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: 811-750
Exact name of registrant as specified in charter: Delaware Group Equity Funds II
Address of principal executive offices: 2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service: Richelle S. Maestro, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: November 30
Date of reporting period: November 30, 2004
Item 1. Reports to Stockholders
Delaware
Investments(SM)
--------------------------------------
VALUE-EQUITY A member of Lincoln Financial Group(R)
ANNUAL REPORT NOVEMBER 30, 2004
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DELAWARE LARGE CAP VALUE 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 9
Statements of Changes in Net Assets 10
Financial Highlights 11
Notes to Financial Statements 16
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 19
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BOARD OF TRUSTEES/OFFICERS 20
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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 LARGE CAP VALUE FUND
MANAGEMENT REVIEW December 10, 2004
FUND MANAGER
John B. Fields
Senior Portfolio Manager
Q: HOW DID THE FUND PERFORM DURING THE 12-MONTH PERIOD ENDED NOVEMBER 30, 2004
AND WHAT DROVE STOCK MARKET PERFORMANCE DURING THE YEAR?
A: Value-oriented companies and small caps in particular performed well during
the past year as investors sought undervalued companies with strong balance
sheets. For the 12-month period ended November 30, 2004, Delaware Large Cap
Value Fund returned +12.44% (Class A shares at net asset value with
distributions reinvested). The Fund underperformed its benchmark, the S&P 500
Index, which rose +12.85%.
Uncertainties in the geopolitical and economic arenas during the past year
prompted a shift in favor from growth-oriented investments to value-oriented
stocks. During the period, we witnessed increased violence in Iraq, a series of
serious hurricanes that hit the southeastern U.S., and several Federal Reserve
rate increases. Adding to that backdrop, a tight U.S. presidential election made
investors hesitant to make any substantial moves during much of late summer and
early fall.
Throughout the period, the theme of economic sensitivity prevailed. Investors
watched closely for clues as to how wide ranging the economic expansion would
become. Toward the end of 2003, stocks in more volatile, growth-oriented
sectors, such as technology, tended to outperform. Early in 2004, however,
earnings expectations in the technology sector began to lag. As a result,
investors sought companies with strong fundamentals, including dividend-paying
stocks. As the economic expansion began to gain momentum and housing continued
to boom, producers of steel, copper, plastics, and other durables prospered.
Q: WHAT STRATEGIES WERE EMPLOYED BY THE FUND AND HOW DID THEY IMPACT
PERFORMANCE?
A: The Fund's strong performance during the year was driven primarily by sector
positioning. We held a large position in energy stocks, the best-performing
sector for the year. Oil companies, in particular, performed extremely well
during the period, which was a direct result of the dramatic rise in crude oil
prices. We also held a healthy position in the basic materials sector, which
includes companies that provide materials, commodities, and chemicals to
manufacturers. As the economy strengthened during the year, manufacturing picked
up, increasing business opportunities for companies within this arena.
Alternatively, technology stocks lagged for the year. Consumer and corporate
spending waned, creating a technology surplus that in turn hurt profits.
Semiconductor companies, in particular, were hit hard as demand for computers
dropped from previously lofty levels.
Q: PLEASE IDENTIFY SOME STOCKS THAT CONTRIBUTED POSITIVELY TO FUND PERFORMANCE.
A: During the year we have been steadily adding to our position in basic
materials, a sector that we believe will continue to grow as the economy
strengthens and demand increases for materials like plastics, metals, and
chemicals. Strong performers for the year included basic material company Dow
Chemical. Under new management, Dow has undertaken a massive campaign to recoup
losses registered during the late 1990s and early part of this decade. During
the last year, the company has substantially cut operating costs and increased
sales levels.
In financial services, strong performance came from Bank of America and Charter
One Financial. With its recent acquisition of Fleet, we see strong growth
potential for Bank of America. We consolidated our holdings in this area by
selling Charter One Financial at a net profit.
Retail product companies like Limited Brands, Federated Department Stores, and
Starwood Hotels and Resorts also offered strong results, as retail spending
remained strong and business travel began to recover after the long lag since
September 11, 2001. We sold Starwood at a substantial profit late in the year.
And in the high-performing energy sector, we received strong gains from
ChevronTexaco, Kerr-McGee, Exxon Mobil, and Occidental Petroleum. As oil prices
reached higher and higher levels during the year, we began to gradually reduce
our positions in these stocks. For example, to take advantage of opportunities
in what we believed were undervalued companies in other sectors -- technology in
particular -- we sold Occidental Petroleum at a profit, and reduced our holdings
in several other energy companies.
1
Q: WHAT HOLDINGS DETRACTED FROM FUND PERFORMANCE FOR THE 12-MONTH PERIOD?
A: Technology stocks, the big winners from 2003, offered disappointing
performance during fiscal 2004. Despite some losses, we added to our allocation
during the year, based on our belief that many technology companies are poised
for success going forward. Intel, for example, has a large reserve of free cash
flow and, as a further indicator of its financial health, has implemented an
aggressive share buy-back initiative. National Semiconductor also holds an
excess of free cash flow and recently began paying dividends to shareholders.
Pharmaceutical companies were hurt by increasing competition by generic drug
makers and, in some cases, by health risks found to be associated with
particular drugs. Despite poor recent performance, we believe valuations remain
extremely compelling for companies like Pfizer and Wyeth and expect long-term
positive returns as a result. Pfizer, for example, authorized stock buybacks of
up to $5 billion during the next year, an indicator of management's confidence
in long-term prosperity. We did, however, shift some of our assets within this
industry. For instance, we sold our position in Merck, while increasing our
holding in Pfizer, which we believe to have a more attractive pipeline of
upcoming products.
2
DELAWARE
LARGE CAP VALUE FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. 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 Large Cap Value 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.
Instances of high double-digit returns are highly unusual and cannot be
sustained and were achieved primarily during favorable market conditions.
FUND PERFORMANCE
Average Annual Total Returns
Through November 30, 2004 Lifetime 10 Years Five Years One Year
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Class A (Est. 3/18/57)
Excluding Sales Charge +11.21% +9.87% +2.89% +12.44%
Including Sales Charge +11.07% +9.22% +1.68% +5.98%
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Class B (Est. 9/6/94)
Excluding Sales Charge +8.39% +9.16% +2.13% +11.60%
Including Sales Charge +8.39% +9.16% +1.71% +7.60%
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Class C (Est. 11/29/95)
Excluding Sales Charge +6.90% +2.13% +11.59%
Including Sales Charge +6.90% +2.13% +10.59%
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Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. 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.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 5.75% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%. Lifetime and 10-year performance figures for
Class B shares reflect conversion to Class A shares after 8 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 return for the lifetime and one-year periods ended
November 30, 2004 for Delaware Large Cap Value Fund's Class R shares were
+13.27% and +12.11%, 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 3/18/57), 10-year,
five-year, and one-year periods ended November 30, 2004 for Delaware Large Cap
Value Fund's Institutional Class shares were +11.26%, +10.11%, +3.16%, and
+12.75%, respectively. Institutional Class shares were first made available on
January 13, 1994 and are available without sales or asset-based distribution
charges only to certain eligible institutional accounts. Institutional Class
performance prior to January 13, 1994 is based on Class A performance and was
adjusted to eliminate the sales charges, but not the asset-based distribution
charge of Class A shares.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
SEC 30-day yields for A, B, C, R, and Institutional Class shares were +1.30%,
+0.65%, +0.64%, +1.05%, and +1.62%, respectively, as of November 30, 2004.
Nasdaq Institutional Class symbol: DEDIX
Nasdaq Class R symbol: DECRX
3
DELAWARE
LARGE CAP VALUE FUND
FUND BASICS
As of November 30, 2004
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FUND OBJECTIVE:
The Fund seeks total return.
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TOTAL FUND NET ASSETS:
$1.56 billion
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NUMBER OF HOLDINGS:
60
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FUND START DATE:
March 18, 1957
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YOUR FUND MANAGER:
John B. Fields has 34 years of investment management experience. He
holds a bachelor's degree and an MBA from Ohio State University.
Before joining Delaware Investments in 1992, he was director of
domestic equity risk management at DuPont. Mr. Fields is a CFA
charterholder.
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NASDAQ SYMBOLS:
Class A DELDX
Class B DEIBX
Class C DECCX
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PERFORMANCE OF A $10,000 INVESTMENT
November 30, 1994 through November 30, 2004
DELAWARE LARGE
CAP VALUE FUND
CLASS A SHARES S&P 500 INDEX
-------------- -------------
30-Nov-94 $9,425 $10,000
30-Nov-95 $12,349 $13,693
30-Nov-96 $15,370 $17,507
30-Nov-97 $19,179 $22,496
30-Nov-98 $21,486 $27,823
30-Nov-99 $20,951 $33,635
30-Nov-00 $21,521 $32,212
30-Nov-01 $21,683 $28,279
30-Nov-02 $18,834 $23,610
30-Nov-03 $21,489 $27,171
30-Nov-04 $24,159 $30,662
Chart assumes $10,000 invested on November 30, 1994 and includes the effect of a
5.75% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The S&P 500 Index is an unmanaged composite of mostly
large-capitalization U.S. companies. An index is unmanaged and does not reflect
the costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities. You cannot invest directly in an index. Past performance is
not a guarantee of future results.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
4
DISCLOSURE For the Period June 1, 2004 to November 30, 2004
OF FUND EXPENSES
As a shareholder of the fund, you incur two types of costs:
(1) transaction costs, including sales charges (loads) on purchase payments,
reinvested dividends, or other distributions; redemption fees; and exchange
fees; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other fund expenses. This example is intended to help
you understand your ongoing costs (in dollars) of investing in the fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period June 1, 2004 to November 30, 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 of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions. "Expenses Paid During Period" are equal to the Fund's annualized
expense ratio, multiplied by the average account value over the period,
multiplied by 183/366 (to reflect the one-half year period).
DELAWARE LARGE CAP VALUE FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
6/1/04 11/30/04 6/1/04 to
11/30/04
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ACTUAL FUND RETURN
Class A $1,000.00 $1,054.30 1.15% $5.91
Class B 1,000.00 1,050.40 1.89% 9.69
Class C 1,000.00 1,050.10 1.89% 9.69
Class R 1,000.00 1,052.70 1.49% 7.65
Institutional Class 1,000.00 1,055.80 0.89% 4.57
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HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,019.25 1.15% $5.81
Class B 1,000.00 1,015.55 1.89% 9.52
Class C 1,000.00 1,015.55 1.89% 9.52
Class R 1,000.00 1,017.55 1.49% 7.52
Institutional Class 1,000.00 1,020.55 0.89% 4.50
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5
SECTOR ALLOCATION As of November 30, 2004
DELAWARE LARGE CAP VALUE FUND
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 chart lists the Fund's categories of portfolio holdings
as a percent of total net assets and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
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COMMON STOCK 94.61%
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Aerospace & Defense 0.97%
Automobiles & Automotive Parts 1.01%
Banking & Finance 23.08%
Cable, Media & Publishing 4.72%
Chemicals 2.60%
Computers & Technology 9.85%
Consumer Products 1.98%
Consumer Services 0.92%
Diversified Financials 1.00%
Electronics & Electrical Equipment 6.37%
Energy 8.12%
Food, Beverage & Tobacco 5.42%
Healthcare & Pharmaceuticals 7.84%
Industrial Machinery 1.25%
Insurance 4.38%
Metals & Mining 1.50%
Paper & Forest Products 2.59%
Retail 2.61%
Telecommunications 4.22%
Textiles, Apparel & Furniture 1.30%
Transportation 0.93%
Utilities 1.95%
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REPURCHASE AGREEMENTS 1.67%
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SECURITIES LENDING COLLATERAL 3.31%
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TOTAL MARKET VALUE OF SECURITIES 99.59%
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OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL (3.31%)
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RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 3.72%
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TOTAL NET ASSETS 100.00%
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6
STATEMENT DELAWARE LARGE CAP VALUE FUND
OF NET ASSETS November 30, 2004
Number of Market
Shares Value
COMMON STOCK - 94.61%
Aerospace & Defense - 0.97%
Honeywell International 429,400 $ 15,170,702
------------
15,170,702
------------
Automobiles & Automotive Parts - 1.01%
Goodrich (B.F.) 497,600 15,798,800
------------
15,798,800
------------
Banking & Finance - 23.08%
American Express 301,700 16,807,707
Bank of America 835,184 38,643,964
Citigroup 1,368,912 61,258,812
Goldman Sachs Group 236,500 24,775,740
J.P. Morgan Chase 1,371,730 51,645,635
MBNA 1,640,400 43,569,024
Mellon Financial 1,163,500 33,997,470
*Morgan Stanley 1,006,200 51,064,650
U.S. Bancorp 782,500 23,185,475
Wells Fargo 258,100 15,942,837
------------
360,891,314
------------
Cable, Media & Publishing - 4.72%
Knight-Ridder 206,100 14,033,349
New York Times 440,900 18,076,900
Viacom Class B 761,363 26,419,296
+Westwood One 683,100 15,315,102
------------
73,844,647
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Chemicals - 2.60%
Dow Chemical 806,600 40,709,102
------------
40,709,102
------------
Computers & Technology - 9.85%
+Cisco Systems 1,474,900 27,595,379
First Data 463,100 19,028,779
Intel 1,395,300 31,184,955
Microsoft 1,032,700 27,686,687
+National Semiconductor 1,618,000 25,014,280
+Oracle 1,851,900 23,445,054
------------
153,955,134
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Consumer Products - 1.98%
Clorox 262,000 14,441,440
Procter & Gamble 309,500 16,552,060
------------
30,993,500
------------
Consumer Services - 0.92%
ARAMARK Class B 551,200 14,419,392
------------
14,419,392
------------
Diversified Financials - 1.00%
Merrill Lynch 281,400 15,676,794
------------
15,676,794
------------
Electronics & Electrical Equipment - 6.37%
Eaton 246,100 16,587,140
Emerson Electric 230,200 15,381,964
General Electric 1,911,914 67,605,279
------------
99,574,383
------------
Energy - 8.12%
ChevronTexaco 570,200 31,132,920
Exxon Mobil 1,076,380 55,164,475
