,443,728 Shares) $9.06
-----
Net Asset Value - Delaware Social Awareness Fund
Class C ($6,257,972 / 690,279 Shares) $9.07
-----
Net Asset Value - Delaware Social Awareness Fund
Institutional Class ($769,813 / 79,027 Shares) $9.74
-----
Components of Net Assets at November 30, 2003:
Shares of beneficial interest
(unlimited authorization - no par) $59,060,248
Accumulated net realized loss on investments (18,417,635)
Net unrealized appreciation of investments 8,200,496
-----------
Total net assets $48,843,109
===========
*Non-income producing security for the year ended November 30, 2003.
Summary of Abbreviations:
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
Net Asset Value and Offering Price per Share -
Delaware Social Awareness Fund
Net assets value Class A (A) $ 9.57
Sales charge (5.75% of offering price, or 6.06% of
the amount invested per share) (B) 0.58
------
Offering price $10.15
======
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon the redemption or repurchase of shares.
(B) See the current prospectus for purchases of $50,000 or more.
See accompanying notes
6
Statement Delaware Social Awareness Fund
OF OPERATIONS Year Ended November 30, 2003
Investment Income:
Dividends $652,602
Interest 5,549 $ 658,151
-------- ---------
Expenses:
Management fees 338,517
Distribution expense - Class A 54,067
Distribution expense - Class B 210,424
Distribution expense - Class C 54,388
Dividend disbursing and transfer agent fees
and expenses 298,798
Reports and statements to shareholders 51,471
Registration fees 34,927
Accounting and administration expenses 19,422
Professional fees 3,992
Trustees' fees 3,160
Custodian fees 3,055
Other 13,643 1,085,864
--------
Less expenses absorbed or waived by investment manager (203,062)
Less waiver of distribution expenses - Class A (9,011)
Less expenses paid indirectly (1,083)
----------
Total expenses 872,708
----------
Net Investment Loss (214,557)
----------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized loss on investments (3,078,229)
Net change in unrealized appreciation/depreciation
of investments 11,081,813
----------
Net Realized and Unrealized Gain on Investments 8,003,584
----------
Net Increase in Net Assets Resulting from Operations $7,789,027
==========
See accompanying notes
7
Statements Delaware Social Awareness Fund
OF CHANGES IN NET ASSETS
Year Ended
11/30/03 11/30/02
Increase (Decrease) in Net Assets from Operations:
Net investment loss $ (214,557) $ (284,511)
Net realized loss on investments (3,078,229) (13,018,962)
Net change in unrealized appreciation/depreciation of investments 11,081,813 2,719,938
----------- -----------
Net increase (decrease) in net assets resulting from operations 7,789,027 (10,583,535)
----------- -----------
Capital Share Transactions:
Proceeds from shares sold:
Class A 2,961,003 3,239,827
Class B 1,417,132 1,988,926
Class C 969,314 945,055
Institutional Class 205,257 216,769
----------- -----------
5,552,706 6,390,577
----------- -----------
Cost of shares repurchased:
Class A (4,853,548) (6,735,428)
Class B (4,557,684) (5,619,923)
Class C (1,077,760) (3,316,929)
Institutional Class (106,021) (106,108)
----------- -----------
(10,595,013) (15,778,388)
----------- -----------
Decrease in net assets derived from capital share transactions (5,042,307) (9,387,811)
----------- -----------
Net Increase (Decrease) in Net Assets 2,746,720 (19,971,346)
Net Assets:
Beginning of year 46,096,389 66,067,735
----------- -----------
End of year $48,843,109 $46,096,389
=========== ===========
See accompanying notes
8
Financial
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Social Awareness Fund Class A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $8.030 $9.620 $11.820 $13.010 $11.260
Income (loss) from investment operations:
Net investment loss(1) (0.004) (0.007) (0.039) (0.064) (0.043)
Net realized and unrealized gain (loss) on investments 1.544 (1.583) (0.991) (0.981) 1.793
------ ------ ------- ------- -------
Total from investment operations 1.540 (1.590) (1.030) (1.045) 1.750
------ ------ ------- ------- -------
Less dividends and distributions from:
Net realized gain on investments -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Total dividends and distributions -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Net asset value, end of period $9.570 $8.030 $9.620 $11.820 $13.010
====== ====== ====== ======= =======
Total return(2) 19.18% (16.53%) (9.80%) (8.15%) 15.44%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $19,670 $18,391 $26,043 $36,206 $46,354
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.49%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.00% 1.90% 1.75% 1.63% 1.69%
Ratio of net investment loss to average net assets (0.04%) (0.08%) (0.39%) (0.45%) (0.35%)
Ratio of net investment loss to average net assets prior to
expense limitation and expenses paid indirectly (0.54%) (0.48%) (0.64%) (0.58%) (0.55%)
Portfolio turnover 60% 34% 50% 68% 28%
(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 and
distributor. Performance would have been lower had the expense limitation
not been in effect.
