UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-6324
Exact name of registrant as specified in charter: Delaware Group Government Fund
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
Richelle S. Maestro, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: July 31
Date of reporting period: July 31, 2004
Item 1. Reports to Stockholders
Delaware
FIXED INCOME Investments(SM)
--------------------------------------
a member of Lincoln Financial Group(R)
Annual Report JULY 31, 2004
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DELAWARE AMERICAN GOVERNMENT BOND FUND
[LOGO] POWERED BY RESEARCH.(SM)
TABLE
OF CONTENTS
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PORTFOLIO MANAGEMENT REVIEW 1
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PERFORMANCE SUMMARY 3
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DISCLOSURE OF FUND EXPENSES 5
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SECTOR ALLOCATION 6
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FINANCIAL STATEMENTS:
Statement of Net Assets 7
Statement of Operations 11
Statements of Changes in Net Assets 12
Financial Highlights 13
Notes to Financial Statements 18
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 22
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BOARD OF TRUSTEES/OFFICERS 23
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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 AMERICAN GOVERNMENT BOND FUND
MANAGEMENT REVIEW August 9, 2004
FUND MANAGERS
Steven R. Cianci
Senior Portfolio Manager
Paul Grillo
Senior Portfolio Manager
Q: HOW DID THE FUND AND THE FIXED-INCOME MARKETS PERFORM DURING THE PAST YEAR?
A: The fixed-income markets continued the upward momentum of the past few years,
with your Fund again outpacing its overall peer group. For the fiscal year ended
July 31, 2004, Delaware American Government Bond Fund gained +3.77% (Class A
shares at net asset value with distributions reinvested), outperforming the
+3.49% increase in the Lipper General U.S. Government Funds Average (an average
return of 192 government bond funds). The Fund's benchmark, the Lehman Brothers
Government Bond Index, gained +3.86% during the same 12-month period.
Q: WHAT IMPACTED THE FIXED-INCOME MARKETS DURING THE PAST 12 MONTHS?
A: Uncertainty continued to guide much of the interest rate movement during the
fiscal year as investors interpreted a variety of economic, international,
political, and even regulatory factors. The 10-year Treasury note ended the year
virtually unchanged from where it began (yielding about 4.5% after falling to a
low of around 3.7% and climbing as high as 4.9% during the year). As the year
progressed, the Federal Reserve revealed a plan to move to a more normalized
federal funds rate, a decision that contributed to a decline in volatility in
both equity and fixed-income markets.
The labor picture took center stage in economic news, as investors closely
monitored the monthly payroll additions for signs of economic strength. While
significant gains in March and April 2004 confirmed the economy had rebounded
from its prior recession, the last few months of the period revealed a weaker
labor market than many investors (and politicians) had projected. Surging oil
prices also sent shock waves through the financial markets. While some feared
that inflationary pressures would follow, the more apparent effect has been a
general slowdown as the higher energy prices served as somewhat of a "tax" on
the economy as a whole.
Ongoing threats of terror and the conflict in Iraq undoubtedly contributed to
uncertainty among investors. Such concerns led to a "flight to quality" from
equity markets as many investors continued to seek the safe haven of U.S.
government fixed-income securities. Presidential election-year rhetoric and
campaign promises also contributed to uncertainty about domestic and foreign
policies for the next four years.
The Sarbanes-Oxley Act of 2002 (the Public Company Accounting Reform and
Investor Protection Act) continued to increase scrutiny by regulators and has
caused many entities to enact a more conservative approach toward managing their
balance sheets and income statements. Fannie Mae (Federal National Mortgage
Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are two
such entities that have been forced to deal with increased oversight and
scrutiny. Because of their importance to the fixed-income markets, investors
have closely monitored the lending activities of these organizations throughout
the year.
Federal Reserve Board Chairman Alan Greenspan and the Fed Governors have the
challenging task of interpreting all of this information (and the uncertainties)
and establishing ongoing monetary policy. At this point, the Fed appears to be
on a measured, yet cautious pace toward higher short-term rates.
Q: HOW HAVE THESE DEVELOPMENTS IMPACTED YOUR INVESTMENT DECISIONS AND THE FUND'S
PERFORMANCE OVER THE PAST 12 MONTHS?
A: During the course of the year, we looked to capitalize on rate and volatility
moves and sought out those opportunities that benefited most from the uncertain
market environment. Early in the period, we increased our exposure to
non-Treasury fixed-income securities to take advantage of the yield premium that
existed among corporate and mortgage-related bonds. The high-quality corporate
market performed quite well in late 2003 and early 2004. In recent months,
however, we recognized that the yield premiums had subsided and we shifted some
of our corporate bond allocation into more stable mortgage securities, including
some adjustable-rate products. Currently, our exposure to mortgage- and
asset-backed securities exceeds 50%, with a strong focus on less volatile
securities with more certain cash flow structures.
1
With inflation held in check during the period, we also reduced our position in
Treasury Inflation-Protected Securities over the second half of the fiscal year.
Despite the rise in oil prices, ongoing threats of inflation have been reduced
due to the recent slowdown in economic activity (led by the labor market), a
decline in other commodity prices, and the current Fed tightening policy.
Without the pressures of rising prices, the primary advantages of
inflation-protected securities have been significantly diminished.
We also closely monitored the circumstances surrounding Fannie Mae and Freddie
Mac, as both entities came under increased regulatory scrutiny. Their internal
management teams worked to overcome the accounting and operational issues in
question. We recognized that these financial uncertainties resulted in increased
yield opportunities among both their debt and mortgage-backed securities and
took advantage of these yield premiums by increasing our holdings in such
issues. Your Fund has been rewarded, as both institutions have adopted a more
conservative approach to ongoing business and their related securities have
benefited.
Q: WHAT STRATEGIES DID YOU PURSUE AND HOW HAS THE FUND BEEN POSITIONED?
A: We continue to maintain an intermediate-term profile by investing in
securities with expected maturities between five and 10 years. Early in the
fiscal year, your Fund was positioned somewhat longer than its peer group and
benefited from the decline in interest rates during the first quarter of 2004.
We took a more defensive stance in mid-March as the labor market began to
reflect strong growth and the Fed initiated discussions about the prospects for
higher interest rates. This move to shorten the average maturity of your Fund
proved correct as rates surged from late March to June. Generally, in a rising
interest rate environment, short-term fixed-income securities generally perform
better than (or are not as adversely impacted as) their longer-term
counterparts.
As the end of the fiscal year approached, we again increased the maturity of the
portfolio by adding longer-term, stable securities. Such a decision stemmed from
our belief that the economy may not have the firepower to sustain significant
growth at much higher interest rate levels and the Fed may not raise short-term
rates as quickly as many others believe. A slow growth, credit-stable
environment may lead to a decline in volatility and enhanced opportunities in
longer non-Treasury securities, in our opinion. To date, the most recent weak
labor market releases have appeared to confirm these perceptions, to the benefit
of your Fund.
2
DELAWARE
AMERICAN GOVERNMENT BOND FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Current performance may be lower or higher than the
performance data quoted. Please obtain the performance data for the most recent
month end by calling 800 523-1918 or visiting our web site at
www.delawareinvestments.com/performance. You should consider the investment
objectives, risks, charges and expenses of the investment carefully before
investing. The Delaware American Government Bond Fund prospectus contains this
and other important information about the investment company. Please request a
prospectus by calling 800 523-1918. Read it carefully before you invest or send
money. Performance includes reinvestment of all distributions.
FUND PERFORMANCE
Average Annual Total Returns
Through July 31, 2004 Lifetime 10 Years Five Years One Year
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Class A (Est. 8/16/85)
Excluding Sales Charge +6.75% +5.96% +6.41% +3.77%
Including Sales Charge +6.49% +5.47% +5.45% -0.86%
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Class B (Est. 5/2/94)
Excluding Sales Charge +5.20% +5.36% +5.67% +3.05%
Including Sales Charge +5.20% +5.36% +5.42% -0.93%
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Class C (Est. 11/29/95)
Excluding Sales Charge +4.90% +5.66% +3.05%
Including Sales Charge +4.90% +5.66% +2.05%
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Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. Return and share value will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. Performance
for Class B and C shares, excluding sales charges, assumes either that
contingent deferred sales charges did not apply or the investment was not
redeemed. Past performance is not a guarantee of future results.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 4.50% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%. Lifetime and 10-year performance figures for
Class B shares reflect conversion to Class A shares after approximately eight
years.