Kerr-McGee 309,200 19,241,516
Number of Market
Shares Value
COMMON STOCK (continued)
Energy (continued)
+Noble 441,400 $ 21,385,830
------------
126,924,741
------------
Food, Beverage & Tobacco - 5.42%
Anheuser-Busch 508,100 25,450,729
Coca-Cola 388,300 15,264,073
General Mills 387,900 17,645,571
PepsiCo 528,800 26,392,408
------------
84,752,781
------------
Healthcare & Pharmaceuticals - 7.84%
Abbott Laboratories 358,500 15,042,660
*GlaxoSmithKline ADR 470,800 20,027,832
*HCA 192,500 7,588,350
Pfizer 1,207,085 33,520,750
*+Tenet Healthcare 2,147,700 23,302,545
Wyeth 579,200 23,092,704
------------
122,574,841
------------
Industrial Machinery - 1.25%
Caterpillar 213,200 19,518,460
------------
19,518,460
------------
Insurance - 4.38%
*Cigna 212,700 14,893,254
*PMI Group 644,200 26,528,156
Prudential Financial 552,400 27,039,980
------------
68,461,390
------------
Metals & Mining - 1.50%
Alcoa 688,600 23,398,628
------------
23,398,628
------------
Paper & Forest Products - 2.59%
International Paper 570,808 23,699,948
Weyerhaeuser 253,400 16,724,400
------------
40,424,348
------------
Retail - 2.61%
Federated Department Stores 347,200 19,026,560
Limited Brands 160,935 3,933,251
RadioShack 565,600 17,855,992
-------------
40,815,803
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Telecommunications - 4.22%
ALLTEL 560,500 31,774,745
BCE 1,409,600 34,182,800
-------------
65,957,545
-------------
Textiles, Apparel & Furniture - 1.30%
NIKE 240,200 20,335,332
-------------
20,335,332
-------------
Transportation - 0.93%
Union Pacific 229,900 14,584,856
-------------
14,584,856
-------------
Utilities - 1.95%
Dominion Resources 249,700 16,347,859
*FPL Group 201,800 14,192,594
-------------
30,540,453
-------------
TOTAL COMMON STOCK (cost $1,277,769,650) 1,479,322,946
-------------
7
STATEMENT DELAWARE LARGE CAP VALUE FUND
OF NET ASSETS (CONTINUED)
Principal Market
Amount Value
REPURCHASE AGREEMENTS - 1.67%
With BNP Paribas 1.94% 12/1/04
(dated 11/30/04, to be repurchased
at $13,611,733, collateralized by
$12,320,000 U.S. Treasury Bills
due 3/3/05, market value
$12,250,940 and $1,651,000
U.S. Treasury Bills due 5/12/05,
market value $1,633,940) $13,611,000 $ 13,611,000
With UBS Warburg 1.94% 12/1/04
(dated 11/30/04, to be repurchased
at $12,424,670, collateralized by
$4,141,000 U.S. Treasury Bills
due 12/23/04, market value
$4,136,195 and $8,610,000
U.S. Treasury Bills due 4/14/05,
market value $8,541,509) 12,424,000 12,424,000
-------------
TOTAL REPURCHASE AGREEMENTS
(cost $26,035,000) 26,035,000
-------------
TOTAL MARKET VALUE OF SECURITIES
BEFORE SECURITIES LENDING
COLLATERAL - 96.28% (cost $1,303,804,650) 1,505,357,946
-------------
SECURITIES LENDING COLLATERAL** - 3.31%
Banc of America Securities LLC
2.08% 12/1/04 8,351,641 8,351,641
Barclays London 1.92% 1/31/05 394,511 394,363
Bear Stearns 2.12% 3/18/05 1,776,951 1,778,448
Beta Finance 2.30% 2/11/05 1,694,763 1,687,022
BNP Paribus 2.21% 1/25/05 398,360 397,771
Calyon 2.07% 4/19/05 1,971,694 1,971,610
Credit Swiss First Boston NY
1.60% 12/13/04 1,577,581 1,577,450
Deutsche Bank Financial 2.13% 2/22/05 394,349 394,462
Deutsche Bank London 1.96% 12/31/04 1,577,626 1,577,450
Fannie Mae 1.94% 12/29/04 1,572,692 1,570,158
General Electric Capital 2.12% 2/3/05 591,571 591,820
Goldman Sachs Group LP
1.80% 12/21/04 907,125 907,034
2.24% 12/8/04 926,700 926,752
IXIS Corporate & Investment Bank
2.19% 12/31/04 1,971,805 1,971,813
Landesbank Hessen 2.19% 12/30/04 1,990,932 1,989,365
Lehman Holdings 2.13% 12/23/05 1,981,252 1,981,252
Merrill Lynch Mortgage Capital
2.16% 1/12/05 1,577,450 1,577,450
Morgan Stanley
2.14% 3/10/05 1,577,450 1,577,450
2.21% 1/2/06 393,745 394,363
Nordea Bank New York 2.07% 5/13/05 1,971,731 1,971,537
Pfizer 2.02% 1/2/06 1,892,121 1,892,940
Proctor and Gamble 1.83% 1/2/06 1,970,746 1,971,813
Rabobank, New York 2.15% 3/2/05 1,971,797 1,971,566
Royal Bank of Canada 2.14% 6/27/05 1,972,061 1,971,469
Sigma Finance 1.97% 9/30/05 1,853,728 1,853,080
Societe Generale
2.06% 6/14/05 989,562 989,276
2.15% 12/8/04 1,577,322 1,577,351
Union Bank of Switzerland 1.13% 12/20/04 1,972,400 1,971,813
Wells Fargo 2.06% 1/2/06 1,971,813 1,971,813
Principal Market
Amount Value
SECURITIES LENDING COLLATERAL** (continued)
Wilmington Trust 2.05% 1/5/05 $1,972,010 $ 1,971,889
--------------
TOTAL SECURITIES LENDING COLLATERAL
(cost $51,732,221) 51,732,221
--------------
TOTAL MARKET VALUE OF SECURITIES - 99.59%
(cost $1,355,536,871) 1,557,090,167++
OBLIGATION TO RETURN SECURITIES
LENDING COLLATERAL - (3.31%)** (51,732,221)
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 3.72%*** 58,140,321
--------------
NET ASSETS APPLICABLE TO 86,780,399
SHARES OUTSTANDING - 100.00% $1,563,498,267
--------------
Net Asset Value - Delaware Large Cap Value Fund Class A
($1,253,876,435 / 69,539,579 Shares) $18.03
------
Net Asset Value - Delaware Large Cap Value Fund Class B
($184,202,816 / 10,282,864 Shares) $17.91
------
Net Asset Value - Delaware Large Cap Value Fund Class C
($42,370,876 / 2,350,773 Shares) $18.02
------
Net Asset Value - Delaware Large Cap Value Fund Class R
($1,234,077 / 68,526 Shares) $18.01
------
Net Asset Value - Delaware Large Cap Value Fund Institutional Class
($81,814,063 / 4,538,657 Shares) $18.03
------
COMPONENTS OF NET ASSETS AT NOVEMBER 30, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $1,502,651,211
Undistributed net investment income 7,408,081
Accumulated net realized loss on investments (148,114,321)
Net unrealized appreciation of investments 201,553,296
--------------
Total net assets $1,563,498,267
==============
*Security is fully or partially on loan.
**See Note 8 in "Notes to Financial Statements."
***Of this amount $49,843,219 represents receivables for securities sold as of
November 30, 2004.
+Non-income producing security for the year ended November 30, 2004.
++Includes $50,780,473 of securities loaned.
SUMMARY OF ABBREVIATIONS:
ADR - American Depositary Receipts
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE LARGE CAP VALUE FUND
Net asset value Class A (A) $18.03
Sales charge (5.75% of offering price) (B) 1.10
------
Offering price $19.13
======
(A) Net asset value per share, as illustrated, is the estimated amount, which
would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $50,000 or more.
See accompanying notes
8
STATEMENT DELAWARE LARGE CAP VALUE FUND
OF OPERATIONS Year Ended November 30, 2004
INVESTMENT INCOME:
Dividends $33,321,275
Interest 248,074
Securities lending income 125,372
Foreign tax withheld (84,206) $ 33,610,515
----------- ------------
EXPENSES:
Management fees 8,671,826
Distribution expenses -- Class A 3,108,389
Distribution expenses -- Class B 1,545,085
Distribution expenses -- Class C 360,140
Distribution expenses -- Class R 5,923
Dividend disbursing and transfer agent fees and expenses 2,984,508
Accounting and administration expenses 512,366
Reports and statements to shareholders 252,937
Registration fees 176,257
Legal and professional fees 155,069
Trustees' fees 57,350
Custodian fees 47,181
Taxes 5,076
Pricing fees 3,118
Other 17,947 17,903,172
-----------
Less expenses paid indirectly (3,614)
Less waived distribution expenses -- Class A (99,596)
------------
Total operating expenses 17,799,962
------------
NET INVESTMENT INCOME 15,810,553
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain on:
Investments 117,696,669
Foreign currencies 10,958
------------
Net realized gain 117,707,627
Net change in unrealized appreciation/depreciation of investments 20,658,996
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCIES 138,366,623
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $154,177,176
============
See accompanying notes
9
STATEMENTS DELAWARE LARGE CAP VALUE FUND
OF CHANGES IN NET ASSETS
Year Ended
11/30/04 11/30/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 15,810,553 $ 12,928,693
Net realized gain (loss) on investments 117,707,627 (8,142,049)
Net change in unrealized appreciation/depreciation of investments and foreign currencies 20,658,996 123,764,997
-------------- --------------
Net increase in net assets resulting from operations 154,177,176 128,551,641
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (12,973,202) (6,955,180)
Class B (469,649) (36,646)
Class C (89,784) (5,500)
Class R (7,991) (62)
Institutional Class (1,000,853) (353,397)
-------------- --------------
(14,541,479) (7,350,785)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 86,001,134 32,982,623
Class B 11,601,777 8,422,733
Class C 15,236,218 3,775,235
Class R 625,931 647,752
Institutional Class 29,018,913 13,838,801
Net assets from merger(1):
Class A 354,886,323 --
Class B 129,663,370 --
Class C 21,894,855 --
Institutional Class 35,905,405 --
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 11,225,537 5,931,383
Class B 413,644 32,222
Class C 82,376 5,093
Class R 7,970 60
Institutional Class 1,000,814 353,397
-------------- --------------
697,564,267 65,989,299
-------------- --------------
Cost of shares repurchased:
Class A (208,444,090) (120,101,777)
Class B (45,760,130) (18,873,009)
Class C (11,482,846) (2,684,627)
Class R (140,920) (12,990)
Institutional Class (36,609,549) (6,647,382)
-------------- --------------
(302,437,535) (148,319,785)
-------------- --------------
Increase (decrease) in net assets derived from capital share transactions 395,126,732 (82,330,486)
-------------- --------------
NET INCREASE IN NET ASSETS 534,762,429 38,870,370
NET ASSETS:
Beginning of year 1,028,735,838 989,865,468
-------------- --------------
End of year (including undistributed net investment income of $7,408,081 and $6,128,049,
respectively) $1,563,498,267 $1,028,735,838
============== ==============
(1)See Note 6 in "Notes to Financial Statements."
See accompanying notes
10
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE LARGE CAP VALUE FUND CLASS A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $16.240 $14.320 $16.730 $16.770 $17.200
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.204 0.205 0.170 0.182 0.370
Net realized and unrealized gain (loss) on investments and
foreign currencies 1.802 1.835 (2.381) (0.062) 0.050
------- ------- ------- ------- -------
Total from investment operations 2.006 2.040 (2.211) 0.120 0.420
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.216) (0.120) (0.199) (0.160) (0.378)
Net realized gain on investments -- -- -- -- (0.472)
------- ------- ------- ------- -------
Total dividends and distributions (0.216) (0.120) (0.199) (0.160) (0.850)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $18.030 $16.240 $14.320 $16.730 $16.770
======= ======= ======= ======= =======
TOTAL RETURN(2) 12.44% 14.34% (13.34%) 0.75% 2.72%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $1,253,876 $895,108 $870,132 $1,132,147 $1,258,738
Ratio of expenses to average net assets 1.15% 1.20% 1.11% 1.07% 1.12%
Ratio of expenses to average net assets
prior to expense limitation and expenses paid indirectly 1.16% 1.20% 1.11% 1.07% 1.12%
Ratio of net investment income to average net assets 1.18% 1.40% 1.10% 1.06% 2.30%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.17% 1.40% 1.10% 1.06% 2.30%
Portfolio turnover 70% 77% 99% 111% 77%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the distributor,
as applicable. Performance would have been lower had the expense limitation
not been in effect.
See accompanying notes
11
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE LARGE CAP VALUE FUND CLASS B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $16.150 $14.240 $16.630 $16.690 $17.120
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.077 0.096 0.054 0.054 0.248
Net realized and unrealized gain (loss) on investments and
foreign currencies 1.789 1.821 (2.364) (0.063) 0.059
------- ------- ------- ------- -------
Total from investment operations 1.866 1.917 (2.310) (0.009) 0.307
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.106) (0.007) (0.080) (0.051) (0.265)
Net realized gain on investments -- -- -- -- (0.472)
------- ------- ------- ------- -------
Total dividends and distributions (0.106) (0.007) (0.080) (0.051) (0.737)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $17.910 $16.150 $14.240 $16.630 $16.690
======= ======= ======= ======= =======
TOTAL RETURN(2) 11.60% 13.47% (13.96%) (0.05%) 2.01%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $184,203 $74,019 $75,707 $100,419 $99,266
Ratio of expenses to average net assets 1.89% 1.94% 1.86% 1.82% 1.88%
Ratio of net investment income to average net assets 0.44% 0.66% 0.35% 0.31% 1.54%
Portfolio turnover 70% 77% 99% 111% 77%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge.
See accompanying notes
12
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE LARGE CAP VALUE FUND CLASS C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $16.250 $14.320 $16.730 $16.780 $17.220
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.076 0.095 0.054 0.053 0.247
Net realized and unrealized gain (loss) on investments and
foreign currencies 1.800 1.842 (2.384) (0.052) 0.050
------- ------- ------- ------- -------
Total from investment operations 1.876 1.937 (2.330) 0.001 0.297
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.106) (0.007) (0.080) (0.051) (0.265)
Net realized gain on investments -- -- -- -- (0.472)
------- ------- ------- ------- -------
Total dividends and distributions (0.106) (0.007) (0.080) (0.051) (0.737)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $18.020 $16.250 $14.320 $16.730 $16.780
======= ======= ======= ======= =======
TOTAL RETURN(2) 11.59% 13.53% (14.00%) 0.02% 1.94%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $42,371 $13,764 $11,098 $13,442 $11,372
Ratio of expenses to average net assets 1.89% 1.94% 1.86% 1.82% 1.88%
Ratio of net investment income to average net assets 0.44% 0.66% 0.35% 0.31% 1.54%
Portfolio turnover 70% 77% 99% 111% 77%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge.
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE LARGE CAP VALUE FUND CLASS R
- -----------------------------------------------------------------------------------------
Year 6/02/03(1)
Ended to
11/30/04 11/30/03
NET ASSET VALUE, BEGINNING OF PERIOD $16.230 $15.150
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.145 0.072
Net realized and unrealized gain on investments and
foreign currencies 1.809 1.063
------- -------
Total from investment operations 1.954 1.135
------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.174) (0.055)
------- -------
Total dividends and distributions (0.174) (0.055)
------- -------
NET ASSET VALUE, END OF PERIOD $18.010 $16.230
======= =======
TOTAL RETURN(3) 12.11% 7.51%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $1,234 $654
Ratio of expenses to average net assets 1.49% 1.54%
Ratio of net investment income to average net assets 0.84% 0.91%
Portfolio turnover 70% 77%
(1) Date of commencement of operations; ratios have been annualized and total
return has not been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value.
See accompanying notes
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE LARGE CAP VALUE FUND INSTITUTIONAL CLASS
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $16.240 $14.320 $16.730 $16.770 $17.200
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.248 0.242 0.209 0.224 0.408
Net realized and unrealized gain (loss) on investments and
foreign currencies 1.805 1.835 (2.380) (0.065) 0.054
------- ------- ------- ------- -------
Total from investment operations 2.053 2.077 (2.171) 0.159 0.462
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.263) (0.157) (0.239) (0.199) (0.420)
Net realized gain on investments -- -- -- -- (0.472)
------- ------- ------- ------- -------
Total dividends and distributions (0.263) (0.157) (0.239) (0.199) (0.892)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $18.030 $16.240 $14.320 $16.730 $16.770
======= ======= ======= ======= =======
TOTAL RETURN(2) 12.75% 14.64% (13.11%) 1.00% 2.99%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $81,814 $45,191 $32,928 $48,192 $52,020
Ratio of expenses to average net assets 0.89% 0.94% 0.86% 0.82% 0.88%
Ratio of net investment income to average net assets 1.44% 1.66% 1.35% 1.31% 2.54%
Portfolio turnover 70% 77% 99% 111% 77%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value.