See accompanying notes
9
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Social Awareness Fund Class B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $7.670 $9.250 $11.490 $12.740 $11.120
Income (loss) from investment operations:
Net investment loss(1) (0.062) (0.069) (0.113) (0.155) (0.133)
Net realized and unrealized gain (loss) on investments 1.452 (1.511) (0.957) (0.950) 1.753
------ ------ ------- ------- -------
Total from investment operations 1.390 (1.580) (1.070) (1.105) 1.620
------ ------ ------- ------- -------
Less dividends and distributions from:
Net realized gain on investments -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Total dividends and distributions -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Net asset value, end of period $9.060 $7.670 $9.250 $11.490 $12.740
====== ====== ====== ======= =======
Total return(2) 18.12% (17.08%) (10.49%) (8.80%) 14.57%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $22,145 $21,737 $30,376 $36,301 $41,091
Ratio of expenses to average net assets 2.25% 2.25% 2.25% 2.25% 2.24%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.70% 2.60% 2.45% 2.33% 2.39%
Ratio of net investment loss to average net assets (0.79%) (0.83%) (1.14%) (1.20%) (1.10%)
Ratio of net investment loss to average net assets prior to
expense limitation and expenses paid indirectly (1.24%) (1.18%) (1.34%) (1.28%) (1.25%)
Portfolio turnover 60% 34% 50% 68% 28%
(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.
See accompanying notes
10
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Social Awareness Fund Class C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $7.670 $9.260 $11.490 $12.740 $11.120
Income (loss) from investment operations:
Net investment loss(1) (0.062) (0.069) (0.113) (0.154) (0.133)
Net realized and unrealized gain (loss) on investments 1.462 (1.521) (0.947) (0.951) 1.753
------ ------ ------- ------- -------
Total from investment operations 1.400 (1.590) (1.060) (1.105) 1.620
------ ------ ------- ------- -------
Less dividends and distributions from:
Net realized gain on investments -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Total dividends and distributions -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Net asset value, end of period $9.070 $7.670 $9.260 $11.490 $12.740
====== ====== ====== ======= =======
Total return(2) 18.25% (17.17%) (10.39%) (8.80%) 14.57%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $6,258 $5,418 $9,115 $10,459 $9,673
Ratio of expenses to average net assets 2.25% 2.25% 2.25% 2.25% 2.24%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.70% 2.60% 2.45% 2.33% 2.39%
Ratio of net investment loss to average net assets (0.79%) (0.83%) (1.14%) (1.20%) (1.10%)
Ratio of net investment loss to average net assets prior to
expense limitation and expenses paid indirectly (1.24%) (1.18%) (1.34%) (1.28%) (1.25%)
Portfolio turnover 60% 34% 50% 68% 28%
(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.