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 average annual total returns for the lifetime and one-year periods ended
July 31, 2004 for Delaware American Government Bond Fund's Class R shares were
- -0.42% and +3.43%, respectively. Class R shares were first made available on
June 2, 2003 and are available only for certain retirement plan products. They
are sold without a sales charge and have an annual distribution and service fee
of 0.60%.
The average annual total returns for the lifetime (since 8/16/85), 10-year,
five-year, and one-year periods ended July 31, 2004 for Delaware American
Government Bond Fund's Institutional Class were +7.00%, +6.27%, +6.73%, and
+4.08%, respectively. The Institutional Class shares were first made available
on June 1, 1992 and are available without sales or asset-based distribution
charges only to certain eligible institutional accounts. Institutional Class
performance prior to June 1, 1992 for Delaware American Government Bond Fund is
based on Class A performance and was adjusted to eliminate the sales charges,
but not the asset-based distribution charge of Class A shares.
An expense limitation was in effect for all classes of Delaware American
Government Bond Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
The performance graph and table do not reflect the deduction of taxes the
shareholder would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DUGIX
Nasdaq Class R symbol: DUGRX
3
DELAWARE
AMERICAN GOVERNMENT BOND FUND
FUND BASICS
As of July 31, 2004
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FUND OBJECTIVE:
To provide high current income consistent with safety of principal.
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TOTAL FUND NET ASSETS:
$183.29 million
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NUMBER OF HOLDINGS:
245
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FUND START DATE:
August 16, 1985
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YOUR FUND MANAGERS:
Stephen R. Cianci joined Delaware Investments in 1992. He holds both a BS and an
MBA from Widener University. He became co-manager of the Fund in January 1999.
Mr. Cianci is an Adjunct Professor of Finance at Widener University and is a CFA
charterholder.
Paul Grillo joined Delaware Investments in 1993 after serving as a mortgage
strategist and trader at Dreyfus Corporation. He holds a bachelor's degree from
North Carolina State University and an MBA from Pace University. Mr. Grillo is
also a CFA charterholder.
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NASDAQ SYMBOLS:
Class A DEGGX
Class B DEGBX
Class C DUGCX
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PERFORMANCE OF A $10,000 INVESTMENT
July 31, 1994 through July 31, 2004
[CHART OMITTED]
DELAWARE AMERICAN
GOVERNMENT BOND
FUND - CLASS A LEHMAN BROTHERS
SHARES GOVERNMENT BOND INDEX
JUL-94 $9,550 $10,000
JUL-95 $10,202 $9,988
JUL-96 $10,619 $10,999
JUL-97 $11,656 $11,582
JUL-98 $12,394 $12,831
JUL-99 $12,467 $13,870
JUL-00 $13,076 $14,192
JUL-01 $14,667 $14,999
JUL-02 $15,792 $16,906
JUL-03 $16,400 $17,656
JUL-04 $17,032 $18,338
Chart assumes $10,000 invested on July 31, 1994 and includes the effect of a
4.50% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. Returns plotted on the chart were as of the last day of each
successive month shown. The Lehman Brothers Government Bond Index is an
unmanaged index that generally tracks the performance of U.S. government bonds.
An index is unmanaged and does not reflect the costs of operating a mutual fund,
such as the costs of buying, selling, and holding securities. You cannot invest
directly in an index. The performance table and graph do not reflect the
deduction of taxes the shareholder would pay on Fund distributions or
redemptions of Fund shares. Past performance is not a guarantee of future
results.
An expense limitation was in effect for all classes of Delaware American
Government Bond Fund during the periods shown. Performance would have been lower
had the expense limitation not been in effect.
4
DISCLOSURE DELAWARE AMERICAN GOVERNMENT BOND FUND
OF FUND EXPENSES For the Period February 1, 2004 to July 31, 2004
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs,
including sales charges (loads) on purchase payments, reinvested dividends, or
other distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution and/or service (12b-1) fees; and other
Fund expenses. This Example is intended to help you understand your ongoing
costs (in dollars) of investing in a Fund and to compare these costs with the
ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from February 1, 2004 through July 31,
2004.
ACTUAL EXPENSES
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section, together with the amount you invested, to estimate the expenses
that you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first section under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
a Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The expenses shown in the table assume reinvestment of all dividends and
distributions.
DELAWARE AMERICAN GOVERNMENT BOND FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period*
2/1/04 7/31/04 2/1/04 to
7/31/04
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ACTUAL FUND RETURN
Class A $1,000.00 $1,003.90 1.05% $5.23
Class B 1,000.00 1,000.40 1.75% 8.70
Class C 1,000.00 1,000.40 1.75% 8.70
Class R 1,000.00 1,001.10 1.35% 6.72
Institutional Class 1,000.00 1,005.40 0.75% 3.74
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HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A 1,000.00 1,019.71 1.05% 5.29
Class B 1,000.00 1,016.19 1.75% 8.81
Class C 1,000.00 1,016.19 1.75% 8.81
Class R 1,000.00 1,018.20 1.35% 6.80
Institutional Class 1,000.00 1,021.22 0.75% 3.78
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* Expenses are equal to the Fund's annualized expense ratio, multiplied by the
average account value over the period, multiplied by 182/366 (to reflect the
one-half year period).
5
SECTOR ALLOCATION DELAWARE AMERICAN GOVERNMENT BOND FUND
As of July 31, 2004
The SEC adopted a requirement that all Funds present their categories of
portfolio holdings in a table, chart or graph format in their annual and
semiannual shareholder reports, whether or not a schedule of investments is
utilized. The following table, which presents portfolio holdings as a percent of
total net assets, is provided in compliance with such requirement.