See accompanying notes
15
NOTES DELAWARE LARGE CAP VALUE FUND
TO FINANCIAL STATEMENTS November 30, 2004
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware
statutory trust and offers three series: Delaware Value Fund, (formerly Delaware
Diversified Value Fund) Delaware Large Cap Value Fund (formerly Delaware Decatur
Equity Income Fund), and Delaware Social Awareness Fund. These financial
statements and related notes pertain to the Delaware Large Cap Value Fund (the
"Fund"). The Trust is an open-end investment company. The Fund is considered
diversified under the Investment Company Act of 1940, as amended, and offers
Class A, Class B, Class C, Class R and Institutional Class shares. Class A
shares are sold with a front-end sales charge of up to 5.75%. Class B shares are
sold with a contingent deferred sales charge that declines from 4% to zero
depending upon the period of time the shares were held. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately eight
years after purchase. Class C shares are sold with a contingent deferred sales
charge of 1%, if redeemed during the first 12 months. Class R and Institutional
Class shares are not subject to a sales charge and are offered for sale
exclusively to a limited group of investors.
The investment objective of the Fund is to seek total return.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (NASDAQ), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the NASDAQ are valued in accordance with the NASDAQ
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Fund's Board of Trustees.
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements -- The Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates -- The preparation of financial statements in conformity with
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 some 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. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. The Fund declares and pays dividends from net investment income quarterly
and distributions from net realized gain on investments, if any, annually.
Through December 31, 2003, certain expenses of the Fund were paid through
commission arrangements with brokers. The amount of these expenses was
approximately $2,146 for the year ended November 30, 2004. In addition, the Fund
receives earnings credits from its custodian when positive cash balances are
maintained, which are used to offset custody fees. The earnings credits for the
year ended November 30, 2004 were approximately $1,468. The expenses paid under
the above arrangements are included in their respective expense captions on the
Statement of Operations with the corresponding expense offset shown as "expenses
paid indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the Fund,
0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50% on
average daily net assets in excess of $2.5 billion.
Effective March 27, 2004, DMC has contractually agreed to waive that
portion, if any, of its management fee and reimburse the Fund to the extent
necessary to ensure that annual operating expenses, exclusive of taxes,
interest, brokerage commissions, distribution fees, certain insurance costs and
extraordinary expenses, do not exceed 0.91% of average daily net assets of the
Fund through March 26, 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.
Effective March 27, 2004, DDLP has contracted to waive distribution and service
fees through March 26, 2005 in order to prevent distribution and service fees of
Class A shares from exceeding 0.26% of average daily net assets. Institutional
class shares pay no distribution and service expenses.
At November 30, 2004, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $778,105
Dividend disbursing, transfer agent, accounting and
administration fees and other expenses payable to DSC 254,029
Other expenses payable to DMC and affiliates* 33,907
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services expenses, including internal legal services, provided to
the Fund by DMC employees. For the year ended November 30, 2004, the Fund was
charged $47,792 for internal legal services provided by DMC.
16
NOTES DELAWARE LARGE CAP VALUE FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
For the year ended November 30, 2004, DDLP earned $98,855 for commissions on
sales of the Fund's Class A shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. INVESTMENTS
For the year ended November 30, 2004, the Fund made purchases of $989,520,626
and sales of $1,202,149,481 of investment securities other than short-term
investments.
At November 30, 2004, the cost of investments for federal income tax purposes
was $1,370,170,057. At November 30, 2004, net unrealized appreciation was
$186,920,110, of which $210,549,764 related to unrealized appreciation of
investments and $23,629,654 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 November 30, 2004 and 2003 was as follows:
Year Ended
11/30/04 11/30/03
-------- --------
Ordinary income $14,541,479 $7,350,785
As of November 30, 2004, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $1,502,651,211
Undistributed ordinary income 7,408,081
Undistributed long-term capital gain 1,264,234
*Capital loss carryforwards (134,745,369)
Unrealized appreciation of investments 186,920,110
--------------
Net assets $1,563,498,267
==============
*The amount of this loss which can be utilized in subsequent years is subject to
an annual limitation in accordance with the Internal Revenue Code due to the
fund merger with Delaware Core Equity Fund, Delaware Devon Fund and Delaware
Growth and Income Fund.
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. The Fund utilized $104,522,311
in 2004. The remaining capital loss carryforwards expire as follows: $20,170,293
expires in 2007, $20,496,938 expires in 2008, $40,482,074 expires in 2009,
$38,177,581 expires in 2010 and $15,418,483 expires in 2011.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. For the year ended November 30,
2004, the Fund recorded the following permanent reclassifications.
Reclassifications are primarily due to capital loss carry forward loss
limitations in accordance with Internal Revenue Code. Results of operations and
net assets were not affected by these reclassifications.
Accumulated net realized loss $ 38,386,838
Paid-in Capital (38,386,838)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Year Ended
11/30/04 11/30/03
Shares sold:
Class A 4,964,886 2,284,578
Class B 678,008 583,138
Class C 877,784 255,741
Class R 35,956 41,125
Institutional Class 1,681,375 917,732
Shares issued from merger(1):
Class A 20,875,666 --
Class B 7,663,320 --
Class C 1,286,419 --
Institutional Class 2,113,326 --
Shares issued upon reinvestment
of dividends and distributions:
Class A 660,691 407,803
Class B 24,710 2,350
Class C 4,891 369
Class R 471 4
Institutional Class 58,725 24,293
----------- -----------
40,926,228 4,517,133
----------- -----------
Shares repurchased:
Class A (12,086,933) (8,338,255)
Class B (2,666,885) (1,319,726)
Class C (665,430) (183,907)
Class R (8,211) (819)
Institutional Class (2,098,242) (458,715)
----------- -----------
(17,525,701) (10,301,422)
----------- -----------
Net increase (decrease) 23,400,527 (5,784,289)
=========== ===========
(1) See Note #6
For the years ended November 30, 2004 and 2003, 647,252 Class B shares were
converted to 643,183 Class A shares valued at $11,138,820 and 211,325 Class B
shares were converted to 209,990 Class A shares valued at $3,118,790,
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. FUND MERGER
Effective March 29, 2004, the Fund acquired all of the assets and assumed all of
the liabilities of Delaware Core Equity Fund, Delaware Devon Fund and Delaware
Growth and Income Fund, respectively, each an open-end investment company,
pursuant to a Plan and Agreement of Reorganization (the "Reorganization"). The
shareholders of Delaware Core Equity Fund, Delaware Devon Fund and Delaware
Growth and Income Fund received shares of the respective class of the Fund equal
to the aggregate net asset value of their shares prior to the Reorganization
based on the net asset value per share of the respective classes of the Fund.
17
NOTES DELAWARE LARGE CAP VALUE FUND
TO FINANCIAL STATEMENTS (CONTINUED)
6. FUND MERGER (CONTINUED)
The Reorganization was treated as a non-taxable event and, accordingly, the
Fund's basis in the securities acquired reflected the historical cost basis as
of the date of transfer. The net assets, net unrealized appreciation and
accumulated net realized loss of Delaware Core Equity Fund, Delaware Devon Fund
and Delaware Growth and Income Fund as of the close of business on March 26,
2004 were as follows:
Accumulated
Net Unrealized Net Realized
Net Assets Appreciation Losses
------------ ------------ -------------
Delaware Core Equity Fund $ 24,162,687 $ 3,890,995 $ (2,438,179)
Delaware Devon Fund 85,017,709 6,162,170 (64,550,847)
Delaware Growth and
Income Fund 433,169,557 46,754,264 (88,845,597)
------------ ----------- -------------
$542,349,953 $56,807,429 $(155,834,623)
============ =========== =============
The net assets of the Fund prior to the Reorganization were $1,110,631,768.
7. LINE OF CREDIT
The Fund, along with certain other funds in the Delaware Investments Family of
Funds (the "Participants"), participates in a $183,100,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one third of their net assets under the agreement. The
Fund had no amounts outstanding as of November 30, 2004, or at any time during
the year.
8. SECURITIES LENDING
The Fund, along with other funds in the Delaware Investments Family of Funds,
may lend its securities pursuant to a security lending agreement (Lending
Agreement) with J.P. Morgan Chase. Initial security loans made pursuant to the
Lending Agreement are required to be secured by U.S. Treasury obligations and/or
cash collateral not less than 102% of the market value of the securities issued
in the United States. With respect to each loan, if the aggregate market value
of the collateral held on any business day is less than the aggregate market
value of the securities which are the subject of such loan, the borrower will be
notified to provide additional collateral not less than the applicable
collateral requirements. Cash collateral received is invested in fixed-income
securities, with a weighted average maturity not to exceed 90 days, rated in one
of the top two tiers by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. or repurchase agreements collateralized by such securities.
However, in the event of default or bankruptcy by the lending agent, realization
and/or retention of the collateral may be subject to legal proceedings. In the
event the borrower fails to return loaned securities and the collateral received
is insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Fund, or at the discretion
of the lending agent, replace the loaned securities. The Fund continues to
record dividends on the securities loaned and is subject to changes in fair
value of the securities loaned that may occur during the term of the loan. The
Fund has the right under the Lending Agreement to recover the securities from
the borrower on demand. The security lending agent and the borrower retain a
portion of the earnings from the collateral investments. The Fund records
security lending income net of such allocation.
At November 30, 2004, the market value of the securities on loan was
$50,780,473, for which cash collateral was received and invested in accordance
with the Lending Agreement. Such investments are presented on the Statement of
Net Assets under the caption "Securities Lending Collateral."
9. 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.
10. 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
basis for income tax purposes, which may include distributions for portions of
two fiscal years of a fund. Accordingly, the information needed by shareholders
for income tax purposes will be sent to them in January of each year. Please
consult your tax advisor for proper treatment of this information.
For the fiscal year ended November 30, 2004, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total (C)
Distributions Distributions Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
-------------- ------------- ------------- ------------
-- 100% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
(C) is based on a percentage of the Fund's ordinary income distributions.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
For the fiscal year ended November 30, 2004, certain dividends paid by the Fund
may be subject to maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate up
to a maximum amount of $14,541,479 to be taxed at a maximum rate of 15%.
Complete information will be computed and reported in conjunction with your 2004
Form 1099-DIV.
18
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II -- Delaware Large Cap
Value Fund
We have audited the accompanying statement of net assets of the Delaware Large
Cap Value Fund (one of the series constituting Delaware Group Equity Fund II)
(the "Fund") as of November 30, 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 November 30, 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 Large Cap Value Fund of Delaware Group Equity Funds II at November 30,
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.
Ernst & Young LLP
Philadelphia, Pennsylvania
January 14, 2005
19
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, President, 4 Years - Since August 2000, 75 None
2005 Market Street Chief Executive Officer, Executive Officer Mr. Driscoll has served in
Philadelphia, PA and Trustee(4) various executive capacities
19103 1 Year - at different times at
Trustee Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 92 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 92 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 - 75 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 92 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
20
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 - 92 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 92 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
(January 1993 - Present)
February 25, 1936 Director -
Digital River Inc.
Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
JANET L. YEOMANS Trustee 5 Years Vice President/Mergers & 92 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 1 Year Mr. Hastings has served in 92 None(5)
2005 Market Street Vice President various executive capacities
Philadelphia, PA and at different times at
19103 Chief Financial Delaware Investments.
Officer
Decenber 19, 1949
RICHELLE S. MAESTRO Executive Vice President, 1 Year Ms. Maestro has served in 92 None(5)
2005 Market Street Chief Legal Officer various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 92 None(5)
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the funds 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.
21
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Large Cap Value Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Large Cap Value Fund and the
Delaware Investments Performance Update for the most recently completed calendar
quarter. The prospectus sets forth details about charges, expenses, investment
objectives, and operating policies of the Fund. You should read the prospectus
carefully before you invest. The figures in this report represent past results
which are not a guarantee of future results. The return and principal value of
an investment in the Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
BOARD OF TRUSTEES AFFILIATED OFFICERS CONTACT INFORMATION
JUDE T. DRISCOLL JOSEPH H. HASTINGS INVESTMENT MANAGER
Chairman Executive Vice President and Delaware Management Company
Delaware Investments Family of Funds Chief Financial Officer Philadelphia, PA
Philadelphia, PA Delaware Investments Family of Funds
Philadelphia, PA NATIONAL DISTRIBUTOR
WALTER P. BABICH Delaware Distributors, L.P.
Board Chairman RICHELLE S. MAESTRO Philadelphia, PA
Citadel Construction Corporation Executive Vice President,
King of Prussia, PA Chief Legal Officer and Secretary SHAREHOLDER SERVICING, DIVIDEND
Delaware Investments Family of Funds DISBURSING AND TRANSFER AGENT
JOHN H. DURHAM Philadelphia, PA Delaware Service Company, Inc.
Private Investor 2005 Market Street
Gwynedd Valley, PA MICHAEL P. BISHOF Philadelphia, PA 19103-7094
Senior Vice President and Treasurer
JOHN A. FRY Delaware Investments Family of Funds FOR SHAREHOLDERS
President Philadelphia, PA 800 523-1918
Franklin & Marshall College
Lancaster, PA FOR SECURITIES DEALERS AND FINANCIAL
INSTITUTIONS REPRESENTATIVES ONLY
ANTHONY D. KNERR 800 362-7500
Managing Director
Anthony Knerr & Associates WEB SITE
New York, NY www.delawareinvestments.com
ANN R. LEVEN
Former Treasurer/Chief Fiscal Officer
National Gallery of Art
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
- --------------------------------------------------------------------------------
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 Web site at http://www.delawareinvestments.com;
and (iii) on the Commission's Web site 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 Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(9105) Printed in the USA
AR-001 [11/04] IVES 1/05 J9925
Delaware
Investments(SM)
--------------------------------------
CORE-EQUITY A member of Lincoln Financial Group(R)
ANNUAL REPORT NOVEMBER 30, 2004
- --------------------------------------------------------------------------------
DELAWARE SOCIAL AWARENESS FUND
[LOGO]
POWERED BY RESEARCH.(SM)
TABLE
OF CONTENTS
- -----------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- -----------------------------------------------------------------
PERFORMANCE SUMMARY 3
- -----------------------------------------------------------------
DISCLOSURE OF FUND EXPENSES 5
- -----------------------------------------------------------------
SECTOR ALLOCATION 6
- -----------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 7
Statement of Operations 10
Statements of Changes in Net Assets 11
Financial Highlights 12
Notes to Financial Statements 16
- -----------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 19
- -----------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 20
- -----------------------------------------------------------------
Funds are not FDIC insured and are not guaranteed. It is possible to lose
the principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a
series of Delaware Management Business Trust, which is a registered
investment advisor.
(C) 2004 Delaware Distributors, L.P.
PORTFOLIO DELAWARE SOCIAL AWARENESS FUND
MANAGEMENT REVIEW December 10, 2004
FUND MANAGER
Christopher S. Adams
Vice President, Portfolio Manager
Q: HOW DID THE FUND AND THE MARKETS IN GENERAL PERFORM DURING THE 12-MONTH
PERIOD?
A: The equity markets experienced significant volatility during the 12-month
period ended November 30, 2004, as investors remained uncertain about many
domestic and global situations. Early in the fiscal year, strong corporate
earnings and positive economic releases prompted renewed investor confidence. As
the period progressed, rising oil prices brought inflationary concerns. The
ongoing conflict in Iraq, the declining dollar, and a changing Federal Reserve
policy further contributed to market volatility. Finally, throughout much of the
12-month period, the presidential campaign dominated the news, with polls
indicating the race was too close to call. Once the election passed, investors
moved beyond uncertainty and again focused on the economy, more stable oil
prices, corporate earnings, and the events most pertinent to the markets. The
fiscal year ended on a positive note and a post-election rally ensued.
For the fiscal year ended November 30, 2004, Delaware Social Awareness Fund
returned +10.97% (Class A shares at net asset value with distributions
reinvested); the benchmark Russell 1000 Index and the S&P 500 Index rose by
+12.66% and +12.85%, respectively. The Fund's performance trailed the +11.53%
gain in the Lipper Multi-Cap Core Funds Average (an average return of 699
multi-cap core funds).
It is worth noting that the Fund faces considerable investment restrictions
because of its social responsibility mandate. Yet, despite limitations, the Fund
earned favorable absolute returns and fared quite well relative to the benchmark
indexes and its peers which do not face similar limitations.