See accompanying notes
11
Financial
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Social Awareness Fund Institutional Class
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/03 11/30/02 11/30/01 11/30/00 11/30/99
Net asset value, beginning of period $8.160 $9.750 $11.930 $13.090 $11.310
Income (loss) from investment operations:
Net investment income (loss)(1) 0.017 0.015 (0.014) (0.024) (0.012)
Net realized and unrealized gain (loss) on investments 1.563 (1.605) (0.996) (0.991) 1.792
------ ------ ------- ------- -------
Total from investment operations 1.580 (1.590) (1.010) (1.015) 1.780
------ ------ ------- ------- -------
Less dividends and distributions from:
Net realized gain on investments -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Total dividends and distributions -- -- (1.170) (0.145) --
------ ------ ------- ------- -------
Net asset value, end of period $9.740 $8.160 $9.750 $11.930 $13.090
====== ====== ====== ======= =======
Total return(2) 19.36% (16.31%) (9.52%) (7.87%) 15.74%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $770 $550 $533 $337 $329
Ratio of expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.24%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.70% 1.60% 1.45% 1.33% 1.39%
Ratio of net investment income (loss) to average net assets 0.21% 0.17% (0.14%) (0.20%) (0.10%)
Ratio of net investment income (loss) to average net
assets prior to expense limitation and expenses paid
indirectly (0.24%) (0.18%) (0.34%) (0.28%) (0.25%)
Portfolio turnover 60% 34% 50% 68% 28%
(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.
See accompanying notes
12
Notes Delaware Social Awareness Fund
TO FINANCIAL STATEMENTS November 30, 2003
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware business
trust and offers four series: Delaware Decatur Equity Income Fund, Delaware
Diversified Value Fund, Delaware Growth and Income Fund and Delaware Social
Awareness Fund. These financial statements and related notes pertain to Delaware
Social Awareness 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 5.75%.
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 November 30,
2003, Class R had not commenced operations.
The investment objective of the Fund is to seek long-term capital appreciation.
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.
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, 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.
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. The Fund declares and pays dividends from net
investment income and distributions from net realized gain on investments, if
any, annually.
Certain expenses of the Fund are paid through commission arrangements with
brokers. The amount of these expenses was approximately $1,083 for the year
ended November 30, 2003. In addition, the Fund receives earnings credits from
its custodian when positive cash balances are maintained, which are used to
offset custody fees. There were no earnings credits for the year ended November
30, 2003. 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 0.75% on the first $500 million of average daily net assets of the Fund,
0.70% on the next $500 million, 0.65% on the next $1.5 billion and 0.60% 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, certain insurance costs and extraordinary expenses, do not
exceed 1.25% of average daily net assets of the Fund through January 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
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.
Institutional Class shares pay no distribution and service expenses. DDLP has
contracted to waive distribution and service fees through January 31, 2004 in
order to prevent distribution and service fees of Class A shares from exceeding
0.25% of average daily net assets.
At November 30, 2003, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $10,246
Dividend disbursing, transfer agent fees, accounting
and other expenses payable to DSC 20,104
Other expenses payable to DMC and affiliates 18,536
13
Notes Delaware Social Awareness Fund
TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended November 30, 2003, DDLP earned $8,140 of 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 November 30, 2003, the Fund made purchases of $26,960,126 and
sales of $31,783,561 of investment securities other than short-term investments.
At November 30, 2003, the cost of investments for federal income tax purposes
was $40,896,869. At November 30, 2003, net unrealized appreciation was
$7,872,198, of which $9,243,826 relate to unrealized appreciation of investments
and $1,371,628 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. There were no dividends and
distributions paid during the years ended November 30, 2003 and 2002.
As of November 30, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $59,060,248
Capital loss carryforwards (18,089,337)
Unrealized appreciation of investments 7,872,198
-----------
Net assets $48,843,109
-----------
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: $2,183,250 expires in 2009,$13,031,715 expires
in 2010 and $2,874,372 expires in 2011.