PERCENTAGE
SECTOR OF NET ASSETS
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AGENCY BONDS 8.03%
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AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 19.19%
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AGENCY MORTGAGE-BACKED SECURITIES 28.88%
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ASSET-BACKED SECURITIES 4.96%
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COLLATERALIZED MORTGAGE OBLIGATIONS 1.60%
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COMMERCIAL MORTGAGE-BACKED SECURITIES 0.27%
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CORPORATE BONDS 8.14%
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Banking & Finance 4.69%
Cable, Media & Publishing 0.29%
Computers & Technology 0.58%
Energy 0.54%
Food, Beverage & Tobacco 0.50%
Metals & Mining 0.62%
Real Estate 0.31%
Telecommunications 0.32%
Utilities 0.29%
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MUNICIPAL BONDS 1.09%
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NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS 4.22%
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U.S. TREASURY OBLIGATIONS 25.79%
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REPURCHASE AGREEMENTS 2.93%
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TOTAL MARKET VALUE OF SECURITIES 105.10%
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LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (5.10%)
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TOTAL NET ASSETS 100.00%
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6
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS July 31, 2004
Principal Market
Amount Value (U.S.$)
AGENCY BONDS - 8.03%
Fannie Mae
3.25% 8/15/08 $ 1,550,000 $ 1,517,949
4.25% 5/15/09 375,000 378,273
++Fannie Mae Strip
6.38% 11/15/27 9,000,000 2,210,697
Federal Home Loan Bank
3.875% 2/12/10 3,090,000 3,025,784
7.625% 5/14/10 5,200,000 6,063,933
Freddie Mac
4.75% 10/11/12 790,000 776,331
5.875% 3/21/11 700,000 744,918
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Total Agency Bonds (cost $15,065,482) 14,717,885
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AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 19.19%
Fannie Mae Grantor Trust Series 2001-T8
Class A2 9.50% 7/25/41 1,368,439 1,538,807
Fannie Mae Grantor Trust Series 2001-T10
Class A1 7.00% 12/25/41 526,879 558,037
Fannie Mae Grantor Trust Series 2002-T1
Class A2 7.00% 11/25/31 229,385 244,510
Fannie Mae Grantor Trust Series 2002-T16
Class A3 7.50% 7/25/42 666,258 718,934
Fannie Mae Strip Series 35
Class 2 12.00% 7/1/18 205,795 243,127
Fannie Mae Strip Series C
Class 2 12.00% 5/1/09 334,589 374,654
Fannie Mae Strip Series D-2
11.00% 4/1/09 258,666 283,119
Fannie Mae Strip Series F
Class 2 11.50% 5/1/09 150,277 166,540
Fannie Mae Strip Series H
Class 2 11.50% 5/1/09 261,984 290,308
Fannie Mae Strip Series J
Class 1 7.00% 11/1/10 14,057 14,681
Fannie Mae Series 1988-15 Class A
9.00% 6/25/18 3,545 3,876
Fannie Mae Series 2002-W1 Class 2A
7.50% 2/25/42 420,425 453,665
Fannie Mae Series 2003-18 Class DA
4.50% 11/25/14 2,262,963 2,284,515
Fannie Mae Series 2004-W9 Class 2A1
6.50% 2/25/44 450,105 470,079
Freddie Mac Series 2764 5.00% 3/15/34 650,000 607,504
Freddie Mac Structured Pass Through
Securities Series T-42 Class A5
7.50% 2/25/42 141,870 153,042
Freddie Mac Structured Pass Through
Securities Series T-58 Class 1A2
3.108% 5/25/35 1,495,000 1,492,744
Freddie Mac Structured Pass Through
Securities Series T-58 Class 2A
6.50% 9/25/43 3,704,660 3,887,578
GNMA Series 2002-28 Class B
5.779% 7/16/24 4,000,000 4,222,256
GNMA Series 2002-61 Class BA
4.648% 3/16/26 3,000,000 3,020,167
Principal Market
Amount Value (U.S.$)
AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
GNMA Series 2003-43 Class B
4.374% 4/16/33 $ 5,000,000 $ 4,878,954
GNMA Series 2003-72 Class C
4.86% 2/16/30 2,500,000 2,487,421
GNMA Series 2003-78 Class B
5.11% 10/16/27 5,000,000 5,041,667
GNMA Series 2004-45 Class A
4.02% 12/16/21 1,745,345 1,742,345
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TOTAL AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (cost $35,107,867) 35,178,530
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AGENCY MORTGAGE-BACKED SECURITIES - 28.88%
Fannie Mae
4.92% 5/1/13 4,000,000 4,041,250
7.41% 4/1/10 4,897,191 5,558,311
10.50% 6/1/30 51,639 59,191
Fannie Mae Balloon 7 yr 4.50% 11/1/10 6,932,926 6,943,758
Fannie Mae Relocation 30 yr
5.00% 9/1/33 to 11/1/33 2,179,748 2,148,414
Fannie Mae S.F. 15 yr
6.00% 6/1/17 1,804,996 1,886,785
6.50% 6/1/16 65 69
Fannie Mae S.F. 15 yr TBA August
4.50% 8/15/19 1,225,000 1,205,094
5.00% 8/15/19 5,505,000 5,546,288
5.50% 8/15/19 2,590,000 2,660,416
Fannie Mae S.F. 30 yr
5.50% 3/1/29 984,441 993,055
6.50% 3/1/34 655,845 684,538
7.50% 6/1/31 720,993 772,363
8.00% 2/1/30 68,207 74,090
10.00% 7/1/20 to 2/1/25 1,242,307 1,413,974
Fannie Mae TBA 30 yr 6.00% 8/1/34 740,000 759,194
Freddie Mac Relocation 15 yr
3.50% 9/1/18 to 10/1/18 3,524,526 3,326,271
Freddie Mac Relocation 30 yr
5.00% 9/1/33 3,092,795 3,047,370
Freddie Mac S.F. 15 yr 9.00% 12/1/05 14,690 14,993
Freddie Mac S.F. 30 yr
6.00% 10/1/29 1,548,474 1,595,896
7.00% 11/1/33 307,039 325,173
8.00% 5/1/11 936,300 985,456
8.50% 12/1/09 72,998 77,013
9.00% 9/1/30 561,696 620,148
10.00% 1/1/19 56,984 63,947
11.50% 4/1/11 to 3/1/16 326,285 378,733
GNMA GPM
11.00% 3/15/13 41,743 46,922
11.75% 8/15/13 120,415 136,407
12.00% 1/15/13 8,802 10,001
12.25% 3/15/14 33,496 38,258
GNMA II GPM
10.75% 3/20/16 to 2/20/18 31,340 35,176
12.00% 1/20/14 24,878 28,276
GNMA II S.F. 15 yr 9.00%
11/20/04 to 10/20/05 7,636 7,689
7
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value (U.S.$)
AGENCY MORTGAGE-BACKED SECURITIES (continued)
GNMA II S.F. 30 yr
6.00% 11/20/28 $ 431,909 $ 445,271
6.50% 2/20/30 787,710 824,388
7.50% 9/20/30 147,432 158,582
8.00% 6/20/30 80,111 87,521
10.00% 11/20/15 to 6/20/21 124,263 139,699
10.50% 3/20/16 to 7/20/21 114,635 129,798
11.00% 5/20/15 to 7/20/19 54,821 62,120
12.00% 3/20/14 to 5/20/15 80,478 92,170
12.50% 10/20/13 to 7/20/15 231,596 266,221
GNMA S.F. 15 yr 6.50% 7/15/14 166,489 176,999
GNMA S.F. 30 yr
6.00% 4/15/33 848,824 874,553
6.50% 1/15/28 6,785 7,118
7.00% 5/15/28 943,963 1,005,321
7.50% 12/15/23 to 1/15/32 1,159,611 1,251,424
8.00% 5/15/30 90,653 99,208
9.50% 9/15/17 to 3/15/23 348,067 393,404
10.00% 3/15/16 to 9/15/18 73,665 82,879
11.00% 12/15/09 to 9/15/15 246,693 276,721
11.50% 7/15/15 7,576 8,679
12.00% 12/15/12 to 12/15/15 773,141 888,476
12.50% 5/15/10 to 1/15/16 141,979 163,434
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TOTAL AGENCY MORTGAGE-BACKED SECURITIES
(cost $49,802,557) 52,918,505
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ASSET-BACKED SECURITIES - 4.96%
Chase Manhattan Auto Owner Trust
Series 03-B Class A3 1.82% 7/16/07 1,925,000 1,912,508
Freddie Mac Structured Pass Through
Securities Series T-50 Class A3
2.182% 9/27/07 263,852 263,503
Honda Auto Receivables Owner Trust
Series 2004-2 Class A4 3.81% 10/15/09 700,000 703,905
*Sallie Mae Student Loan Trust Series 02-7