Q: PLEASE DESCRIBE THE SOCIAL MANDATE TO WHICH THE FUND ADHERES.
A: While expected returns will always be important considerations, many
investors do not make decisions based on performance alone. A growing number of
individuals and institutions find value in investing for the good of the
community, the economy, and/or the environment. We have incorporated a number of
screens into our analysis to best meet the desires of the socially conscious
investor.
The Fund will avoid companies that:
o engage in activities damaging to the environment;
o produce nuclear power;
o manufacture military weapons;
o produce or promote alcohol, tobacco, or related products;
o participate in or promote gambling activities;
o conduct animal testing for non-medical purposes.
We engage an independent research firm to share its expertise and judgment about
socially responsible companies. By analyzing related financial filings, company
news, and ongoing business activities, pre-defined social screens are applied to
a universe of stocks that comprises the benchmark.
Once the social screens have narrowed the universe of investment opportunities,
our own proprietary, quantitative models measure the current valuations,
expected returns, and risk characteristics of the remaining stocks. We then
determine the validity of the output of our models by including a qualitative
element, to limit the risk that a recently developing issue might impact the
future performance of the stocks. This qualitative, fundamental analysis is
focused on earnings, cash flow, and other balance sheet measures, as well as the
strength of the companies' management teams and business outlooks. Finally, we
seek to ensure that the resulting investment portfolio possesses risk
characteristics similar to its benchmark index.
Q: PLEASE DISCUSS THE SPECIFIC CHALLENGES YOU FACE WHEN ADHERING TO THE SOCIAL
AWARENESS RESTRICTIONS.
A: Because of the nature of their business models, companies within certain
industry sectors may be more affected by the social screens. For example,
pharmaceutical companies may engage in animal testing, while consumer
discretionary firms may promote alcohol or tobacco products. To compensate for
such restrictions and to structure a fund with similar composition and risk
characteristics as the benchmark, we often invest in positions of substitute
companies that do not engage in these activities.
For example, during the past 12 months, many energy-related stocks surged
because of the significant rise in oil prices. Exxon Mobil comprises a sizable
position within the Russell 1000 Index and -- without social screens in place --
would have been a viable candidate for the Fund. The stock rose 45 percent
during the fiscal year, boosting the benchmark index. We are unable to own this
stock, and sought out substitute companies within the energy sector that pass
our social screens. To compensate, we owned a position in Burlington Resources,
an oil services company that increased more than 85 percent during the period.
1
Likewise, General Electric was another large benchmark component (representing
over three percent of the Russell 1000 Index) that climbed significantly in the
period but does not pass the Fund's social screens. General Electric gained 26
percent during the year. Among similar consumer-related companies, the Fund held
Emerson Electric, which rose just over 12 percent during the fiscal year. Though
Emerson possesses similar characteristics to General Electric in terms of its
electrical equipment business, it fails to provide exposure to other markets
that are a part of GE operations, such as GE's financial services division.
Q: PLEASE DISCUSS SOME OF THE OTHER HOLDINGS THAT POSITIVELY CONTRIBUTED TO THE
FUND'S PERFORMANCE DURING THE FISCAL YEAR.
A: In addition to Burlington Resources, the Fund benefited from owning several
other energy-related companies during the period. These included well-performing
stocks such as EOG Resources, Apache, and BJ Services. An exploration and
development holding, Noble Energy returned 62 percent during the 12-month
period. While we held somewhat small positions in each of these stocks, their
combined performance allowed us to compensate within the energy sector for
missing the performance of Exxon Mobil, a very large benchmark constituent.
During the period, the optimistic consumer continued to provide strength to the
economy. Among consumer discretionary companies, we owned Nordstrom and Limited
Brands, which both benefited from renewed consumer demand. Additionally,
Gillette and Kellogg offered positive returns within the consumer staples
sector.
Our social screens also led us to avoid certain healthcare companies that were
impacted by negative news regarding pharmaceutical products. Lawsuits concerning
the arthritis drug Vioxx prompted Merck to decline 29 percent during the period.
Likewise, drug manufacturer Pfizer dropped 15 percent. Within this sector, the
Fund was rewarded by instead holding medical supply companies such as C.R. Bard
and Becton, Dickinson, & Co.
Finally, among technology issues, software company Adobe Systems continued to
benefit from its successful product line and solid business plan. During the
12-month period, its stock price increased by 47 percent. Dell surged 17 percent
during the fiscal year, primarily during the latter part of the period. The
company continues to increase its PC market share, and also is successfully
expanding its volume in both servers and printers.
Q: PLEASE DISCUSS SOME OF THE ISSUES THAT NEGATIVELY IMPACTED THE FUND'S
PERFORMANCE DURING THE PERIOD.
A: In addition to missing key performance gains in energy, which impeded the
Fund's relative performance, technology holdings more directly contributed to
negative performance. In many cases, the technology sector is relatively
unaffected by social screens, so the Fund does not face as many restrictions in
this area. Our positive outlook for semiconductors proved incorrect during the
year, and Fund holding Intel declined by 33 percent. Likewise, networking
company Cisco Systems dropped by 17 percent, as a result of slower growth
prospects.
The Fund's performance versus its benchmark also suffered from certain strong
technology performers that we either failed to own, or owned less than the
percentage appearing in the index. For example, Apple Computer, which we failed
to own, skyrocketed 221 percent on the success of its iPod digital music player.
Similarly, we did not own the Internet company Yahoo, which surged 75 percent
during the fiscal year. Finally, with Qualcomm, a leader among wireless
telecommunication technologies, our position was smaller than that in the
benchmark.
2
DELAWARE
SOCIAL AWARENESS FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. 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 Social
Awareness 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.
FUND PERFORMANCE
Average Annual Total Returns
Through November 30, 2004 Lifetime Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 2/24/97)
Excluding Sales Charge +4.48% -1.77% +10.97%
Including Sales Charge +3.68% -2.92% +4.63%
- --------------------------------------------------------------------------------
Class B (Est. 2/24/97)
Excluding Sales Charge +3.69% -2.51% +10.15%
Including Sales Charge +3.69% -2.90% +6.15%
- --------------------------------------------------------------------------------
Class C (Est. 2/24/97)
Excluding Sales Charge +3.70% -2.49% +10.14%
Including Sales Charge +3.70% -2.49% +9.14%
- --------------------------------------------------------------------------------
Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. 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.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 5.75% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
Class R shares are available only for certain retirement plan products. They are
sold without a sales charge and have an annual distribution and service fee of
0.60%. No Class R shares were made available during the periods shown.
The average annual total returns for the lifetime, five-year, and one-year
periods ended November 30, 2004 for Delaware Social Awareness Fund's
Institutional Class were +4.74%, -1.51%, and +11.29%, respectively.
Institutional Class shares were first made available on February 24, 1997, and
are available without sales or asset-based distribution charges only to certain
eligible institutional accounts.
An expense limitation was in effect for all classes of Delaware Social Awareness
Fund during the periods shown. Performance would have been lower had the expense
limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DEQNX
3
DELAWARE
SOCIAL AWARENESS FUND
FUND BASICS
As of November 30, 2004
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks long-term capital appreciation.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$48.54 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
144
- --------------------------------------------------------------------------------
FUND START DATE:
February 24, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOUR FUND MANAGER:
Christopher S. Adams holds both a bachelor's and master's degrees in history and
economics from Oxford University, England and received a MBA with dual majors in
finance and insurance/risk management from the Wharton School of Business at the
University of Pennsylvania. He joined Delaware Investments in 1995 after several
years' experience in the financial services industry in the U.S. and U.K. Mr.
Adams is a CFA charterholder.
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A DEQAX
Class B DEQBX
Class C DEQCX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
February 24, 1997 through November 30, 2004
DELAWARE SOCIAL
AWARENESS FUND
CLASS A SHARES S&P 500 INDEX
-------------- -------------
Feb-97 $ 9,424 $10,000
Nov-97 $11,452 $12,224
Nov-98 $12,543 $15,141
Nov-99 $14,480 $18,306
Nov-00 $13,299 $17,534
Nov-01 $11,996 $15,391
Nov-02 $10,013 $12,850
Nov-03 $11,934 $14,788
Nov-04 $13,243 $16,688
Chart assumes $10,000 invested on February 24, 1997, and includes the effect of
a 5.75% front-end sales charge and the reinvestment of all distributions.
Performance for other Fund classes will vary due to differing charges and
expenses. The chart also assumes $10,000 invested in the S&P 500 Index at that
month's end, February 28, 1997. After February 28, 1997, returns plotted on the
chart were as of the last day of each month shown. The S&P 500 Index is an
unmanaged composite of mostly large-capitalization U.S. companies. An index is
unmanaged and does not reflect the costs of operating a mutual fund, such as the
costs of buying, selling, and holding securities. You cannot invest directly in
an index. Past performance is not a guarantee of future results.
An expense limitation was in effect for the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
4
DISCLOSURE For the Period June 1, 2004 to November 30, 2004
OF FUND EXPENSES
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from June 1, 2004 to November 30, 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 of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions. "Expenses Paid During Period" are equal to the Fund's annualized
expense ratio, multiplied by the average account value over the period,
multiplied by 183/366 (to reflect the one-half year period).
DELAWARE SOCIAL AWARENESS FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
6/1/04 11/30/04 6/1/04 to
11/30/04
- --------------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,051.50 1.50% $7.69
Class B 1,000.00 1,047.20 2.25% 11.52
Class C 1,000.00 1,048.30 2.25% 11.52
Institutional Class 1,000.00 1,052.40 1.25% 6.41
- --------------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,017.50 1.50% $7.57
Class B 1,000.00 1,013.75 2.25% 11.33
Class C 1,000.00 1,013.75 2.25% 11.33
Institutional Class 1,000.00 1,018.75 1.25% 6.31
- --------------------------------------------------------------------------------------------------------------
5
SECTOR ALLOCATION As of November 30, 2004
SOCIAL AWARENESS FUND
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 chart lists the Fund's categories of portfolio holdings
as a percent of total net assets and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
- --------------------------------------------------------------------------------
COMMON STOCK 97.51%
- --------------------------------------------------------------------------------
Basic Materials 3.71%
Business Services 0.79%
Capital Goods 4.19%
Communication Services 1.73%
Consumer Discretionary 5.98%
Consumer Services 2.18%
Consumer Staples 7.15%
Credit Cyclicals 1.20%
Energy 7.05%
Finance 22.49%
Health Care 14.53%
Media 5.09%
REITs 1.36%
Technology 17.29%
Transportation 0.94%
Utilities 1.83%
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 1.84%
- --------------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 99.35%
- --------------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.65%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- --------------------------------------------------------------------------------
6
STATEMENT DELAWARE SOCIAL AWARENESS FUND
OF NET ASSETS November 30, 2004
Number of Market
Shares Value
COMMON STOCK- 97.51%
Basic Materials - 3.71%
Ecolab 12,600 $ 440,748
Lubrizol 2,800 96,740
Masco 4,200 148,134
+Pactiv 15,100 375,235
Praxair 8,300 372,670
Sigma-Aldrich 6,200 370,326
----------
1,803,853
----------
Business Services - 0.79%
Deluxe 3,700 146,298
Pitney Bowes 5,400 236,358
----------
382,656
----------
Capital Goods - 4.19%
+American Standard 9,500 369,930
Emerson Electric 9,000 601,380
Fluor 5,100 264,690
Johnson Controls 6,100 374,540
Teleflex 5,000 252,500
York International 4,600 169,602
----------
2,032,642
----------
Communication Services - 1.73%
CenturyTel 4,700 154,724
SBC Communications 17,300 435,441
Telefonos de Mexico ADR 7,100 248,571
----------
838,736
----------
Consumer Discretionary - 5.98%
Best Buy 5,000 281,900
+Coach 4,700 234,248
Federated Department Stores 2,900 158,920
Gap 11,800 257,830
Home Depot 16,300 680,525
+Kohl's 5,500 253,880
Limited Brands 2,222 54,306
Nike Class B 3,400 287,844
Nordstrom 6,800 297,500
RadioShack 6,600 208,362
Saks 13,700 190,567
----------
2,905,882
----------
Consumer Services - 2.18%
Cendant 9,600 217,632
McDonald's 14,300 439,582
Southwest Airlines 6,100 95,953
Yum! Brands 6,700 304,180
----------
1,057,347
----------
Consumer Staples - 7.15%
Clorox 7,700 424,424
Coca-Cola Enterprises 10,400 216,320
CVS 8,800 399,256
+Energizer Holdings 4,300 200,810
General Mills 3,100 141,019
Gillette 13,900 604,511
Heinz (H.J.) 7,100 263,836
Kellogg 8,400 367,080
Pepsi Bottling Group 6,900 193,338
Number of Market
Shares Value
COMMON STOCK (continued)
Consumer Staples (continued)
Sara Lee 11,600 $ 272,368
Walgreen 3,300 125,994
Wrigley, (W.M.) Jr 3,800 261,440
-----------
3,470,396
-----------
Credit Cyclicals - 1.20%
KB Home 4,000 351,560
Magna International Class A 2,900 229,477
-----------
581,037
-----------
Energy - 7.05%
Apache 9,700 524,382
BJ Services 6,800 344,556
Burlington Resources 12,900 598,689
EOG Resources 8,300 623,081
+Nabors Industries 3,300 171,600
+National-Oilwell 5,500 199,100
+Newfield Exploration 4,400 276,540
+Noble 3,600 174,420
Noble Energy 5,400 344,466
Patterson-UTI Energy 8,300 166,000
-----------
3,422,834
-----------
Finance - 22.49%
Allstate 5,500 277,750
American Express 5,500 306,405
American International Group 9,600 608,160
+Anthem 1,800 182,394
Bank of America 24,200 1,119,734
Bear Stearns 1,000 97,580
Berkley (W.R.) 4,500 204,075
Capital One Financial 1,800 141,444
CIT Group 6,500 277,875
Citigroup 29,800 1,333,550
Countrywide Financial 10,900 361,989
Everest Re Group 2,100 176,967
First Horizon National 3,100 135,470
Freddie Mac 7,900 539,254
Goldman Sachs Group 2,800 293,328
JP Morgan Chase 20,500 771,825
MBNA 9,300 247,008
Mellon Financial 8,500 248,370
Merrill Lynch 7,000 389,970
Morgan Stanley 13,400 680,050
Nationwide Financial Services Class A 3,400 127,772
PMI Group 5,900 242,962
PNC Financial Services Group 2,400 130,560
Prudential Financial 7,600 372,020
UnitedHealth Group 2,900 240,265
US Bancorp 12,500 370,375
Washington Mutual 3,800 154,698
+WellPoint Health Networks 2,700 337,770
Wells Fargo 6,200 382,974
Zions Bancorporation 2,500 166,250
-----------
10,918,844
-----------
7
STATEMENT DELAWARE SOCIAL AWARENESS FUND
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
COMMON STOCK (continued)
Health Care - 14.53%
Abbott Laboratories 26,200 $1,099,352
Allergan 2,700 198,450
+Amgen 11,100 666,444
Bard (C.R.) 3,600 215,676
Baxter International 3,700 117,105
Beckman Coulter 3,400 222,564
Becton Dickinson 5,300 290,334
Biomet 4,700 224,989
+Express Scripts Class A 2,900 208,684
+Forest Laboratories 2,700 105,219
+Genentech 5,600 270,200
+Gilead Sciences 7,500 258,450
GlaxoSmithKline ADR 20,000 850,800
Guidant 5,800 376,014
Lilly (Eli) 12,800 682,624
+MedImmune 8,100 215,460
Medtronic 7,700 369,985
PerkinElmer 11,100 236,763
Quest Diagnostics 2,500 234,375
+Tenet Healthcare 19,200 208,320
----------
7,051,808
----------
Media - 5.09%
Clear Channel Communications 8,700 293,016
+Comcast Class A 5,400 162,216
+Comcast Special Class A 18,400 545,560
Disney (Walt) 17,900 481,152
Knight-Ridder 2,200 149,798
Omnicom Group 1,600 129,600
+Time Warner 40,100 710,171
----------
2,471,513
----------
REITs - 1.36%
Equity Office Properties Trust 8,400 230,580
Mills 2,600 154,336
ProLogis 6,900 277,587
----------
662,503
----------
Technology - 17.29%
Adobe Systems 6,400 387,584
+Applied Materials 8,700 144,768
+Cisco Systems 52,000 972,920
+Dell 21,500 871,180
+DST Systems 4,600 224,250
+eBay 1,300 146,185
+Electronic Arts 3,800 185,820
+EMC 19,400 260,348
Hewlett-Packard 19,800 396,000
Intel 39,600 885,060
+InterActiveCorp 7,600 187,644
+Intuit 4,500 188,280
+Juniper Networks 7,100 195,463
Microsoft 51,600 1,383,396
+National Semiconductor 8,800 136,048
+NEXTEL Communications Class A 10,200 290,292
Nokia ADR 13,100 211,827
+Oracle 26,700 338,022
Number of Market
Shares Value
COMMON STOCK (continued)
Technology (continued)
QUALCOMM 4,200 $ 174,804
+SanDisk 6,600 149,028
Sony ADR 3,300 119,988
+Storage Technology 4,500 131,130
Texas Instruments 17,100 413,478
-----------
8,393,515
-----------
Transportation - 0.94%
FedEx 4,800 456,144
-----------
456,144
-----------
Utilities - 1.83%
NSTAR 3,400 172,210
ONEOK 6,900 192,648
Puget Energy 7,700 180,950
Questar 6,700 340,427
-----------
886,235
-----------
TOTAL COMMON STOCK (cost $36,432,170) 47,335,945
-----------
Principal
Amount
REPURCHASE AGREEMENTS - 1.84%
With BNP Paribas 1.94% 12/1/04
(dated 11/30/04, to be repurchased
at $467,425 collateralized by $423,000
U.S. Treasury Bills due 3/3/05,
market value $420,678 and $56,700
U.S. Treasury Bills due 5/12/05,
market value $56,107) $467,400 467,400
With UBS Warburg 1.94% 12/1/04
(dated 11/30/04, to be repurchased at
$426,623, collateralized by $142,200
U.S. Treasury Bills due 12/23/04,
market value $142,030 and $295,700
U.S. Treasury Bills due 4/14/05,
market value $293,302) 426,600 426,600
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $894,000) 894,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 99.35%
(cost $37,326,170) 48,229,945
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 0.65% 314,788
-----------
NET ASSETS APPLICABLE TO 4,740,698 SHARES
OUTSTANDING - 100.00% $48,544,733
===========
Net Asset Value - Delaware Social Awareness Fund
Class A ($19,672,149 / 1,853,214 Shares) $10.62
------
Net Asset Value - Delaware Social Awareness Fund
Class B ($20,856,240 / 2,089,670 Shares) $9.98
------
Net Asset Value - Delaware Social Awareness Fund
Class C ($7,379,069 / 739,009 Shares) $9.99
------
Net Asset Value - Delaware Social Awareness Fund
Institutional Class ($637,275 / 58,805 Shares) $10.84
------
8
STATEMENT DELAWARE SOCIAL AWARENESS FUND
OF NET ASSETS (CONTINUED)
COMPONENTS OF NET ASSETS AT NOVEMBER 30, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $53,864,738
Accumulated net realized loss on investments (16,223,780)
Net unrealized appreciation of investments 10,903,775
-----------
Total net assets $48,544,733
===========
+Non-income producing security for the year ended November 30, 2004.