5. Capital Shares
Transactions in capital shares were as follows:
Year Ended
11/30/03 11/30/02
Shares sold:
Class A 353,669 364,724
Class B 181,715 238,553
Class C 120,566 111,567
Institutional Class 24,548 25,590
---------- ---------
680,498 740,434
---------- ---------
Shares repurchased:
Class A (586,394) (782,057)
Class B (572,463) (686,610)
Class C (136,574) (390,034)
Institutional Class (12,942) (12,890)
---------- ---------
(1,308,373) (1,871,591)
---------- ---------
Net decrease (627,875) (1,131,157)
========== =========
For the years ended November 30, 2003 and 2002, 3,126 Class B shares were
converted to 2,977 Class A shares valued at $24,653 and 247 Class B shares were
converted to 237 Class A shares valued at $2,068, 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 $177,300,000 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 November 30, 2003, or at any time during
the year.
7. Credit & Market Risk
The Fund only invests in companies that meet its definition of "socially
responsible" and may be subject to certain risks as a result of investing
exclusively in socially responsible companies. By avoiding certain companies not
considered socially responsible, it could miss out on strong performance from
those companies.
14
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II - Delaware Social
Awareness Fund
We have audited the accompanying statement of net assets of Delaware Social
Awareness Fund (the "Fund") as of November 30, 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 November 30, 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 Social Awareness Fund at November 30, 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
January 2, 2004
15
Delaware Investments Family of Funds
BOARD OF TRUSTEES/DIRECTORS 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.
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
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 since 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 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 -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
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
16
Number of Other
Principal Portfolios in Fund Directorships
Name, Position(s) Occupation(s) Complex Overseen Held by
Address Held with Length of Time During by Trustee/Director Trustee/Director
and Birthdate Fund(s) Served Past 5 Years or Officer or Officer
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Ann R. Leven Trustee 14 Years Treasurer/Chief Fiscal Officer - 101 Director - Andy
2005 Market Street National Gallery of Art Warhol Foundation
Philadelphia, PA (1994 - 1999)
19103 Director -
Systemax Inc.
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
Joseph H. Hastings Executive Executive Mr. Hastings has served in 101 None
2005 Market Street Vice President Vice President various executive capacities
Philadelphia, PA and and at different times at
19103 Chief Financial Chief Financial Delaware Investments.
Officer Officer since
August 21, 2003
Decenber 19, 1999
Richelle S. Maestro Senior Vice President, Chief Legal Ms. Maestro has served in 101 None
2005 Market Street Chief Legal Officer Officer since various executive capacities
Philadelphia, PA and Secretary March 17, 2003 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.
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Social Awareness Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Social Awareness 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 Joseph H. Hastings Investment Manager
Chairman Executive Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA International Affiliate
Walter P. Babich Delaware International Advisers Ltd.
Board Chairman Richelle S. Maestro London, England
Citadel Construction Corporation Senior Vice President,
King of Prussia, PA Chief Legal Officer and Secretary National Distributor
Delaware Investments Family of Funds Delaware Distributors, L.P.
John H. Durham Philadelphia, PA Philadelphia, PA
Private Investor
Gwynedd Valley, PA Michael P. Bishof Shareholder Servicing, Dividend
Senior Vice President and Treasurer Disbursing and Transfer Agent
John A. Fry Delaware Investments Family of Funds Delaware Service Company, Inc.
President Philadelphia, PA 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.; and 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.
- --------------------------------------------------------------------------------
(8454) Printed in the USA
AR-147 [11/03] IVES 1/04 J9503 EXP: 1/05
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: Delaware Group Equity Funds II
Jude T. Driscoll
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By: Jude T. Driscoll
Title: Chairman
Date: January 29, 2004
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
Title: Chairman
Date: January 29, 2004
Joseph H. Hastings
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By: Joseph H. Hastings
Title: Chief Financial Officer
Date: January 27, 2004