Class A2 1.56% 6/17/13 857,268 857,281
*Sallie Mae Student Loan Trust Series 03-8
Class A1 1.53% 6/16/08 32,019 32,013
*Sallie Mae Student Loan Trust Series 04-1
Class A1 1.70% 1/26/15 2,776,861 2,777,883
*Sallie Mae Student Loan Trust Series 04-5
Class A2 1.585% 4/25/14 1,250,000 1,245,204
*Sallie Mae Student Loan Trust Series 97-2
Class A2 2.049% 1/25/10 581,961 583,534
*Sallie Mae Student Loan Trust Series 97-4
Class A2 2.199% 10/25/10 87,288 88,409
#Sierra Receivables Funding Company
Series 03-1A 144A 3.09% 1/15/14 634,454 629,001
-----------
TOTAL ASSET-BACKED SECURITIES
(cost $9,092,939) 9,093,241
-----------
Principal Market
Amount Value (U.S.$)
COLLATERALIZED MORTGAGE OBLIGATION - 1.60%
First Horizon Asset Securities
Series 03-5 1A17 8.00% 7/25/33 $ 341,156 $ 359,963
#GSMPS Mortgage Loan Trust
Series 144A 1998-2 Class A
7.75% 5/19/27 450,810 485,937
MASTR Alternative Loan Trust Series 04-1
Class 2A1 7.00% 1/25/34 506,093 523,806
Structured Asset Securities
Series 02-22H 1A 7.00% 11/25/32 1,521,748 1,567,145
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATION
(cost $2,958,922) 2,936,851
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 0.27%
*Greenwich Capital Commercial Funding
Series 2004-GG1 Class A7
5.317% 6/10/36 495,000 500,031
------------
TOTAL COMMERCIAL MORTGAGE-BACKED
SECURITIES (cost $497,454) 500,031
------------
CORPORATE BONDS - 8.14%
Banking & Finance - 4.69%
CitiFinancial 10.00% 5/15/09 1,500,000 1,868,097
GMAC 6.75% 1/15/06 3,000,000 3,142,728
*#Premium Asset Trust Series 04-01 144A
1.48% 2/6/06 3,600,000 3,601,764
------------
8,612,589
------------
Cable, Media & Publishing - 0.29%
Thomson Multimedia 5.75% 2/1/08 500,000 529,654
------------
529,654
------------
Computers & Technology - 0.58%
Computer Sciences 6.75% 6/15/06 1,000,000 1,065,321
------------
1,065,321
------------
Energy - 0.54%
ConocoPhillips 4.75% 10/15/12 1,000,000 987,581
------------
987,581
------------
Food, Beverage & Tobacco - 0.50%
Kraft Foods 4.625% 11/1/06 400,000 410,366
Universal 6.50% 2/15/06 475,000 498,726
------------
909,092
------------
Metals & Mining - 0.62%
Alcan 7.25% 3/15/31 1,000,000 1,130,926
------------
1,130,926
------------
Real Estate - 0.31%
Apache Finance 7.00% 3/15/09 500,000 567,895
------------
567,895
------------
Telecommunications - 0.32%
British Telecommunications
8.375% 12/15/10 500,000 590,043
------------
590,043
------------
Utilities - 0.29%
Southern Capital 5.30% 2/1/07 502,000 530,183
------------
530,183
------------
TOTAL CORPORATE BONDS (cost $14,876,023) 14,923,284
------------
8
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value (U.S.$)
MUNICIPAL BONDS - 1.09%
Colorado Department Transportation
5.00% 12/15/12 (FGIC) $ 725,000 $ 793,353
Cook County, Illinois, Chicago Heights
School District, Taxable-Series B
13.15% 12/1/05 (AMBAC) 1,055,000 1,201,191
------------
TOTAL MUNICIPAL BONDS (cost $2,297,654) 1,994,544
------------
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 4.22%
Bank of America Alternative Loan Trust
Series 03-10 Class 2A1 6.00% 12/25/33 2,060,957 2,103,492
*Bank of America Mortgage Securities
Series 04-E Class 1A1 3.555% 6/25/34 685,843 679,078
*Countrywide Home Loans Series 01-HYB2
Class 3A1 5.508% 9/19/31 672,919 674,974
Credit Suisse First Boston Mortgage
Securities Series 03-29 5A1
7.00% 12/25/33 911,077 971,283
*Residential Asset Mortgage Products
Series 04-RZ2 Class AI3 4.30% 1/25/31 410,000 406,669
Residential Asset Mortgage Products
Series 04-SL1 Class A3 7.00% 11/25/31 644,873 670,217
Structured Asset Securities 2004-12H 1A
6.00% 5/25/34 962,873 979,121
*#Summit Mortgage Trust Series 02-1
Class B2 144A 6.276% 6/28/16 290,000 292,175
Travelers Mortgage Securities Series 1- Z2
12.00% 3/1/14 396,507 405,715
*Wells Fargo Mortgage Backed Securities
Trust Series 04-I Class 1A1
3.395% 7/25/34 551,524 551,524
------------
TOTAL NON-AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (cost $7,748,013) 7,734,248
------------
U.S. TREASURY OBLIGATIONS - 25.79%
U.S. Treasury Bonds
5.375% 2/15/31 8,725,000 8,939,042
**12.00% 8/15/13 11,915,000 15,722,224
U.S. Treasury Inflation Index Notes
1.875% 7/15/13 921,313 917,283
2.00% 1/15/14 2,742,230 2,750,157
2.00% 7/15/14 1,604,816 1,604,503
2.375% 1/15/25 1,835,508 1,831,065
3.875% 1/15/09 4,104,075 4,590,313
U.S. Treasury Note
2.50% 5/31/06 2,740,000 2,735,506
3.125% 5/15/07 500,000 501,719
4.25% 11/15/13 1,047,000 1,031,009
++U.S. Treasury Strip - Principal Only
5.433% 11/15/27 24,000,000 6,647,352
------------
TOTAL U.S. TREASURY OBLIGATIONS
(cost $49,364,836) 47,270,173
------------
Principal Market
Amount Value (U.S.$)
REPURCHASE AGREEMENTS - 2.93%
With BNP Paribas 1.30% 8/2/04
(dated 7/30/04, to be repurchased
at $2,758,299 collateralized by
$407,000 U.S. Treasury Bills due
8/19/04, market value $406,690,
$522,000 U.S. Treasury Bills due
12/23/04, market value $518,660,
and $1,904,000 U.S. Treasury Bills due
1/20/05, market value $1,888,067) $ 2,758,000 $ 2,758,000
With UBS Warburg 1.30% 8/2/04
(dated 7/30/04, to be repurchased
at $2,621,284 collateralized by
$1,311,000 U.S. Treasury Bills due
8/12/04, market value $1,310,189,
and $1,360,000 U.S. Treasury Notes
1.625% due 3/31/05, market
value $1,365,496) 2,621,000 2,621,000
------------
REPURCHASE AGREEMENTS (cost $5,379,000) 5,379,000
------------
TOTAL MARKET VALUE OF SECURITIES - 105.10%
(cost $192,190,747) 192,646,292
LIABILITIES NET OF RECEIVABLES AND
OTHER ASSETS - (5.10%)+ (9,356,520)
------------
NET ASSETS APPLICABLE TO 23,933,655 SHARES
OUTSTANDING - 100.00% $183,289,772
------------
Net Asset Value -- Delaware American
Government Bond Fund Class A
($117,566,876 / 15,351,529 Shares) $7.66
-----
Net Asset Value -- Delaware American
Government Bond Fund Class B
($28,086,545 / 3,667,514 Shares) $7.66
-----
Net Asset Value -- Delaware American
Government Bond Fund Class C
($8,633,912 / 1,127,393 Shares) $7.66
-----
Net Asset Value -- Delaware American
Government Bond Fund Class R
($63,533 / 8,290 Shares) $7.66
-----
Net Asset Value -- Delaware American
Government Bond Fund Institutional Class
($28,938,906 / 3,778,929 Shares) $7.66
-----
9
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF NET ASSETS (CONTINUED)
COMPONENTS OF NET ASSETS AT JULY 31, 2004:***
Shares of beneficial interest
(unlimited authorization - no par) $203,200,098
Accumulated net realized loss on investments (20,400,618)
Net unrealized appreciation of investments 490,292
------------
Total net assets $183,289,772
============
SUMMARY OF ABBREVIATIONS:
AMBAC -- Insured by the AMBAC Indemnity Corporation
FGIC -- Insured by the Financial Guaranty Insurance Company
GNMA -- Government National Mortgage Association
GPM -- Graduate Payment Mortgage
S.F. -- Single Family
TBA -- To be announced
yr -- Year
*Variable Rate Notes - the interest rate shown is the rate as of July 31,
2004.
**Fully or partially pledged as collateral for financial futures contracts.
***See Note #4 in "Notes to Financial Statements."
+Of this amount, $13,353,220 represents payable for securities purchased as of
July 31, 2004.