SUMMARY OF ABBREVIATIONS:
ADR - American Depositary Receipts
REIT - Real Estate Investment Trust
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE SOCIAL AWARENESS FUND
Net asset value Class A (A) $10.62
Sales charge (5.75% of offering price) (B) 0.65
------
Offering price $11.27
======
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon the redemption or repurchases of shares.
(B) See the current prospectus for purchases of $50,000 or more.
See accompanying notes
9
STATEMENT DELAWARE SOCIAL AWARENESS FUND
OF OPERATIONS Year Ended November 30, 2004
INVESTMENT INCOME:
Dividends $883,727
Interest 3,281 $ 887,008
-------- ----------
EXPENSES:
Management fees 368,469
Distribution expenses -- Class A 59,364
Distribution expenses -- Class B 215,907
Distribution expenses -- Class C 69,868
Dividend disbursing and transfer agent fees and expenses 279,847
Registration fees 49,302
Accounting and administration expenses 17,598
Reports and statements to shareholders 15,603
Legal and professional fees 4,915
Trustees' fees 3,492
Custodian fees 2,531
Pricing fees 1,351
Other 2,972 1,091,219
--------
Less expenses absorbed or waived (130,695)
Less waiver of distribution expenses -- Class A (9,894)
Less expenses paid indirectly (111)
----------
Total expenses 950,519
----------
NET INVESTMENT LOSS (63,511)
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 2,193,855
Net change in unrealized appreciation/depreciation of investments 2,703,279
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 4,897,134
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,833,623
==========
See accompanying notes
10
STATEMENTS DELAWARE SOCIAL AWARENESS FUND
OF CHANGES IN NET ASSETS
Year Ended
11/30/04 11/30/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment loss $ (63,511) $ (214,557)
Net realized gain (loss) on investments 2,193,855 (3,078,229)
Net change in unrealized appreciation/depreciation of investments 2,703,279 11,081,813
----------- -----------
Net increase in net assets resulting from operations 4,833,623 7,789,027
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 3,931,369 2,961,003
Class B 1,352,976 1,417,132
Class C 1,853,733 969,314
Institutional Class 345,533 205,257
----------- -----------
7,483,611 5,552,706
----------- -----------
Cost of shares repurchased:
Class A (5,974,240) (4,853,548)
Class B (4,712,297) (4,557,684)
Class C (1,381,313) (1,077,760)
Institutional Class (547,760) (106,021)
----------- -----------
(12,615,610) (10,595,013)
----------- -----------
Decrease in net assets derived from capital share transactions (5,131,999) (5,042,307)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (298,376) 2,746,720
NET ASSETS:
Beginning of year 48,843,109 46,096,389
----------- -----------
End of year (there was no undistributed net investment income at either year end) $48,544,733 $48,843,109
=========== ===========
See accompanying notes
11
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE SOCIAL AWARENESS FUND CLASS A
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.570 $8.030 $9.620 $11.820 $13.010
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(1) 0.029 (0.004) (0.007) (0.039) (0.064)
Net realized and unrealized gain (loss) on investments 1.021 1.544 (1.583) (0.991) (0.981)
------- ------ ------ ------- -------
Total from investment operations 1.050 1.540 (1.590) (1.030) (1.045)
------- ------ ------ ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net realized gain on investments -- -- -- (1.170) (0.145)
------- ------ ------ ------- -------
Total dividends and distributions -- -- -- (1.170) (0.145)
------- ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.620 $9.570 $8.030 $ 9.620 $11.820
======= ====== ====== ======= =======
TOTAL RETURN(2) 10.97% 19.18% (16.53%) (9.80%) (8.15%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $19,672 $19,670 $18,391 $26,043 $36,206
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.82% 2.00% 1.90% 1.75% 1.63%
Ratio of net investment income (loss) to average net assets 0.30% (0.04%) (0.08%) (0.39%) (0.45%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly (0.02%) (0.54%) (0.48%) (0.64%) (0.58%)
Portfolio turnover 35% 60% 34% 50% 68%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects a waiver and payment of fees by the manager and
distributor. Performance would have been lower had the expense limitation
not been in effect.
See accompanying notes
12
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE SOCIAL AWARENESS FUND CLASS B
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $9.060 $7.670 $9.250 $11.490 $12.740
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(1) (0.041) (0.062) (0.069) (0.113) (0.155)
Net realized and unrealized gain (loss) on investments 0.961 1.452 (1.511) (0.957) (0.950)
------ ------ ------ ------- -------
Total from investment operations 0.920 1.390 (1.580) (1.070) (1.105)
------ ------ ------ ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net realized gain on investments -- -- -- (1.170) (0.145)
------ ------ ------ ------- -------
Total dividends and distributions -- -- -- (1.170) (0.145)
------ ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $9.980 $9.060 $7.670 $ 9.250 $11.490
====== ====== ====== ======= =======
TOTAL RETURN(2) 10.15% 18.12% (17.08%) (10.49%) (8.80%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $20,856 $22,145 $21,737 $30,376 $36,301
Ratio of expenses to average net assets 2.25% 2.25% 2.25% 2.25% 2.25%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.52% 2.70% 2.60% 2.45% 2.33%
Ratio of net investment loss to average net assets (0.45%) (0.79%) (0.83%) (1.14%) (1.20%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly (0.72%) (1.24%) (1.18%) (1.34%) (1.28%)
Portfolio turnover 35% 60% 34% 50% 68%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects a waiver and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
13
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE SOCIAL AWARENESS FUND CLASS C
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $9.070 $7.670 $9.260 $11.490 $12.740
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss(1) (0.041) (0.062) (0.069) (0.113) (0.154)
Net realized and unrealized gain (loss) on investments 0.961 1.462 (1.521) (0.947) (0.951)
------ ------ ------ ------- -------
Total from investment operations 0.920 1.400 (1.590) (1.060) (1.105)
------ ------ ------ ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net realized gain on investments -- -- -- (1.170) (0.145)
------ ------ ------ ------- -------
Total dividends and distributions -- -- -- (1.170) (0.145)
------ ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $9.990 $9.070 $7.670 $9.260 $11.490
====== ====== ====== ======= =======
TOTAL RETURN(2) 10.14% 18.25% (17.17%) (10.39%) (8.80%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $7,379 $6,258 $5,418 $9,115 $10,459
Ratio of expenses to average net assets 2.25% 2.25% 2.25% 2.25% 2.25%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 2.52% 2.70% 2.60% 2.45% 2.33%
Ratio of net investment loss to average net assets (0.45%) (0.79%) (0.83%) (1.14%) (1.20%)
Ratio of net investment loss to average net assets prior
to expense limitation and expenses paid indirectly (0.72%) (1.24%) (1.18%) (1.34%) (1.28%)
Portfolio turnover 35% 60% 34% 50% 68%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects a waiver and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
See accompanying notes
14
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE SOCIAL AWARENESS FUND INSTITUTIONAL CLASS
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $9.740 $8.160 $9.750 $11.930 $13.090
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(1) 0.054 0.017 0.015 (0.014) (0.024)
Net realized and unrealized gain (loss) on investments 1.046 1.563 (1.605) (0.996) (0.991)
------- ------ ------ ------- -------
Total from investment operations 1.100 1.580 (1.590) (1.010) (1.015)
------- ------ ------ ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net realized gain on investments -- -- -- (1.170) (0.145)
------- ------ ------ ------- -------
Total dividends and distributions -- -- -- (1.170) (0.145)
------- ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.840 $9.740 $8.160 $ 9.750 $11.930
======= ====== ====== ======= =======
TOTAL RETURN(2) 11.29% 19.36% (16.31%) (9.52%) (7.87%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $637 $770 $550 $533 $337
Ratio of expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.52% 1.70% 1.60% 1.45% 1.33%
Ratio of net investment income (loss) to average net assets 0.55% 0.21% 0.17% (0.14%) (0.20%)
Ratio of net investment income (loss) to average net assets
prior to expense limitation and expenses paid indirectly 0.28% (0.24%) (0.18%) (0.34%) (0.28%)
Portfolio turnover 35% 60% 34% 50% 68%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value. Total investment return reflects a waiver and payment of
fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
See accompanying notes
15
NOTES DELAWARE SOCIAL AWARENESS FUND
TO FINANCIAL STATEMENTS November 30, 2004
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware
statutory trust and offers three series: Delaware Value Fund (formerly Delaware
Diversified Value Fund), Delaware Large Cap Value (formerly Delaware Decatur
Equity Income Fund), and Delaware Social Awareness Fund. These financial
statements and the related notes pertain to Delaware Social Awareness Fund (the
"Fund"). The Trust is an open-end investment company. The Fund is considered
diversified under the Investment Company Act of 1940, as amended, and offers
Class A, Class B, Class C, Class R and Institutional Class shares. Class A
shares are sold with a front-end sales charge of up to 5.75%. Class B shares are
sold with a contingent deferred sales charge that declines from 4% to zero
depending upon the period of time the shares are held. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately eight
years after purchase. Class C shares are sold with a contingent deferred sales
charge of 1%, if redeemed during the first 12 months. Class R and Institutional
Class shares are not subject to a sales charge and are offered for sale
exclusively to a limited group of investors. As of November 30, 2004, Class R
had not commenced operations.
The investment objective of the Fund is to seek long-term capital appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- Equity securities, except those traded on the Nasdaq Stock
Market, Inc. ("NASDAQ") are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the NASDAQ are valued in accordance with the NASDAQ
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Fund's Board of Trustees.
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements -- The Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates -- The preparation of financial statements in conformity with
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 some 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. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. Distributions received from investments in Real Estate Investment Trusts
(REITs) are recorded as dividend income on the ex-dividend date, subject to
reclassification upon notice of the character of such distribution by the
issuer. The Fund declares and pays dividends from net investment income and
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 $100 for the year ended November 30, 2004. In addition, the Fund
receives earnings credits from its custodian when positive cash balances are
maintained, which are used to offset custody fees. The earnings credits for the
year ended November 30, 2004 were approximately $11. The expenses paid under the
above arrangements are included in their respective expense captions on the
Statement of Operations with the corresponding expense offset shown as "expenses
paid indirectly."
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the Fund,
0.70% on the next $500 million, 0.65% on the next $1.5 billion, and 0.60% on
average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Fund to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 1.25% of average daily net assets of the Fund through January 31, 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
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 and 1.00% of the average daily net assets of the
Class B and C shares and 0.60% of the average daily net assets of Class R
shares. Institutional Class shares pay no distribution and service expenses.
DDLP has contracted to waive distribution and service fees through January 31,
2005 in order to prevent distribution and service fees of Class A shares from
exceeding 0.25% of average daily net assets.
At November 30, 2004, the Fund had receivables from or liabilities payable to
affiliates as follows:
Investment management fee payable to DMC $30,008
Dividend disbursing, transfer agent, accounting and
administration fees other expenses payable to DSC 16,625
Other expenses payable to DMC and affiliates* 18,352
*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.
16
NOTES DELAWARE SOCIAL AWARENESS FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
As provided in the investment management agreement the Fund bears the cost of
certain legal services expenses, including internal legal services provided to
the Fund by DMC employees. For the year ended November 30, 2004, the Fund was
charged $1,910 for internal legal services provided by DMC.
For the year ended November 30, 2004, DDLP earned $16,077 commissions on sales
of the Fund's Class A shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. INVESTMENTS
For the year ended November 30, 2004, the Fund made purchases of $17,080,684 and
sales of $23,331,894 of investment securities other than short-term investments.
At November 30, 2004, the cost of investments for federal income tax purposes
was $37,548,377. At November 30, 2004, the net unrealized appreciation was
$10,681,568, of which $11,339,145 related to unrealized appreciation of
investments and $657,577 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. There were no dividends and distributions paid
for the years ended November 30, 2004 and 2003.
As of November 30, 2004, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $53,864,738
Capital loss carryforwards (16,001,573)
Unrealized appreciation of investments 10,681,568
-----------
Net assets $48,544,733
===========
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. $2,084,340 was utilized in
2004. The remaining capital loss carryforwards expire as follows: $98,910
expires in 2009, $13,031,715 expires in 2010 and $2,870,948 expires in 2011.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. For the year ended November 30,
2004, the Fund recorded the following permanent reclassifications.
Reclassifications are primarily due to tax treatment of net operating losses.
Results of operations and net assets were not affected by these
reclassifications.