++Zero coupon bond. The interest rate shown is the effective yield as of July
31, 2004.
#Securities exempt from registration under Rule 144A of the securities Act of
1933. See Note #10 in "Notes to Financial Statements."
NET ASSET VALUE AND OFFERING PRICE PER SHARE --
DELAWARE AMERICAN GOVERNMENT BOND FUND
Net asset value Class A (A) $7.66
Sales charge (4.50% of offering price, or 4.70%
of the amount invested per share) (B) 0.36
-----
Offering price $8.02
=====
(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 $100,000 or more.
See accompanying notes
10
STATEMENT DELAWARE AMERICAN GOVERNMENT BOND FUND
OF OPERATIONS Year Ended July 31, 2004
INVESTMENT INCOME:
Interest $8,727,444
----------
EXPENSES:
Management fees $1,178,003
Dividend disbursing and transfer agent fees and expenses 1,324,550
Distribution expenses -- Class A 414,103
Distribution expenses -- Class B 346,169
Distribution expenses -- Class C 96,489
Distribution expenses -- Class R 259
Accounting and administration expenses 81,403
Registration fees 66,535
Legal and professional fees 44,582
Reports and statements to shareholders 39,187
Custodian fees 18,474
Trustees' fees 15,150
Pricing Fees 4,482
Taxes (other than taxes on income) 1,195
Other 8,650 3,639,231
---------
Less expenses absorbed or waived (1,169,544)
Less expenses paid indirectly (2,247)
----------
Total expenses 2,467,440
----------
NET INVESTMENT INCOME 6,260,004
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments (594,808)
Futures contracts (1,990,552)
Options written 151,591
Swap agreements (139,167)
----------
Net realized loss (2,572,936)
Net change in unrealized appreciation/depreciation of investments 4,608,718
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,035,782
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,295,786
==========
See accompanying notes
11
STATEMENTS DELAWARE AMERICAN GOVERNMENT BOND FUND
OF CHANGES IN NET ASSETS
Year Ended
7/31/04 7/31/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 6,260,004 $ 7,931,142
Net realized gain (loss) on investments (2,572,936) 13,251,527
Net change in unrealized appreciation/depreciation of investments 4,608,718 (11,670,640)
------------ ------------
Net increase in net assets resulting from operations 8,295,786 9,512,029
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (5,322,346) (6,863,002)
Class B (1,108,293) (1,849,857)
Class C (310,855) (393,326)
Class R (1,559) --
Institutional Class (1,347,990) (2,044,301)
Return of capital:
Class A (476,374) --
Class B (100,061) --
Class C (27,064) --
Class R (169) --
Institutional Class (101,032) --
------------ ------------
(8,795,743) (11,150,486)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 23,433,436 51,065,955
Class B 1,841,149 14,638,875
Class C 1,774,343 5,620,553
Class R 78,018 8
Institutional Class 9,534,793 17,403,515
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 4,392,646 5,057,517
Class B 857,889 1,287,885
Class C 294,822 347,959
Class R 1,668 --
Institutional Class 1,402,231 2,031,021
------------ ------------
43,610,995 97,453,288
------------ ------------
Cost of shares repurchased:
Class A (60,896,348) (45,701,741)
Class B (17,109,323) (19,706,765)
Class C (4,039,598) (3,943,333)
Class R (15,319) --
Institutional Class (25,084,967) (17,348,277)
------------ ------------
(107,145,555) (86,700,116)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions (63,534,560) 10,753,172
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS (64,034,517) 9,114,715
NET ASSETS:
Beginning of year 247,324,289 238,209,574
------------ ------------
End of year (including distributions in excess of net investment income of $- and ($73), respectively) $183,289,772 $247,324,289
============ ============
See accompanying notes
12
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Delaware American Government Bond Fund Class A
Year Ended
7/31/04 7/31/03 7/31/02(1) 7/31/01 7/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $7.700 $7.750 $7.590 $7.170 $7.300
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.211 0.249 0.339 0.433 0.469
Net realized and unrealized gain (loss) on investments 0.077 0.050 0.227 0.418 (0.128)
------ ------ ------ ------ ------
Total from investment operations 0.288 0.299 0.566 0.851 0.341
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.302) (0.349) (0.406) (0.431) (0.471)
Return of capital (0.026) -- -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.328) (0.349) (0.406) (0.431) (0.471)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
====== ====== ====== ====== ======
TOTAL RETURN(2) 3.77% 3.85% 7.66% 12.14% 4.88%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $117,567 $151,135 $141,771 $96,539 $92,100
Ratio of expenses to average net assets 1.05% 1.05% 1.05% 1.61% 1.34%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.60% 1.69% 1.64% 1.61% 1.34%
Ratio of net investment income to average net assets 3.02% 3.17% 4.43% 5.82% 6.55%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 2.47% 2.53% 3.84% 5.82% 6.55%
Portfolio turnover 303% 501% 316% 186% 223%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets of 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for 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, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Delaware American Government Bond Fund Class B
Year Ended
7/31/04 7/31/03 7/31/02(1) 7/31/01 7/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $7.700 $7.750 $7.590 $7.170 $7.300
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.161 0.194 0.283 0.380 0.419
Net realized and unrealized gain (loss) on investments 0.073 0.049 0.227 0.418 (0.128)
------ ------ ------ ------ ------
Total from investment operations 0.234 0.243 0.510 0.798 0.291
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.252) (0.293) (0.350) (0.378) (0.421)
Return of capital (0.022) -- -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.274) (0.293) (0.350) (0.378) (0.421)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
====== ====== ====== ====== ======
TOTAL RETURN(2) 3.05% 3.12% 6.88% 11.36% 4.15%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $28,087 $42,543 $46,486 $23,556 $15,855
Ratio of expenses to average net assets 1.75% 1.75% 1.75% 2.31% 2.04%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.30% 2.39% 2.34% 2.31% 2.04%
Ratio of net investment income to average net assets 2.32% 2.47% 3.73% 5.12% 5.85%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 1.77% 1.83% 3.14% 5.12% 5.85%
Portfolio turnover 303% 501% 316% 186% 223%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets of 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for 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, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Delaware American Government Bond Fund Class C
Year Ended
7/31/04 7/31/03 7/31/02(1) 7/31/01 7/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $7.700 $7.750 $7.590 $7.170 $7.300
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.161 0.193 0.281 0.380 0.420
Net realized and unrealized gain (loss) on investments 0.073 0.050 0.227 0.418 (0.129)
------ ------ ------ ------ ------
Total from investment operations 0.234 0.243 0.508 0.798 0.291
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.252) (0.293) (0.348) (0.378) (0.421)
Return of capital (0.022) -- -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.274) (0.293) (0.348) (0.378) (0.421)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
====== ====== ====== ====== ======
TOTAL RETURN(2) 3.05% 3.12% 6.85% 11.36% 4.15%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $8,634 $10,641 $8,728 $4,145 $2,434
Ratio of expenses to average net assets 1.75% 1.75% 1.75% 2.31% 2.04%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.30% 2.39% 2.34% 2.31% 2.04%
Ratio of net investment income to average net assets 2.32% 2.47% 3.73% 5.12% 5.85%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 1.77% 1.83% 3.14% 5.12% 5.85%
Portfolio turnover 303% 501% 316% 186% 223%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets of 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for 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, as
applicable. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
15
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Delaware American Government Bond Fund Class R
6/2/03(1)
Year Ended to
7/31/04 7/31/03
NET ASSET VALUE, BEGINNING OF PERIOD $7.700 $8.040
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.187 0.051
Net realized and unrealized gain (loss) on investments 0.075 (0.355)
------ ------
Total from investment operations 0.262 (0.304)
------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.278) (0.036)
Return of capital (0.024) --
------ ------
Total dividends and distributions (0.302) (0.036)
------ ------
NET ASSET VALUE, END OF PERIOD $7.660 $7.700
====== ======
TOTAL RETURN(2) 3.43% (3.79%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $63 $--
Ratio of expenses to average net assets 1.35% 1.35%
Ratio of expenses to average net assets prior to expense limitation
and expenses paid indirectly 1.90% 2.35%
Ratio of net investment income to average net assets 2.72% 2.07%
Ratio of net investment income to average net assets prior to expense
limitation and expenses paid indirectly 2.17% 1.07%
Portfolio turnover 303% 501%
(1) Date of commencement of operations. Ratios have been annualized and total
return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share
for 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, as applicable. Performance would have been lower had
the expense limitation not been in effect.
See accompanying notes
16
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Delaware American Government Bond Fund Institutional Class
Year Ended
7/31/04 7/31/03 7/31/02(1) 7/31/01 7/31/00
NET ASSET VALUE, BEGINNING OF PERIOD $7.700 $7.750 $7.590 $7.170 $7.300
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.233 0.272 0.361 0.454 0.492
Net realized and unrealized gain (loss) on investments 0.079 0.050 0.228 0.418 (0.130)
------ ------ ------ ------ ------
Total from investment operations 0.312 0.322 0.589 0.872 0.362
------ ------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.324) (0.372) (0.429) (0.452) (0.492)
Return of capital (0.028) -- -- -- --
------ ------ ------ ------ ------
Total dividends and distributions (0.352) (0.372) (0.429) (0.452) (0.492)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $7.660 $7.700 $7.750 $7.590 $7.170
====== ====== ====== ====== ======
TOTAL RETURN(2) 4.08% 4.15% 7.99% 12.46% 5.19%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $28,939 $43,006 $41,225 $33,337 $32,609
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 1.31% 1.04%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.30% 1.39% 1.34% 1.31% 1.04%
Ratio of net investment income to average net assets 3.32% 3.47% 4.73% 6.12% 6.85%
Ratio of net investment income to average net assets prior
to expense limitation and expenses paid indirectly 2.77% 2.83% 4.14% 6.12% 6.85%
Portfolio turnover 303% 501% 316% 186% 223%
(1) As required, effective August 1, 2001, the Fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies that requires
amortization of all premiums and discounts on debt securities and the
recording of paydown gains and losses on mortgage- and asset-backed
securities as an adjustment to interest income. The effect of these changes
for the year ended July 31, 2002 was a decrease in net investment income per
share of $0.076, an increase in net realized and unrealized gain (loss) per
share of $0.076, and a decrease in the ratio of net investment income to
average net assets of 0.99%. Per share data and ratios for the periods prior
to August 1, 2001 have not been restated to reflect these changes in
accounting.
(2) Total investment return is based on the change in net asset value of a share
for 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, as applicable. Performance would have been lower had
the expense limitation not been in effect.
See accompanying notes
17
NOTES DELAWARE AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS July 31, 2004
Delaware Group Government Bond Funds (the "Trust") is organized as a Delaware
statutory trust and offers one series: Delaware American Government Bond Fund
(the "Fund"). The Trust is an open-end investment company. The Fund is
considered diversified under the Investment Company Act of 1940, as amended, and
offers Class A, Class B, Class C, Class R and Institutional Class shares. Class
A shares are sold with a front-end sales charge of up to 4.50%. Class B shares
are sold with a contingent deferred sales charge that declines from 4% to zero
depending upon the period of time the shares are held. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately eight
years after purchase. Class C shares are sold with a contingent deferred sales
charge of 1%, if redeemed during the first 12 months. Institutional and Class R
shares are not subject to a sales charge and are offered for sales exclusively
to a limited group of investors.
The investment objective of the Fund is to seek high current income consistent
with safety of principal by investing primarily in debt obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- U.S. government and agency securities are valued at the
mean between the bid and asked prices. Other long-term debt securities are
valued by an independent pricing service and such prices are believed to reflect
the fair value of such securities. Short-term debt securities having less than
60 days to maturity are valued at amortized cost, which approximates market
value. Futures contracts and options on futures are valued at the daily quoted
settlement prices. Swap agreements and other securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Fund's Board of Trustees.
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income and common expenses are allocated to the
classes of the Fund on the basis of "settled shares" of each class in relation
to the net assets of the Fund. Realized and unrealized gain (loss) on
investments are allocated to the various classes of the Fund on the basis of
daily net assets of each class. Distribution expenses relating to a specific
class are charged directly to that class.
Repurchase Agreements -- The Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates -- The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other -- Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Management fees and other expenses are paid monthly. 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. Interest income is
recorded on the accrual basis. Discounts and premiums are amortized to interest
income over the lives of the respective securities. Realized gains (losses) on
paydowns of mortgage- and asset-backed securities are classified as interest
income. The Fund declares dividends daily from net investment income and pays
such dividends monthly and declares and pays distributions from net realized
gain on investments, if any, annually.
Through December 31, 2003, certain expenses of the Fund were paid through
commission arrangements with brokers. The amount of these expenses was
approximately $2,247 for the year ended July 31, 2004. 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 July 31, 2004. 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 0.55% on the first $500 million of average daily net assets of the Fund,
0.50% on the next $500 million, 0.45% on the next $1.5 billion, and 0.425% on
average daily net assets in excess of $2.5 billion.
DMC has contractually waived 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 September 30, 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.
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 July 31, 2004, the Fund had receivables from and liabilities payable to
affiliates as follows:
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses
payable to DSC ($99,359)
Other expenses payable to DMC and affiliates* (8,058)
Receivable from DMC under expense limitation agreement 50,759
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
18
NOTES DELAWARE AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
For the year ended July 31, 2004, DDLP earned $180,381 for commissions on sales
of the Fund's Class A shares.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services expenses, including in-house legal services provided to
the Fund by DMC employees. For the year ended July 31, 2004, the Fund had costs
of $11,477.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. INVESTMENTS
For the year ended July 31, 2004, the Fund made purchases and sales of
investment securities as follows:
Purchases other than U.S. government securities
and short-term investments $280,590,048
Purchases of U.S. government securities 374,803,225
Sales other than U.S. government securities
and short-term investments 300,989,198
Sales of U.S. government securities 417,075,429
At July 31, 2004, the cost of investments for federal tax purposes was
$195,046,637. At July 31, 2004, the net unrealized depreciation was $2,400,345
of which $1,537,709 related to unrealized appreciation of investments and
$3,938,054 related to unrealized depreciation of investments.
4. DIVIDEND AND DISTRIBUTION INFORMATION
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from U.S. generally
accepted accounting principles. The tax character of dividends and distributions
paid during the years ended July 31, 2004 and 2003 was as follows:
2004 2003
---- ----
Ordinary income $8,091,043 $11,150,486
Return of capital 704,700 --
---------- -----------
$8,795,743 $11,150,486
---------- -----------
As of July 31, 2004, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $203,200,098
Capital loss carryforwards (16,190,391)
Post-October losses (1,363,657)
Unrealized depreciation of investments (2,356,278)
------------
Net assets $183,289,772
============
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. $3,761,689 expired in 2004.
Such capital loss carry forwards expire as follows: $2,371,574 expires in 2005;
$3,195,086 expires in 2007; $6,907,431 expires in 2008; $1,219,236 expires in
2009 and $2,497,064 expires in 2012.
Post-October losses represent losses realized on investment transactions from
November 1, 2003 through July 31, 2004 that, in accordance with federal income
tax regulations, the Fund has elected to defer and treat as having arisen in the
following fiscal year.
For financial reporting purposes, capital accounts and distributions to
shareholders are adjusted to reflect the tax character of permanent book/tax
differences. For the year ended July 31, 2004, the Fund recorded the following
permanent reclassifications. Reclassifications are primarily due to tax
treatment of market discount on certain debt instruments and paydowns of
mortgage- and asset-backed securities and expiration of capital loss
carryforward. Results of operations and net assets were not affected by these
reclassifications.