Accumulated net
investment loss Paid-in capital
--------------- ---------------
$63,511 $(63,511)
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Year Ended
11/30/04 11/30/03
Shares sold:
Class A 392,469 353,669
Class B 142,551 181,715
Class C 195,437 120,566
Institutional Class 33,615 24,548
---------- ----------
764,072 680,498
---------- ----------
Shares repurchased:
Class A (595,506) (586,394)
Class B (496,609) (572,463)
Class C (146,707) (136,574)
Institutional Class (53,837) (12,942)
---------- ----------
(1,292,659) (1,308,373)
---------- ----------
Net decrease (528,587) (627,875)
========== ==========
For the years ended November 30, 2004 and 2003, 3,129 Class B shares were
converted to 2,951 Class A shares valued at $29,760 and 3,126 Class B shares
were converted to 2,977 Class A shares valued at $24,653, 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 $183,100,000 revolving
line of credit facility to be used for temporary or emergency purposes as an
additional source of liquidity to fund redemptions of investor shares. The
Participants are charged an annual commitment fee, which is allocated across the
Participants on the basis of each fund's allocation of the entire facility. The
Participants may borrow up to a maximum of one third of their net assets under
the agreement. The Fund had no amounts outstanding as of November 30, 2004, or
at any time during the year.
7. CREDIT AND MARKET RISKS
The Fund only invests in companies that meet its definition of "socially
responsible" and may be subject to certain risks as a result of investing
exclusively in socially responsible companies. By avoiding certain companies not
considered socially responsible, it could miss out on strong performance from
those companies.
8. 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.
17
NOTES DELAWARE SOCIAL AWARENESS FUND
TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED)
At a Special Meeting of Shareholders held on January 5, 2005, the shareholders
of the Delaware Social Awareness Fund voted to approve a proposed Agreement and
Plan of Reorganization (the "Reorganization") among Delaware Group Equity Funds
II, on behalf of the Delaware Social Awareness Fund, Calvert Social Investment
Fund, on behalf of the Equity Portfolio (the "CSIF Equity Portfolio"), and
Calvert Asset Management Company, Inc. providing for: (i) the acquisition by the
CSIF Equity Portfolio of substantially all of the assets of the Delaware Social
Awareness Fund in exchange for shares of the CSIF Equity Portfolio; (ii) the pro
rata distribution of those shares of the CSIF Equity Portfolio to the
shareholders of the Delaware Social Awareness Fund; and (iii) the liquidation
and dissolution of the Delaware Social Awareness Fund. The result of the voting
on the proposed Reorganization at the Special Meeting of Shareholders was as
follows:
Shares Shares Shares
Proposal Voted For Voted Against Abstained
-------- --------- ------------- ---------
Approval of
Agreement and
Plan of
Reorganization 1,581,631.870 58,465.360 56,597.253
It is expected that the CSIF Equity Portfolio will acquire all of the assets of
the Delaware Social Awareness Fund on or about January 21, 2005 pursuant to the
Agreement and Plan of Reorganization. The shareholders of the Delaware Social
Awareness Fund will receive shares of the CSIF Equity Portfolio equal in value
to the aggregate net asset value of their shares in the Delaware Social
Awareness Fund prior to the Reorganization based on the net asset value per
share of the CSIF Equity Portfolio. The Reorganization will be treated as a
non-taxable event for federal income tax purposes. Accordingly, the shareholders
of the Delaware Social Awareness Fund will not recognize any gain or loss upon
the exchange of their Delaware Social Awareness Fund shares for shares of the
CSIF Equity Portfolio to be received in the Reorganization, and the basis of the
CSIF Equity Portfolio shares received by Delaware Social Awareness Fund
shareholders in the Reorganization will be the same as their basis for the
shares of the Delaware Social Awareness Fund to be surrendered in the
Reorganization.
18
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II -- Delaware Social
Awareness Fund
We have audited the accompanying statement of net assets of the Delaware Social
Awareness Fund (one of the series constituting Delaware Group Equity Funds II)
(the "Fund") as of November 30, 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
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of securities owned as of November 30, 2004, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Delaware Social Awareness Fund of Delaware Group Equity Funds II at November 30,
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 five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
January 14, 2005
19
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, President, 4 Years - Since August 2000, 75 None
2005 Market Street Chief Executive Officer, Executive Officer Mr. Driscoll has served in
Philadelphia, PA and Trustee(4) various executive capacities
19103 1 Year - at different times at
Trustee Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 92 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 92 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 - 75 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 92 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
20
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 - 92 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 92 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
(January 1993 - Present)
February 25, 1936 Director -
Digital River Inc.
Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
JANET L. YEOMANS Trustee 5 Years Vice President/Mergers & 92 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 1 Year Mr. Hastings has served in 92 None(5)
2005 Market Street Vice President various executive capacities
Philadelphia, PA and at different times at
19103 Chief Financial Delaware Investments.
Officer
Decenber 19, 1949
RICHELLE S. MAESTRO Executive Vice President, 1 Year Ms. Maestro has served in 92 None(5)
2005 Market Street Chief Legal Officer various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 92 None(5)
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the funds 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.
21
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Social Awareness Fund, but
may be used with prospective investors when preceded or accompanied by a current
prospectus for Delaware Social Awareness Fund and the Delaware Investments
Performance Update for the most recently completed calendar quarter. The
prospectus sets forth details about charges, expenses, investment objectives,
and operating policies of the Fund. You should read 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 NATIONAL DISTRIBUTOR
WALTER P. BABICH Delaware Distributors, L.P.
Board Chairman RICHELLE S. MAESTRO Philadelphia, PA
Citadel Construction Corporation Executive Vice President,
King of Prussia, PA Chief Legal Officer and Secretary SHAREHOLDER SERVICING, DIVIDEND
Delaware Investments Family of Funds DISBURSING AND TRANSFER AGENT
JOHN H. DURHAM Philadelphia, PA Delaware Service Company, Inc.
Private Investor 2005 Market Street
Gwynedd Valley, PA MICHAEL P. BISHOF Philadelphia, PA 19103-7094
Senior Vice President and Treasurer
JOHN A. FRY Delaware Investments Family of Funds FOR SHAREHOLDERS
President Philadelphia, PA 800 523-1918
Franklin & Marshall College
Lancaster, PA FOR SECURITIES DEALERS AND FINANCIAL
INSTITUTIONS REPRESENTATIVES ONLY
ANTHONY D. KNERR 800 362-7500
Managing Director
Anthony Knerr & Associates WEB SITE
New York, NY www.delawareinvestments.com
ANN R. LEVEN
Former Treasurer/Chief Fiscal Officer
National Gallery of Art
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
- --------------------------------------------------------------------------------
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 Web site at http://www.delawareinvestments.com;
and (iii) on the Commission's Web site 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 Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(9106) Printed in the USA
AR-147 [11/04] IVES 1/05 J9915
Delaware
Investments(SM)
--------------------------------------
VALUE-EQUITY A member of Lincoln Financial Group(R)
ANNUAL REPORT NOVEMBER 30, 2004
- --------------------------------------------------------------------------------
DELAWARE VALUE FUND
[LOGO]
POWERED BY RESEARCH.(SM)
TABLE
OF CONTENTS
- -----------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- -----------------------------------------------------------------
PERFORMANCE SUMMARY 3
- -----------------------------------------------------------------
DISCLOSURE OF FUND EXPENSES 5
- -----------------------------------------------------------------
SECTOR ALLOCATION 6
- -----------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 7
Statement of Operations 8
Statements of Changes in Net Assets 9
Financial Highlights 10
Notes to Financial Statements 13
- -----------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 16
- -----------------------------------------------------------------
BOARD OF TRUSTEES/OFFICERS 17
- -----------------------------------------------------------------
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) 2005 Delaware Distributors, L.P.
PORTFOLIO DELAWARE VALUE FUND
MANAGEMENT REVIEW December 10, 2004
FUND MANAGERS
D. Tysen Nutt, Jr.
Senior Portfolio Manager
Jordan L. Irving
Senior Portfolio Manager
Anthony A. Lombardi
Senior Portfolio Manager
Robert A. Vogel, Jr.
Senior Portfolio Manager
Q: HOW DID THE FUND AND EQUITY MARKETS PERFORM DURING THE 12-MONTH PERIOD?
A: During the 12-month period ended November 30, 2004, the Delaware Value Fund
returned +14.59% (Class A shares at net asset value with distributions
reinvested). During the same period, the Fund's benchmark, the Russell 1000
Value Index, rose +19.67%, while the Fund's peers in the Lipper Multi-Cap Value
Funds category averaged +16.47%. It is worth noting, however, that the Fund did
outperform the broad market, as measured by the +12.85% gain of the S&P 500
Index.
Despite strong absolute returns, the Fund underperformed its benchmark and peer
group, predominantly due to sector allocation. For example, we held a smaller
allocation within the positively performing financial sector than did our
benchmark index; our underweight position hurt our relative performance.
Likewise, we held overweight positions relative to the index in the poorly
performing information technology and healthcare sectors.
Interest rate levels changed substantially during the year, as the Federal
Reserve raised rates on four separate occasions. Rising rates affected financial
services companies, in particular larger banks and investment brokerage houses.
Consumer spending remained strong throughout most of the fiscal year, although
we began to see some weaker reports toward the end of the period.
Corporate profit margins and earnings were high for most of the year, driving
the continued economic expansion. We have recently begun to see some indications
of slower growth, however, and have thus positioned our portfolio somewhat
defensively. When compared to the broad market, we held overweighted positions
in the utilities, telecommunications, and energy sectors at period end. These
defensive positions should, in our opinion, benefit the portfolio in an
environment of decelerating earnings growth.
Q: DID YOU ALTER YOUR INVESTMENT PHILOSOPHY OR STOCK SELECTION PROCESSES DURING
THE FISCAL YEAR?
A: Quite simply, yes, there were substantial changes made to the Fund's
investment philosophy and stock selection process during the year. We believe
that these changes will enhance the profit potential of your Fund.
In early August 2004, we were installed as a new team of investment managers to
oversee the Fund. Although new to the Delaware Investments family in 2004, our
portfolio management team has been managing money together in our signature
investment style for more than six years. Consistent with our traditional,
value-based investment philosophy, the changes we made to the portfolio this
year resulted in a decrease in the portfolio's price-to-earnings (P/E) ratio, an
increase in its dividend yield, and a considerable decrease in the number of
stocks held. These changes should, in our opinion, add to the defensive
positioning of the portfolio and increase the Fund's potential to outpace the
market.
Although there was substantial turnover within the portfolio in 2004 as we
changed the Fund's holdings to meet our investment style, we tend to be patient,
long-term-oriented investors and advocate a buy-and-hold style of investing. We
purchase stocks with the intent to hold them until they return to fair value.
Our investment horizon for each stock is typically two to four years. We seek to
own companies that have fallen out of favor with the investment community, for
one reason or another, and that trade at what we believe is a substantial
discount to estimated intrinsic value. We expect the Fund's turnover level to
decrease considerably during the coming year.
Q: CAN YOU DISCUSS SOME OF THE STOCKS THAT CONTRIBUTED TO THE FUND'S
PERFORMANCE?
A: Commodity companies, in general, offered positive performance during the past
year. Within your portfolio, agricultural producer Archer-Daniels-Midland (ADM)
was able to benefit from increasing prices in this area. ADM produces basic food
ingredients like soy meal and oil, corn (for use as a sweetener), wheat for
baked goods, and cocoa for use in chocolate products. During its past fiscal
year, ADM posted increases in both net sales and net earnings while increasing
its shareholder dividend. ADM has recently announced a plan to continue its
stock buy-back program, a move that highlights management's positive outlook for
the future of the company.
1
Also during the year, increases in manufacturing led to higher profits among
industrial companies, leading to the industrial sector being the second best
performer in the S&P 500. Within the sector, the railroad subindustry was one of
the leading groups. Our holding in Burlington Northern Santa Fe (BNI), a leading
U.S. railroad company, profited from manufacturing trends as companies
contracted with BNI to haul their wares across the country. This was evidenced
in the company's third quarter earnings results in which BNI had all-time record
revenues, based upon "unprecedented demand." Burlington Northern transports
coal, grain, chemicals, metals, minerals, and other goods across much of
the U.S.
A dramatic rise in crude oil prices during the year led to strong profits among
many energy companies. Within your portfolio, we held Exxon Mobil,
ChevronTexaco, and ConocoPhillips, each of which performed well. As investor
sentiment on the energy sector continues to improve, we will be closely
monitoring our exposure to the sector and the valuations of our holdings in
particular.
Q: CAN YOU ADDRESS SOME HOLDINGS THAT DID NOT PERFORM AS WELL DURING THE
12-MONTH PERIOD?
A: Insurance companies, in general, suffered poor performance as a result of a
weakening commercial underwriting cycle and, later in the year, an in-depth
probe into business practices of the brokerage industry. We owned both Aon and
Hartford Financial Services, two financially strong companies, both of which
succumbed to negative investor sentiment as a result of New York Attorney
General Elliot Spitzer's focus on specific financial arrangements related to the
structure of brokerage commissions. While there are likely to be changes to
prior business models, we believe a longer-term focus on prospects alleviates
near-term financial impacts that might result. Investment brokerage firm Morgan
Stanley also performed poorly during the period. The firm's retail and
institutional business activity remained sluggish against the poor capital
markets backdrop, while its credit services business (Discover) struggled with
organic growth and felt the financial pressure of a rising interest rate
environment.
Pharmaceutical manufacturer and distributor Merck faced challenges during the
year as its anti-inflammatory drug Vioxx was withdrawn from U.S. and
international drug markets. Despite the legal liability surrounding the recall,
Merck has significant assets and cash flow generation potential. In our opinion,
Merck's compelling valuation makes it an attractive long-term holding. The
company offers a secure dividend that is very high by historical standards. We
believe its litigation risks are manageable given the company's other assets and
we think the market's assessment of the company's long-term prospects is too
pessimistic.
PC and enterprise hardware manufacturer Hewlett-Packard Company suffered
somewhat during the year as a result of sluggish demand for technology
products/services by large corporate customers, intense competition from other
major players, and management execution issues. Despite some short-term
setbacks, notably as they pertain to consistency, Hewlett-Packard offers
shareholders long-term potential in our opinion. Anchored by the company's
dominant franchise and strong product line-up in printing and imaging,
Hewlett-Packard generates attractive levels of cash flow, is engaged in an
aggressive stock buy-back program, and offers a compelling dividend relative to
most large-cap technology companies.
2
DELAWARE
VALUE FUND
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when redeemed, may be worth more or less than their
original cost. 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 Value 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. Instances of high double digit returns are
highly unusual and cannot be sustained and were achieved primarily during
favorable market conditions.
FUND PERFORMANCE
Average Annual Total Returns
Through November 30, 2004 Lifetime Five Years One Year
- --------------------------------------------------------------------------------
Class A (Est. 9/15/98)
Excluding Sales Charge +6.52% + 3.14% +14.59%
Including Sales Charge +5.51% + 1.92% + 7.99%
- --------------------------------------------------------------------------------
Class B (Est. 5/1/02)
Excluding Sales Charge +4.31% +13.69%
Including Sales Charge +3.30% +9.69%
- --------------------------------------------------------------------------------
Class C (Est. 5/1/02)
Excluding Sales Charge +4.23% +13.80%
Including Sales Charge +4.23% +12.80%
- --------------------------------------------------------------------------------
Returns reflect the reinvestment of all distributions and any applicable sales
charges as noted below. 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.
The Fund offers Class A, B, C, R, and Institutional Class shares. Class A shares
are sold with a front-end sales charge of up to 5.75% and have an annual
distribution and service fee of up to 0.30%.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. They are also subject to an annual
distribution and service fee of 1%.
Class C shares are sold with a contingent deferred sales charge of 1% if
redeemed during the first 12 months. They are also subject to an annual
distribution and service fee of 1%.