Undistributed net investment income $ 2,497,323
Accumulated net realized gain (loss) 1,264,420
Paid-in-Capital (3,761,743)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Year Ended
7/31/04 7/31/03
Shares sold:
Class A 3,022,977 6,473,667
Class B 237,322 1,855,418
Class C 228,490 710,912
Class R 10,050 1
Institutional Class 1,231,246 2,204,417
Shares issued upon reinvestment of
dividends and distributions:
Class A 566,213 642,084
Class B 110,566 163,578
Class C 38,004 44,183
Class R 215 --
Institutional Class 180,839 257,863
---------- ----------
5,625,922 12,352,123
---------- ----------
Shares repurchased:
Class A (7,867,124) (5,780,683)
Class B (2,205,653) (2,492,357)
Class C (521,129) (499,371)
Class R (1,976) --
Institutional Class (3,218,511) (2,196,588)
---------- ----------
(13,814,393) (10,968,999)
---------- ----------
Net increase (decrease) (8,188,471) 1,383,124
========== ==========
For the years ended July 31, 2004 and 2003, 220,824 Class B shares were
converted to 220,824 Class A shares valued at $1,721,971 and 215,772 Class B
shares were converted to 215,772 Class A shares valued at $1,708,857,
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 amount outstanding as of July 31, 2004, or at any time during the
year.
19
NOTES DELAWARE AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
7. OPTIONS WRITTEN
During the year ended July 31, 2004, the Fund entered into options contracts in
accordance with its investment objectives. When the Fund writes an option, a
premium is received and a liability is recorded and adjusted on a daily basis to
reflect the current market value of the options written. Premiums received from
writing options that expire unexercised are treated by the Fund on the
expiration date as realized gains. The difference between the premium received
and the amount paid on effecting a closing purchase transaction, including
brokerage commissions, is treated as realized gain or loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security in determining whether the Fund has a realized gain or loss. If a put
option is exercised, the premium reduces the cost basis of the securities
purchased by the Fund. The Fund, as a writer of an option, bears the market risk
of an unfavorable change in the price of the security underlying the written
option.
Transactions in options written during the year ended July 31, 2004 for the Fund
were as follows:
Number of
Contracts Premiums
--------- --------
Options outstanding at July 31, 2003 610 $ 265,292
Options written 2,288 1,014,642
Options terminated in closing purchase transactions (2,898) (1,133,191)
------- ----------
Options outstanding at July 31, 2004 -- $--
======= ==========
8. FUTURES CONTRACTS
The Fund may invest in financial futures contracts to hedge its existing
portfolio securities against fluctuations in fair value caused by changes in
prevailing market interest rates. Upon entering into a futures contract, the
Fund deposits cash or pledges U.S. government securities to a broker, equal to
the minimum "initial margin" requirements of the exchange on which the contract
is traded. (In some cases, due to the form of the futures agreement, initial
margin is held in a segregated account with the Fund's custodian, rather than
directly with the broker.) Subsequent payments are received from the broker or
paid to the broker (or added to the segregated account) each day, based on the
daily fluctuation in the market value of the contract. These receipts or
payments are known as "variation margin" and are recorded daily by the Fund as
unrealized gains or losses until the contracts are closed. When the contracts
are closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk of entering into futures contracts include potential
imperfect correlation between the futures contracts and the underlying
securities and the possibility of an illiquid secondary market for these
instruments.
Financial futures contracts open at July 31, 2004 were as follows:
Notional Unrealized
Contracts to Sell Proceeds Expiration Date Loss
- ----------------- ----------- --------------- ----------
(38) U.S. 10 Year Treasury Note $(4,203,694) September 2004 $(3,619)
(69) U.S. 5 Year Treasury Note (7,549,799) September 2004 (5,701)
-------
$(9,320)
=======
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the financial statements. The notional
amounts presented above represent the Fund's total exposure in such contracts,
whereas only the net unrealized appreciation (depreciation) is reflected in the
Fund's net assets.
9. SWAP AGREEMENTS
During the year ended July 31, 2004, the Fund entered into total return swap
agreements in accordance with its investment objectives. A swap is an agreement
to exchange the return generated by one instrument for the return generated by
another instrument. Total return swaps involve commitments to pay interest in
exchange for a market linked return based on a notional amount. To the extent
the total return of the security, instrument or basket of instruments underlying
the transaction exceeds the offsetting interest obligation, the Fund will
receive a payment from the counterparty. To the extent the total return of the
security, instrument or basket of instruments underlying the transaction falls
short of the offsetting interest obligation, the Fund will make a payment to the
counterparty. The change in value of swap agreements outstanding, if any, is
recorded as unrealized appreciation or depreciation daily. A realized gain or
loss is recorded on maturity or termination of the swap agreement.
At July 31, 2004, the Fund had the following total return swap agreement
outstanding:
Notional Expiration
Amount Date Description Unrealized Gain
- --------- ------------ ----------- ---------------
$ 5,765,000 12/31/2004 Agreement with Goldman Sachs Capital Markets, L.P. $44,067
to receive The notional amount multiplied by the return on
the Lehman Brothers Commercial MBS Index AAA and to pay
the notional Amount multiplied by the 1 month BBA LIBOR
adjusted by a spread of minus 0.45%.
Because there is no organized market for these swap agreements, the value of
open swaps may differ from that which would be realized in the event the Fund
terminated its position in the agreement. Risks of entering into these
agreements include the potential inability of the counterparty to meet the terms
of the agreements. This type of risk is generally limited to the amount of
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the day of default. Risks also arise from
potential losses from adverse market movements and such losses could exceed the
related amounts shown above.
20
NOTES DELAWARE AMERICAN GOVERNMENT BOND FUND
TO FINANCIAL STATEMENTS (CONTINUED)
10. CREDIT AND MARKET RISK
The Fund may invest up to 20% of net assets in high quality non-government
securities. Non-government securities include corporate bonds, certificates of
deposit, corporate commercial paper, asset-backed securities and mortgage-backed
securities that are not directly guaranteed by the U.S. government in any way.
Some of these securities are collateralized mortgage obligations (CMOs). CMOs
are debt securities issued by U.S. government agencies or by financial
institutions and other mortgage lenders, which are collateralized by a pool of
mortgages held under an indenture. Prepayment of mortgages may shorten the
stated maturity of the obligations and can result in a loss of premium, if any
has been paid. Certain of these securities may be stripped (securities which
provide only principal or interest feature of the underlying security). The
yield to maturity on an interest-only CMO is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. A rapid rate
of principal payments may have a material adverse affect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investments in these securities even if the securities are rated in the highest
rating categories.
The Fund may invest up to 10% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
11. CONTRACTUAL OBLIGATIONS
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
12. TAX INFORMATION (UNAUDITED)
The information set forth below is for the Fund's fiscal year as required
by federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly, the information needed by
shareholders for income tax purposes will be sent to them in January of each
year. Please consult your tax advisor for proper treatment of this information.
For the fiscal year ended July 31, 2004, the Fund designates distributions paid
during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income (C) Total
Distributions Distributions Return Distributions
(Tax Basis) (Tax Basis) of Capital (Tax Basis)
- --------------- -------------- ---------- ----------------
-- 92% 8% 100%
(A), (B) and (C) are based on a percentage of the Fund's total distribution.
21
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group Government Fund - Delaware American
Government Bond Fund
We have audited the accompanying statement of net assets of Delaware American
Government Bond Fund (the only series of Delaware Group Government Fund) (the
"Fund") as of July 31, 2004, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of securities owned as of July 31, 2004, 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 the
Delaware American Government Bond Fund of Delaware Group Government Fund at July
31, 2004, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and its
financial highlights for each of the periods indicated therein, in conformity
with U.S. generally accepted accounting principles. Philadelphia, Pennsylvania
September 10, 2004
Ernst & Young LLP
Philadelphia, Pennsylvania
September 10, 2004
22
DELAWARE INVESTMENTS FAMILY OF FUNDS
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors which has oversight
responsibility for the management of a fund's business affairs.
Trustees/Directors 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/Directors and
Officers with 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 4 Years - Since August 2000, 77 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 16 Years Board Chairman - 94 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 94 Trustee - Abington
2005 Market Street Memorial Hospital
Philadelphia, PA
19103 President/Director -
22 WR Corporation
August 7, 1937
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN A. FRY Trustee(4) 3 Years President - 77 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
May 28, 1960 University of Pennsylvania
(April 1995 - June 2002)
- ------------------------------------------------------------------------------------------------------------------------------------
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 94 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
- ------------------------------------------------------------------------------------------------------------------------------------
23
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 15 Years Treasurer/Chief Fiscal Officer - 94 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
November 1, 1940 Director - Systemax Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS F. MADISON Trustee 10 Years President/Chief 94 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
February 25, 1936 (January 1993 - Present)
Director - Digital River Inc.
Director - Rimage
Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
JANET L. YEOMANS Trustee 5 Years Vice President/Mergers & 94 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 94 None(5)
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 Executive Vice Chief Legal Ms. Maestro has served in 94 None(5)
2005 Market Street President, Officer various executive capacities
Philadelphia, PA Chief Legal Officer since at different times at
19103 and Secretary March 17, 2003 Delaware Investments.
November 26, 1957
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL P. BISHOF Senior Vice 8 Years Mr. Bishof has served in 94 None(5)
2005 Market Street President various executive capacities
Philadelphia, PA and Treasurer at different times at
19103 Delaware Investments.
August 18, 1962
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the Registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the portfolios of Voyageur
Insured Funds, Voyageur Intermediate Tax Free Funds, Voyageur Investment
Trust, Voyageur Mutual Funds, Voyageur Mutual Funds II, Voyageur Mutual
Funds III and Voyageur Tax Free Funds.
(5) Mr. Hastings, Mr. Bishof and Ms. Maestro also serve in similar capacities
for the six portfolios of the Optimum Fund Trust, which have the same
investment advisor, principal underwriter, and transfer agent as the
registrant.
The Statement of Additional Information for the Fund(s) includes additional
information about the Trustees/Directors and Officers and is available, without
charge, upon request by calling 800 523-1918.
24
Delaware
Investments(SM)
- --------------------------------------
a member of Lincoln Financial Group(R)
This annual report is for the information of Delaware American Government Bond
Fund shareholders, but it may be used with prospective investors when preceded
or accompanied by a current prospectus for Delaware American Government Bond
Fund and the Delaware Investments Performance Update for the most recently
completed calendar quarter. The prospectus sets forth details about charges,
expenses, investment objectives, and operating policies of 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 Executive 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
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The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and
procedures that the Fund uses to determine how to vote proxies (if any) relating
to portfolio securities 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. The Fund's Forms
N-Q may be reviewed and copied at the Commission's Public Reference Room in
Washington, DC; information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through the Fund's website at
http://www.delawareinvestments.com; and (ii) on the Commission's website at
http://www.sec.gov.
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(8898) Printed in the USA
AR-023 [8/04] IVES 9/04 J9785
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
(a) Audit fees.
----------
The aggregate fees billed for services provided to the Registrant by
its independent auditors for the audit of the Registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $26,000 for
the fiscal year ended July 31, 2004.
The aggregate fees billed for services provided to the Registrant by
its independent auditors for the audit of the Registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $23,750 for
the fiscal year ended July 31, 2003.
_______________________
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.
(b) Audit-related fees.
------------------
The aggregate fees billed by the Registrant's independent auditors for
services relating to the performance of the audit of the Registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended July 31, 2004.
The aggregate fees billed by the Registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the Registrant's investment adviser(s) and other service providers under common
control with the adviser(s) and that relate directly to the operations or
financial reporting of the Registrant were $167,700 for the Registrant's fiscal
year ended July 31, 2004. The percentage of these fees relating to services
approved by the Registrant's Audit Committee pursuant to the de minimis
exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of
Regulation S-X was 0%. These audit-related services were as follows: issuance of
reports concerning transfer agent's system of internal accounting control
pursuant to Rule 17Ad-13 of the Securities Exchange Act; issuance of agreed upon
procedures reports to the Fund's Board in connection with the annual transfer
agent and fund accounting service agent contract renewals and the pass-through
of internal legal cost relating to the operations of the Funds; and preparation
of Report on Controls Placed in Operation and Tests of Operating Effectiveness
Relating to the Retirement Plan Services Division ("SAS 70 report").
The aggregate fees billed by the Registrant's independent auditors for
services relating to the performance of the audit of the Registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended July 31, 2003.
The aggregate fees billed by the Registrant's independent auditors for
services relating to the performance of the audit of the financial statements of
the Registrant's investment adviser(s) and other service providers under common
control with the adviser(s) and that relate directly to the operations or
financial reporting of the Registrant were $166,400 for the Registrant's fiscal
year ended July 31, 2003. The percentage of these fees relating to services
approved by the Registrant's Audit Committee pursuant to the de minimis
exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of
Regulation S-X was 0%. These audit-related services were as follows: issuance of
reports concerning transfer agent's system of internal accounting control
pursuant to Rule 17Ad-13 of the Securities Exchange Act; issuance of agreed upon
procedures reports to the Fund's Board in connection with the annual transfer
agent and fund accounting service agent contract renewals and the pass-through
of internal legal cost relating to the operations of the Funds; and preparation
of Report on Controls Placed in Operation and Tests of Operating Effectiveness
Relating to the Retirement Plan Services Division ("SAS 70 report").
(c) Tax fees.
--------
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant were $1,750 for the fiscal year
ended July 31, 2004. The percentage of these fees relating to services approved
by the Registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax returns and
annual excise distribution calculations.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant's investment adviser(s) and
other service providers under common control with the adviser(s) and that relate
directly to the operations or financial reporting of the Registrant were $0 for
the Registrant's fiscal year ended July 31, 2004.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant were $1,250 for the fiscal year
ended July 31, 2003. The percentage of these fees relating to services approved
by the Registrant's Audit Committee pursuant to the de minimis exception from
the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
These tax-related services were as follows: review of income tax returns and
annual excise distribution calculations.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant's adviser(s) and other service
providers under common control with the adviser(s) and that relate directly to
the operations or financial reporting of the Registrant were $0 for the
Registrant's fiscal year ended July 31, 2003.
(d) All other fees.
--------------
The aggregate fees billed for all services provided by the independent
auditors to the Registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended July 31, 2004.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the Registrant's independent
auditors to the Registrant's adviser(s) and other service providers under common
control with the adviser(s) and that relate directly to the operations or
financial reporting of the Registrant were $0 for the Registrant's fiscal year
ended July 31, 2004.
The aggregate fees billed for all services provided by the independent
auditors to the Registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended July 31, 2003.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the Registrant's independent
auditors to the Registrant's adviser(s) and other service providers under common
control with the adviser(s) and that relate directly to the operations or
financial reporting of the Registrant were $0 for the Registrant's fiscal year
ended July 31, 2003.
(e) The Registrant's Audit Committee has not established pre-approval
policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the Registrant's independent
auditors for services rendered to the Registrant and to its investment
adviser(s) and other service providers under common control with the adviser(s)
were $344,690 and $299,550 for the Registrant's fiscal years ended July 31, 2004
and July 31, 2003, respectively.
(h) In connection with its selection of the independent auditors, the
Registrant's Audit Committee has considered the independent auditors' provision
of non-audit services to the Registrant's investment adviser(s) and other
service providers under common control with the adviser(s) that were not
required to be pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X.
The Audit Committee has determined that the independent auditors' provision of
these services is compatible with maintaining the auditors' independence.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. 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 11. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf, by the undersigned, thereunto duly authorized.
NAME OF REGISTRANT: Delaware Group Government Fund
JUDE T. DRISCOLL
- --------------------------------
By: Jude T. Driscoll
Title: Chairman
Date: 10/4/04
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
- --------------------------------
By: Jude T. Driscoll
Title: Chairman
Date: 10/4/04
JOSEPH H. HASTINGS
- --------------------------------
By: Joseph H. Hastings
Title: Chief Financial Officer
Date: 10/4/04