Class R shares are available only for certain retirement plan products. They are
sold without a sales charge and have an annual distribution and service fee of
0.60%. No Class R shares were made available during the periods shown.
The average annual total returns for the lifetime, five-year, and one-year
periods ended November 30, 2004 for Delaware Value Fund's Institutional Class
shares were + 6.63%, + 3.26%, and +14.83%, respectively. Institutional Class
shares were first made available on September 15, 1998 and are available without
sales or asset-based distribution charges only to certain eligible institutional
accounts.
An expense limitation was in effect for all classes of Delaware Value Fund
during the periods shown. Performance would have been lower had the expense
limitation not been in effect.
The performance table does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
Nasdaq Institutional Class symbol: DDVIX
3
Delaware
value fund
FUND BASICS
As of November 30, 2004
- --------------------------------------------------------------------------------
FUND OBJECTIVE:
The Fund seeks long-term capital appreciation.
- --------------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$79.79 million
- --------------------------------------------------------------------------------
NUMBER OF HOLDINGS:
33
- --------------------------------------------------------------------------------
FUND START DATE:
September 15, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOUR FUND MANAGERS:
D. Tysen Nutt graduated from Dartmouth College with a BA degree. Before joining
Delaware Investments in 2004, he managed large-cap value portfolios for both
institutions and private clients at Van Deventer & Hoch (V&H), after which he
moved to Merrill Lynch Investment Managers in 1994 and served as leader of the
U.S. Active Large Cap Value Team, managing mutual funds and separate accounts
for institutions and private clients.
Jordan L. Irving graduated from Yale University with a BA in american studies
and earned a special diploma in social studies at Oxford University the
following year. Before joining Delaware Investments in 2004, he served as a
portfolio manager with the U.S. Active Large Cap Value Team of Merrill Lynch
Investment Managers (MLIM).
Anthony A. Lombardi graduated from Hofstra University with a BBA and an MBA in
finance. Before joining Delaware Investments in 2004, he served as a portfolio
manager with the U.S. Active Large Cap Value Team of Merrill Lynch Investment
Managers (MLIM). Mr. Lombardi is a CFA charterholder.
Robert A. Vogel, Jr. graduated from Loyola College in Maryland, earning both his
BBA and MS in finance. He earned his MBA with a concentration in finance at the
Wharton School of Business at the University of Pennsylvania. Before joining
Delaware Investments in 2004, he served as a portfolio manager with the U.S.
Active Large Cap Value Team of Merrill Lynch Investment Managers (MLIM). Mr.
Vogel is a CFA charterholder.
- --------------------------------------------------------------------------------
NASDAQ SYMBOLS:
Class A DDVAX
Class B DDVBX
Class C DDVCX
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
September 15, 1998 (Fund's inception) through November 30, 2004
DELAWARE
DIVERSIFIED
VALUE FUND RUSSELL 1000
CLASS A SHARES VALUE INDEX
-------------- ------------
9/30/98 $ 9,302 $10,000
11/30/98 $10,577 $11,277
11/30/99 $11,957 $12,458
11/30/00 $12,234 $12,760
11/30/01 $11,976 $12,358
11/30/02 $10,553 $11,171
11/30/03 $12,176 $13,089
11/30/04 $13,952 $15,664
Chart assumes $10,000 invested on September 15, 1998 and includes the effect of
a 5.75% front-end sales charge and the reinvestment of all distributions.
Performance of other Fund classes will vary due to different charges and
expenses. Returns plotted on the chart were as of the last day of each month
shown. The Russell 1000 Value Index measures the performance of those Russell
1000 companies with lower price-to-book ratios and lower forecasted growth
values. An index is unmanaged and does not reflect the costs of operating a
mutual fund, such as the costs of buying, selling, and holding securities. You
cannot invest directly in an index. Past performance is not a guarantee of
future results.
An expense limitation was in effect for the period shown. Performance would have
been lower had the expense limitation not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or redemptions of Fund shares.
4
DISCLOSURE For the Period June 1, 2004 to November 30, 2004
OF FUND EXPENSES
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period June 1, 2004 to November 30, 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 of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions. "Expenses Paid During Period" are equal to the Fund's annualized
expense ratio, multiplied by the average account value over the period,
multiplied by 183/366 (to reflect the one-half year period).
DELAWARE VALUE FUND
EXPENSE ANALYSIS OF AN INVESTMENT OF $1,000
Beginning Ending Annualized Expenses
Account Account Expense Paid During
Value Value Ratio Period
6/1/04 11/30/04 6/1/04 to
11/30/04
- -----------------------------------------------------------------------------------------------------------
ACTUAL FUND RETURN
Class A $1,000.00 $1,068.50 1.00% $5.17
Class B 1,000.00 1,064.80 1.75% 9.03
Class C 1,000.00 1,065.80 1.75% 9.03
Institutional Class 1,000.00 1,069.40 0.75% 3.88
- -----------------------------------------------------------------------------------------------------------
HYPOTHETICAL 5% RETURN (5% return before expenses)
Class A $1,000.00 $1,020.00 1.00% $5.05
Class B 1,000.00 1,016.25 1.75% 8.82
Class C 1,000.00 1,016.25 1.75% 8.82
Institutional Class 1,000.00 1,021.25 0.75% 3.79
- -----------------------------------------------------------------------------------------------------------
5
SECTOR ALLOCATION As of November 30, 2004
VALUE FUND
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 chart lists the Fund's categories of portfolio holdings
as a percent of total net assets and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
- --------------------------------------------------------------------------------
COMMON STOCK 96.83%
- --------------------------------------------------------------------------------
Consumer Discretionary 6.01%
Consumer Staples 9.32%
Energy 8.96%
Financial 23.35%
Healthcare 16.66%
Industrials 8.99%
Information Technology 8.78%
Materials 3.00%
Telecommunication Services 5.93%
Utilities 5.83%
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 2.67%
- --------------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 99.50%
- --------------------------------------------------------------------------------
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES 0.50%
- --------------------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- --------------------------------------------------------------------------------
6
STATEMENT DELAWARE VALUE FUND
OF NET ASSETS November 30, 2004
Number of Market
Shares Value
COMMON STOCK - 96.83%
Consumer Discretionary - 6.01%
Limited Brands 97,700 $ 2,387,788
Mattel 127,100 2,408,545
-----------
4,796,333
-----------
Consumer Staples - 9.32%
Archer-Daniels-Midland 126,100 2,673,320
ConAgra Foods 87,500 2,366,875
Kimberly-Clark 37,700 2,398,097
-----------
7,438,292
-----------
Energy - 8.96%
ChevronTexaco 43,500 2,375,100
ConocoPhillips 26,400 2,402,136
Exxon Mobil 46,200 2,367,750
-----------
7,144,986
-----------
Financial - 23.35%
Allstate 46,600 2,353,300
Aon 114,800 2,424,576
Hartford Financial Services 39,100 2,502,400
Huntington Bancshares 85,900 2,083,934
Marshall & Ilsley 53,600 2,234,584
Morgan Stanley 46,100 2,339,575
Wachovia 45,000 2,328,750
Washington Mutual 58,100 2,365,251
-----------
18,632,370
-----------
Health Care - 16.66%
Abbott Laboratories 56,200 2,358,152
Baxter International 73,900 2,338,935
Beckman Coulter 38,200 2,500,572
Bristol-Myers Squibb 101,200 2,378,200
Merck 46,500 1,302,930
Wyeth 60,600 2,416,122
-----------
13,294,911
-----------
Industrials - 8.99%
Boeing 43,600 2,335,652
Burlington Northern Santa Fe 54,800 2,468,192
Union Pacific 37,300 2,366,312
-----------
7,170,156
-----------
Information Technology - 8.78%
Hewlett-Packard 120,400 2,408,000
International Business Machines 24,600 2,318,304
+Xerox 148,900 2,281,148
-----------
7,007,452
-----------
Materials - 3.00%
Weyerhaeuser 36,300 2,395,800
-----------
2,395,800
-----------
Telecommunication Services - 5.93%
SBC Communications 93,200 2,345,844
Verizon Communications 57,900 2,387,217
-----------
4,733,061
-----------
Utilities - 5.83%
Energy East 93,600 2,355,912
FPL Group 32,600 2,292,758
-----------
4,648,670
-----------
TOTAL COMMON STOCK (cost $71,584,800) 77,262,031
-----------
Principal Market
Amount Value
REPURCHASE AGREEMENTS - 2.67%
With BNP Paribas 1.94% 12/1/04
(dated 11/30/04, to be repurchased
at $1,113,060, collateralized by
$1,007,000 U.S. Treasury Bills due
3/3/05, market value $1,001,815 and
$135,000 U.S. Treasury Bills due
5/12/05, market value $133,615) $1,113,000 $ 1,113,000
With UBS Warburg 1.94% 12/1/04
(dated 11/30/04, to be repurchased
at $1,016,055, collateralized by
$339,000 U.S. Treasury Bills
due 12/23/04, market value
$338,235 and $704,000
U.S. Treasury Bills due 4/14/05,
market value $698,478) 1,016,000 1,016,000
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $2,129,000) 2,129,000
-----------
TOTAL MARKET VALUE OF SECURITIES - 99.50%
(cost $73,713,800) 79,391,031
RECEIVABLES AND OTHER ASSETS NET
OF LIABILITIES - 0.50% 398,652
-----------
NET ASSETS APPLICABLE TO 7,404,773 SHARES
OUTSTANDING - 100.00% $79,789,683
===========
Net Asset Value - Delaware Value Fund
Class A ($6,846,204 / 636,124 Shares) $10.76
------
Net Asset Value - Delaware Value Fund
Class B ($1,518,030 / 142,100 Shares) $10.68
------
Net Asset Value - Delaware Value Fund
Class C ($2,476,857 / 231,777 Shares) $10.69
------
Net asset Value - Delaware Value Fund
Institutional Class
($68,948,592 / 6,394,772 Shares) $10.78
------
COMPONENTS OF NET ASSETS AT NOVEMBER 30, 2004:
Shares of beneficial interest
(unlimited authorization - no par) $69,721,506
Undistributed net investment income 855,206
Accumulated net realized gain on investments 3,535,740
Net unrealized appreciation of investments 5,677,231
-----------
Total net assets $79,789,683
===========
+Non-income producing security for the year ended November 30, 2004.
NET ASSET VALUE AND OFFERING PRICE PER SHARE -
DELAWARE VALUE FUND
Net asset value Class A (A) $10.76
Sales charge (5.75% of offering or 6.13% of
the amount invested per share) (B) 0.66
------
Offering price $11.42
======
(A) Net asset value per share, as illustrated, is the estimated amount which
would be paid upon the redemption or repurchase of shares.
(B) See the current prospectus for purchases of $50,000 or more.
See accompanying notes
7
STATEMENT DELAWARE VALUE FUND
OF OPERATIONS Year Ended November 30, 2004
INVESTMENT INCOME:
Dividends $1,364,281
Interest 20,381 $1,384,662
---------- ----------
EXPENSES:
Management fees 388,627
Registration fees 53,151
Reports and statements to shareholders 29,549
Accounting and administration expenses 21,504
Distribution expenses -- Class A 7,158
Distribution expenses -- Class B 8,172
Distribution expenses -- Class C 5,021
Dividend disbursing and transfer agent fees and expenses 10,023
Legal and professional fees 7,038
Trustees' fees 3,723
Custodian fees 3,718
Pricing fees 1,037
Other 2,859 541,580
----------
Less expenses absorbed or waived (72,579)
Less waiver of distribution expenses -- Class A (1,201)
Less expenses paid indirectly (164)
----------
Total expenses 467,636
----------
NET INVESTMENT INCOME 917,026
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 5,922,995
Net change in unrealized appreciation/depreciation of investments 1,099,847
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 7,022,842
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,939,868
==========
See accompanying notes
8
STATEMENTS DELAWARE VALUE FUND
OF CHANGES IN NET ASSETS
Year Ended
11/30/04 11/30/03
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 917,026 $ 502,811
Net realized gain (loss) on investments 5,922,995 (267,031)
Net change in unrealized appreciation/depreciation of investments 1,099,847 5,422,498
----------- -----------
Net increase in net assets resulting from operations 7,939,868 5,658,278
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A (7,656) (664)
Class B (1,151) (496)
Class C (360) (60)
Institutional Class (520,206) (280,307)
----------- -----------
(529,373) (281,527)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
Class A 7,159,439 642,162
Class B 1,228,442 366,291
Class C 2,262,305 122,624
Institutional Class 23,979,557 19,558,554
Net asset value of shares issued upon reinvestment of dividends and distributions:
Class A 7,395 590
Class B 1,013 400
Class C 360 --
Institutional Class 520,206 280,307
----------- -----------
35,158,717 20,970,928
----------- -----------
Cost of shares repurchased:
Class A (1,355,689) (20,527)
Class B (191,695) (34,406)
Class C (13,165) (30,321)
Institutional Class (3,499,381) (7,339,770)
----------- -----------
(5,059,930) (7,425,024)
----------- -----------
Increase in net assets derived from capital share transactions 30,098,787 13,545,904
----------- -----------
NET INCREASE IN NET ASSETS 37,509,282 18,922,655
NET ASSETS:
Beginning of year 42,280,401 23,357,746
----------- -----------
End of year (including undistributed net investment income of $855,206 and $467,553, respectively) $79,789,683 $42,280,401
=========== ===========
See accompanying notes
9
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE VALUE FUND CLASS A
- ------------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.480 $8.300 $9.490 $10.150 $10.690
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.134 0.110 0.113 0.116 0.125
Net realized and unrealized gain (loss) on investments 1.240 1.151 (1.231) (0.309) 0.092
------- ------ ------ ------- -------
Total from investment operations 1.374 1.261 (1.118) (0.193) 0.217
------- ------ ------ ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.094) (0.081) (0.072) (0.103) (0.070)
Net realized gain on investments -- -- -- (0.364) (0.687)
------- ------ ------ ------- -------
Total dividends and distributions (0.094) (0.081) (0.072) (0.467) (0.757)
------- ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.760 $9.480 $8.300 $ 9.490 $10.150
======= ====== ====== ======= =======
TOTAL RETURN(2) 14.59% 15.37% (11.88%) (2.11%) 1.32%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $6,846 $717 $42 $22 $23
Ratio of expenses to average net assets 1.00% 1.00% 1.03% 0.75% 0.75%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.17% 1.26% 1.60% 1.08% 1.10%
Ratio of net investment income to average net assets 1.32% 1.29% 1.27% 1.18% 1.23%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.15% 1.03% 0.70% 0.85% 0.88%
Portfolio turnover 128% 101% 61% 101% 130%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the manager and
distributor. Performance would have been lower had the expense limitation
not been in effect.
See accompanying notes
10
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
Delaware Value Delaware Value
Fund Class B Fund Class C
- ------------------------------------------------------------------------------------------------------------------------------------
Year Year 5/1/02(1) Year Year 5/1/02(1)
Ended Ended to Ended Ended to
11/30/04 11/30/03 11/30/02 11/30/04 11/30/03 11/30/02
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.420 $8.310 $9.700 $ 9.420 $8.280 $9.700
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.058 0.044 0.030 0.062 0.044 0.032
Net realized and unrealized gain (loss) on investments 1.229 1.147 (1.420) 1.235 1.155 (1.452)
------- ------ ------ ------- ------ ------
Total from investment operations 1.287 1.191 (1.390) 1.297 1.199 (1.420)
------- ------ ------ ------- ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.027) (0.081) -- (0.027) (0.059) --
------- ------ ------ ------- ------ ------
Total dividends and distributions (0.027) (0.081) -- (0.027) (0.059) --
------- ------ ------ ------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.680 $9.420 $8.310 $10.690 $9.420 $8.280
======= ====== ====== ======= ====== ======
TOTAL RETURN(3) 13.69% 14.50% (14.33%) 13.80% 14.60% (14.64%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $1,518 $383 $13 $2,477 $133 $27
Ratio of expenses to average net assets 1.75% 1.75% 1.93% 1.75% 1.75% 1.93%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 1.87% 1.96% 2.62% 1.87% 1.96% 2.62%
Ratio of net investment income to average net assets 0.57% 0.54% 0.59% 0.57% 0.54% 0.59%
Ratio of net investment income (loss) to average net
assets prior to expense limitation and expenses paid
indirectly 0.45% 0.33% (0.10%) 0.45% 0.33% (0.10%)
Portfolio turnover 128% 101% 61% 128% 101% 61%
(1) Date of commencement of operations; ratios have been annualized and total
return has not been annualized.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value and does not reflect the impact of a sales charge. Total
investment return reflects waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in
effect.
11
FINANCIAL
HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding
throughout each period were as follows:
DELAWARE VALUE FUND INSTITUTIONAL CLASS
- ------------------------------------------------------------------------------------------------------------------------
Year Ended
11/30/04 11/30/03 11/30/02 11/30/01 11/30/00
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.500 $8.310 $9.490 $10.150 $10.690
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.160 0.132 0.126 0.116 0.125
Net realized and unrealized gain (loss) on investments 1.237 1.155 (1.234) (0.309) 0.092
------- ------ ------ ------- -------
Total from investment operations 1.397 1.287 (1.108) (0.193) 0.217
------- ------ ------ ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income (0.117) (0.097) (0.072) (0.103) (0.070)
Net realized gain on investments -- -- -- (0.364) (0.687)
------- ------ ------ ------- -------
Total dividends and distributions (0.117) (0.097) (0.072) (0.467) (0.757)
------- ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.780 $9.500 $8.310 $ 9.490 $10.150
======= ====== ====== ======= =======
TOTAL RETURN(2) 14.83% 15.70% (11.77%) (2.11%) 2.32%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $68,949 $41,047 $23,276 $13,980 $15,327
Ratio of expenses to average net assets 0.75% 0.75% 0.87% 0.75% 0.75%
Ratio of expenses to average net assets prior to expense
limitation and expenses paid indirectly 0.87% 0.96% 1.30% 0.78% 0.80%
Ratio of net investment income to average net assets 1.57% 1.54% 1.43% 1.18% 1.23%
Ratio of net investment income to average net assets
prior to expense limitation and expenses paid indirectly 1.45% 1.33% 1.00% 1.15% 1.18%
Portfolio turnover 128% 101% 61% 101% 130%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of dividends and distributions at
net asset value. Total investment return reflects waivers and payment of
fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
See accompanying notes
12
NOTES DELAWARE VALUE FUND
TO FINANCIAL STATEMENTS November 30, 2004
Delaware Group Equity Funds II (the "Trust") is organized as a Delaware
statutory trust and offers three series: Delaware Value Fund (formerly Delaware
Diversified Value Fund), Delaware Large Cap Value Fund (formerly Delaware Growth
and Income Fund) and Delaware Social Awareness Fund. These financial statements
and related notes pertain to Delaware Value Fund (the "Fund"). The Trust is an
open-end investment company. The Fund is considered diversified under the
Investment Company Act of 1940, as amended, and offers Class A, Class B, Class
C, Class R and Institutional Class shares. Class A shares are sold with a
front-end sales charge of up to 5.75%. Class B shares are sold with a contingent
deferred sales charge that declines from 4% to zero depending upon the period of
time the shares are held. Class B shares will automatically convert to Class A
shares on a quarterly basis approximately 8 years after purchase. Class C shares
are sold with a contingent deferred sales charge of 1%, if redeemed during the
first twelve months. Class R and Institutional Class shares are not subject to a
sales charge and are offered for sale exclusively to a limited group of
investors. As of November 30, 2004, Class R shares have not commenced
operations.
The investment objective of the Fund is to achieve capital appreciation with
current income as a secondary objective.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation -- Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (NASDAQ), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the NASDAQ are valued in accordance with the NASDAQ
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Fund's Board of Trustees.
Federal Income Taxes -- The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
Class Accounting -- Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements -- The Fund may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is 102% collateralized. However, in the
event of default or bankruptcy by the counterparty to the agreement, realization
of the collateral may be subject to legal proceedings.
Use of Estimates -- The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that may 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 some 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. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. The Fund declares and pays dividends from net investment income and
distributions from net realized gain from 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 $91 for the year ended November 30, 2004. In addition, the Fund
receives earnings credits from its custodian when positive cash balances are
maintained, which are used to offset custody fees. The earnings credits for the
year ended November 30, 2004 were approximately $73. 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 it's investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the Fund,
0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50% on
average daily net assets in excess of $2.5 billion.
DMC has contractually agreed to waive that portion, if any, of its management
fee and reimburse the Fund to the extent necessary to ensure that annual
operating expenses, exclusive of taxes, interest, brokerage commissions,
distribution fees, certain insurance costs and extraordinary expenses, do not
exceed 0.75% of average daily net assets of the Fund through January 31, 2005.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee based on average net assets subject to certain minimums for
accounting and administration services. The Fund pays DSC a monthly fee based on
the number of shareholder accounts for dividend disbursing and transfer agent
services.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an
annual fee not to exceed 0.30% of the average daily net assets of the Class A
shares, 1.00% of the average daily net assets of the Class B and C shares, and
0.60% of the average daily net assets of the Class R shares. DDLP has contracted
to waive distribution and service fees through January 31, 2005 in order to
prevent distribution and service fees of Class A shares from exceeding 0.25% of
average daily net assets. Institutional Class shares pay no distribution and
service expenses.
13
NOTES DELAWARE VALUE FUND
TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT MANAGEMENT, ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES (CONTINUED)
At November 30, 2004, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $9,513
Dividend disbursing, transfer agent, accounting,
and administration fees and other expenses
payable to DSC 3,674
Other expenses payable to DMC and affiliates* 1,854
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services expenses, including internal legal services provided to
the Fund by DMC employees. For the year ended November 30, 2004, the Fund was
charged $2,794 for internal legal services provided by DMC.
For the year ended November 30, 2004, DDLP earned $5,548 for commissions on
sales of the Fund's Class A shares.
Certain officers of DMC, DSC and DDLP are officers and/or trustees of the Trust.
These officers and trustees are paid no compensation by the Fund.
3. INVESTMENTS
For the year ended November 30, 2004, the Fund made purchases of $103,047,409
and sales of $74,881,958 of investment securities other than short-term
investments.
At November 30, 2004, the cost of investments for federal income tax purposes
was $74,189,694. At November 30, 2004, the net unrealized appreciation was
$5,201,337 of which $6,722,035 related to unrealized appreciation of investments
and $1,520,698 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 November 30, 2004 and 2003 were as follows:
11/30/04 11/30/03
-------- --------
Ordinary income $529,373 $281,527
As of November 30, 2004, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $69,721,506
Undistributed ordinary income 855,206
Undistributed long-term capital gains 4,011,634
Unrealized appreciation of investments 5,201,337
-----------
Net assets $79,789,683
===========
The difference between book basis and tax basis components of net assets are
primarily attributable to tax deferral of wash sales.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Year Ended
11/30/04 11/30/03
Shares sold:
Class A 692,628 73,086
Class B 120,113 42,941
Class C 218,997 14,392
Institutional Class 2,367,959 2,338,783
Shares issued upon reinvestment of
dividends and distributions:
Class A 755 73
Class B 103 50
Class C 37 --
Institutional Class 53,137 34,907
--------- ---------
3,453,729 2,504,232
--------- ---------
Shares repurchased:
Class A (132,921) (2,515)
Class B (18,794) (3,831)
Class C (1,343) (3,588)
Institutional Class (347,644) (852,729)
--------- ---------
(500,702) (862,663)
--------- ---------
Net increase 2,953,027 1,641,569
========= =========
For the year ended November 30, 2004, 4,820 Class B shares were converted to
4,798 Class A shares valued at $48,374. The respective amounts are included in
Class B redemptions and Class A subscriptions in the table above and the
Statement of Changes in the 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 $183,100,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each fund's allocation of the entire facility. The Participants may
borrow up to a maximum of one-third of their net assets under the agreement. The
Fund had no amount outstanding at November 30, 2004, or at any time during the
year.
14
NOTES DELAWARE VALUE FUND
TO FINANCIAL STATEMENTS (CONTINUED)
7. CONTRACTUAL OBLIGATIONS
The Fund enters into contracts 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 and expects the
risk of loss to be remote.
8. TAX INFORMATION (UNAUDITED)
The information set forth below is for the Funds fiscal year as required by
federal laws. Shareholders, however, must report distributions on a calendar
year basis for income tax purposes, which may include distributions for portions
of two fiscal years of a fund. Accordingly the information needed by
shareholders for income tax purposes will be send to them in January of each
year. Please consult your tax advisor for proper treatment of the information.
For the fiscal year ended November 30, 2004, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total (C)
Distributions Distributions* Distributions Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
------------- -------------- ------------- ------------
-- 100% 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
(C) is based on a percentage of the Fund's ordinary income distributions.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
*For the fiscal year ended November 30, 2004, certain dividends paid by the Fund
may be subject to a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate up
to a maximum amount of $529,373 to be taxed at a maximum rate of 15%. Complete
information will be computed and reported in conjunction with your 2004 Form
1099-DIV.
15
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Delaware Group Equity Funds II -- Delaware Value Fund
We have audited the accompanying statement of net assets of the Delaware Value
Fund (one of the series constituting Delaware Group Equity Funds II) (the
"Fund") as of November 30, 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 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 November 30, 2004, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Delaware Value Fund of Delaware Group Equity Funds II at November 30, 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 U.S. generally accepted
accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
January 14, 2005
16
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, President, 4 Years - Since August 2000, 75 None
2005 Market Street Chief Executive Officer, Executive Officer Mr. Driscoll has served in
Philadelphia, PA and Trustee(4) various executive capacities
19103 1 Year - at different times at
Trustee Delaware Investments(1)
March 10, 1963
Senior Vice President and
Director of Fixed-Income Process -
Conseco Capital Management
(June 1998 - August 2000)
- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
WALTER P. BABICH Trustee 16 Years Board Chairman - 92 None
2005 Market Street Citadel Construction Corporation
Philadelphia, PA (1989 - Present)
19103
October 1, 1927
JOHN H. DURHAM Trustee 25 Years(3) Private Investor 92 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 - 75 Director -
2005 Market Street Franklin & Marshall College Community Health
Philadelphia, PA (June 2002 - Present) Systems
19103
Executive Vice President -
University of Pennsylvania
May 28, 1960 (April 1995 - June 2002)
ANTHONY D. KNERR Trustee 11 Years Founder/Managing Director - 92 None
2005 Market Street Anthony Knerr & Associates
Philadelphia, PA (Strategic Consulting)
19103 (1990 - Present)
December 7, 1938
17
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 - 92 Director and
2005 Market Street National Gallery of Art Audit Committee
Philadelphia, PA (1994 - 1999) Chairperson - Andy
19103 Warhol Foundation
Director -
Systemax Inc.
November 1, 1940
THOMAS F. MADISON Trustee 10 Years President/Chief 92 Director -
2005 Market Street Executive Officer - Banner Health
Philadelphia, PA MLM Partners, Inc.
19103 (Small Business Investing Director -
and Consulting) CenterPoint Energy
(January 1993 - Present)
February 25, 1936 Director -
Digital River Inc.
Director - Rimage
Corporation
Director - Valmont
Industries, Inc.
JANET L. YEOMANS Trustee 5 Years Vice President/Mergers & 92 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 1 Year Mr. Hastings has served in 92 None(5)
2005 Market Street Vice President various executive capacities
Philadelphia, PA and at different times at
19103 Chief Financial Delaware Investments.
Officer
Decenber 19, 1949
RICHELLE S. MAESTRO Executive Vice President, 1 Year Ms. Maestro has served in 92 None(5)
2005 Market Street Chief Legal Officer various executive capacities
Philadelphia, PA and Secretary at different times at
19103 Delaware Investments.
November 26, 1957
MICHAEL P. BISHOF Senior Vice President 8 Years Mr. Bishof has served in 92 None(5)
2005 Market Street and Treasurer various executive capacities
Philadelphia, PA at different times at
19103 Delaware Investments.
August 18, 1962
(1) Delaware Investments is the marketing name for Delaware Management Holdings,
Inc. and its subsidiaries, including the registrant's investment advisor,
principal underwriter and its transfer agent.
(2) Mr. Driscoll is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's manager and distributor.
(3) Mr. Durham served as a Director Emeritus from 1995 through 1998.
(4) Mr. Driscoll and Mr. Fry are not Trustees of the funds 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.
18
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Delaware Value Fund, but may be
used with prospective investors when preceded or accompanied by a current
prospectus for Delaware Value Fund and the Delaware Investments Performance
Update for the most recently completed calendar quarter. The prospectus sets
forth details about charges, expenses, investment objectives, and operating
policies of the Fund. You should read 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 NATIONAL DISTRIBUTOR
WALTER P. BABICH Delaware Distributors, L.P.
Board Chairman RICHELLE S. MAESTRO Philadelphia, PA
Citadel Construction Corporation Executive Vice President,
King of Prussia, PA Chief Legal Officer and Secretary SHAREHOLDER SERVICING, DIVIDEND
Delaware Investments Family of Funds DISBURSING AND TRANSFER AGENT
JOHN H. DURHAM Philadelphia, PA Delaware Service Company, Inc.
Private Investor 2005 Market Street
Gwynedd Valley, PA MICHAEL P. BISHOF Philadelphia, PA 19103-7094
Senior Vice President and Treasurer
JOHN A. FRY Delaware Investments Family of Funds FOR SHAREHOLDERS
President Philadelphia, PA 800 523-1918
Franklin & Marshall College
Lancaster, PA FOR SECURITIES DEALERS AND FINANCIAL
INSTITUTIONS REPRESENTATIVES ONLY
ANTHONY D. KNERR 800 362-7500
Managing Director
Anthony Knerr & Associates WEB SITE
New York, NY www.delawareinvestments.com
ANN R. LEVEN
Former Treasurer/Chief Fiscal Officer
National Gallery of Art
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
- --------------------------------------------------------------------------------
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 Web site at http://www.delawareinvestments.com;
and (iii) on the Commission's Web site 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 Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(9107) Printed in the USA
AR-456 [11/04] IVES 1/05 J9916
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 $68,200 for
the fiscal year ended November 30, 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 $74,300 for
the fiscal year ended November 30, 2003.
(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 November 30, 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%.
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 $164,700 for the Registrant's fiscal
year ended November 30, 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 Registrant'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
Registrant; 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 November 30, 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%.
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(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.
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 $162,700 for the Registrant's fiscal
year ended November 30, 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 Registrant; 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 $7,500 for the fiscal year
ended November 30, 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 services were as follows: review of income tax
returns and review of annual excise distribution calculations.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant's investment adviser(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 November 30, 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%.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant were $5,000 for the fiscal year
ended November 30, 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 services were as follows: review of income tax
returns and review of annual excise distribution calculations.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant's adviser(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 November 30, 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%.
(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 November 30, 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%.
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 November 30, 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%.
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 November 30, 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%.
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 November 30, 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%.
(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 $359,959 and $290,600 for the Registrant's fiscal years ended November 30,
2004 and November 30, 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. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control
over financial reporting that occurred during the second fiscal quarter of the
period covered by the report to stockholders included herein (i.e., the
registrant's fourth fiscal quarter) that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf, by the undersigned, thereunto duly authorized.
DELAWARE GROUP EQUITY FUNDS II
Jude T. Driscoll
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By: Jude T. Driscoll
Title: Chairman
Date: February 3, 2005
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: February 3, 2005
Joseph H. Hastings
- ------------------------------------
By: Joseph H. Hastings
Title: Chief Financial Officer
Date: February 3, 2005